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, 2001. 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, 2002.

                                                                                            Three months ended
                                                                                      ------------------------------
                                                                                        March 31,        March 31,
                                                                                          2002             2001
                                                                                      --------------   -------------
Transaction revenues with related parties:
    Fully electronic transactions............................................         $   21,588,338   $  21,274,034
    Voice-assisted brokerage transactions....................................              4,482,500       5,363,462
    Screen-assisted open outcry transactions.................................                107,346         100,658
                                                                                      --------------   -------------
         Total transaction revenues with related parties.....................             26,178,184      26,738,154
Software solution fees from related parties..................................              2,855,689       2,959,851
Software solution fees from unrelated parties................................                298,315         448,420
Interest income from related parties.........................................                700,987       1,741,149
                                                                                      --------------   -------------
         Total revenues......................................................         $   30,033,175   $  31,887,574
                                                                                      ==============   =============

TRANSACTION REVENUES WITH RELATED PARTIES

Under the Joint Services Agreement between us and Cantor and services agreements between us and TradeSpark and between us and Freedom, we own and operate the electronic trading system and are responsible for providing electronic brokerage services, and Cantor, TradeSpark or Freedom 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. In general, for fully electronic transactions, we receive 65% of the transaction revenues and Cantor, TradeSpark or Freedom receives 35% of the transaction revenues. In general, for voice-assisted brokerage transactions, we receive 7% of the transaction revenues, in the case of Cantor transactions, and 35% of the transaction revenues, in the case of TradeSpark and Freedom transactions. In addition, we receive 25% of the net revenues from Cantor's gaming businesses.

For the three months ended March 31, 2002, we earned transaction revenues with related parties of $26,178,184, which were essentially unchanged as compared to transaction revenues of $26,738,154 for the three months ended March 31, 2001. For the three months ended March 31, 2002, 82% of our transaction revenues was 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 SOLUTION FEES FROM RELATED PARTIES

Under various services agreements, we provide Cantor, TradeSpark and Freedom 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, we charge Cantor, TradeSpark and Freedom the actual direct and indirect costs, including overhead, of providing such services and receive payment on a monthly basis; provided, however, in exchange for a 25% share of the net revenues from Cantor's gaming businesses, we are obligated to spend, and do not otherwise get reimbursed for, the first $750,000 of costs for providing technology support and development services in connection with such gaming businesses.

Software solution fees from related parties for the three months ended March 31, 2002 were $2,855,689. This compares with software solution fees from related parties for the three months ended March 31, 2001 of $2,959,851, a decrease of 4%. As a result of the September 11 Events, there has been a reduction in demand for our support services from Cantor and TradeSpark due to the loss of their voice brokers and therefore a decrease in our software solution fees from related parties.

SOFTWARE SOLUTION FEES FROM UNRELATED PARTIES

Certain of our clients provide online access to their customers through use of the Company's electronic trading platform for which the Company receives fees (formerly presented as licensing fees). Such fees are deferred and recognized as revenues ratably over the term of the licensing agreement. We also receive software solution fees from unrelated parties by charging our clients for additional connections to our system to help protect them from possible business interruptions. Software solution fees from unrelated parties for the three months ended March 31, 2002 were $298,315 as compared to software solution fees from unrelated parties of $448,420 for the three months ended March 31, 2001, a decrease of 33%. This decrease was primarily attributable to decreased licensing fees received from Visible Markets, which ceased operations in the third quarter of 2001.

INTEREST INCOME FROM RELATED PARTIES

For the three months ended March 31, 2002, weighted average interest rates on overnight reverse repurchase agreements were 1.8% as compared to 5.9% for the three months ended March 31, 2001. As a result, we generated interest income from related parties of $700,987 for the three months ended March 31, 2002 as compared to $1,741,149 for the three months ended March 31, 2001, a decrease of 60%.

                                                       Three months ended
                                                  -----------------------------
                                                    March 31,       March 31,
                                                      2002             2001
                                                  -------------   -------------

Compensation and employee benefits............    $   9,318,303   $  15,848,598
Occupancy and equipment.......................        5,918,685       6,973,004
Professional and consulting fees..............        1,921,985       3,700,409
Communications and client networks............        1,357,427       1,900,273
Marketing.....................................        1,649,145       1,496,951
Administrative fees paid to related parties...        2,141,425       1,950,637
Non-cash business partner securities..........          406,403              --
Other.........................................        1,349,684       2,210,166
                                                  -------------   -------------

       Total expenses.........................    $  24,063,057   $  34,080,038
                                                  =============   =============

COMPENSATION AND EMPLOYEE BENEFITS

At March 31, 2002, we had approximately 274 employees, as compared to approximately 471 employees at March 31, 2001. The decrease in the number of employees was principally due to the September 11 Events. Substantially all of our employees are full time employees located predominantly in the New York metropolitan area and London. Compensation costs include salaries, bonus accruals, payroll taxes and costs of employer-provided benefits for our employees. For the three months ended March 31, 2002, our compensation costs were $9,318,303 as compared to $15,848,598 for the three months ended March 31, 2001, a decrease of 41%. Our future compensation costs are uncertain and are dependent upon the degree and/or speed with which we replace our lost employees and businesses.

