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/A for the year ended December 31, 2000. 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.

As discussed in Note 1 to the financial statements, we have restated our financial statements for the three and nine months ended September 30, 2000. The accompanying discussion and analysis gives effect to that restatement.

OVERVIEW

eSpeed, Inc. was incorporated on June 3, 1999 as a Delaware corporation. Our direct and indirect wholly owned subsidiaries are eSpeed Securities, Inc., eSpeed Government Securities, Inc., eSpeed Markets, Inc., eSpeed International Limited, eSpeed (Canada), Inc., eSpeed (Japan) Limited, eSpeed (Australia) Pty Limited, eSpeed (Hong Kong) Holdings I, Inc., eSpeed (Hong Kong) Holdings II, Inc. and eSpeed (Hong Kong) Limited. Prior to our initial public offering in December 1999, 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 had 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 provide 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. 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 September 30, 2001.

September 11 Events

On September 11, 2001, our principal place of business at One World Trade Center was destroyed. As a result, we lost approximately 180 employees and Cantor and TradeSpark lost an aggregate of 477 employees.

Through the implementation of our business recovery plan, we immediately relocated our surviving employees to various locations in the New York metropolitan area. The United States government bond markets were closed on September 11, 2001 and September 12, 2001. By the time the United States government bond market reopened on September 13, 2001, we had re-established global connectivity of our eSpeed(R) system. Our operating proprietary software was unharmed.

As a result of the September 11 Events, fixed assets with a book value of $17,690,289 were destroyed. We expect to recover these losses through insurance proceeds, and as such, have not recorded a net loss related to the destruction of our fixed assets. We have committed to pay a full year discretionary bonus to the estates of our deceased employees and, as a result, have recorded compensation expense for such amounts.

The Company has $40 million of insurance coverage to mitigate property damage and $25 million of insurance coverage to mitigate business interruption losses suffered by the Company.

We have recognized a provision of $14,368,554 for non-property damage related to the September 11 Events. Such provision includes the incremental costs associated with substituting external professionals for deceased employees, recruitment fees, write-off of software development costs, write-off of goodwill and costs associated with our restructuring, including costs associated with the closing of two offices, as a result of the September 11 Events. The write-off related to software development consists of costs that previously were capitalized but have now been written off because the software being developed related to aspects of our business that were adversely affected by the September 11 Events. The write-off of goodwill relates to goodwill associated with the acquisition of TreasuryConnect LLC. The $14,368,554 of incremental costs related to the September 11 Events that we expect to incur in the year ending December 31, 2001 are probable and estimable. Certain other costs we expect to incur in relation to the September 11 Events are not reasonably estimable at this time. We hope to recover a significant portion of our costs related to the September 11 Events through our insurance coverage. However, we cannot currently estimate the amount or timing of any such recovery.

The families of our deceased employees will also receive a share of Cantor's partnership profits for the next five years to pay for, among other things, 10 years of healthcare coverage. These costs will be borne by Cantor and not by us.

                                                                                           Three months ended
                                                                                    -----------------------------------
                                                                                      September 30,      September 30,
                                                                                          2001               2000
                                                                                    -----------------  ----------------
Transaction revenues with related parties:
       Fully electronic transactions.........................................       $      15,676,495  $     13,106,847
       Voice-assisted brokerage transactions.................................               5,577,545         3,480,895
       Screen-assisted open outcry transactions..............................                 146,673           486,660
                  Total transaction revenues with related parties............              21,400,713        17,074,402
Software solution fees from related parties..................................               4,806,225         2,316,025
Software solution fees from unrelated parties................................                 691,677                --
Interest income from related parties.........................................               1,292,718         3,101,169
                                                                                    -----------------  ----------------
                  Total revenues.............................................       $      28,191,333  $     22,491,596
                                                                                    =================  ================

TRANSACTION REVENUES WITH RELATED PARTIES

Under a 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 September 30, 2001, we earned transaction revenues with related parties of $21,400,713 as compared to $17,074,402 for the three months ended September 30, 2000, an increase of 25%. The growth in these revenues was attributable to the continued increase in the number of products available on and clients trading on our eSpeed(R) system. For the three months ended September 30, 2001, 74% 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. We anticipate expanded use of our eSpeed(R) system for non-financial products. However, due to the loss of Cantor's and TradeSpark's voice brokers, we anticipate our voice-assisted transaction revenues to decrease in the future. In addition, we expect that the loss of Cantor's and TradeSpark's voice brokers will reduce the potential revenues that would have resulted from the conversion of voice-assisted transactions to fully electronic transactions.

