ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as "may," "will," "should," "estimates," "predicts," "potential," "continue," "strategy," "believes," "anticipates," "plans," "expects," "intends" and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, the effect of the September 11 Events on our operations, including in particular the loss of hundreds of eSpeed, Cantor and TradeSpark employees, our limited operating history, the possibility of future losses and negative cash flow from operations, the effect of market conditions, including volume and volatility, and the current global recession on our business, our ability to enter into marketing and strategic alliances, to hire new personnel, to expand the use of our electronic system, to induce clients to use our marketplaces and services and to effectively manage any growth we achieve, and other factors that are discussed under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2002. The following discussion is qualified in its entirety by, and should be read in conjunction with, the more detailed information set forth in our financial statements and the notes thereto appearing elsewhere in this filing.

OVERVIEW

We were incorporated on June 3, 1999 as a Delaware corporation. Prior to our initial public offering, we were a wholly-owned subsidiary of, and we conducted our operations as a division of, Cantor Fitzgerald Securities, which in turn is a 99.5%-owned subsidiary of Cantor Fitzgerald, L.P. (collectively with its affiliates, Cantor). We commenced operations as a division of Cantor on March 10, 1999, the date the first fully electronic transaction using our eSpeed(R) system was executed. Cantor has been developing systems to promote fully electronic marketplaces since the early 1990s. Since January 1996, Cantor has used our eSpeed(R) system internally to conduct electronic trading.

Concurrent with our initial public offering in December 1999, Cantor contributed to us, and we acquired from Cantor, certain of our assets. These assets primarily consist of proprietary software, network distribution systems, technologies and other related contractual rights that comprise our eSpeed(R) system.

We operate interactive electronic marketplaces and license customized real-time software solutions to our clients. In general, we receive transaction fees based on a percentage of the face value of products traded through our system. Products may be traded on a fully electronic basis, electronically through a voice broker, or via open outcry with prices displayed on data screens. We receive different fees for these different system utilizations. Additionally, we receive revenues from licensing software and providing technology support.

We continue to pursue our strategy to expand our client base and expand the number and types of products that our clients can trade electronically on our system. Other than Cantor, no client of ours accounted for more than 10% of our revenues from our date of inception through March 31, 2003.

                                                                              For the three months ended
                                                                      -------------------------------------------
                                                                        March 31, 2003          March 31, 2002
Transaction revenues with related parties
      Fully electronic transactions                                          $ 22,509,651           $ 21,588,338
      Voice-assisted brokerage transactions                                     5,161,600              4,482,500
      Screen-assisted open outcry transactions                                     48,989                107,346
                                                                      --------------------    -------------------
  Total transaction revenues with related parties                              27,720,240             26,178,184
Software Solutions fees from related parties                                    3,649,267              2,855,689
Software Solutions and licensing fees from unrelated parties                    2,131,442                298,315
Interest income from related parties                                              542,270                700,987
                                                                      --------------------    -------------------
      Total revenues                                                         $ 34,043,219           $ 30,033,175
                                                                      ====================    ===================

TRANSACTION REVENUES WITH RELATED PARTIES

We have entered into a Joint Services Agreement with Cantor under which we and Cantor have agreed to collaborate to provide brokerage and related services to clients in multiple electronic markets for transactions in securities and other products. Under the Joint Services Agreement, as currently in effect, we are responsible for providing electronic brokerage services, and Cantor provides voice-assisted brokerage services, fulfillment services, such as clearance and settlement, and related services, such as credit risk management services, oversight of client suitability and regulatory compliance, sales positioning of products and other services customary to marketplace intermediary operations. Under this agreement, we and Cantor share revenues derived from transactions effected in the marketplaces in which we collaborate and other specified markets. The portion of the transaction revenues that we and Cantor receive is based on several factors, including whether: (1) the marketplace is one in which we collaborate with Cantor; (2) the transaction is fully electronic or Cantor provides voice-assisted brokerage services; (3) the product traded is a financial or other product; and (4) the product is traded on the Cantor ExchangeSM. The percentage of the transaction revenues we receive ranges from 2.5% to 65%. However, in general, for fully electronic transactions, we receive 65% of the transaction revenues and Cantor receives 35% of the transaction revenues; and for voice-assisted brokerage transactions, Cantor receives 93% of the transaction revenues and we receive 7% of the transaction revenues. In addition, if the transactions relate to a gaming business, we receive 25% of the net trading revenues. We have agreed to provide to Cantor technology support services at cost.

