**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

**FORM 10-Q**

**(Markone)**
| **ý**                                         | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**       |
|----------------------------------------------------|----------------------------------------------------------------------------------------------------|
| **For the  quarterly period ended: June 30, 2006** |
| **OR**                                             |
| **o**                                              | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

**For the transition period from                to               **

**Commission file number 0-13093**

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**HYPERFEED TECHNOLOGIES, INC.**(Exact name of registrant as specified in its charter)

| **Delaware**                                           |   | **36-3131704**       |
|--------------------------------------------------------|--------|----------------------|
| (State or Other  Jurisdiction of                       |   | (I.R.S. Employer     |
| Incorporation or  Organization)                        |   | Identification  No.) |
| ** **                                             |   | ** **           |
| ** **                                             |   | ** **           |
| **300 S.  Wacker Drive, Suite 300, Chicago, Illinois** |   | **60606**            |
| (Address of Principal  Executive Offices)              |   | (Zip Code)           |
| ** **                                             |   | ** **           |

 

Registrant’s telephone number, including area code: **(312) 913-2800**

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

Indicateby check mark whether the registrant is a large accelerated filer, andaccelerated Filer, or a non-accelerated filer. (as defined in Rule 12b-2 of theAct). Large Accelerated Filer oAccelerated Filer oNon-Accelerated Filer x

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). Yes o  No x

Thenumber of shares of common stock outstanding as of August 4, 2006 was 7,643,474shares.

 

 

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**HYPERFEEDTECHNOLOGIES, INC. AND SUBSIDIARIES**

**INDEX**
|           | ** ** | ** **                                                                                                   | ** ** | **PAGE** |
|-----------|------------|--------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I.   |       | FINANCIAL INFORMATION                                                                                        |       |     |
|      |       |                                                                                                         |       |     |
| Item 1.   |       | Financial Statements                                                                                         |       |     |
|      |       |                                                                                                         |       |     |
|      |       | Consolidated  Balance Sheets as of June 30, 2006 and December 31, 2005 (unaudited)                           |       |     |
|      |       |                                                                                                         |       |     |
|      |       | Consolidated Statements of Operations for the three  and six months ended June 30, 2006 and 2005 (unaudited) |       |     |
|      |       |                                                                                                         |       |     |
|      |       | Consolidated  Statements of Cash Flows for the six months ended June 30, 2006 and 2005  (unaudited)          |       |     |
|      |       |                                                                                                         |       |     |
|      |       | Notes to  Unaudited Interim Consolidated Financial Statements                                                |       |     |
|      |       |                                                                                                         |       |     |
| Item 2.   |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                  |       |     |
|      |       |                                                                                                         |       |     |
| Item 3.   |       | Quantitative  and Qualitative Disclosures about Market Risk                                                  |       |     |
|      |       |                                                                                                         |       |     |
| Item 4.   |       | Controls and  Procedures                                                                                     |       |     |
|      |       |                                                                                                         |       |     |
| PART II.  |       | OTHER  INFORMATION                                                                                           |       |     |
|      |       |                                                                                                         |       |     |
| Item 1.   |       | Legal Proceedings                                                                                            |       |     |
|      |       |                                                                                                         |       |     |
| Item  1A. |       | Risk  Factors                                                                                                |       |     |
|      |       |                                                                                                         |       |     |
| Item  6.  |       | Exhibits                                                                                                     |       |     |
|      |       |                                                                                                         |       |     |
|      |       | SIGNATURES                                                                                                   |       |     |

 

 

2

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**PARTI**

**ITEM1. Financial Statements**

**HYPERFEEDTECHNOLOGIES, INC. AND SUBSIDIARIESConsolidated Balance Sheets (Unaudited)**
| ** **                                                                                                                                                        | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                        | ** ** | ** **              | ** ** | ** **                  | ** ** |
| **Current Assets**                                                                                                                                                | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Cash and cash  equivalents                                                                                                                                        |       | $                       | 98,145     |                        | $          | 302,171 |   |
| Short-term investment                                                                                                                                             |       | 75,000                  |       | —                      |       |
| Accounts  receivable, less allowance for doubtful accounts of: 2006: $189,091; 2005:  $101,309                                                                    |       | 144,237                 |       | 191,656                     |       |
| Notes  receivable, less allowance for doubtful accounts of: 2006: $0; 2005: $10,830                                                                               |       | —                  |       | 90,493                      |       |
| Prepaid expenses  and other current assets                                                                                                                        |       | 240,039                 |       | 64,351                      |       |
| Assets related  to discontinued operations                                                                                                                        |       | 40,917                  |       | 57,094                      |       |
| **Total Current Assets**                                                                                                                                          |       | 598,338                 |       | 705,765                     |       |
|                                                                                                                                                              |       |                    |       |                        |       |
| Property and equipment                                                                                                                                            |       |                    |       |                        |       |
| Computer  equipment                                                                                                                                               |       | 1,548,705               |       | 1,511,660                   |       |
| Communication  equipment                                                                                                                                          |       | 555,936                 |       | 737,993                     |       |
| Furniture and  fixtures                                                                                                                                           |       | 54,856                  |       | 74,853                      |       |
| Leasehold  improvements                                                                                                                                           |       | —                  |       | 9,260                       |       |
|                                                                                                                                                              |       | 2,159,497               |       | 2,333,766                   |       |
| Less:  Accumulated depreciation and amortization                                                                                                                  |       | (1,434,695              | )          | (1,798,168                  | )          |
| Property and equipment,  net                                                                                                                                      |       | 724,802                 |       | 535,598                     |       |
| Intangible assets, net  of accumulated amortization of: 2006: $189,583; 2005: $432,917                                                                            |       | 160,417                 |       | 224,583                     |       |
| Software development  costs, net of accumulated amortization of: 2006: $2,257,183; 2005: $2,709,165                                                               |       | 3,447,189               |       | 3,102,182                   |       |
| Deposits and other  assets                                                                                                                                        |       | 64,699                  |       | 47,390                      |       |
| **Total Assets**                                                                                                                                                  |       | $                       | 4,995,445  |                        | $          | 4,615,518 |   |
|                                                                                                                                                              |       |                    |       |                        |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                    | ** ** | ** **              | ** ** | ** **                  | ** ** |
| **Current Liabilities**                                                                                                                                           | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Convertible note  payable to affiliate                                                                                                                            |       | $                       | 6,680,000  |                        | $          | 810,000 |   |
| Line of credit                                                                                                                                                    |       | —                  |       | 500,000                     |       |
| Accounts payable                                                                                                                                                  |       | 1,805,201               |       | 1,423,756                   |       |
| Accrued expenses                                                                                                                                                  |       | 398,392                 |       | 272,342                     |       |
| Accrued  professional fees                                                                                                                                        |       | 189,150                 |       | 189,975                     |       |
| Accrued  compensation                                                                                                                                             |       | 132,447                 |       | 80,279                      |       |
| Income taxes  payable                                                                                                                                             |       | 2,040                   |       | 12,014                      |       |
| Unearned revenue                                                                                                                                                  |       | 491,898                 |       | 245,774                     |       |
| Liabilities  related to discontinued operations                                                                                                                   |       | 451,089                 |       | 533,548                     |       |
| **Total Current Liabilities**                                                                                                                                     |       | 10,150,217              |       | 4,067,688                   |       |
|                                                                                                                                                              |       |                    |       |                        |       |
| Accounts payable, less  current portion                                                                                                                           |       | —                  |       | 815,625                     |       |
| Accrued expenses, less  current portion                                                                                                                           |       | 239,063                 |       | 287,347                     |       |
| **Total Noncurrent Liabilities**                                                                                                                                  |       | 239,063                 |       | 1,102,972                   |       |
| **Total Liabilities**                                                                                                                                             |       | 10,389,280              |       | 5,170,660                   |       |
|                                                                                                                                                              |       |                    |       |                        |       |
| **Stockholders’ Equity**                                                                                                                                     | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Preferred stock, $.001  par value; authorized 5,000,000 shares; none issued and outstanding                                                                       |       | —                  |       | —                      |       |
| Common stock, $.001 par  value; authorized 50,000,000 shares; issued and outstanding 7,643,474 shares  at June 30, 2006 and 7,641,889 shares at December 31, 2005 |       | 7,644                   |       | 7,642                       |       |
| Additional paid-in  capital                                                                                                                                       |       | 56,152,804              |       | 54,238,176                  |       |
| Accumulated deficit                                                                                                                                               |       | (61,554,283             | )          | (54,800,960                 | )          |
| **Total Stockholders’ Equity**                                                                                                                               |       | (5,393,835              | )          | (555,142                    | )          |
| **Total Liabilities and Stockholders’ Equity**                                                                                                               |       | $                       | 4,995,445  |                        | $          | 4,615,518 |   |

 

See accompanyingnotes to unaudited interim consolidated financial statements.

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**HYPERFEEDTECHNOLOGIES, INC. AND SUBSIDIARIESConsolidated Statements of Operations (Unaudited)**

 
| ** **                                                              | ** ** | **For The Three Months Ended  June 30,** | ** ** | **For The Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                                                          | ** ** | **2005**                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenue**                                                             |       |                                                              |       |                                                            |       |   |   |   |   |
| HyperFeed                                                               |       | $                                                                 | 807,569    |                                                            | $          | 957,744 |   | $ | 1,728,480 |   | $ | 1,751,925 |   |
| HYPRWare                                                                |       | 74,302                                                            |       | 86,785                                                          |       | 151,875 |   | 181,658 |   |
| **Total  Revenue**                                                      |       | 881,871                                                           |       | 1,044,529                                                       |       | 1,880,355 |   | 1,933,583 |   |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| **Direct  Costs of Revenue**                                            |       | 440,625                                                           |       | 278,754                                                         |       | 887,357 |   | 561,997 |   |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| **Gross  Margin**                                                       |       | 441,246                                                           |       | 765,775                                                         |       | 992,998 |   | 1,371,586 |   |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| **Operating  Expenses**                                                 |       |                                                              |       |                                                            |       |   |   |   |   |
| Sales and marketing                                                     |       | 514,384                                                           |       | 505,447                                                         |       | 1,045,073 |   | 848,771 |   |
| General and administrative                                              |       | 746,541                                                           |       | 737,814                                                         |       | 1,533,642 |   | 1,537,883 |   |
| Research and development                                                |       | 508,687                                                           |       | 336,320                                                         |       | 1,122,833 |   | 731,405 |   |
| Operations                                                              |       | 988,598                                                           |       | 542,449                                                         |       | 2,017,405 |   | 1,045,248 |   |
| Depreciation and amortization                                           |       | 130,651                                                           |       | 195,907                                                         |       | 291,981 |   | 408,856 |   |
| **Total  Operating Expenses**                                           |       | 2,888,861                                                         |       | 2,317,937                                                       |       | 6,010,934 |   | 4,572,163 |   |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| **Loss  from Operations**                                               |       | (2,447,615                                                        | )          | (1,552,162                                                      | )          | (5,017,936 | ) | (3,200,577 | ) |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| **Other  Income (Expense)**                                             |       |                                                              |       |                                                            |       |   |   |   |   |
| Interest income                                                         |       | 1,514                                                             |       | 44                                                              |       | 1,664 |   | 82 |   |
| Interest income (expense)                                               |       | 346,985                                                           |       | (495,504                                                        | )          | (1,902,051 | ) | (793,177 | ) |
| **Other  Income (Expense), Net**                                        |       | 348,499                                                           |       | (495,460                                                        | )          | (1,900,387 | ) | (793,095 | ) |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| **Loss  from Continuing Operations Before Income Taxes**                |       | (2,099,116                                                        | )          | (2,047,622                                                      | )          | (6,918,323 | ) | (3,993,672 | ) |
| Income tax benefit                                                      |       | —                                                            |       | —                                                          |       | 63,000 |   | — |   |
| **Loss  from Continuing Operations**                                    |       | (2,099,116                                                        | )          | (2,047,622                                                      | )          | (6,855,323 | ) | (3,993,672 | ) |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| **Discontinued  Operations**                                            |       |                                                              |       |                                                            |       |   |   |   |   |
| Loss from discontinued operations                                       |       | —                                                            |       | (17,050                                                         | )          | — |   | (39,649 | ) |
| Income tax benefit (expense) from discontinued  operations              |       | —                                                            |       | —                                                          |       | — |   | — |   |
| Gain on disposition of discontinued operations                          |       | —                                                            |       | —                                                          |       | 165,000 |   | — |   |
| Income tax expense from gain on disposition of  discontinued operations |       | —                                                            |       | —                                                          |       | (63,000 | ) | — |   |
| **Income  (Loss) from Discontinued Operations**                         |       | —                                                            |       | (17,050                                                         | )          | 102,000 |   | (39,649 | ) |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| **Net  Loss**                                                           |       | $                                                                 | (2,099,116 | )                                                               | $          | (2,064,672 | ) | $ | (6,753,323 | ) | $ | (4,033,321 | ) |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Basic and  diluted net income (loss) per share:                         |       |                                                              |       |                                                            |       |   |   |   |   |
| Continuing operations                                                   |       | $                                                                 | (0.27      | )                                                               | $          | (0.66 | ) | $ | (0.90 | ) | $ | (1.30 | ) |
| Discontinued operations                                                 |       | —                                                            |       | (0.01                                                           | )          | 0.02 |   | (0.01 | ) |
| Basic and  diluted net loss per share                                   |       | $                                                                 | (0.27      | )                                                               | $          | (0.67 | ) | $ | (0.88 | ) | $ | (1.31 | ) |
|                                                                    |       |                                                              |       |                                                            |       |   |   |   |   |
| Basic and diluted  weighted-average common shares outstanding           |       | 7,643,474                                                         |       | 3,090,333                                                       |       | 7,642,686 |   | 3,084,390 |   |

 

See accompanyingnotes to unaudited interim consolidated financial statements.