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 September 30, 2001 were $4,806,225. This compares with software solution fees from related parties for the three months ended September 30, 2000 of $2,316,025, an increase of 108%. For the period ended September 10, 2001, software solution fees from related parties increased primarily as a result of an increase in support provided to Cantor as well as support provided to TradeSpark and Freedom. As a result of the September 11 Events, there has been and will continue to be 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 September 30, 2001 were $691,677. There were no software solution fees from unrelated parties for the nine months ended September 30, 2000.

INTEREST INCOME FROM RELATED PARTIES

For the three months ended September 30, 2001, weighted average interest rates on overnight reverse repurchase agreements were 3.4%, as compared to 6.5% for the three months ended September 30, 2000. As a result, we generated interest income from related parties of $1,292,718 for the three months ended September 30, 2001 as compared to $3,101,169 for the three months ended September 30, 2000, a decrease of 59%. We expect interest income from related parties to decrease due to lower interest rates.

                                                                          Three months ended
                                                                   --------------------------------
                                                                    September 30,    September 30,
                                                                        2001             2000
                                                                   ---------------  ---------------
Compensation and employee benefits...........................      $    14,738,315  $    14,003,834
Occupancy and equipment......................................            7,414,913        5,789,997
Professional and consulting fees.............................            1,196,878        2,814,761
Communications and client networks...........................            2,470,533        1,209,473
Marketing....................................................              999,188        2,105,587
Administrative fees paid to related parties..................            2,911,382        1,526,963
Non-cash business partner securities.........................              517,328        2.235.200
Loss on investments..........................................            3,833,679               --
Other........................................................            2,461,958        2,654,452
Provision for September 11 Events............................           14,368,554               --
                                                                   ---------------  ---------------
       Total expenses........................................      $    50,912,728  $    32,340,267
                                                                   ===============  ===============

COMPENSATION AND EMPLOYEE BENEFITS

At September 30, 2001, we had approximately 306 employees, as compared to approximately 480 employees at September 30, 2000. The decrease in the number of employees was principally due to the loss of our employees as a result of 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 September 30, 2001, our compensation costs were $14,738,315 as compared to $14,003,834 for the three months ended September 30, 2000, an increase of 5%. Our future compensation costs are uncertain and are dependent upon the degree and/or speed with which we replace our lost employees. However, we anticipate that such costs will be lower in the near term.

OCCUPANCY AND EQUIPMENT

Occupancy and equipment costs were $7,414,913 for the three months ended September 30, 2001 as compared to occupancy and equipment costs of $5,789,997 for the three months ended September 30, 2000, an increase of 28%. The increase in occupancy and equipment costs was due to the expansion of space needed to accommodate our additional operations and an increase in the number of our locations, including our new concurrent computing center in New Jersey. Occupancy expenditures primarily consist of the rent and facilities costs of our New York, London and Tokyo offices. We anticipate that occupancy

and equipment costs should decline in the near term because the costs of our temporary space and our temporary equipment are lower than they were prior to the September 11 Events. However, we anticipate that our occupancy costs will increase in the future in connection with a new lease for our corporate headquarters. 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 $1,196,878 for the three months ended September 30, 2001 as compared to $2,814,761 for the three months ended September 30, 2000, a decrease of 57%, primarily due to a decrease in contract employee personnel costs. We anticipate professional and consulting fees will increase in the future due to the September 11 Events.