We have also entered into services agreements with TradeSpark, Freedom, MPLLC and CO2e pursuant to which we provide the technology infrastructure for the transactional and technology related elements of the TradeSpark, Freedom, MPLLC and CO2e marketplaces, as well as certain other services, in exchange for specified percentages of transaction revenues from the marketplaces. In general, if a transaction is fully electronic, we receive 65% of the aggregate transaction revenues and TradeSpark or Freedom receives 35% of the transaction revenues. If TradeSpark or Freedom provides voice-assisted brokerage services with respect to a transaction, then we receive 35% of the revenues and TradeSpark or Freedom receives 65% of the revenues. We and MPLLC each receive 50% of the fully electronic revenues related to municipal bonds. Our agreement with CO2e provides that we receive 50% of CO2e's fully electronic revenues and 15% of CO2e's voice-assisted and open outcry revenues until December 2003; thereafter we will receive 20% of voice-assisted and open outcry revenues.

For the three months ended March 31, 2003, we earned transaction revenues with related parties of $27,720,240, an increase of 6% as compared to transaction revenues with related parties of $26,178,184 for the three months ended March 31, 2002. This increase resulted primarily from market conditions in Europe, where market fluctuations drove increases in our European product volumes and transactions counts. For the three months ended March 31, 2003, 81% of our transaction revenues were generated from fully electronic transactions.

Our revenues are currently highly dependent on transaction volume in the global financial product markets. Accordingly, among other things, equity market volatility, economic and political conditions in the United States and elsewhere in the world, concerns over inflation, institutional and consumer confidence levels, the availability of cash for investment by mutual funds and other wholesale and retail investors, fluctuating interest and exchange rates and legislative and regulatory changes and currency values may have an impact on our volume of transactions. In addition, a significant amount of our revenues is currently received in connection with our relationship with Cantor. Consequently, our revenues have been negatively affected by the effect of the September 11 Events on Cantor and may continue to be negatively affected in the future if Cantor's business continues to suffer due to the September 11 Events or otherwise.

SOFTWARE SOLUTIONS FEES FROM RELATED PARTIES

Under various services agreements, the Company has agreed to provide Cantor, TradeSpark, Freedom, MPLLC and CO2e technology support services, including systems administration, internal network support, support and procurement for desktops of end-user equipment, operations and disaster recovery services, voice and data communications, support and development of systems for clearance and settlement services, systems support for brokers, electronic applications systems and network support, and provision and/or implementation of existing electronic applications systems, including improvements and upgrades thereto, and use of the related intellectual property rights. In general, the Company charges Cantor, TradeSpark, Freedom and MPLLC the actual direct and indirect costs, including overhead, of providing such services and receives payment on a monthly basis. These services are provided to CO2e at no additional cost other than the revenue sharing arrangement set forth above. In exchange for a 25% share of the net revenues from Cantor's gaming businesses, the Company is obligated to spend and does not get reimbursed for the first $750,000 each quarter of the costs of providing support and development services for such gaming businesses. Software Solutions fees from related parties for the three months ended March 31, 2003 were $3,649,267. This compares with Software Solutions fees from related parties for the three months ended March 31, 2002 of $2,855,689, an increase of 28%, principally due to an increase in demand for our support services from Cantor.

SOFTWARE SOLUTIONS AND LICENSING FEES FROM UNRELATED PARTIES

Certain of our clients provide online access to their customers through use of our electronic trading platform for which we receive fees. Such fees are deferred and recognized as revenues ratably over the term of the licensing agreement. We also receive software solutions fees from unrelated parties by charging our clients for additional connections to our system to help protect them from possible business interruptions. Software Solutions and licensing fees from unrelated parties for the three months ended March 31, 2003 were $2,131,442 as compared to Software Solutions and licensing fees from unrelated parties of $298,315 for the three months ended March 31, 2002, an increase of 614%, due primarily to licensing fees earned from IntercontinentalExchange for use of the Wagner Patent and licensing fees earned as part of the Wagner Patent Settlement Agreement.