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**HYPERFEEDTECHNOLOGIES, INC. AND SUBSIDIARIESConsolidated Statements of Cash Flows (Unaudited)**

 
| ** **                                                                                                  | ** ** | **For The Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2006**                                                        | ** ** | **2005** | ** ** |
| **Cash  Flows from Operating Activities:**                                                                  |       |                                                            |       |   |   |
| Net loss                                                                                                    |       | $                                                               | (6,753,323 | ) | $ | (4,033,321 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities:                  |       |                                                            |       |   |   |
| Depreciation and amortization                                                                               |       | 291,981                                                         |       | 408,856 |   |
| Amortization of software development costs                                                                  |       | 643,954                                                         |       | 512,208 |   |
| Noncash compensation-related charges                                                                        |       | 151,880                                                         |       | — |   |
| Provision for doubtful accounts                                                                             |       | 78,976                                                          |       | 17,456 |   |
| Interest expense related to convertible note payable  to affiliate                                          |       | 1,682,217                                                       |       | 776,250 |   |
| Changes in assets and liabilities, net of effects  from dispositions:                                       |       |                                                            |       |   |   |
| Accounts receivable                                                                                         |       | (31,557                                                         | )          | 190,601 |   |
| Prepaid expenses and other current assets                                                                   |       | (96,883                                                         | )          | (60,344 | ) |
| Deposits and other assets                                                                                   |       | (17,309                                                         | )          | (587 | ) |
| Accounts payable                                                                                            |       | (434,180                                                        | )          | 442,085 |   |
| Accrued expenses                                                                                            |       | 129,109                                                         |       | 187,084 |   |
| Income taxes payable                                                                                        |       | (9,974                                                          | )          | — |   |
| Unearned revenue                                                                                            |       | 246,124                                                         |       | (94,799 | ) |
| Net cash used in continuing operations                                                                      |       | (4,118,985                                                      | )          | (1,654,511 | ) |
| Net cash provided by (used in) discontinued  operations                                                     |       | (66,282                                                         | )          | (23,576 | ) |
| **Net  Cash Used in Operating Activities**                                                                  |       | (4,185,267                                                      | )          | (1,678,087 | ) |
|                                                                                                        |       |                                                            |       |   |   |
| **Cash  Flows from Investing Activities:**                                                                  |       |                                                            |       |   |   |
| Purchase of property and equipment                                                                          |       | (417,019                                                        | )          | (112,427 | ) |
| Software development costs capitalized                                                                      |       | (988,961                                                        | )          | (722,015 | ) |
| Investment in certificate of deposit                                                                        |       | (75,000                                                         | )          | — |   |
| Purchase of intangible asset                                                                                |       | —                                                          |       | (350,000 | ) |
| Proceeds from payment on note receivable                                                                    |       | 90,493                                                          |       | 3,305 |   |
| **Net  Cash Used in Investing Activities**                                                                  |       | (1,390,487                                                      | )          | (1,181,137 | ) |
|                                                                                                        |       |                                                            |       |   |   |
| **Cash  Flows from Financing Activities:**                                                                  |       |                                                            |       |   |   |
| Proceeds from issuance of common stock                                                                      |       | 1,728                                                           |       | 2,392 |   |
| Proceeds from convertible note payable to affiliate                                                         |       | 5,870,000                                                       |       | 2,805,000 |   |
| Net borrowings (repayments) under line of credit                                                            |       | (500,000                                                        | )          | 35,000 |   |
| **Net  Cash Provided by Financing Activities**                                                              |       | 5,371,728                                                       |       | 2,842,392 |   |
|                                                                                                        |       |                                                            |       |   |   |
| **Net  Decrease in Cash and Cash Equivalents**                                                              |       | (204,026                                                        | )          | (16,832 | ) |
| Cash and cash  equivalents:                                                                                 |       |                                                            |       |   |   |
| Beginning of the period                                                                                     |       | 302,171                                                         |       | 193,702 |   |
|                                                                                                        |       |                                                            |       |   |   |
| **End of the Period**                                                                                       |       | $                                                               | 98,145     |   | $ | 176,870 |   |
|                                                                                                        |       |                                                            |       |   |   |
| **Supplemental  Disclosures of Noncash Operating Activities:**                                              |       |                                                            |       |   |   |
| Beneficial conversion feature and commitment fee  related to convertible note payable to affiliate (Note 6) |       | $                                                               | 1,761,022  |   | $ | 776,250 |   |
|                                                                                                        |       |                                                            |       |   |   |
| **Supplemental  disclosures of noncash investing and financing activities:**                                |       |                                                            |       |   |   |
| Acquisition of  licensed software utilizing long-term commitment (Note 5)                                   |       | $                                                               | —     |   | $ | 1,000,000 |   |

 

See accompanyingnotes to unaudited interim consolidated financial statements.

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** HYPERFEED TECHNOLOGIES, INC. AND SUBSIDIARIESNOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTSJUNE 30, 2006**

(1) NATURE OF BUSINESSAND SIGNIFICANT ACCOUNTING POLICIES

The unauditedconsolidated financial statements herein have been prepared by the Companypursuant to the rules and regulations of the U.S. Securities and ExchangeCommission. The accompanying notes to unaudited interim consolidated financialstatements have been prepared under the presumption that users of the interimfinancial information have either read or have access to the audited financialstatements for the latest fiscal year ended December 31, 2005. Accordingly,footnote disclosures which would substantially duplicate the disclosures containedin the December 31, 2005 audited consolidated financial statements have beenomitted from these interim consolidated financial statements. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been omitted pursuant to such rules andregulations. Although the Company believes that the disclosures are adequate tomake the information presented not misleading, it is suggested that theseinterim consolidated financial statements be read in conjunction with theconsolidated financial statements and the notes thereto included in the Company’slatest Annual Report on Form 10-K.

HyperFeed Technologies,Inc., a Delaware corporation (“HyperFeed” or the “Company”), is a provider ofenterprise-wide ticker plant, data platform, and transaction technologysoftware and services to exchanges, financial institutions, content providers,channel partners, and value-added resellers. HyperFeed’s advanced softwaretechnology serves as a corporate-wide ticker plant, providing firms in thefinancial services industry with the flexibility and agility to control theirown data sources and data content in a cost-effective manner.

The Company has overtwenty years of experience designing, building, and running ticker plants forthe North American financial marketplace. The Company’s software technology,including HyperFeed’s Next Generation Ticker Plant (“HTPX”) product, iscurrently being used by over forty customers, including exchanges, largefinancial institutions, and customers of the Company’s High Performance Centerproduct. Additionally, the Company has deployed more than 1,500 of HyperFeed’shigh performance single server HBOX products at customer sites. The Companyalso offers its HyperFeed Market Data Platform (“HMDP”) product, which is basedon Telerate’s Trading Room System (“TRS”) technology, and its OpenCollaborative Container (“OCC”) product for use with HMDP, which is based onTelerate’s Active8 technology. HyperFeed’s technology supports many firmsdemanding transaction and order routing systems.

HyperFeed principallyderives revenue from licensing technology and providing management andmaintenance services of HTPX, HBOX, HMDP, and OCC software, ticker plant anddata platform technologies, and managed services. Additionally, HyperFeedderives revenue from the development of customized software.

HYPRWare, Inc. (“HYPRWare”)is a majority-owned subsidiary of HyperFeed that receives royalties related tolicense fees for customers it referred to a channel partner prior to December31, 2002.

HyperFeed Acquisition Holdings, Inc., a Delaware corporation (“AcquisitionHoldings”), is a wholly-owned subsidiary of HyperFeed.

PICO Holdings, Inc. (“PICO”) owns 80.0% of HyperFeed’s common stock asof June 30, 2006.

CURRENT OPERATIONS:  The Company has sustained significant lossesin recent years and in the first six months of 2006. In particular, the Companyincurred a net loss of $6.8 million for the first six months of 2006 comparedto a net loss of $4.0 million for the same period in 2005, and an overall netloss of $9.5 million for the fiscal year ended December 31, 2005. Included inthe net loss of $6.8 million for the first six months of 2006 is $1.7 millionof noncash interest expense related to the beneficial conversion feature of theSecured Convertible Promissory Note (the “2006 Convertible Note”) issued by theCompany to PICO in thefirst quarter of 2006 as described in Note 6 of the Notes to UnauditedInterim Consolidated Financial Statements. Operations through June 30, 2006have been funded, in part, by advances on the 2006 Convertible Note. As of June30, 2006, the Company has an outstanding principal balance of $6.7 millionunder the terms of the 2006 Convertible Note and has accrued, but unpaid,interest of $0.2 million. Additionally, the Company’s negative cash flows fromoperating activities increased to $4.1 million for the six months ended June30, 2006 compared to $1.7 million for the six months ended June 30, 2005. Therecurring losses and negative cash flows raise substantial doubt about theCompany’s ability to continue as a going concern. Total revenue remainedrelatively unchanged at $1.9 million for the first six months of 2006 and 2005.

On June 13, 2006, theCompany announced that its Board of Directors approved a 1:1000 reverse stocksplit of its Common Stock to reduce ongoing operating costs including thesubstantial and increasing costs and expense associated with compliance withthe laws, rules, and regulations of the U.S. Securities and Exchange Commission(“SEC”). PICO, HyperFeed’s majority stockholder, pursuant to applicable law andthe Company’s bylaws, approved the reverse stock split. Pending SEC review ofcertain filings the Company has made pursuant to the rules and regulations setforth in Section 13e-3 of the U.S. Securities Exchange Act of 1934 to effectthe reverse stock 

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split, the reverse stocksplit is expected to reduce the number of stockholders of record to less than300, which will permit the Company to terminate its obligation to file reportswith the SEC (the “Going Private Transaction”). Pursuant to the terms of theGoing Private Transaction, stockholders owning less than 1,000 shares would bepaid an amount based on the closing price per share of the Company’s CommonStock on the Over-The-Counter Bulletin Board market on the date ofeffectiveness of the reverse stock split. Stockholders owning more than 1,000shares would remain as stockholders of the Company after the reverse stocksplit and would have fractional shares redeemed at the same rate. The Companyestimates that an aggregate of $400,000 would be paid to its stockholders tocomplete the reverse stock split. Funding for the transaction is expected to beprovided by the 2006 Convertible Note. All amounts to be paid to HyperFeedstockholders in connection with the Going Private Transaction shall have beenpaid or accrued as a liability on the Company’s balance sheet before theclosing date.

On June 19, 2006, theCompany entered into an Agreement and Plan of Merger (the “Merger Agreement”)by and among HyperFeed, Acquisition Holdings, and Exegy Incorporated, aDelaware corporation (“Exegy”), pursuant to which HyperFeed and Exegy haveagreed to combine their businesses through a merger of Exegy and AcquisitionHoldings (the “Merger”). Exegy, which is a privately held company, will survivethe Merger as a wholly-owned subsidiary of HyperFeed. The Company believes thecombination will create an innovative technology company focused on producingunrivaled performance. Under the terms of the Merger Agreement, each Exegycommon share will be converted into HyperFeed shares of common stock and eachExegy option will be converted into HyperFeed options, resulting in thestockholders of both HyperFeed and Exegy each owning 50% of the merged companyon a fully diluted basis. The Merger Agreement is subject to customaryconditions, and requires cash equity contributions by PICO and the stockholdersof Exegy of US $5.0 million each, prior to closing. As a condition to closing,HyperFeed shall have caused PICO to convert its 2006 Convertible Note inexchange for shares of HyperFeed Common Stock in accordance with the terms ofthe 2006 Convertible Note. Additionally, under the terms of the MergerAgreement, HyperFeed shall have completed the Going Private Transaction. TheMerger is expected to close not later than October 31, 2006.

While the Company expectsthe Merger to close, if it fails to do so, the Company currently believes thatits existing and anticipated capital resources, including cash and cashequivalents, accounts receivable, assets related to discontinued operations,cash expected to be received from holdbacks associated with the sale of itsinstitutional consolidated market data feed business and financing from PICO,which currently is the Company’s only source of financing, may not besufficient to fund its operations beyond December 31, 2006. The Companybelieves that it will need to obtain additional capital in the immediate futureboth to fund investments needed to increase its operating revenues to levelsthat will sustain its operations and to fund operating deficits that itanticipates will continue until revenue increases can be realized. There can beno assurances that the Company will be successful in obtaining sufficientadditional capital, or if it does, that the additional capital will enable theCompany to improve its business so as to have a material positive effect on theCompany’s operations and cash flow. The Company believes that withoutadditional investment, from PICO or other sources, it may be forced to ceaseoperations at an undetermined future date. It is uncertain whether the Company’sassets will retain any value if the Company ceases operations. There are noassurances that additional funding will be available to the Company before itmay be forced to cease operations.

In the first quarter of2006, the Company issued the 2006 Convertible Note to PICO for $10.0 million, payable twoyears from issuance, as described in Note6 of the Notes to Unaudited Interim Consolidated Financial Statements.The Company anticipates that PICO will convert the 2006 Convertible Note priorto the close of the Merger Agreement. However,in the event that the merger does not close, the Company may not havesufficient capital resources to repay or refinance the 2006 Convertible Notewhen it comes due in March 2008. In the event that PICO chooses not to convertthe 2006 Convertible Note and the Company is unable to repay or refinance the2006 Convertible Note at such time, PICO will also have the right to declarethe 2006 Convertible Note in default and may, at its option, pursue any otherremedies available to it. See the Company’s Current Report on Form 8-K filed onMarch 31, 2006. If the Company requires additional capital resources, there canbe no assurances that such capital will be available or that such capital willbe available on terms satisfactory to the Company. If the Company does notobtain such capital, it may not have sufficient capital resources to fundcontinuing operations.