COMMUNICATIONS AND CLIENT NETWORKS

Communications costs were $2,470,533 for the three months ended September 30, 2001, a 104% increase over communication costs of $1,209,473 for the three months ended September 30, 2000. 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. The increase in costs was attributable to the continuing expansion of our globally managed digital network. We anticipate expenditures for communications and client networks will increase in the near future due to the September 11 Events.

MARKETING

FWe incurred marketing expenses of $999,188 during the three months ended September 30, 2001 as compared to marketing expenses during the three month period ended September 30, 2000 of $2,105,587, a decrease of 53%, due in part to our bringing our marketing activities in house beginning in the third quarter of 2000. We anticipate that marketing expenditures will remain constant in the near term but increase in the future due to the September 11 Events.

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 $2,911,382 for the three months ended September 30, 2001 as compared to administrative fees of $1,526,963 for the three months ended September 30, 2000, an increase of 91%. Administrative fees increased due to the expanded scope of our business. We believe that administrative fees paid to related parties will decrease in the near future due to the decrease in services provided by Cantor. However, we expect that the need by us or by Cantor under the Administrative Services Agreement to outsource some of the services previously provided by Cantor personnel will result in an increase in administrative fees.

NON-CASH BUSINESS PARTNER SECURITIES

In April 2001, we issued fully vested, non-forfeitable, warrants to purchase 400,000 shares of our Class A common stock to Freedom owner participants to provide incentives to migrate to our fully electronic platform. We will record non-cash charges over the next three years of approximately $3,600,000, representing the value of the warrants at the time of issuance. We recorded a non-cash charge of $299,100 in the third quarter 2001, representing three months of such non-cash expense.

On July 30, 2001, Deutsche Bank purchased 750 shares of our Series C Redeemable Convertible Preferred Stock (Series C Preferred) at its par value of $0.01 per share. Each share of the Series C Preferred is convertible at the option of Deutsche Bank into 10 shares of our Class A common stock at any time during the five years ended July 31, 2006. Accordingly, as of the date of purchase, we

recognized a non-cash charge of $110,925, representing the value of such Class A common stock into which the Series C Preferred may be converted. Such value in excess of the cash proceeds was given as an inducement to Deutsche Bank to enter into the agreement. In addition, at the end of each year of the five year agreement in which Deutsche Bank fulfills its liquidity and market-making obligations for specified products, 150 shares of Series C Preferred will automatically convert into warrants to purchase 150,000 shares of our Class A common stock at an exercise price of $14.79 per share. As Deutsche Bank fulfills its obligations under the agreement, we will recognize additional non-cash charges based upon the value of the warrants. For the three months ended September 30, 2001, we recognized $107,303 of such charges. At the end of the five year period, to the extent that Deutsche Bank does not fulfill its obligations under the agreement and Series C Preferred shares remain outstanding, we have the option to redeem each share of the Series C Preferred outstanding in exchange for 10 shares of our Class A common stock.

In September 2000, we obtained a 5% interest in TradeSpark, LP, which was formed to operate an electronic and telephonic marketplace for North American wholesale energy products. In conjunction with our investment, we issued 5.5 million shares of our Series A Redeemable Convertible Preferred Stock and 2.5 million shares of our Series B Redeemable Convertible Preferred Stock (collectively, the "Preferred Stock") to encourage the majority owners of TradeSpark to electronically trade energy products through our eSpeed(R) system. We will earn a percentage of the revenues resulting from transactions executed through TradeSpark utilizing our trading platform. If certain revenue targets are met, the Preferred Stock is convertible at the holders' option into warrants to purchase up to 8 million shares of our Class A common stock. To the extent that the revenue targets are not met, each share of the Preferred Stock is convertible into 1/100th of a share of our Class A common stock. As a result of such issuance of the Preferred Stock, we recorded a non-cash charge against earnings of $2,235,200 to reflect the cost of 80,000 shares of our Class A common stock issuable upon conversion of the Preferred Stock if none of the targets are met. We will recognize additional non-cash accounting charges related to the issuance of these business partner warrants and will take such charges if and when the Preferred Stock is converted over the next six years.