INTEREST INCOME FROM RELATED PARTIES

For the three months ended March 31, 2003, weighted average interest rates on overnight reverse repurchase agreements were 1.2% as compared to 1.8% for the three months ended March 31, 2002. As a result, we generated interest income from related parties of $542,270 for the three months ended March 31, 2003 as compared to $700,987 for the three months ended March 31, 2002, a decrease of 23%.

                                                      For the three months ended
                                               ------------------------------------------
                                                   March 31, 2003        March 31, 2002
Compensation and employee benefits                    $ 8,843,664         $ 9,318,303
Occupancy and equipment                                 7,177,352           5,918,685
Professional and consulting fees                        1,111,300           1,921,985
Communications and client networks                      1,594,470           1,357,427
Marketing                                                 333,561           1,649,145
Administrative fees paid to related parties             2,578,520           2,141,425
Non-cash business partner securities                      705,027             406,403
Other                                                   2,319,194           1,349,684
                                                ------------------      --------------
   Total Expenses                                    $ 24,663,088        $ 24,063,057
                                                ==================      ==============

COMPENSATION AND EMPLOYEE BENEFITS

At March 31, 2003, we had 322 employees, which was an increase from the 274 employees we had at March 31, 2002. However, prior to the September 11 Events, we had 492 employees. For the three months ended March 31, 2003, our compensation costs were $8,843,664 as compared to compensation costs of $9,318,303 for the three months ended March 31, 2002. This decrease in compensation costs despite an increase in the number of employees resulted from an increase in the percentage of time spent by certain employees on software application development. The costs associated with such development are capitalized and amortized over the associated application's estimated useful life of three years.

Substantially all of our employees are full-time employees located predominately in the New York metropolitan area and London. Compensation costs include salaries, bonuses, payroll taxes and costs of employer-provided benefits for our employees. We expect that our future compensation costs will increase depending, in part, upon a variety of factors, including our incremental revenue growth.

OCCUPANCY AND EQUIPMENT

Occupancy and equipment costs were $7,177,352 for the three months ended March 31, 2003, an increase of 21% as compared to occupancy and equipment costs of $5,918,685 for the three months ended March 31, 2002. The increase was primarily caused by the occupancy and build-out of our temporary corporate headquarters in New York City, which took place in the second quarter of 2002.

Occupancy expenditures primarily consist of the rent and facilities costs of our offices in the New York metropolitan area and our offices in London and Tokyo. We moved into our temporary corporate headquarters in New York City during the second quarter of 2002. The lease for our temporary headquarters will expire in February 2004, and at this time management is evaluating various location alternatives. We anticipate that our occupancy costs will increase as we build out our current space and add infrastructure. Although we believe that equipment costs will increase in the future as we replace lost equipment, we anticipate that such equipment costs will remain below those incurred prior to the September 11 Events. We expect a portion of our capital expenditures to be covered by insurance proceeds from our property and casualty insurance coverage.

PROFESSIONAL AND CONSULTING FEES

Professional and consulting fees were $1,111,300 for the three months ended March 31, 2003 as compared to $1,921,985 for the three months ended March 31, 2002, a decrease of 42%, primarily due to a decrease in legal and contract employee personnel costs.

COMMUNICATIONS AND CLIENT NETWORKS

Communications costs were $1,594,470 for the three months ended March 31, 2003 as compared to $1,357,427 for the three months ended March 31, 2002, a 17% increase. The increase was principally due to a resumption of normal data and telephone costs after a temporary decline caused by the September 11 Events. Communication costs include the costs of local and wide area network infrastructure, the cost of establishing the client network linking clients to us, data and telephone lines, data and telephone usage, and other related costs. We anticipate expenditures for communications and client networks will continue to increase in the near future as we continue to connect additional customers to our network.

MARKETING

We incurred marketing expenses of $333,561 for the three months ended March 31, 2003 as compared to marketing expenses during the three months ended March 31, 2002 of $1,649,145, a decrease of 80%, resulting from a planned reduction in marketing costs. Marketing expenses in the first quarter of 2002 were higher primarily as the result of the development of a major advertising campaign.