PRINCIPLES OFCONSOLIDATION:  The accompanyingunaudited interim consolidated financial statements include the accounts ofHyperFeed and its subsidiaries, HYPRWare and Acquisition Holdings, and havebeen prepared in accordance with accounting principles generally accepted inthe United States of America for interim financial information and inconjunction with the rules and regulations of the SEC. Accordingly, they do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements. The consolidated interim financial statements include adjustments(consisting of normal recurring adjustments), including the elimination of allsignificant intercompany transactions in consolidation, which, in the opinionof management, are necessary for the fair presentation of the results of theinterim periods presented.

REVENUE RECOGNITION:  The Company principally derives revenue fromlicensing technology and providing management and maintenance services of HTPX,HBOX, HMDP, and OCC software, ticker plant and data platform technologies, andmanaged services. Additionally, the Company derives revenue from thedevelopment of customized software.

7

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Revenue is recognizedfrom the licensing of HTPX, HBOX, HMDP, and OCC (1) as payments from customersbecome due when the fee is not fixed or determinable at the outset of thearrangement or (2) ratably over the term of the agreement when post contractcustomer support (“PCS”) has a duration of one year or less. PCS is recognizedratably over the term. Revenue for the development of customized software,consulting, and implementation services is recognized based on time andmaterials from the application of contract accounting for the development ofcustomized software, or based on an hourly rate when it is not a fixed feearrangement. For licensing of the Company’s software through its saleschannels, revenue is recognized as payments from the reseller become due andgenerally commences after the software is installed at the reseller’s customersite.

The Company applies theprovisions of AICPA Statement of Position (“SOP”) 97-2, “Software RevenueRecognition,” as amended, which specifies the following four criteria that mustbe met prior to recognizing revenue: (1) persuasive evidence of the existenceof an arrangement, (2) delivery, (3) fixed or determinable fee, and (4)probable collection. In addition, revenue earned on software arrangementsinvolving multiple elements is allocated to each element based on the relativefair values of the elements. When applicable, revenue allocated to HyperFeed’ssoftware products (including specified upgrades/enhancements) is recognizedupon delivery of the products. If the fee is considered fixed and determinable,it is recognized as revenue when the sale is effected. If the fee is notconsidered fixed and determinable, it is recognized as revenue as payments fromcustomers become due. Revenue allocated to PCS is recognized ratably over theterm of the support and revenue allocated to service elements (such astraining) is recognized as the services are performed.

In accordance with SOP97-2, revenue from contracts that do not require significant production,modification, or customization of software is recognized when the abovecriteria are met. Revenue from contracts that require significant production,modification, or customization of software is accounted for in conformity withthe provisions of Accounting Research Bulletin No. 45, “Long-Term ConstructionContracts,” using the relevant guidance therein, and SOP 81-1, “Accounting forPerformance of Construction-Type and Certain Production-Type Contracts.” SOP81-1 provides for revenue recognition under the “percentage-of-completion” or “completedcontract” method depending on the facts and circumstances of contracts enteredinto and management’s ability to reasonably estimate its progress towardcompletion. Contract losses, if any, are provided for in their entirety in theperiod they become known, without regard to the percentage-of-completion. Forthose contracts which the Company cannot reasonably estimate progress towardcompletion, the Company employs the completed contract method of accounting.Revenue from arrangements accounted for under contract accounting are allocatedamong licensed technologies, managed services, and consulting fees based on thecontractual terms of the arrangements.

The use of contractaccounting inherently includes the use of estimates of progress towardcompletion. Such estimates are subject to periodic revisions and, as a result,the financial statements could be materially impacted.

The Company applies theprovisions of Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accountingfor Revenue Arrangements with Multiple Deliverables.” EITF 00-21 addressescertain aspects of the accounting by a vendor for arrangements under which itwill perform multiple revenue-generating activities. Specifically, EITF 00-21addresses how to determine whether an arrangement involving multipledeliverables contains more than one earnings process and, if it does, how to dividethe arrangement into separate units of accounting consistent with theidentified earnings processes for revenue recognition purposes. EITF 00-21 alsoaddresses how arrangement consideration should be measured and allocated to theseparate units of accounting in the arrangement.

HYPRWare derives revenuefrom royalties related to license fees collected by Townsend Analytics, Ltd. (“Townsend”)from subscribers to Townsend’s service over the Internet who had been referredthrough HYPRWare prior to December 31, 2002. Revenue is recorded as royaltiesare reported from Townsend.

LICENSED ANDDEVELOPED SOFTWARE COSTS:  Licensed anddeveloped software costs are accounted for in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs ofComputer Software to Be Sold, Leased, or Otherwise Marketed.” Costs associatedwith the planning and design phase of software development, including codingand testing activities necessary to establish technological feasibility of computersoftware products to be licensed or otherwise marketed, are expensed asresearch and development costs as incurred. Once technological feasibility hasbeen determined, costs incurred in the construction phase of softwaredevelopment including coding, testing, and product quality assurance arecapitalized. In accordance with SFAS No. 86, the Company has capitalizedlicensed software for which the Company believes technological feasibility hasbeen established.

Amortizationcommences at the time of capitalization or, in the case of a new serviceoffering, at the time the service becomes available for use. Unamortizedcapitalized costs determined to be in excess of the net realizable value of theproduct are expensed at the date of such determination. The accumulatedamortization and related software development costs are removed from therespective accounts effective in the year following full amortization.

The Company’spolicy is to amortize capitalized software costs by the straight-line methodover three to five years, the remaining estimated economic life of the productincluding the period being reported. The Company assesses the recoverability ofits software 

8

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development costsagainst estimated future undiscounted cash flows. Given the highly competitiveenvironment and technological changes, it is reasonably possible that thoseestimates of anticipated future gross revenue, the remaining estimated economiclife of the product, or both may be reduced significantly.

STOCK BASEDCOMPENSATION:  Effective January 1, 2006,the Company adopted SFAS No. 123(R), “Share-Based Payment,” using themodified-prospective-transition method. Under this transition method,compensation cost in 2006 includes cost for options granted prior to but notvested as of December 31, 2005, and options granted in 2006. Therefore, resultsfor prior periods have not been restated. The Company recognized compensationexpense of approximately $0.1 million and $0.2 million for the three and sixmonths ended June 30, 2006, respectively.

The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS No. 123 during the threeand six months ended June 30, 2005. For the purposes of this pro forma disclosure,the value of the options is estimated using a Black-Scholes option-pricingmodel and amortized to expense over the options vesting periods.

 
| ** **                                                                                                       | ** ** | **Three Months  Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2005**                                    | ** ** | **2005**                                  | ** ** |
| Net loss, as  reported                                                                                           |       | $                                           | (2,064,672 | )                                         | $          | (4,033,321 | ) |
| Compensation  expense related to stock options granted and employee stock purchase plan  issuances, net of taxes |       | (47,285                                     | )          | (100,283                                  | )          |
| Pro forma net  loss                                                                                              |       | $                                           | (2,111,957 | )                                         | $          | (4,133,604 | ) |
|                                                                                                             |       |                                        |       |                                      |       |
| Basic and  diluted net loss per share, as reported                                                               |       | $                                           | (0.67      | )                                         | $          | (1.31 | ) |
| Pro forma basic and  diluted net loss per share                                                                  |       | $                                           | (0.68      | )                                         | $          | (1.34 | ) |

 

As of July 1, 2006, theCompany has approximately $0.7 million of unrecognized compensation costrelated to unvested share-based compensation awards granted, which the Companyexpects to recognize over the next four years.

ACCOUNTS RECEIVABLE:Included in the Company’s accounts receivable balances in the ConsolidatedBalance Sheets are unbilled receivables of $44,100 at June 30, 2006. TheCompany did not have any unbilled receivables at December 31, 2005.

SOFTWARE LICENSEINDEMNIFICATIONS: In November 2002, the Financial Accounting Standards Board (“FASB”)issued FASB Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers” (“FIN 45”). FIN 45 requires that the Company recognize the fair valuefor certain guarantee and indemnification arrangements issued or modified bythe Company after December 31, 2002. In addition, the Company must continue tomonitor the conditions that are subject to the guarantees and indemnifications,as required under previously existing generally accepted accounting principles,in order to identify if a loss has occurred. If the Company determines that aloss is probable, the estimated loss must be recognized as it relates toapplicable guarantees and indemnifications. Some of the software licensesgranted by the Company contain provisions that indemnify customers of theCompany’s software from damages and costs resulting from claims alleging thatthe Company’s software infringes on the intellectual property rights of a thirdparty. Historically, the Company has not been required to pay material amountsin connection with claims asserted under these provisions and, accordingly, theCompany has not recorded a liability relating to these indemnificationprovisions.

(2) EMPLOYEE STOCKOPTIONS AND STOCK APPRECIATION RIGHTS

The fair value ofeach option and stock appreciation right (“SAR”) grant is estimated using theBlack-Scholes option-pricing model with the following weighted-averageassumptions for the six months ended June 30, 2006 and 2005:

 
| ** **               | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------|------------|------------|------------|------------|------------|
| Expected life            |       | 5.00 years |       | 5.00 years |       |
| Dividend rate            |       | 0          | %          | 0          | %          |
| Risk-free  interest rate |       | 4.30       | %          | 3.90       | %          |
| Volatility factors       |       | 94         | %          | 106        | %          |

 

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Theweighted-average exercise price and weighted-average fair value of optionsgranted during the six months ended June 30, 2006 and 2005 where the marketprice equals, exceeds, or is less than the exercise price at the time of grantis as follows:

 
| ** **           | ** ** | **2006**   | ** ** | **2005**    | ** ** |
|----------------------|------------|------------|------------|-------------|------------|
| ** **           | ** ** | **Equals** | ** ** | **Exceeds** | ** ** | **Is Less  Than** | ** ** | **Equals** | ** ** | **Exceeds** | ** ** | **Is Less  Than** | ** ** |
| Exercise price       |       | $          | 1.35       |        | —     |   | — |   | $ | 2.00 |   | — |   | — |   |
| Fair value of option |       | $          | 0.99       |        | —     |   | — |   | $ | 1.57 |   | — |   | — |   |

 

The Company granted12,500 options in the first quarter of 2006 and no options in the secondquarter of 2006. The Company granted 20,000 options in the first quarter of2005 and 31,645 options in the second quarter of 2005. No SARs were grantedduring the six months ended June 30, 2006 and 2005.

(3) SEGMENT INFORMATION

While the Companyoperates in one industry, financial services, in applying SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” the Company hasidentified three segments within which it operates. HyperFeed has two businesssegments, which are HTPX and HMDP. HTPX is offered as a complete turnkeysolution for the normalization, databasing, integration and transmission ofhigh performance, real-time data sources from market data sources, contentproviders, and proprietary in-house sources. HMDP, which the Company acquiredin the second quarter of 2005, is a market data platform that integrates marketdata from any source into any type of display or application software:transactional, web distribution, risk management, or other mid and back-officesystems. HMDP is currently generating no revenue because it is still in thedevelopmental stage. In the first quarter of 2006, HyperFeed first began todifferentiate between the operating results of HTPX and HMDP as reportablesegments.  The Company allocatesresources based upon the operating results of these segments. HYPRWare derivesrevenue from royalties related to license fees collected by Townsend fromsubscribers to Townsend’s service over the Internet who had been referredthrough HYPRWare. The accounting policies of the reportable segments are thesame as those described in Note 1 of the Notes to Unaudited InterimConsolidated Financial Statements. Financial information relating to industrysegments were as follows for the three and six months ended June 30, 2006 andJune 30, 2005:

 
| ** **                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Sales  to unaffiliated customers**                    |       |                                            |       |                                          |       |   |   |   |   |
| HyperFeed — HTPX                                   |       | $                                               | 807,569    |                                          | $          | 957,744 |   | $ | 1,728,480 |   | $ | 1,751,925 |   |
| HyperFeed — HMDP                                   |       |                                            |       | —                                        |       | — |   | — |   |
| HYPRWare                                                |       | 74,302                                          |       | 86,785                                        |       | 151,875 |   | 181,658 |   |
| Total revenue                                           |       | $                                               | 881,871    |                                          | $          | 1,044,529 |   | $ | 1,880,355 |   | $ | 1,933,583 |   |
|                                                    |       |                                            |       |                                          |       |   |   |   |   |
| HyperFeed — HTPX                                   |       | 91.6                                            | %          | 91.7                                          | %          | 91.9 | % | 90.6 | % |
| HyperFeed — HMDP                                   |       | —                                          |       | —                                        |       | — |   | — |   |
| HYPRWare                                                |       | 8.4                                             | %          | 8.3                                           | %          | 8.1 |   | 9.4 | % |
| Total revenue                                           |       | 100.0                                           | %          | 100.0                                         | %          | 100.0 | % | 100.0 | % |
|                                                    |       |                                            |       |                                          |       |   |   |   |   |
| **Operating  income (loss) from continuing operations** |       |                                            |       |                                          |       |   |   |   |   |
| HyperFeed — HTPX                                   |       | $                                               | (2,144,833 | )                                             | $          | (1,638,235 | ) | $ | (4,322,678 | ) | $ | (3,378,124 | ) |
| HyperFeed — HMDP                                   |       | (377,084                                        | )          | (30,577                                       | )          | (846,299 | ) | (30,577 | ) |
| HYPRWare                                                |       | 74,302                                          |       | 86,073                                        |       | 151,041 |   | 177,547 |   |
| Total operating  loss from continuing operations        |       | $                                               | (2,447,615 | )                                             | $          | (1,552,162 | ) | $ | (5,017,936 | ) | $ | (3,200,577 | ) |
|                                                    |       |                                            |       |                                          |       |   |   |   |   |
| HyperFeed — HTPX                                   |       | *                                               |       | *                                             |       | * |   | * |   |
| HyperFeed — HMDP                                   |       | *                                               |       | *                                             |       | * |   | * |   |
| HYPRWare                                                |       | *                                               |       | *                                             |       | * |   | * |   |
| Total operating loss  from continuing operations        |       | *                                               |       | *                                             |       | * |   | * |   |