LOSS ON INVESTMENTS

In the third quarter of 2001, we wrote off our investments in QV Trading Systems and Visible Markets, each of which ceased operations in the third quarter of 2001. We recognized a loss of $3,833,679 related to the write-offs.

OTHER EXPENSES

Other expenses consist primarily of recruitment fees, travel, promotional and entertainment expenditures. For the three months ended September 30, 2001, other expenses were $2,461,958 as compared to other expenses of $2,654,452 for the three months ended September 30, 2000, a decrease of 7%, principally as a result of decreased recruitment fees. We anticipate that other expenses will decrease 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 for the three months ended September 30, 2001.

NET LOSS

Excluding non-cash business partner securities, loss on investments and the Provision for September 11 Events, our net loss was $4,130,834 for the three months ended September 30, 2001. Including the above non-cash charges, we incurred a net loss of $22,850,395 for the three months ended September 30, 2001.

                                                                                             Nine months ended
                                                                                    -----------------------------------
                                                                                      September 30,     September 30,
                                                                                           2001              2000
                                                                                    -----------------  ----------------
Transaction revenues with related parties:
        Fully electronic transactions........................................       $      57,752,654  $     35,789,388
        Voice-assisted brokerage transactions................................              17,275,168        10,712,251
        Screen assisted-open outcry transactions.............................                 313,581         2,058,371
                  Total transaction revenues with related parties............              75,341,403        48,560,010
Software solution fees from related parties..................................              12,775,813         9,363,222
Software solution fees from unrelated parties................................               1,339,596                --
Interest income from related parties.........................................               4,701,569         6,244,549
                                                                                    -----------------  ----------------
                  Total revenues.............................................       $      94,158,381  $     64,167,781
                                                                                    =================  ================

TRANSACTION REVENUES WITH RELATED PARTIES

For the nine months ended September 30, 2001, we earned transaction revenues with related parties of $75,341,403 as compared to $48,560,010 for the nine months ended September 30, 2000, an increase of 55%. The growth in these revenues was attributable to the continued increase in the number of products available on and clients trading on our eSpeed(R) system. For the nine months ended September 30, 2001, 77% 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. We anticipate expanded use of our eSpeed(R) system for non-financial products. However, due to the loss of Cantor's and TradeSpark's voice brokers, we anticipate our voice-assisted transaction revenues to decrease in the future. In addition, we expect that the loss of Cantor's and TradeSpark's voice brokers will reduce the potential revenues that would have resulted from the conversion of voice-assisted transactions to fully electronic transactions.

SOFTWARE SOLUTION FEES FROM RELATED PARTIES

Software solution fees from related parties for the nine months ended September 30, 2001 were $12,775,813. This compares with software solution fees from related parties for the nine months ended September 30, 2000 of $9,363,222, an increase of 36%. For the period ended September 10, 2001, software solution fees from related parties increased primarily as a result of an increase in support provided to Cantor as well as support provided to TradeSpark and Freedom. As a result of the September 11 Events, there has been and will continue to be 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

Software solution fees from unrelated parties for the nine months ended September 30, 2001 were $1,339,596. There were no software solution fees from unrelated parties for the nine months ended September 30, 2000.

INTEREST INCOME FROM RELATED PARTIES

For the nine months ended September 30, 2001 weighted average interest rates on overnight reverse repurchase agreements were 4.5%, as compared to 6.1% for the nine months ended September 30, 2000. As a result, we generated interest income from related parties of $4,701,569 for the nine months ended September 30, 2001 as compared to $6,244,549 for the nine months ended September 30, 2000, a decrease of 25%. We expect interest income from related parties to decrease due to lower interest rates.