ADMINISTRATIVE FEES PAID TO RELATED PARTIES

Under an Administrative Services Agreement, Cantor provides various administrative services to us, including accounting, tax, legal and facilities management, for which we reimburse Cantor for the direct and indirect costs of providing such services. Administrative fees paid to related parties amounted to $2,578,520 for the three months ended March 31, 2003, a 20% increase over the $2,141,425 of such fees for the three months ended March 31, 2002. Overall, administrative fees decreased in the months following the September 11 Events as compared to the months prior to the September 11 Events. We do not expect a significant change in the level of future administrative fees paid to related parties in 2003.

Administrative fees paid to related parties are dependent upon both the costs incurred by Cantor and the portion of Cantor's administrative services that is utilized by us.

NON-CASH BUSINESS PARTNER SECURITIES

We enter into strategic alliances with other industry participants in order to expand our business and to enter into new marketplaces. As part of these strategic alliances, we have issued warrants and convertible preferred stock. These securities do not require cash outlays and do not represent a use of our assets. The expense related to these issuances is based on the value of the securities being issued and the structure of the transaction. Generally, this expense is amortized over the term of the related agreement. Non-cash business partner securities charges were $705,027 for the three months ended March 31, 2003, an increase of 73% as compared to non-cash business partner securities charges of $406,403 for the three months ended March 31, 2002. This increase resulted primarily from the amortization of the value of warrants issued under an agreement executed with a business partner in August 2002. We believe period to period comparisons are not meaningful as these transactions do not recur on a regular basis. Note 4 of our consolidated financial statements in this Report on Form 10-Q contains further details regarding the expense for non-cash business partner securities.

OTHER EXPENSES

Other expenses consist primarily of recruitment fees, travel, amortization of intangible assets, business-related insurance expense and promotional and entertainment expenditures. For the three months ended March 31, 2003, other expenses were $2,319,194, an increase of 72% as compared to other expenses of $1,349,684 for the three months ended March 31, 2002, principally due to increases in business-related insurance costs and an increase in the amortization of intangible assets. Other expenses are expected to increase primarily due to an increase in the amortization of capitalized legal fees associated with the Wagner and other patents.

INCOME TAXES

We adjusted our valuation allowance against our deferred tax asset as of the beginning of the quarter ended March 31, 2003 by $3,984,000 to reflect management's estimate that it is more likely than not that all NOL carryforwards will be utilized in the future. The credit for the adjustment to the valuation allowance served to offset the tax provision on the current period's earnings to reflect a net benefit for income taxes of $95,000 for the first quarter of 2003. The tax provision in future periods is expected to be based on an estimated effective tax rate of approximately 40%.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2003, we had cash and cash equivalents of $175.1 million, a decrease of $12.9 million as compared to December 31, 2002. We used cash of $10.0 million in our operating activities, consisting of net income after non-cash items of $14.3 million net of $24.3 million of other changes , including the net reduction of liabilities. We also used net cash of $1.4 million resulting from purchases of fixed assets and intangible assets, capitalization of software development costs and patent defense costs, offset by proceeds from asset sales. In addition, we used $1.9 million to repurchase Class A common stock.

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

We anticipate that we will experience an increase in our capital expenditures and lease commitments consistent with our anticipated growth in operations, infrastructure, personnel and our anticipated move into a new headquarters. We currently anticipate that we will continue to experience growth in our operating expenses for the foreseeable future and that our operating expenses will be a material use of our cash resources. Our property and casualty insurance coverage may mitigate our capital expenditures for the near term.

Under the current operating structure, our cash flows from operations and our existing cash resources should be sufficient to fund our current working capital and current capital expenditure requirements for at least the next 12 months. However, we believe that there are a significant number of capital intensive opportunities for us to maximize our growth and strategic position, including, among other things, strategic alliances and joint ventures potentially involving all types and combinations of equity, debt, acquisition, recapitalization and reorganization alternatives. We are continually considering such options, including the possibility of additional repurchases of our Class A common stock, and their effect on our liquidity and capital resources.