----

* percentages notmeaningful

10

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| **Identifiable assets** | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| HyperFeed — HTPX        |       | $                           | 3,531,916  |                            | $          | 3,320,596 |   |
| HyperFeed — HMDP        |       | 1,435,339                   |       | 1,159,497                       |       |
| HYPRWare                     |       | 28,190                      |       | 135,425                         |       |
| Total  identifiable assets   |       | $                           | 4,995,445  |                            | $          | 4,615,518 |   |
|                         |       |                        |       |                            |       |
| HyperFeed — HTPX        |       | 70.8                        | %          | 72.0                            | %          |
| HyperFeed — HMDP        |       | 28.6                        | %          | 25.2                            | %          |
| HYPRWare                     |       | 0.6                         | %          | 2.9                             | %          |
| Total  identifiable assets   |       | 100.0                       | %          | 100.0                           | %          |
|                         |       |                        |       |                            |       |

 

(4) INTANGIBLES

On April 30,2001, the Company acquired certain assets of Marketscreen.com, Inc. (“Marketscreen”)for $100,000 and 45,000 shares of HyperFeed’s common stock and, in conjunctionwith the Marketscreen acquisition, acquired certain assets of Lasdorf CorporateServices, Inc. (“Lasdorf”) for $300,000. The acquisitions of Marketscreen andof Lasdorf’s intellectual property were accounted for under the purchase methodof accounting. The total purchase price of $1,607,609 consisted of $1,147,500for the fair value of common stock issued, $400,000 of cash consideration, and$60,109 for acquisition fees and expenses.

Duringthe fourth quarter of 2002, the Company conducted a review of the carryingvalue of goodwill and purchased intangible assets. Certain intangibles were determinedto be impaired because the carrying amount of the assets exceeded theundiscounted future cash flows expected to be derived from the assets. Theimpairment losses aggregating $0.7 million were measured as the amount by whichthe carrying amounts of the assets exceeded the fair values of the assets,determined based on the discounted future cash flows expected to be derivedfrom the assets. No impairment losses were recorded after the fourth quarter of2002. At December 31, 2005, the intangible asset was fully amortized.

On September 23, 2004,the Company repurchased a customer contract that had been sold by HyperFeed toInteractive Data Corporation (“IDC”) as part of the sale of HyperFeed’sinstitutional consolidated market data feed business in October 2003. As aresult of this repurchase, the Company recorded an intangible asset of$127,500. At December 31, 2005, the intangible asset was fully amortized.

On February 16, 2005, theCompany acquired Focus Technology Group LLC (“Focus”), a Delaware limitedliability company, developer of Smart Order Routing Technology for Traders (“SORTT”).The Company purchased substantially all of the assets of Focus, which primarilyconsisted of developed technology, a customer contract and relationships. Theacquisition of Focus was considered to be an acquisition of a development stageenterprise, as defined under SFAS No. 141, “Business Combinations,” and was notconsidered a business combination. As a result, the transaction was accountedfor under SFAS No. 142, “Goodwill and Other Intangible Assets.” The guaranteedportion of the purchase price was $350,000 and was allocated to theidentifiable intangible assets on the basis of their estimated fair values onthe acquisition date. The Company allocated $250,000 to developed technology,$80,000 to non-compete agreements, and $20,000 to customer contracts, withamortization periods of three years, two years, and one year, respectively. Thepurchase price also included a contingent portion dependent upon theachievement of certain growth targets for license and maintenance revenues fromthe SORTT applications through February 2008, not to exceed $3.4 million in theaggregate. As of June 30, 2006, the Company did not have any contingentpayments due.

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Intangible asset data isas follows:

 
| ** **                                  | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization**   | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Amortized  intangibles:                     |       |                        |       |                            |       |   |   |   |   |
| Developed technology                        |       | $                           | 250,000    |                            | $          | (114,583 | ) | $ | 430,000 |   | $ | (252,917 | ) |
| Non-compete agreements                      |       | 80,000                      |       | (55,000                         | )          | 80,000 |   | (35,000 | ) |
| Acquired customer contract                  |       | 20,000                      |       | (20,000                         | )          | 147,500 |   | (145,000 | ) |
| Total                                       |       | $                           | 350,000    |                            | $          | (189,583 | ) | $ | 657,500 |   | $ | (432,917 | ) |
|                                        |       |                        |       |                            |       |   |   |   |   |
| Estimated  amortization, for the year ended |       |                        |       |                            |       |   |   |   |   |
|                                        |       |                        |       |                            |       |   |   |   |   |
| December 31, 2006                           |       | $                           | 125,833    |                            |       |   |   |   |   |   |
| December 31, 2007                           |       | $                           | 88,333     |                            |       |   |   |   |   |   |
| December 31,  2008                          |       | $                           | 10,417     |                            |       |   |   |   |   |   |

 

The net amortizedintangibles at June 30, 2006 are $160,417 and the weighted average amortizationperiod is 2.66 years in total. The net amortized intangibles at June 30, 2005are $316,250 and the weighted average amortization period was 2.53 years intotal.

(5) LICENSED SOFTWARE

On May 20, 2005, the Companyentered into an exclusive license agreement with Reuters Limited, a corporationorganized under the laws of England and Wales (“Reuters”), and MoneylineTelerate, a Delaware corporation (“Telerate”), to license globally inperpetuity the source code for both Telerate’s Trading Room System (“TRS”) andTelerate’s Active8 technology. In accordance with SFAS No. 86, the Company hasrecorded the $1.0 million license fee as an asset under licensed and developedsoftware costs with the corresponding liability recorded under accountspayable. The license fee is due in two installments with 25% payable January15, 2006 and the remainder payable January 15, 2007. The licensed software hasan estimated useful life of five years and amortization began in the thirdquarter of 2005. As a result of certain disputes between the Company andReuters relating to the license agreement, the Company has not paid the portionof the license fee due on January 15, 2006.

In August 2005, theCompany entered into an exclusive, multi-year distributor agreement withMarketXS, a leading European provider of real-time market data technology andtrading solutions, that gives MarketXS the right to license, distribute, andsupport HyperFeed’s HMDP and OCC products in Europe, the Middle East, andAfrica. HyperFeed plans to provide software upgrades, maintenance and secondlevel support, while MarketXS is expected to provide European development,technical sales, and first level maintenance support. The term of thedistributor agreement varies, with certain elements extending through January2015.

(6) LINE OF CREDIT ANDCONVERTIBLE NOTE

On December 20, 2005, theCompany issued a Promissory Note to PICO in the amount of $810,000 at aninterest rate of 7.0% per annum. The entire unpaid principal balance andrelated interest under the December 20, 2005 Promissory Note was due andpayable not later than January 31, 2006. As described below, the December 20,2005 Promissory Note has been cancelled.

On January 23, 2006, theCompany issued a Promissory Note to PICO in the amount of $1,500,000 at aninterest rate of 7.0% per annum. The entire unpaid principal balance andrelated interest under the January 23, 2006 Promissory Note was due and payablenot later than February 28, 2006. The Company paid off a $500,000 line ofcredit with the borrowings from the January 23, 2006 Promissory Note andcancelled the line of credit. As described below, the January 23, 2006Promissory Note has been cancelled.

On February 15, 2006, theCompany issued a Promissory Note to PICO in the amount of $3,310,000 at aninterest rate of 7.0% per annum. The Company borrowed an additional $1,000,000under the February 15, 2006 Promissory Note. The principal sum borrowed underthe December 20, 2005 Promissory Note, the January 23, 2006 Promissory Note,and the February 15, 2006 Promissory Note totaled $3,310,000. In connectionwith this issuance, the December 20, 2005 Promissory Note and the January 23,2006 Promissory Note were cancelled. The entire unpaid principal balance andrelated interest under the February 15, 2006 Promissory Note was due andpayable not later than March 31, 2006. As described below, the February 15,2006 Promissory Note has been cancelled.

On March 15, 2006, theCompany issued a Promissory Note to PICO in the amount of $4,160,000 at aninterest rate of 7.0% per annum. The Company borrowed an additional $850,000under the March 15, 2006 Promissory Note. The principal sum borrowed under theFebruary 15, 2006 Promissory Note and the March 15, 2006 Promissory Notetotaled $4,160,000. In connection with this

 

12

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issuance, the February15, 2006 Promissory Note was cancelled. The entire unpaid principal balance andrelated interest under the March 15, 2006 Promissory Note was due and payablenot later than April 30, 2006. As described below, the March 15, 2006 PromissoryNote has been replaced by the 2006 Convertible Note.

OnMarch 30, 2006, the Company issued to PICO the 2006 Convertible Note, whichreplaced the March 15, 2006 Promissory Note. Under the terms of the 2006Convertible Note, the Company may borrow up to $10.0 million at an interestrate of prime plus 2.75%. The Company is obligated to repay all outstandingprincipal and accrued interest under the 2006 Convertible Note two years fromissuance. The 2006 Convertible Note, which is convertible by PICO at any timeinto HyperFeed’s common stock, provides that the number of shares that PICOwould receive in connection with a conversion of any amounts outstanding underthe 2006 Convertible Note would be determined by dividing the total outstandingamount to be converted by the lesser of (i) 80% of the five-day moving averageper share price of HyperFeed’s common stock on the date of conversion or (ii)80% of $1.05 per share. The number of shares of HyperFeed’s common stockissuable upon conversion of the 2006 Convertible Note is not subject to a cap.It is anticipated that the 2006 Convertible Note will be converted upon theconsummation of the Merger described in Note 1 above. In addition, inconnection with issuing the 2006 Convertible Note, the Company issued to PICO awarrant to purchase 125,000 shares of HyperFeed’s common stock at an exerciseprice of $1.05 per share. The fair value assigned to the warrants was$0.1 million. The warrantexpires on March 30, 2009.

The 2006 Convertible Notecontains a beneficial conversion feature and, as a result, the Company recordedadditional paid in capital and interest expense of $1.7 million for the sixmonths ended June 30, 2006, in accordance with EITF Issue No. 00-27, “Applicationof EITF Issue No. 98-5, “Accounting for Convertible Securities with BeneficialConversion Features or Contingently Adjustable Conversion Ratios,” to CertainConvertible Instruments.” The 2006 Convertible Note is secured by all of theassets of the Company andcontains customary representations, warranties, covenants, and events ofdefault. As of June 30, 2006, the Company has borrowed $6.7 millionunder the terms of the 2006 Convertible Note and has accrued, but unpaid,interest of $0.2 million.

(7) DISCONTINUEDOPERATIONS

On October 31, 2003, theCompany sold its institutional consolidated market data feed business to IDCfor $8.5 million. The sale allowed HyperFeed to focus on its business model asa utility provider of technology, software, and managed services for financialinstitutions. The sale price of $8.5 million included (1) an initial payment of$7.0 million cash paid on October 31, 2003, (2) $0.6 million in holdbackspayable upon completion of custom software and the fulfillment of certaintransition services, and (3) an $0.9 million indemnification holdback. TheCompany also entered into a transition services agreement whereby IDCreimbursed HyperFeed on a monthly basis for direct costs relative to thepurchased business. These costs included costs associated with resourcesdedicated to the transition, communications expenses, and other related costs.Of the $0.6 million in holdbacks related to completion of customer software andfulfillment of certain transition services, the Company received $0.4 millionand waived $0.1 million during the first quarter of 2004 and received the final$0.1 million during the third quarter of 2005. Of the $0.9 million,indemnification holdback, as of June 30, 2006, the Company remains eligible toreceive $0.2 million, subject to satisfaction of certain conditions. Thisamount has previously been reduced by $0.1 million attributable to the customercontract repurchased from IDC in September 2004, $0.1 million received in thefourth quarter of 2004, $0.3 million received in the fourth quarter of 2005, and$0.2 million received in the first quarter of 2006. The Company received theremaining holdback in July 2006.

The disposition wasaccounted for as discontinued operations in accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.” The results of operationsfor the discontinued businesses are as follows:

The Company recognized again from discontinued operations of $102,000, net of a $63,000 tax expense,for the three and six months ended June 30, 2006, compared to no gain for threeand six months ended June 30, 2005. The Company had no operating expenses fromdiscontinued operations for three and six months ended June 30, 2006 comparedto operating expenses of $17,050 and $39,649, unadjusted for taxes, for thethree and six months ended June 30, 2005, respectively. There were no revenueor direct costs of revenue from discontinued operations for the three and sixmonths ended June 30, 2006 and 2005.