                                                                          Nine months ended
                                                                   ---------------------------------
                                                                    September 30,    September 30,
                                                                        2001            2000
                                                                   ---------------  ---------------
Compensation and employee benefits...........................      $    46,124,822  $    39,782,281
Occupancy and equipment......................................           22,329,398       15,445,236
Professional and consulting fees.............................            7,232,006        8,573,454
Communications and client networks...........................            6,672,676        3,058,804
Marketing....................................................            3,997,959        6,905,152
Administrative fees paid to related parties..................            7,753,500        4,839,542
Non-cash business partner securities.........................              816,228       32,040,505
Loss on investments..........................................            3,833,679               --
Other........................................................            6,756,622        7,124,539
Provision for September 11 Events............................           14,368,554               --
                                                                   ---------------  ---------------
       Total expenses........................................      $   119,885,444  $   117,769,513
                                                                   ===============  ===============

COMPENSATION AND EMPLOYEE BENEFITS

At September 30, 2001, we had approximately 306 employees, as compared to approximately 480 employees at September 30, 2000. Substantially all of our employees are full time employees located predominantly in New York and London. Compensation costs include salaries, bonus accruals, payroll taxes and costs of employer-provided benefits for our employees. For the nine months ended September 30, 2001, our compensation costs were $46,124,822 as compared to $39,782,281 for the nine months ended September 30, 2000, an increase of 16%, principally due to our increased number of employees in 2001 compared to 2000 prior to the September 11 Events, as well as compensation paid to the estates of our employees who were victims of the September 11 Events. Our future compensation costs are uncertain and are dependent upon the degree and/or speed with which we replace our lost employees. However, we anticipate that such costs will be lower in the near term.

OCCUPANCY AND EQUIPMENT

Occupancy and equipment costs were $22,329,398 for the nine months ended September 30, 2001 as compared to occupancy and equipment costs of $15,445,236 for the nine months ended September 30, 2000, an increase of 45%. The increase in occupancy and equipment costs was due to the expansion of space needed to accommodate our additional operations and an increase in the number of our locations, including our new concurrent computing center in New Jersey. Occupancy expenditures primarily consist of the rent and facilities costs of our New York, London and Tokyo offices. We anticipate that occupancy and equipment costs should decline in the near term because the costs of our temporary space and our temporary equipment are lower than they were prior to the September 11 Events. However, we anticipate that our occupancy costs will increase in the future in connection with a new lease for our corporate headquarters. 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 $7,232,006 for the nine months ended September 30, 2001 as compared to $8,573,454 for the nine months ended September 30, 2000, a decrease of 16%, principally due to a decrease in contract employee personnel costs. We anticipate professional and consulting fees will increase in the future due to the September 11 Events.

COMMUNICATIONS AND CLIENT NETWORKS

Communications costs were $6,672,676 for the nine months ended September 30, 2001, a 118% increase over communication costs of $3,058,804 for the nine months ended September 30, 2000. 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. The increase in costs was attributable to the continuing expansion of our globally managed digital network. We anticipate expenditures for communications and client networks will increase in the near future due to the September 11 Events.

MARKETING

We incurred marketing expenses of $3,997,959 during the nine months ended September 30, 2001 as compared to marketing expenses during the nine month period ended September 30, 2000 of $6,905,152, a decrease of 42%, due in part to us bringing our marketing activities in house beginning in the third quarter of 2001. We anticipate that marketing expenditures will remain constant in the near term but increase in the future due to the September 11 Events.

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 $7,753,500 for the nine months ended September 30, 2001 as compared to administrative fees of $4,839,542 for the nine months ended September 30, 2000, an increase of 60%. Administrative fees increased due to the expanded scope of our business. We believe that administrative fees paid to related parties will decrease in the near future due to the decrease in services provided by Cantor. However, we expect that the need by us or by Cantor under the Administrative Services Agreement to outsource some of the services previously provided by Cantor personnel will result in an increase in administrative fees.

NON-CASH BUSINESS PARTNER SECURITIES

In April 2001, we issued fully vested, non-forfeitable, warrants to purchase 400,000 shares of our Class A common stock to Freedom owner participants to provide incentives to migrate to our fully electronic platform. We will record non-cash charges over the next three years of approximately $3,600,000, representing the value of the warrants at the time of issuance. We recorded a non-cash charge of $598,000 in 2001, representing six months of such non-cash expense.

