UNITED STATES SECURITIES AND EXCHANGE

COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

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: 001-32274

ARCHIPELAGO HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

100 South Wacker Drive, Suite 1800

Chicago, IL 60606

(312) 960-1696

(Address, including zip code, and

telephone number including area code, of

Registrant’s principal executive offices)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes ý No o

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

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

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

ARCHIPELAGO HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

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

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to; general economic conditions; our future operating results; market penetration and financial condition; industry trading activity and fluctuations; regulatory changes and competition; the ability to obtain governmental approval of any pending transaction on the proposed terms and schedule; the failure to obtain stockholder approval for any pending transaction; the inability to integrate businesses successfully following the consummation of any pending transaction; the risk that any expected cost savings and any revenue synergies resulting from any pending transaction may not be fully realized or may take longer to realize than expected; the risk that disruption from any pending transaction may make it more difficult to maintain relationships with clients, employees or suppliers; as well as the risks and uncertainties described under the section heading “Certain Factors That May Affect Our Business” in Part I, Item 1 of our Form 10-K filed with the Securities and Exchange Commission on March 23, 2005, the factors discussed below under the section heading “Management’s Discussion and Analysis” and under Part II, Item 5 “Other Information,” as well as the risks and uncertainties described under the section heading “Risk Factors” in the registration statement on Form S-4 filed by the NYSE Group, Inc. with the Securities and Exchange Commission which was declared effective on November 3, 2005.  You are urged to carefully consider these factors. All forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statements.

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

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

In connection with the proposed merger of the New York Stock Exchange, Inc. and Archipelago Holdings, Inc., NYSE Group, Inc. has filed a registration statement on Form S-4 with the Securities and Exchange Commission (SEC) containing a joint proxy statement/prospectus regarding the proposed transaction. The parties have filed other publicly available relevant documents concerning the proposed transaction with the SEC.  The SEC declared the Registration Statement effective on November 3, 2005.

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

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

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

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PART I – Financial Information

Item 1. Financial Statements

Archipelago Holdings, Inc.

Condensed Consolidated Statements of Financial Condition

(In thousands, except per share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Archipelago Holdings, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(unaudited)

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

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Archipelago Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Archipelago Holdings, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2005

1.  ORGANIZATION AND BASIS OF PRESENTATION

Organization

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

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

On August 11, 2004, Holdings LLC converted to a Delaware corporation, Archipelago Holdings, Inc.  We refer to Archipelago Holdings, Inc. and, prior to its conversion to a Delaware corporation, Holdings LLC, as the “Company”.  On August 19, 2004, the Company completed an initial public offering (“IPO”) of its common stock. See below discussion of the “Conversion Transaction” and the “Initial Public Offering.”

Through certain subsidiaries, the Company also provides broker execution services to institutions for orders involving Nasdaq and listed securities, as well as introducing broker services for ArcaEx to broker-dealers that do not hold an equity trading permit (“ETP”).

Conversion Transaction

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

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

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

Initial Public Offering

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

Basis of Presentation

The accompanying condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned subsidiaries. Management has made estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

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Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates.

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

Certain information and footnote disclosures normally included in financial statements have been condensed or omitted; however, management believes that the disclosures are adequate to make the information presented not misleading.

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

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

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

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

On April 20, 2005, Archipelago entered into a definitive merger agreement (the “Original Agreement”) with the New York Stock Exchange, Inc., a New York Type A not-for-profit corporation (the “NYSE”), pursuant to which Archipelago and the NYSE agreed to combine their businesses and become wholly-owned subsidiaries of NYSE Group, Inc. (“NYSE Group”), a newly-created, for-profit and publicly-traded holding company (the “NYSE Transaction”).  On July 20, 2005, Archipelago, NYSE, NYSE Group and certain of their affiliates entered into a definitive Amended and Restated Agreement and Plan of Merger (“Amended NYSE Agreement”) that amended and restated the terms and condition of the Original Agreement which was reported on a Current Report on Form 8-K filed on July 21, 2005.  On October 20, 2005, Archipelago, NYSE, NYSE Group and certain of their affiliates entered into an amendment (“NYSE Amendment No. 1”) to the Amended NYSE Agreement which was reported on a Current Report on Form 8-K filed on October 25, 2005.  On November 1, 2005, Archipelago, NYSE and the NYSE Group and certain of their affiliates entered into an amendment No. 2 to the Amended Agreement (“NYSE Amendment No. 2”) which was reported on a Current Report on Form 8-K filed on November 4, 2005.