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Assets and liabilitiesrelated to discontinued operations consist of the following:

 
| ** **                                                                                    | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets  Related to Discontinued Operations**                                                |       |                    |       |                        |       |
| Accounts receivable, net of allowance for doubtful  accounts of 2006: $28,705; 2005: $204,948 |       | $                       | 40,917     |                        | $          | 57,094 |   |
| **Total  Assets Related to Discontinued Operations**                                          |       | $                       | 40,917     |                        | $          | 57,094 |   |
|                                                                                          |       |                    |       |                        |       |
| **Liabilities  Related to Discontinued Operations**                                           |       |                    |       |                        |       |
| Accounts payable                                                                              |       | $                       | 201,089    |                        | $          | 45,259 |   |
| Accrued expenses                                                                              |       | 250,000                 |       | 488,289                     |       |
| **Total Liabilities Related to  Discontinued Operations**                                     |       | $                       | 451,089    |                        | $          | 533,548 |   |

 

(8) SIGNIFICANT CUSTOMERS

The Nasdaq Stock Market,Inc. accounted for approximately 10.7% and 2.0% of the Company’s consolidatedrevenue for the six months ended June 30, 2006 and 2005, respectively, andapproximately 8.0% and 2.4% of the company’s consolidated revenue for the threemonths ended June 30, 2006 and 2005, respectively. ComStock accounted forapproximately 10.2% and 19.1% of the Company’s consolidated revenue for the sixmonths ended June 30, 2006 and 2005, respectively, and approximately 8.4% and16.8% of the Company’s consolidated revenue for the three months ended June 30,2006 and 2005, respectively. Susquehanna International Group, LLP accounted forapproximately 7.5% and 12.5% of the Company’s consolidated revenue for the sixmonths ended June 30, 2006 and 2005, respectively, and approximately 8.0% and11.6% of the Company’s consolidated revenue for the three months ended June 30,2006 and 2005, respectively.

(9) LITIGATION

On February 23,2006, the Company filed a two-count complaint in the Tax Court of New Jerseycontesting the determination by the New Jersey Division of Taxation thatHyperFeed had nexus with New Jersey for the purposes of (i) the New JerseyCorporation Tax and (ii) the New Jersey Sales and Use Tax for the periodbeginning January 1, 1994 and forward. On April 25, 2006, the Company receivednotice that the New Jersey Division of Taxation has denied the allegations setforth in the two-count complaint. The Company intends to aggressively contestthe determination. As of June 30, 2006, the Company had accrued $250,000 inpotential tax liability and recorded the expense in discontinued operations.

The Company is aparty to various other legal proceedings incidental to its business operations,none of which is expected to have a material adverse effect on the financialcondition or results of operations of the Company.

(10) PENDING TRANSACTIONS

On June 13, 2006, theCompany announced that its Board of Directors approved a 1:1000 reverse stocksplit of its Common Stock to reduce ongoing operating costs including thesubstantial and increasing costs and expense associated with compliance withthe laws, rules, and regulations of the SEC. PICO, HyperFeed’s majoritystockholder, pursuant to applicable law and the Company’s bylaws, has approvedthe reverse stock split. Pending SEC review of certain filings the Company hasmade pursuant to the rules and regulations set forth in Section 13e-3 of theU.S. Securities Exchange Act of 1934 to effect the reverse stock split, thereverse stock split is expected to reduce the number of stockholders of recordto less than 300, which will permit the Company to terminate its obligation tofile reports with the SEC. Pursuant to the terms of the Going PrivateTransaction, stockholders owning less than 1,000 shares would be paid an amountbased on the closing price per share of the Company’s Common Stock on theOver-The-Counter Bulletin Board market on the date of effectiveness of thereverse stock split. Stockholders owning more than 1,000 shares would remain asshareholders of the Company after the reverse stock split and would havefractional shares redeemed at the same rate. The Company estimates that anaggregate of $400,000 would be paid to its stockholders to complete the reversestock split. Funding for the transaction is expected to be provided by the 2006Convertible Note. All amounts to be paid to HyperFeed stockholders inconnection with the Going Private Transaction shall have been paid or accruedas a liability on the Company’s balance sheet before the closing date.

On June 19, 2006, theCompany entered into the Merger Agreement by and among HyperFeed, AcquisitionHoldings, and Exegy, pursuant to which HyperFeed and Exegy have agreed tocombine their businesses through the Merger. Exegy, which is a privately heldcompany, will survive the Merger as a wholly-owned subsidiary of HyperFeed. TheCompany believes the combination will create an innovative technology companyfocused on producing unrivaled performance. Under the terms of the MergerAgreement, each Exegy common share will be converted into HyperFeed shares ofcommon stock and each Exegy option will be converted into HyperFeed options,resulting in the stockholders of both HyperFeed and Exegy each owning 50% ofthe merged company on a fully diluted basis. The Merger Agreement is subject tocustomary conditions, and requires cash equity contributions by PICO and thestockholders of 

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Exegy of US $5.0 millioneach, prior to closing. As a condition to closing, HyperFeed shall have causedPICO to convert its 2006 Convertible Note in exchange for shares of HyperFeedCommon Stock in accordance with the terms of the 2006 Convertible Note.Additionally, under the terms of the Merger Agreement, HyperFeed shall havecompleted the Going Private Transaction. The Merger is expected to close notlater than October 31, 2006.

While the Company expectsthe Merger to close, if it fails to do so, the Company currently believes thatits existing and anticipated capital resources, including cash and cashequivalents, accounts receivable, assets related to discontinued operations,cash expected to be received from holdbacks associated with the sale of itsinstitutional consolidated market data feed business and financing from PICO,which currently is the Company’s only source of financing, may not besufficient to fund its operations beyond December 31, 2006. The Companybelieves that it will need to obtain additional capital in the immediate futureboth to fund investments needed to increase its operating revenues to levelsthat will sustain its operations and to fund operating deficits that itanticipates will continue until revenue increases can be realized. There can beno assurances that the Company will be successful in obtaining sufficient additionalcapital, or if it does, that the additional capital will enable the Company toimprove its business so as to have a material positive effect on the Company’soperations and cash flow. The Company believes that without additionalinvestment, from PICO or other sources, it may be forced to cease operations atan undetermined future date. It is uncertain whether the Company’s assets willretain any value if the Company ceases operations. There are no assurances thatadditional funding will be available to the Company before it may be forced tocease operations.

**ITEM 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

This Quarterly Report onForm 10-Q contains forward-looking statements that involve risks and uncertainties,as well as assumptions that, if they never materialize or prove incorrect,could cause the results of HyperFeed Technologies, Inc. (“HyperFeed”) and itssubsidiary, HYPRWare, Inc. (“HYPRWare”), (collectively, the “Company”) todiffer materially from those expressed or implied by such forward-lookingstatements. All statements other than statements of historical fact arestatements that could be deemed forward-looking statements, including anystatements of the plans, strategies and objectives of management for futureoperations; any statements regarding future economic conditions or performance;any statement of expectation or belief; and any statements of assumptionsunderlying any of the foregoing. The risks, uncertainties, and assumptions referredto above include risks related to the possibility of requiring additionalfinancing; the Company’s proposed reverse stock split, the completion of theproposed merger, the possible issuance of additional shares and significantdilution of our stockholders’ ownership percentage associated with our securedconvertible note payable; the execution of our business plan; the fluctuationsin our financial results; our history of operating losses; attracting andretaining qualified management and key employees; the timely development andintroduction of new product and service initiatives at competitive prices andperformance levels; pending or future legal proceedings; the effect of economicand business conditions generally; and risks that are otherwise described inthe Company’s Annual Report on Form 10-K for the year ended December 31, 2005and from time to time in the Company’s other reports and registrationstatements filed with the Securities and Exchange Commission.

OVERVIEW

The Company has sustainedsignificant losses in recent years and in the first six months of 2006. Inparticular, the Company incurred a net loss of $6.8 million for the first sixmonths of 2006 compared to a net loss of $4.0 million for the same period in2005, and an overall net loss of $9.5 million for the fiscal year endedDecember 31, 2005. Included in the net loss of $6.8 million for the first sixmonths of 2006 is $1.7 million of noncash interest expense related to thebeneficial conversion feature of the Secured Convertible Promissory Note (the “2006Convertible Note”) issued by the Company to PICO in the first quarter of 2006 asdescribed in Note 6 of the Notes to Unaudited Interim Consolidated FinancialStatements. Operations through June 30, 2006 have been funded, in part, by advanceson the 2006 Convertible Note. As of June 30, 2006, the Company has anoutstanding principal balance of $6.7 million under the terms of the 2006Convertible Note and has accrued, but unpaid, interest of $0.2 million.Additionally, the Company’s negative cash flows from operating activitiesincreased to $4.1 million for the six months ended June 30, 2006 compared to$1.7 million for the six months ended June 30, 2005. The recurring losses andnegative cash flows raise substantial doubt about the Company’s ability tocontinue as a going concern. Total revenue for the first six months remainedrelatively unchanged at $1.9 million for 2006 and 2005.

On June 13, 2006, theCompany announced that its Board of Directors approved a 1:1000 reverse stocksplit of its Common Stock to reduce ongoing operating costs including thesubstantial and increasing costs and expense associated with compliance withthe laws, rules, and regulations of the U.S. Securities and Exchange Commission(“SEC”). PICO, HyperFeed’s majority stockholder, pursuant to applicable law andthe Company’s bylaws, has approved the reverse stock split. Pending SEC reviewof certain filings the Company has made pursuant to the rules and regulationsset forth in Section 13e-3 of the U.S. Securities Exchange Act of 1934 toeffect the reverse stock split, the reverse stock split is expected to reducethe number of stockholders of record to less than 300, which will permit theCompany to terminate its obligation to file reports with the SEC (the “GoingPrivate Transaction”). Pursuant to the terms of the Going Private Transaction,stockholders owning less than 1,000 shares would be paid an amount based on theclosing price per share of the Company’s Common Stock on the Over-The-CounterBulletin Board market on the date of effectiveness of the reverse stock split.Stockholders owning more than 1,000 shares would remain as shareholders of the 

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Company after the reversestock split and would have fractional shares redeemed at the same rate. TheCompany estimates that an aggregate of $400,000 would be paid to itsstockholders to complete the reverse stock split. Funding for the transactionis expected to be provided by the 2006 Convertible Note. All amounts to be paidto HyperFeed stockholders in connection with the Going Private Transactionshall have been paid or accrued as a liability on the Company’s balance sheetbefore the closing date.

On June 19, 2006, theCompany entered into an Agreement and Plan of Merger (the “Merger Agreement”)by and among HyperFeed, HyperFeed’s subsidiary, HyperFeed Acquisition Holdings,Inc., a Delaware corporation (“Acquisition Holdings”), and Exegy Incorporated,a Delaware corporation (“Exegy”), pursuant to which HyperFeed and Exegy haveagreed to combine their businesses through a merger of Exegy and AcquisitionHoldings (the “Merger”). Exegy, which is a privately held company, will survivethe Merger as a wholly-owned subsidiary of HyperFeed.  The Company believes the combination willcreate an innovative technology company focused on producing unrivaledperformance. Under the terms of the Merger Agreement, each Exegy common sharewill be converted into HyperFeed shares of common stock and each Exegy optionwill be converted into HyperFeed options, resulting in the stockholders of bothHyperFeed and Exegy each owning 50% of the merged company on a fully dilutedbasis. The Merger Agreement is subject to customary conditions, and requirescash equity contributions by PICO and the stockholders of Exegy of US $5.0million each, prior to closing. As a condition to closing, HyperFeed shall havecaused PICO to convert its 2006 Convertible Note in exchange for shares ofHyperFeed Common Stock in accordance with the terms of the 2006 ConvertibleNote. Additionally, under the terms of the Merger Agreement, HyperFeed shallhave completed the Going Private Transaction. The Merger is expected to closenot later than October 31, 2006.

While the Company expectsthe Merger to close, if it fails to do so, the Company currently believes thatits existing and anticipated capital resources, including cash and cashequivalents, accounts receivable, assets related to discontinued operations,cash expected to be received from holdbacks associated with the sale of itsinstitutional consolidated market data feed business and financing from PICO,which currently is the Company’s only source of financing, may not besufficient to fund its operations beyond December 31, 2006. The Companybelieves that it will need to obtain additional capital in the immediate futureboth to fund investments needed to increase its operating revenues to levelsthat will sustain its operations and to fund operating deficits that itanticipates will continue until revenue increases can be realized. There can beno assurances that the Company will be successful in obtaining sufficientadditional capital, or if it does, that the additional capital will enable theCompany to improve its business so as to have a material positive effect on theCompany’s operations and cash flow. The Company believes that withoutadditional investment, from PICO or other sources, it may be forced to ceaseoperations at an undetermined future date. It is uncertain whether the Company’sassets will retain any value if the Company ceases operations. There are noassurances that additional funding will be available to the Company before itmay be forced to cease operations.

In the first quarter of2006, the Company issued the 2006 Convertible Note to PICO for $10.0 million, payable twoyears from issuance, as described in Note6 of the Notes to Unaudited Interim Consolidated Financial Statements.The Company anticipates that PICO will convert the 2006 Convertible Note priorto the close of the Merger Agreement. However,in the event that the Merger Agreement does not close, the Company may not havesufficient capital resources to repay or refinance the 2006 Convertible Notewhen it comes due in March 2008. In the event that PICO chooses not to convertthe 2006 Convertible Note and the Company is unable to repay or refinance the2006 Convertible Note at such time, PICO will also have the right to declarethe 2006 Convertible Note in default and may, at its option, pursue any otherremedies available to it. See the Company’s Current Report on Form 8-K filed onMarch 31, 2006. If the Company requires additional capital resources, there canbe no assurances that such capital will be available or that such capital willbe available on terms satisfactory to the Company. If the Company does notobtain such capital, it may not have sufficient capital resources to fundcontinuing operations.

The Company derivesrevenue from software licensing, maintenance, and consulting fees. In general,the Company expects that its licensing fees will be structured as a one timefee with a recurring maintenance fee, a recurring monthly fee, based upon thenature, size, and scope of the licensee, or a monthly fee, based upon thenumber of end users that rely upon the products and services offered by thelicensee. Consulting fees charged to customers are expected to vary based uponthe nature, size, and scope of the projects undertaken.