On July 30, 2001, Deutsche Bank purchased 750 shares of our Series C Redeemable Convertible Preferred Stock (Series C Preferred) at its par value of $0.01 per share. Each share of the Series C Preferred is convertible at the option of Deutsche Bank into 10 shares of our Class A common stock at any time during the five years ended July 31, 2006. Accordingly, as of the date of purchase, we recognized a non-cash charge of $110,925, representing the value of such Class A common stock into which the Series C Preferred may be converted. Such value in excess of the cash proceeds was given as an inducement to Deutsche Bank to enter into the agreement. In addition, at the end of each year of the five year agreement in which Deutsche Bank fulfills its liquidity and market-making obligations for specified products, 150 shares of Series C Preferred will automatically convert into warrants to purchase 150,000 shares of our Class A common stock at an exercise price of $14.79 per share. As Deutsche Bank

fulfills its obligations under the agreement, we will recognize additional non-cash charges based upon the value of the warrants. For the three months ended September 30, 2001, we recognized $107,303 of such charges. At the end of the five year period, to the extent that Deutsche Bank does not fulfill its obligations under the agreement and Series C Preferred shares remain outstanding, we have the option to redeem each share of the Series C Preferred outstanding in exchange for 10 shares of our Class A common stock.

In September 2000, we obtained a 5% interest in TradeSpark, LP ("TradeSpark"), which was formed to operate an electronic and telephonic marketplace for North American wholesale energy products. In conjunction with our investment, we issued 5.5 million shares of our Series A Redeemable Convertible Preferred Stock and 2.5 million shares of our Series B Redeemable Convertible Preferred Stock (collectively, the "Preferred Stock") to encourage the majority owners of TradeSpark to electronically trade energy products through our eSpeed(R) system. We will earn a percentage of the revenues resulting from transactions executed through TradeSpark utilizing our trading platform. If certain revenue targets are met, the Preferred Stock is convertible at the holders' option into warrants to purchase up to 8 million shares of our Class A common stock. To the extent that the revenue targets are not met, each share of the Preferred Stock is convertible into 1/100th of a share of our Class A common stock. As a result of such issuance of the Preferred Stock, we recorded a non-cash charge against earnings of $2,235,200 to reflect the cost of 80,000 shares of our Class A common stock issuable upon conversion of the Preferred Stock if none of the targets are met. We will recognize additional non-cash accounting charges related to the issuance of these business partner warrants and will take such charges if and when the Preferred Stock is converted over the next six years.

LOSS ON INVESTMENTS

In the third quarter 2001, we wrote off our investments in QV Trading Systems and Visible Markets, each of which ceased operations in the third quarter of 2001. We recognized a loss of $3,833,679 related to the write-offs.

OTHER EXPENSES

Other expenses consist primarily of recruitment fees, travel, promotional and entertainment expenditures. For the nine months ended September 30, 2001, other expenses were $6,756,622 as compared to other expenses of $7,124,539 for the nine months ended September 30, 2000, a decrease of 5%, principally as a result of decreased recruitment fees. We anticipate that other expenses will decrease 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 for the three months ended September 30, 2001.

NET LOSS

Excluding non-cash business partner securities, loss on investments and the provision for September 11 events, our net loss was $7,095,602 for the nine months ended September 30, 2001. Including the above non-cash charges, we incurred a net loss of $26,114,063 for the nine months ended September 30, 2001.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2001, we had cash and cash equivalents of $149.1 million, an increase of $26.9 million as compared to December 31, 2000. We generated cash of $1.6 million from our operating activities, consisting of a net loss after non-cash items of $1.9 million net of $3.5 million of other changes in operating assets and liabilities. We also used $21.0 million to purchase additional fixed assets and intangible assets, including the costs incurred to develop software and perfect our interest in patents, offset by $46.3 million of net proceeds from the sale of our Class A common stock, principally related to our public offering in March 2001.

Our operating cash flows consist of transaction revenues, software solution fees from related and unrelated parties, various fees paid to or costs reimbursed to Cantor, TradeSpark or Freedom, other costs paid directly by us and investment income. Under the Administrative Services Agreement with Cantor and our various services agreements, any net receivable or payable is generally settled monthly, 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. 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 other 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.