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

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

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

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

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automatically be redeemed three hours after their issuance for $300,000 in cash per share. Although NYSE Amendment No. 1 modified the corporate mechanics by which NYSE members would receive cash in the mergers, NYSE Amendment No. 1 did not affect the amount of cash or number of shares of NYSE Group common stock that any NYSE member would receive in the transaction or the consideration payable to Archipelago stockholders in the transaction. The reason for structuring the cash component of the consideration in this manner is to provide certain NYSE members that are not U.S. persons with deferral of certain non-U.S. income tax on their receipt of shares of NYSE Group common stock in the mergers.

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

The parties agreed to reduce the minimum amount of net cash required of each party because, on July 22, 2005, Archipelago and PCXH amended the Archipelago-PCXH merger agreement so that all of the consideration paid to the PCXH stockholders in the merger would be paid in the form of cash (rather than part cash and part stock). In addition, under the terms of the merger agreement between Archipelago and PCXH, the consideration payable to PCXH was based in part on the market price of Archipelago common stock during a period immediately prior to the date of the completion of Archipelago’s acquisition of PCXH, and the market price of Archipelago common stock during this period was significantly higher than it was prior to the execution of the original NYSE-Archipelago merger agreement in April 20, 2005.

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

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

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

The Amended NYSE Agreement, as amended by the NYSE Amendments No. 1 and No. 2, also contains customary termination provisions which, under certain circumstances in the event of a termination of the agreement, may subject the parties to liability for the payment of termination fees and reimbursement of expenses in an amount up to $40.0 million, and includes a provision which permits either party to terminate the merger agreement if the Transaction fails to close by February 1, 2006 (unless extended by the parties). Either party may extend the term of the Amended NYSE Agreement, as amended by the NYSE Amendments No. 1 and No. 2, without the consent of the other party for two separate three-month periods (with the first period ending on May 1, 2006 and the second ending on August 1, 2006), provided that the only conditions that remain to be satisfied are the receipt of the approvals of either the NYSE members, the Company’s stockholders or any regulatory entity, and outstanding litigation.

The parties expect that the combined businesses will bring together the strength of NYSE’s auction market and the speed and innovation of the Company and its technology and management.  The parties believe this combination will create a strong and dynamic enterprise with diverse products that will be well positioned to compete in the industry and possess enhanced growth potential.

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

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3.  PCX HOLDINGS, INC. ACQUISITION

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

PCX operates an exchange for trading options as well as provides self regulatory services, including regulatory and market management services, for options and equity trading. The PCXH acquisition will enable the Company to offer all-electronic trading of equity securities as well as equity options, and to expand and diversify the Company’s business lines and products.

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

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

The reversal of deferred revenues relates to the unrecognized portion of deferred revenue balances recorded by PCXH in connection with its May 2001 exchange facility agreement with the Company.

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

The allocation of the purchase price to PCXH’s assets and liabilities are only preliminary allocations based on estimates of fair values and may change when estimates are finalized. Therefore, the information above is subject to change pending the final allocation of purchase price.

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

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

4.  DISCONTINUED OPERATIONS

On September 22, 2005, the SEC entered an order granting approval of the proposed rule change and Amendment No. 1 thereto, and notice of filing and order granting accelerated approval to Amendment No. 2 to the proposed rule change, to amend the certificate of incorporation of PCXH, PCX Rules, and the Bylaws of Archipelago in relation to the acquisition of PCXH by Archipelago. Under the SEC order, Archipelago undertook to divest Wave by December 31, 2005. Wave offers agency brokerage services for institutional customers seeking to access ArcaEx and other U.S. market centers electronically.

The results of operations and financial position of Wave are presented as discontinued operations in the condensed consolidated financial statements. All historical periods presented have been restated to reflect such presentation.

Summarized selected financial information for discontinued operations was as follows (in thousands):

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

5.  GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

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

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Other Intangible Assets

Other intangible assets consisted of the following (in thousands):

In May 2001, the Company acquired the right to operate as the exclusive equity trading facility of PCX Equities including the rights to certain revenue streams comprised primarily of transaction fees, market data fees, and listing fees, for an aggregate consideration of $90.0 million.