The Company’s directcosts of revenue are composed largely of software development amortizationcosts, royalty fees and labor associated with consulting services.

RESULTS OF OPERATIONS FORTHE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005

**Revenue**

Totalrevenue for the first six months remained relatively unchanged at $1.9 millionfor 2006 and 2005. Total revenue for the three months ended June 30, 2006decreased 15.6% to $0.9 million compared with $1.0 million for the three monthsended June 30, 2005.

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HyperFeed revenueremained unchanged at $1.7 million for the six months ended June 30, 2006 anddecreased 15.7% to $0.8 million for the three months ended June 30, 2006 ascompared to $1.0 million for the comparable period in 2005. The decline inHyperFeed revenue for the three-month period is due to two contracts that werestructured as one-time fees and became fully amortized during 2005. HyperFeedrevenue is derived from HTPX and HBOX software and ticker plant technologiesand includes license and consulting revenue, including revenue from multi-yearcontracts with Chicago Board Options Exchange, Philadelphia Stock Exchange,ComStock, Inc., Susquehanna International Group, LLP, and The Nasdaq StockMarket, Inc. There was no HMDP revenue for the three and six months ended June30, 2006 and 2005.

HYPRWare revenuedecreased 16.4% to $151,875 for the six months ended June 30, 2006 comparedwith $181,658 for the six months ended June 30, 2005. For the three monthsended June 30, 2006, HYPRWare revenue decreased 14.4% to $74,302 compared with$86,785 for the three months ended June 30, 2005. HYPRWare derives revenue fromroyalties related to license fees for customers it referred to TownsendAnalytics, Ltd. (“Townsend”) prior to December 31, 2002. The decline inHYPRWare revenue is due to a decrease in royalties from Townsend as formerHYPRWare customers serviced by Townsend decrease. The Company currently expectsthat any future revenue recognized by HYPRWare will be derived exclusively fromroyalties from the licensing agreement with Townsend and that the HYPRWarerevenue will to continue to decline.

**TotalExpenses**

Total expenses (includingdirect costs of revenue, operating expenses, other expense, and expenses indiscontinued operations) increased 47.5% to $8.8 million for the six monthsended June 30, 2006 compared with $6.0 million for the six months ended June30, 2005. Total expenses decreased 4.1% to $3.0 million for the three monthsended June 30, 2006 compared with $3.1 million for the three months ended June30, 2005. The increase in total expenses for the six-month period wasprincipally due to $1.3 million of labor costs, noncash interest expenses of$1.0 million incurred in connection with the beneficial conversion featurerelated to the 2006Convertible Note, and $0.5 million in communication and data costs. The$8.8 million of total expense for the six months ended June 30, 2006 consistsof $8.0 million for HTPX and $0.8 million for HMDP. The $3.0 million of totalexpense for the three months ended June 30, 2006 consists of $2.8 million forHTPX and $0.2 million for HMDP. Total expenses related to HMDP for the threeand six months ended June 30, 2005 were $30,577.

**DirectCosts of Revenue**

Total direct costs ofrevenue increased 57.9% to $0.9 million for the six months ended June 30, 2006compared with $0.6 million for the six months ended June 30, 2005. For the threemonths ended June 30, 2006, total direct costs of revenue increased 58.1% to$0.4 million compared with $0.3 million for the three months ended June 30,2005. The principal component of the increases for the three and six-monthperiods were $0.1 million and $0.2 million, respectively, for license feesrelated to the provision of third party data. Amortization of licensed anddeveloped software costs increased 25.7% to $0.6 million for the six monthsended June 30, 2006 as compared to $0.5 million for the six months ended June30, 2005. Amortization of licensed and developed software costs remainedrelatively unchanged at $0.3 million for the three months ended June 30, 2006and 2005. Direct costs of revenue associated with HTPX for the six months endedJune 30, 2006 were $0.8 million and direct costs of revenue associated withHMDP were $0.1 million for the six months ended June 30, 2006. Direct costs ofrevenue associated with HTPX for the three months ended June 30, 2006 were $0.3million and direct costs of revenue associated with HMDP were $0.1 million forthe three months ended June 30, 2006. There were no direct costs of revenuerelated to HMDP for the three and six months ended June 30, 2005. There are nodirect costs of revenue related to HYPRWare service revenue as such amountsconsist solely of royalty income. Gross margin decreased 27.6% to $1.0 millionfor the six months ended June 30, 2006 compared with $1.4 million for the sixmonths ended June 30, 2005. Gross margin decreased 42.4% to $0.4 million forthe three months ended June 30, 2006 compared with $0.8 million for the threemonths ended June 30, 2005. Direct costs as a percentage of total revenueincreased to 47.2% for the six months ended June 30, 2006 compared with 29.1%for the six months ended June 30, 2005. Direct costs as a percentage of totalrevenue increased to 50.0% for the three months ended June 30, 2006 comparedwith 26.7% for the three months ended June 30, 2005. The increases in theproportion of direct costs of revenue to total revenue for the three and sixmonths ended June 30, 2006 compared to the three and six months ended June 30,2005 were due to an overall increase in direct costs of revenue.

**OperatingExpenses**

Totaloperating expenses increased 31.5% to $6.0 million for the six months endedJune 30, 2006 compared with $4.6 million for the six months ended June 30,2005. For the three months ended June 30, 2006, total operating expensesincreased 24.6% to $2.9 million compared with $2.3 million for the three monthsended June 30, 2005. Increases were experienced in all categories, exceptdepreciation and amortization expenses and general and administrative expensesfor the six-month period. Operating expenses related to HMDP for the three andsix months ended June 30, 2005 were $30,577. Total operating expenses as apercentage of total revenue increased to 319.7% for the six months ended June30, 2006 compared to 236.5% for the six months ended June 30, 2005. Totaloperating expenses as a percentage of total revenue increased to 327.6% for thethree months ended June 30, 2006 compared to 221.9% for the three months endedJune 30, 2005. The increases in the proportion of total operating expenses tototal revenue for the 

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threeand six months ended June 30, 2006 compared to the three and six months endedJune 30, 2005 were due to an overall increase in total operating expenses.

Sales and marketing costsincreased 23.1% to $1.0 million for the six months ended June 30, 2006 comparedwith $0.8 million for the six months ended June 30, 2005. Sales and marketingcosts remained unchanged at $0.5 million for the three months ended June 30,2006 and 2005. The increase for the six-month period was primarily resultedfrom $0.1 million of costs associated with selling the HMDP product, which theCompany acquired in the second quarter of 2005, and $0.1 million of additionallabor costs due to growth in the Company’s sales force. The $1.0 million ofsales and marketing costs for the six months ended June 30, 2006 consist of$0.7 million for HTPX and $0.3 million for HMDP. The $0.5 million for the threemonths ended June 30, 2006 consist of $0.4 million from HTPX and $0.1 millionfor HMDP.  There were no sales andmarketing costs related to HMDP for the three and six months ended June 30, 2005.Sales costs as a percentage of total revenue increased to 55.6% for the sixmonths ended June 30, 2006 compared to 43.9% for the six months ended June 30,2005. Sales costs as a percentage of total revenue increased to 58.3% for thethree months ended June 30, 2006 compared to 48.4% for the three months endedJune 30, 2005. The increases in the proportion of sales and marketing costs tototal revenue for the three and six months ended June 30, 2006 compared to thethree and six months ended June 30, 2005 were due to an overall increase insales and marketing costs.

General andadministrative expenses remained unchanged at $1.5 million for the six monthsended June 30, 2006 and 2005. General and administrative expenses remainedunchanged at $0.7 million for the three months ended June 30, 2006 and 2005.The $1.5 million of general and administrative expenses for the six monthsended June 30, 2006 consists of $1.4 million for HTPX and $0.1 million forHMDP. The $0.7 million of general and administrative expenses for the threemonths ended June 30, 2006 consist of $0.7 million for HTPX and $28,194 forHMDP. There were $30,577 of general and administrative expenses related to HMDPfor the three and six months ended June 30, 2005. General and administrative expensesas a percentage of total revenue increased to 81.6% for the six months endedJune 30, 2006 compared to 79.5% for the six months ended June 30, 2005. Generaland administrative expenses as a percentage of total revenue increased to 84.7%for the three months ended June 30, 2006 compared to 70.6% for the three monthsended June 30, 2005. The increase in the proportion of general andadministrative costs to total revenue for the three months ended June 30, 2006was due to a decrease in revenue compared to the three months ended June 30,2005.

Research and developmentcosts increased 53.5% to $1.1 million for the six months ended June 30, 2006compared with $0.7 million for the six months ended June 31, 2005. Research anddevelopment costs increased 51.3% to $0.5 million for the three months endedJune 30, 2006 compared with $0.3 million for the three months ended June 30,2005. The increase for the six-month period resulted from $0.2 million inadditional labor costs and $0.2 million for the outsourcing of labor, incurredin each case to enhance HyperFeed’s product line. The increase for thethree-month period resulted from $0.1 million in additional labor costs and$0.1 million for the outsourcing of labor, incurred in each case to enhanceHyperFeed’s product line. The $1.1 million of research and development costsfor the six months ended June 30, 2006 consists of $0.9 million for HTPX and$0.2 million for HMDP. The $0.5 million of research and development costs forthe three months ended June 30, 2006 consists of $0.4 million for HTPX and $0.1million for HMDP. There were no research and development costs related to HMDPfor the three and six months ended June 30, 2005. Research and developmentcosts as a percentage of total revenue increased to 59.7% for the six monthsended June 30, 2006 compared to 37.8% for the six months ended June 30, 2005.Research and development costs as a percentage of total revenue increased to57.7% for the three months ended June 30, 2006 compared to 32.2% for the threemonths ended June 30, 2005. The increase in the proportion of research anddevelopment costs to total revenue for the three and six months ended June 30,2006 compared to the three and six months ended June 30, 2005 was due to anoverall increase in research and development costs.

Operations costsincreased 93.0% to $2.0 million for the six months ended June 30, 2006 comparedwith $1.0 million for the six months ended June 30, 2005. Operations costsincreased 82.2% to $1.0 million for the three months ended June 30, 2006compared with $0.5 million for the three months ended June 30, 2005. Theincrease for the six-month period resulted from $0.5 million for communicationcosts, $0.4 million in labor costs relating to the end of the transition serviceagreement period related to the sale of HyperFeed’s institutional consolidatedmarket data feed business, and $0.1 million for data acquisition costs that theCompany did not incur in the first half of 2005. The increase for thethree-month period resulted from $0.2 million for communication costs, $0.2million in labor costs, and $0.1 million for data acquisition costs. Operationscosts consist of technical support, data maintenance, data access, andcommunications costs. The $2.0 million of operations costs for the six monthsended June 30, 2006 consists of $2.0 million for HTPX and $0.1 million forHMDP. The $1.0 million for operations costs for the three months ended June 30,2006 consists of $1.0 million for HTPX and $38,031 for HMDP. There were nooperations costs related to HMDP for the three and six months ended June 30,2005. Operations costs as a percentage of total revenue increased to 107.3% forthe six months ended June 30, 2006 compared to 54.1% for the six months endedJune 30, 2005. Operations costs as a percentage of total revenue increased to112.1% for the three months ended June 30, 2006 compared to 51.9% for the threemonths ended June 30, 2005.  The increasein the proportion of operations costs to total revenue for the three and sixmonths ended June 30, 2006 compared to the three and six months ended June 30,2005 was due to an overall increase in operations costs.

Depreciation andamortization decreased 28.6% to $0.3 million for the six months ended June 30,2006 compared with $0.4 million for the six months ended June 30, 2005.  Depreciation and amortization decreased 33.3%to $0.1 million for the three months ended June 

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30, 2006 compared to $0.2million for the three months ended June 30, 2005. The $0.3 million ofdepreciation and amortization costs for the six months ended June 30, 2006consists of $0.3 million for HTPX and $6,100 for HMDP. The $0.1 million ofdepreciation and amortization costs for the three months ended June 30, 2006consist of $0.1 million for HTPX and $3,657 for HMDP. There were nodepreciation and amortization costs related to HMDP for the three months endedJune 30, 2005. Depreciation and amortization as a percentage of total revenuedecreased to 15.5% for the six months ended June 30, 2006 compared to 21.1% forthe six months ended June 30, 2005. Depreciation and amortization as apercentage of total revenue decreased to 14.8% for the three months ended June30, 2006 compared to 18.8% for the three months ended June 30, 2005.  The decrease in the proportion ofdepreciation and amortization costs to total revenue for the three and sixmonths ended June 30, 2006 compared to the three and six months ended June 30,2005 was due to a decrease in depreciable assets.

**Interest Expense**

Interest expense increased 139.8% to $1.9 million for the six monthsended June 30, 2006 compared with $0.8 million for the six months ended June30, 2005. Interest expense decreased 170.0% to a recovery of $0.3 million forthe three months ended June 30, 2006 compared with expense of $0.5 million forthe three months ended June 30, 2005. The increase for the six month periodprincipally resulted from noncash interest expense of $1.7 million recorded forthe six months ended June 30, 2006 related to the beneficial conversion featureof the 2006 Convertible Note compared to noncash interest expenses of $0.7million recorded in the six months ended June 30, 2005 related to thebeneficial conversion feature of an amended and restated Secured ConvertiblePromissory Note issued by the Company to PICO in the first quarter of 2005 (the“Restated Convertible Note”). Additionally, the Company recorded accruedinterest of $0.2 million for the six months ended June 30, 2006 on borrowingsagainst the 2006 Convertible Note compared to $0.1 million of accrued interestplus commitment fee for the six months ended June 30, 2005 against theborrowings under the Restated Convertible Note. HTPX absorbed 100.0% of theinterest expense for the three and six months ended June 30, 2006 and 2005,respectively. As a result of a decrease in the price of HyperFeed’s commonstock, noncash interest related to the beneficial conversion feature of the2006 Convertible Note was income during the second quarter of 2006. This resultoccurs due to the mark-to-market accounting for the beneficial conversionfeature combined with the decline in the market price of HyperFeed’s commonstock.