OCCUPANCY AND EQUIPMENT

Occupancy and equipment costs were $5,918,685 for the three months ended March 31, 2002 as compared to occupancy and equipment costs of $6,973,004 for the three months ended March 31, 2001, a decrease of 15%. Occupancy expenditures primarily consist of the rent and facilities costs of our offices in London, Tokyo and the New York metropolitan area. We anticipate that our occupancy costs will increase in the future in connection with a new lease for our corporate headquarters; however, we expect that the rental costs for the new corporate headquarters will be less expensive than the World Trade Center. Although we believe that our equipment costs will also increase in the future, we anticipate that equipment costs will remain below those incurred prior to the September 11 Events.

PROFESSIONAL AND CONSULTING FEES

Professional and consulting fees were $1,921,985 for the three months ended March 31, 2002 as compared to $3,700,409 for the three months ended March 31, 2001, a decrease of 48%, primarily due to a decrease in legal and contract employee personnel costs.

COMMUNICATIONS AND CLIENT NETWORKS

Communications costs were $1,357,427 for the three months ended March 31, 2002, a 29% decrease over communication costs of $1,900,273 for the three months ended March 31, 2001, due principally to decreased data and telephone costs subsequent to the September 11 Events. Communications 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 increase in the near future, as we continue to reconstruct our digitally managed global network.

MARKETING

We incurred marketing expenses of $1,649,145 during the three months ended March 31, 2002 as compared to marketing expenses during the three month period ended March 31, 2001 of $1,496,951, an increase of 10%, resulting from the development of a 2002 advertising campaign. We expect the campaign to result in increased marketing expenses throughout 2002.

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 cost of providing such services. Administrative fees paid to related parties were $2,141,425 for the three months ended March 31, 2002 as compared to administrative fees of $1,950,637 for the three months ended March 31, 2001, an increase of 10%.

Administrative fees paid to related parties are dependent upon both the costs incurred by Cantor, and the portion of Cantor's administrative services which we utilize. Due to the continuing effects of the September 11 Events on both us and Cantor, the level of future administrative fees cannot be reasonably determined at this time.

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. We believe period to period comparisons are not meaningful as these transactions do not recur on a regular basis.

OTHER EXPENSES

Other expenses consist primarily of recruitment fees, travel, promotional and entertainment expenditures. For the three months ended March 31, 2002, other expenses were $1,349,684 as compared to other expenses of $2,210,166 for the three months ended March 31, 2001, a decrease of 39%, principally as a result of decreased recruitment fees. We anticipate that other expenses will not increase in the near future because, although we expect to incur additional recruitment fees in the near future due to the September 11 Events, these recruitment costs were estimated and included in the Provision for September 11 Events recorded in 2001.

NET INCOME

Excluding non-cash business partner securities, our net income was $6,262,521 for the three months ended March 31, 2002. Including the above non-cash charges, our net income was $5,856,118 for the three months ended March 31, 2002.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2002, we had cash and cash equivalents of $158.9 million, a decrease of $1.0 million as compared to December 31, 2001. We generated cash of $3.5 million from our operating activities, consisting of net income after non-cash items of $8.7 million net of $5.2 million of other changes in operating assets and liabilities. We also used net cash of $4.5 million resulting from $4.5 million of purchases of fixed assets and intangible assets, capitalization of software developments costs and patent defense costs.

Our operating cash flows consist of transaction revenues from related parties and software solution 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 Joint Services Agreement, remits the gross amount owed to us. In addition, we have entered into a similar services agreements with TradeSpark and Freedom. Under the Administrative Services Agreement, the Joint Services Agreement and the services agreements with TradeSpark and Freedom, any net receivable or payable is settled at the discretion of the parties.

As a result of the September 11 Events, we anticipate that we will be required to make significant capital expenditures in the near future, including the acquisition of computer hardware, network infrastructure and facilities, including our new corporate headquarters in New York City. However, we expect insurance proceeds to fund a significant portion of these costs. In addition, we do not currently plan to rebuild a third data center.

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 and their effect on our liquidity and capital resources.