**DiscontinuedOperations**

In June 2003, the Companysold the individual retail investor unit and related assets of its subsidiary,PCQuote.com, Inc., and, in October 2003, the Company sold its institutionalconsolidated market data feed business. Due to the completion of it obligationsunder the transition service agreement entered into in connection with the saleof its consolidated market data feed business in the second quarter of 2005,the Company did not record any income or expense related to discontinuedoperations for the three and six months ended June 30, 2006 compared with a netloss from discontinued operations of $17,050 and $39,649, unadjusted for tax, forthe three and six months ended June 30, 2005, respectively. The net loss forthe three and six months ended June 30, 2005 resulted from the incurrence ofinbound communications costs associated with the Company’s obligation under atransition services agreement related to the sale of its consolidated marketdata feed business. The Company recorded $0.1 million, net of tax expense of$0.1 million, as a gain on disposition of discontinued operations during thefirst quarter of 2006 related to holdbacks from the sale of its institutionalconsolidated market data feed business. The Company had no comparable gain thesix months ended June 30, 2005.

As of June 30, 2006,assets related to discontinued operations consist of accounts receivable, netof allowance, prior to November 1, 2003. Liabilities related to discontinuedoperations consist of (1) accounts payables related to a sales tax settlementand (2) accrued expenses related to a potential tax liability. See Note 7 ofthe Notes to Unaudited Interim Consolidated Financial Statements. The Companyexpects the assets and liabilities related to the discontinued operations to becompletely settled during 2008.

LIQUIDITY AND CAPITALRESOURCES

Net cash and cashequivalents decreased to $0.1 million at June 30, 2006 from $0.3 million atDecember 31, 2005.

Operating activities usednet cash of $4.2 million for the six months ended June 30, 2006 compared to netcash used of $1.7 million for the six months ended June 30, 2005. The net lossfor the six months ended June 30, 2006 of $6.8 millions was offset in part bynoncash items, including $1.7 million of interest expense related to thebeneficial conversion feature of the 2006 Convertible Note, $0.9 million ofdepreciation and amortization of long-lived assets, and $0.2 million of stockbased compensation expense. The net loss for the six months ended June 30, 2005of $4.0 million was offset in part by noncash items, including $0.7 millioninterest expense related to the beneficial conversion feature of the Restated ConvertibleNote and $0.9 million of depreciation and amortization of long-lived assets.

Investing activities usednet cash of $1.4 million for the six months ended June 30, 2006 compared to netcash used of $1.2 million for the six months ended June 30, 2005. During thesix months ended June 30, 2006, the Company invested $0.4 million in equipmentand $1.0 million in its licensed and developed technology. The increase in thepurchase of equipment resulted from the building of the Company’s HighPerformance Center. Additionally, the Company established a $0.1 millioncertificate of deposit during the first quarter of 2006. The Companycollected  $0.1 million that is appliedto a note receivable from Money.net. During the six months ended June 30, 2005,the Company invested $0.1 million in equipment and $0.7 million in itsdeveloped technology. Additionally, in 

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the first quarter of2005, the Company acquired the assets of Focus Technology Group LLC for $0.4million, as described in Note4 of the Notes to Unaudited Interim Consolidated Financial Statements.

Financing activitiesprovided net cash of $5.4 million for the six months ended June 30, 2006compared to net cash provided of $2.8 million for the six months ended June 30,2005.

On December 20, 2005, theCompany issued a Promissory Note to PICO in the amount of $0.8 million at aninterest rate of 7.0% per annum. The entire unpaid principal balance andrelated interest under the December 20, 2005 Promissory Note was due andpayable not later than January 31, 2006. As described below, the December 20,2005 Promissory Note has been cancelled.

On January 23, 2006, theCompany issued a Promissory Note to PICO in the amount of $1.5 million at aninterest rate of 7.0% per annum. The entire unpaid principal balance andrelated interest under the January 23, 2006 Promissory Note was due and payablenot later than February 28, 2006. The Company paid off a $0.5 million line ofcredit with the borrowings from the January 23 Promissory Note and cancelledthe line of credit. As described below, the January 23, 2006 Promissory Notehas been cancelled.

On February 15, 2006, theCompany issued a Promissory Note to PICO in the amount of $3.3 million at aninterest rate of 7.0% per annum. The Company borrowed an additional $1.0 millionunder the February 15, 2006 Promissory Note. The principal sum borrowed underthe December 20, 2005 Promissory Note, the January 23, 2006 Promissory Note,and the February 15, 2006 Promissory Note totaled $3.3 million. In connectionwith this issuance, the December 20, 2005 Promissory Note and the January 23,2006 Promissory Note were cancelled. The entire unpaid principal balance andrelated interest under the February 15, 2006 Promissory Note was due andpayable not later than March 31, 2006. As described below, the February 15,2006 Promissory Note has been cancelled.

On March 15, 2006, theCompany issued a Promissory Note to PICO in the amount of $4.2 million at aninterest rate of 7.0% per annum. The Company borrowed an additional $0.9million under the March 15, 2006 Promissory Note. The principal sum borrowedunder the February 15, 2006 Promissory Note and the March 15, 2006 PromissoryNote totaled $4.2 million. In connection with this issuance, the February 15,2006 Promissory Note was cancelled. The entire unpaid principal balance andrelated interest under the March 15, 2006 Promissory Note was due and payablenot later than April 30, 2006. As described below, the March 15, 2006Promissory Note has been replaced by the 2006 Convertible Note.

OnMarch 30, 2006, the Company issued to PICO the 2006 Convertible Note whichreplaced the March 15, 2006 Promissory Note. Under the terms of the 2006Convertible Note, the Company may borrow up to $10.0 million at an interestrate of prime plus 2.75%. The Company is obligated to repay all outstandingprincipal and accrued interest under the 2006 Convertible Note two years fromissuance. The 2006 Convertible Note, which is convertible by PICO at any timeinto HyperFeed’s common stock, provides that the number of shares that PICOwould receive in connection with a conversion of any amounts outstanding underthe 2006 Convertible Note would be determined by dividing the total outstandingamount to be converted by the lesser of (i) 80% of the five-day moving averageper share price of HyperFeed’s common stock on the date of conversion or (ii)80% of $1.05 per share. The number of shares of HyperFeed’s common stockissuable upon conversion of the 2006 Convertible Note is not subject to a cap.It is anticipated that the 2006 Convertible Note will be converted upon theconsummation of the Merger described in Note 1 of the Notes to UnauditedInterim Consolidated Financial Statements. In addition, in connection with issuing the 2006 Convertible Note,the Company issued to PICO a warrant to purchase 125,000 shares of HyperFeed’scommon stock, at an exercise price of $1.05 per share. The warrant expires onMarch 30, 2009.

The 2006 Convertible Notecontains a beneficial conversion feature and, as a result, the Company recorded$1.7 million of additional paid-in-capital and interest expense for the sixmonths ended June 30, 2006. The 2006 Convertible Note is secured by all of theassets of the Company andcontains customary representations, warranties, covenants, and events ofdefault. As of June 30, 2006,the Company had borrowed $6.7 million under the terms of the 2006 ConvertibleNote and recorded accrued, but unpaid, interest of $0.2 million.

The Company has sustainedsignificant losses in recent years and in the first six months of 2006. Inparticular, the Company incurred a net loss of $6.8 million for the first sixmonths of 2006 compared to a net loss of $4.0 million for the same period in2005, and an overall net loss of $9.5 million for the fiscal year ended December31, 2005. Included in the net loss of $6.8 million for the first six months of2006 is $1.7 million of noncash interest expense related to the beneficialconversion feature of the 2006 Convertible Note. Operations through June 30,2006 have been funded, in part, by advances on the 2006 Convertible Note. As ofJune 30, 2006, the Company has an outstanding principal balance of $6.7 millionunder the terms of the 2006 Convertible Note and has accrued, but unpaid,interest of $0.2 million. Additionally, the Company’s negative cash flows fromoperating activities increased to $4.1 million for the six months ended June30, 2006 compared to $1.7 million for the six months ended June 30, 2005. Therecurring losses and negative cash flows raise substantial doubt about theCompany’s ability to continue as a going concern. Total revenue remainedrelatively unchanged at $1.9 million for the first six months of 2006 and 2005.

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On June 13, 2006, theCompany announced that its Board of Directors approved a 1:1000 reverse stocksplit of its Common Stock to reduce ongoing operating costs including thesubstantial and increasing costs and expense associated with compliance withthe laws, rules, and regulations of the SEC. PICO, HyperFeed’s majoritystockholder, pursuant to applicable law and the Company’s bylaws, has approvedthe reverse stock split. Pending SEC review of certain filings the Company hasmade pursuant to the rules and regulations set forth in Section 13e-3 of theU.S. Securities Exchange Act of 1934 to effect the reverse stock split, thereverse stock split is expected to reduce the number of stockholders of recordto less than 300, which will permit the Company to terminate its obligation tofile reports with the SEC. Pursuant to the terms of the Going PrivateTransaction, stockholders owning less than 1,000 shares would be paid an amountbased on the closing price per share of the Company’s Common Stock on theOver-The-Counter Bulletin Board market on the date of effectiveness of thereverse stock split. Stockholders owning more than 1,000 shares would remain asshareholders of the Company after the reverse stock split and would havefractional shares redeemed at the same rate. The Company estimates that anaggregate of $400,000 would be paid to its stockholders to complete the reversestock split. Funding for the transaction is expected to be provided by the 2006Convertible Note. All amounts to be paid to HyperFeed stockholders inconnection with the Going Private Transaction shall have been paid or accruedas a liability on the Company’s balance sheet before the closing date.

On June 19, 2006, theCompany entered into the Merger Agreement by and among HyperFeed, AcquisitionHoldings, and Exegy, pursuant to which HyperFeed and Exegy have agreed tocombine their businesses through the Merger. Exegy, which is a privately heldcompany, will survive the Merger as a wholly-owned subsidiary of HyperFeed. TheCompany believes the combination will create an innovative technology companyfocused on producing unrivaled performance. Under the terms of the MergerAgreement, each Exegy common share will be converted into HyperFeed shares ofcommon stock and each Exegy option will be converted into HyperFeed options,resulting in the stockholders of both HyperFeed and Exegy each owning 50% ofthe merged company on a fully diluted basis. The Merger Agreement is subject tocustomary conditions, and requires cash equity contributions by PICO and thestockholders of Exegy of US $5.0 million each, prior to closing. As a conditionto closing, HyperFeed shall have caused PICO to convert its 2006 ConvertibleNote in exchange for shares of HyperFeed Common Stock in accordance with theterms of the 2006 Convertible Note. Additionally, under the terms of the MergerAgreement, HyperFeed shall have completed the Going Private Transaction. TheMerger is expected to close not later than October 31, 2006.

While the Company expectsthe Merger to close, if it fails to do so, the Company currently believes thatits existing and anticipated capital resources, including cash and cashequivalents, accounts receivable, assets related to discontinued operations,cash expected to be received from holdbacks associated with the sale of itsinstitutional consolidated market data feed business and financing from PICO,which currently is the Company’s only source of financing, may not besufficient to fund its operations beyond December 31, 2006. The Companybelieves that it will need to obtain additional capital in the immediate futureboth to fund investments needed to increase its operating revenues to levelsthat will sustain its operations and to fund operating deficits that itanticipates will continue until revenue increases can be realized. There can beno assurances that the Company will be successful in obtaining sufficientadditional capital, or if it does, that the additional capital will enable theCompany to improve its business so as to have a material positive effect on theCompany’s operations and cash flow. The Company believes that withoutadditional investment, from PICO or other sources, it may be forced to ceaseoperations at an undetermined future date. It is uncertain whether the Company’sassets will retain any value if the Company ceases operations. There are noassurances that additional funding will be available to the Company before itmay be forced to cease operations.

In the first quarter of2006, the Company issued the 2006 Convertible Note to PICO for $10.0 million, payable twoyears from issuance, as described in Note6 of the Notes to Unaudited Interim Consolidated Financial Statements.The Company anticipates that PICO will convert the 2006 Convertible Note priorto the close of the Merger Agreement. However,in the event that the Merger Agreement does not close, the Company may not havesufficient capital resources to repay or refinance the 2006 Convertible Notewhen it comes due in March 2008. In the event that PICO chooses not to convertthe 2006 Convertible Note and the Company is unable to repay or refinance the2006 Convertible Note at such time, PICO will also have the right to declarethe 2006 Convertible Note in default and may, at its option, pursue any otherremedies available to it. See the Company’s Current Report on Form 8-K filed onMarch 31, 2006. If the Company requires additional capital resources, there canbe no assurances that such capital will be available or that such capital willbe available on terms satisfactory to the Company. If the Company does notobtain such capital, it may not have sufficient capital resources to fundcontinuing operations

CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES

**General**: Management’s Discussion and Analysisof Financial Condition and Results of Operations discusses the Company’sconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenue and expenses duringthe reporting period.

On an on-going basis,management evaluates its estimates and judgments, including those related tobad debts and intangible assets. Management bases its estimates and judgmentson historical experience and on various other factors that are believed to bereasonable 

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under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates under differentassumptions or conditions. Management believes the following criticalaccounting policies, among others, affect its more significant judgments andestimates used in the preparation of its consolidated financial statements.

**RevenueRecognition**: The Company principally derives revenue fromlicensing technology and providing management and maintenance services of HTPX,HBOX, HMDP, and OCC software, ticker plant and data platform technologies, andmanaged services. Additionally, the Company derives revenue from thedevelopment of customized software.

Revenue is recognizedfrom the licensing of HTPX, HBOX, HMDP, and OCC (1) as payments from customersbecome due when the fee is not fixed or determinable at the outset of thearrangement or (2) ratably over the term of the agreement when post contractcustomer support (“PCS”) has a duration of one year or less. PCS is recognizedratably over the term. Revenue for the development of customized software,consulting, and implementation services is recognized based on time andmaterials from the application of contract accounting for the development ofcustomized software, or based on an hourly rate when it is not a fixed feearrangement. For licensing of the Company’s software through its saleschannels, revenue is recognized as payments from the reseller become due andgenerally commences after the software is installed at the reseller’s customersite.

The Company applies theprovisions of AICPA Statement of Position (“SOP”) 97-2, “Software RevenueRecognition,” as amended, which specifies the following four criteria that mustbe met prior to recognizing revenue: (1) persuasive evidence of the existenceof an arrangement, (2) delivery, (3) fixed or determinable fee, and (4)probable collection. In addition, revenue earned on software arrangementsinvolving multiple elements is allocated to each element based on the relativefair value of the elements. When applicable, revenue allocated to HyperFeed’ssoftware products (including specified upgrades/enhancements) is recognizedupon delivery of the products. If the fee is considered fixed and determinable,it is recognized as revenue when the sale is effected. If the fee is notconsidered fixed and determinable, it is recognized as revenue as payments fromcustomers become due. Revenue allocated to PCS is recognized ratably over theterm of the support and revenue allocated to service elements (such astraining) is recognized as the services are performed.

In accordance with SOP97-2, revenue from contracts that do not require significant production,modification, or customization of software is recognized when the abovecriteria are met. Revenue from contracts that require significant production,modification, or customization of software is accounted for in conformity withthe provisions of Accounting Research Bulletin No. 45, “Long-Term ConstructionContracts,” using the relevant guidance therein, and SOP 81-1, “Accounting forPerformance of Construction-Type and Certain Production-Type Contracts.” SOP81-1 provides for revenue recognition under the “percentage-of-completion” or “completedcontract” method depending on the facts and circumstances of contracts enteredinto and management’s ability to reasonably estimate its progress towardcompletion. Contract losses, if any, are provided for in their entirety in theperiod they become known, without regard to the percentage-of-completion. Forthose contracts which the Company cannot reasonably estimate progress towardcompletion, the Company employs the completed contract method of accounting.Revenue from arrangements accounted for under contract accounting are allocatedamong licensed technologies, managed services, and consulting fees based on thecontractual terms of the arrangements.

The use of contractaccounting inherently includes the use of estimates of progress towardcompletion. Such estimates are subject to periodic revisions and, as a result,the financial statements could be materially impacted.

The Company applies theprovisions of Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accountingfor Revenue Arrangements with Multiple Deliverables.” EITF 00-21 addressescertain aspects of the accounting by a vendor for arrangements under which itwill perform multiple revenue-generating activities. Specifically, EITF 00-21addresses how to determine whether an arrangement involving multipledeliverables contains more than one earnings process and, if it does, how todivide the arrangement into separate units of accounting consistent with theidentified earnings processes for revenue recognition purposes. EITF 00-21 alsoaddresses how arrangement consideration should be measured and allocated to theseparate units of accounting in the arrangement.

HYPRWare derives revenuefrom royalties related to license fees for customers it referred to Townsendprior to December 31, 2002. Revenue is recorded as royalties are reported fromTownsend.

**AllowanceFor Doubtful Accounts**: The Company maintains allowances fordoubtful accounts for estimated losses resulting from the inability of itscustomers to make payments for services or debtors to satisfy note receivableobligations. The Company analyzes accounts receivable, customercredit-worthiness, current economic trends and changes in its customer paymentterms when evaluating the adequacy of the allowance for doubtful accounts and notesreceivable. If the financial condition of the Company’s customers or debtorsdeteriorates, resulting in an impairment of their ability to make payments,additional allowances may be required.

**Valuationof Intangible Assets and Software Development Costs**: TheCompany assesses the impairment of intangible assets on an annual basis orwhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable. Factors the

 

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Company considersimportant which could trigger an impairment review include significantunderperformance relative to expected historical or projected future operatingresults, significant changes in the manner of its use of the acquired assets orthe strategy for its overall business, and significant negative industry oreconomic trends. The Company assesses the recoverability of its softwaredevelopment costs against estimated future revenue over the estimated remainingeconomic life of the software.

**Capitalizationof Licensed and Developed Software Costs**: Licensed anddeveloped software costs are accounted for in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs ofComputer Software to Be Sold, Leased, or Otherwise Marketed.” Costs associatedwith the planning and design phase of software development, including codingand testing activities necessary to establish technological feasibility ofcomputer software products to be licensed or otherwise marketed, are expensedas research and development costs as incurred. Once technological feasibilityhas been determined, costs incurred in the construction phase of softwaredevelopment including coding, testing, and product quality assurance arecapitalized. In accordance with SFAS No. 86, the Company has capitalizedlicensed software for which the Company believes technological feasibility hasbeen established.

Amortization commences atthe time of capitalization or, in the case of a new service offering, at thetime the service becomes available for use. Unamortized capitalized costsdetermined to be in excess of the net realizable value of the product areexpensed at the date of such determination. The accumulated amortization andrelated licensed and developed software costs are removed from the respectiveaccounts effective in the year following full amortization.

The Company’spolicy is to amortize capitalized software costs by the straight-line methodover three to five years, the remaining estimated economic life of the productincluding the period being reported. The Company assesses the recoverability ofits licensed and developed software costs against estimated future undiscountedcash flows. Given the highly competitive environment in which the Company operatesand rapid technological changes, it is reasonably possible that those estimatesof anticipated future gross revenue, the remaining estimated economic life ofthe product, or both may be reduced significantly.

RECENT ACCOUNTINGPRONOUNCEMENTS

In February 2006, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accountingfor Certain Hybrid Financial Instruments,” which eliminates the exemption fromapplying SFAS No.133 to interests in securitized financial assets so thatsimilar instruments are accounted for similarly regardless of the form of theinstruments. SFAS No. 155 also allows the election of fair value measurement atacquisition, at issuance, or when a previously recognized financial instrumentis subject to a remeasurement event. Adoption is effective for all financialinstruments acquired or issued after the beginning of the first fiscal yearthat begins after September 15, 2006. Early adoption is permitted. The adoptionof SFAS No. 155 is not expected to have a material effect on the Company’sconsolidated financial position, results of operations, or cash flows.

In March 2006, the FASBissued SFAS No. 156, “Accounting for Servicing of Financial Assets,” whichrequires all separately recognized servicing assets and servicing liabilitiesbe initially measured at fair value. SFAS No. 156 permits, but does notrequire, the subsequent measurement of servicing assets and servicingliabilities at fair value. Adoption is required as of the beginning of thefirst fiscal year that begins after September 15, 2006. Early adoption ispermitted. The adoption of SFAS No. 156 is not expected to have a materialeffect on the Company’s consolidated financial position, results of operations,or cash flows.

CONTRACTUAL OBLIGATIONSAND OFF-BALANCE SHEET ARRANGEMENTS

To facilitate anunderstanding of our contractual obligations and off-balance sheetarrangements, the following data is provided:

**ContractualObligations**

 
| ** **                     | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | ** ** | ** ** | **Within**                                | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** |
| ** **                     | ** ** | **Total**  | ** ** | **1 Year**                           | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years** | ** ** |
| Long-term debt  (1)            |       | $          | 6,680,000  |                                      | $          | — |   | $ | 6,680,000 |   | $ | — |   | $ | — |   |
| Operating leases               |       | 1,203,436  |       | 495,474                                   |       | 574,186 |   | 133,776 |   | — |   |
| Total contractual  obligations |       | $          | 7,883,436  |                                      | $          | 495,474 |   | $ | 7,254,186 |   | $ | 133,776 |   | $ | — |   |

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(1)             Long-termdebt does not include future interest payments.

The Company has nomaterial unconditional purchase obligations as defined by SFAS No. 47, “Disclosureof Long-Term Purchase Obligations”.

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**OffBalance Sheet Arrangements**

Under the terms ofthe lease agreement for the Chicago office, the Company has an existing letterof credit in the amount of $75,000, for which a $75,000 certificate of depositserves as collateral. The Company is not a party to any off-balance sheetarrangements that have, or are reasonably likely to have, a current or futurematerial effect on its financial condition, revenues, expenses, results ofoperations, liquidity, capital expenditures or capital resources.

**ITEM 3.Quantitative and Qualitative Disclosures About Market Risk**

As ofJune 30, 2006, the Company had excess cash invested in a money market account.The Company does not expect any material loss, if at all, on these investments.

In connection withissuing the 2006 Convertible Note, the Company issued to PICO a warrant topurchase 125,000 shares of HyperFeed’s common stock, at an exercise price of$1.05 per share. The warrant expires on March 30, 2009. All else remainingconstant, for every $0.10 per share increase over $1.05 per share price ofHyperFeed’s common stock, the Company would incur interest expense ofapproximately $7,700 in connection with the fair value of the warrants. Allelse remaining constant, for every 1.0% increase in the discount rate, theCompany would incur interest expense of approximately $800 in connection with thefair value of the warrants.

TheCompany is subject to variable interest rates that could fluctuate with marketconditions.

**ITEM 4. Controlsand Procedures**

a)              *Disclosure Controls and Procedures.* TheCompany maintains a system of disclosure controls and procedures that isdesigned to ensure that information required to be disclosed by the Company inthis Quarterly Report on Form 10-Q and in other reports required to be filedunder the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”),is recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the SEC for such filings. As required byRule 13a-15(b) under the Exchange Act, the Company’s management, under thedirection of our Chief Executive Officer and Principal Accounting Officer,reviewed and performed an evaluation of the effectiveness of the Company’sdisclosure controls and procedures (as defined in Rule 13a-15(e) under theExchange Act) as of June 30, 2006. Based on that review and evaluation, theChief Executive Officer and Principal Accounting Officer, along with theCompany’s management, have determined that as of June 30, 2006, the disclosurecontrols and procedures were and are effective as designed to ensure thatinformation required to be disclosed by the Company in the reports it files orsubmits under the Exchange Act relating to the Company and its consolidatedsubsidiaries would be accumulated and communicated to them, as appropriate, toallow timely disclosures regarding required disclosures..

b)             *Internal Control Over Financial Reporting.*Therehave not been any changes in the Company’s internal control over financialreporting (as such term is defined in Rule 15d-15(f) under the Exchange Act)during the fiscal quarter to which this report relates that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

**Part II**

**ITEM 1. LegalProceedings**

On February 23, 2006, theCompany filed a two-count complaint in the Tax Court of New Jersey contestingthe determination by the New Jersey Division of Taxation that HyperFeed hadnexus with New Jersey for the purposes of (i) the New Jersey Corporation Taxand (ii) the New Jersey Sales and Use Tax for the period beginning January 1,1994 and forward. On April 25, 2006, the Company received notice that the NewJersey Division of Taxation has denied the allegations set forth in thetwo-count complaint. The Company intends to aggressively contest thedetermination. As of June 30, 2006, the Company had accrued $250,000 inpotential tax liability and recorded the expense in discontinued operations.

The Company is aparty to various other legal proceedings incidental to its business operations,none of which is expected to have a material adverse effect on the financialcondition or results of operations of the Company.

**ITEM 1A. Risk Factors**

There have been nomaterial changes from the risk factors disclosed in Item 1A - “Risk Factors” ofthe Company’s Annual Report on Form 10-K for the year ended December 31,2005, other than the following additional risk factor:

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*TheCompany will need additional capital to sustain operations*

The Companybelieves that it will need to obtain additional capital in the immediate futureboth to fund investments needed to increase its operating revenues to levelsthat will sustain its operations and to fund operating deficits that itanticipates will continue until revenue increases can be realized. There can beno assurances that the Company will be successful in obtaining sufficientadditional capital, or if it does, that the additional capital will enable theCompany to improve its business so as to have a material positive effect on theCompany’s operations and cash flow. The Company believes that withoutadditional investment, from PICO or other sources, it may be forced to ceaseoperations at an undetermined future date. Additionally, the Company believesthat its financing available under the 2006 Convertible Note may not besufficient to fund operations beyond December 31, 2006. It is uncertain whetherthe Company’s assets will retain any value if the Company ceases operations.There are no assurances that additional funding will be available to theCompany before it may be forced to cease operations.

**ITEM 6. Exhibits**
| Exhibit 31.1 | — | Certification of  the Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a)  under the Exchange Act.      |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------|
| Exhibit 31.2 | — | Certification of  the Principal Accounting Officer Pursuant to Rules 13a-14(a) and 15d-14(a)  under the Exchange Act.     |
| Exhibit 32   | — | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
| HYPERFEED TECHNOLOGIES, INC. |                                  |
|------------------------------|---------------------------------------|
|                         |                                  |
| Date:                        | August 8, 2006                        |   |
|                         |                                  |   |
| By:                          | /s/ Paul Pluschkell                   |   |
|                         | Paul Pluschkell                       |   |
|                         | President and Chief Executive Officer |   |
|                         | (Principal Executive Officer)         |   |
|                         |                                  |   |
| By:                          | /s/ Gemma Lahera                      |   |
|                         | Gemma Lahera                          |   |
|                         | Principal Accounting Officer          |   |

 

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