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

As of September 30, 2005, the national securities exchange registration allows the Company to (i) generate revenues from market data fees (both from equity and option trading activities) and listing fees, and (ii) to reduce its costs since clearing charges are not incurred for trades matched internally on ArcaEx.

The Company determined that the $105.9 million national securities exchange registration has an indefinite life and, as such, it is not subject to amortization.

6.  RELATED PARTY TRANSACTIONS

The following is a summary of the related party transactions involving the Company and certain former members (i.e., owners of Holdings LLC prior to the IPO) and current stockholders (i.e., stockholders of the Company after the IPO), PCX and other affiliates as part of its operations:

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(1)           Certain stockholders/former members of Holdings LLC and affiliates execute transactions through ArcaEx, and previously through the Company’s ECN, and are charged a transaction service fee by the Company for such activities. Liquidity payments are made to stockholders/former members of Holdings LLC and affiliates in relation to such transaction fees.

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

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

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

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

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

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

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

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

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

(11)         The Company entered into a letter agreement with a stockholder under which the stockholder agreed to perform certain services in relation to the proposed merger of the Company and the NYSE.

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

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

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

7.  STOCK-BASED COMPENSATION

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

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The Company adopted the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”.   Had compensation expense for the Company’s stock option plans been determined based upon fair value consistent with SFAS No. 123, the Company’s net income and earnings per share would have been changed to the following pro forma amounts:

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable.  In addition, option pricing models require the input of highly subjective assumptions.  Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the estimate, in management’s opinion, the existing valuation models may not provide a reliable measure of the fair value of the Company’s employee stock options.

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

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

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8.  COMPUTATION OF EARNINGS PER SHARE

The following is a reconciliation of the basic and diluted earnings per share computations for the respective periods:

For the three and nine months ended September 30, 2004, approximately 1.4 million securities were excluded from the computation of diluted earnings per share because their effect would have been antidilutive.

9.  SEGMENT REPORTING

During the third quarter of 2005, the Company operated in two reportable segments: Transaction Execution Services and Agency Brokerage Services.

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

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

Following the acquisition of PCXH on September 26, 2005, the Company operates in the following two reportable segments: ArcaEx Equities and ArcaEx Options.

ArcaEx Equities consist primarily of the reportable segment formerly described above as Transaction Execution Services.

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

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

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

10. COMMITMENTS AND CONTINGENCIES

In the normal course of conducting its business, the Company has been involved in various legal proceedings. In the opinion of management, after consultation with legal counsel, the ultimate outcome of pending litigation matters, including the three matters below, will not have a material adverse effect on the financial condition or results of operations of the Company.

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

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

On September 30, 2005, PCX was named as defendant in the case entitled Brad Martin et al. v. Chicago Board Options Exchange, Inc. et al., filed in the United States District Court for the Northern District of Illinois. The complaint alleges facts, causes of action and seeks relief substantially similar to that asserted in the Last Atlantis Capital LLC and Brian Rule matters.

On October 28, 2005, pursuant to a previously filed motion, the defendants in this matter, including PCX, appeared before federal district court Judge Bucklo in the Northern District of Illinois, requesting that their obligation to answer or otherwise plead to the pending complaints be postponed until the cases are reassigned and consolidated. In response, the Court directed the plaintiffs in the Last Atlantis Capital LLC, Brian Rule and Brad Martin matters (collectively, “Plaintiffs”), to file a consolidated complaint within ten days.  Also, on October 28, the Plaintiffs filed a motion to reassign the pending cases to Judge Bucklo, based upon relatedness.

On November 7, 2005, the Plaintiffs filed a consolidated complaint in the United States District Court for the Northern District of Illinois. Except for claims relating to violation of the Sherman and Clayton Acts, the complaint alleges facts, causes of action and seeks relief substantially similar to that asserted in the in the Last Atlantis Capital LLC,  Brian Rule and Brad Martin matters. On November 10, 2005, the Court filed an order allowing the cases to be re-assigned to Judge Bucklo.  The defendants, including PCX, have thirty days to answer or otherwise plead to the consolidated complaint.  The Company intends to continue to defend against this matter.

The Company leases office space under non-cancelable operating leases and certain computer equipment under capital leases. As of September 30, 2005, the future minimum commitments under these non-cancelable leases, including those leases assumed as part of the PCXH acquisition, were as follows (in thousands):

11.  NET CAPITAL REQUIREMENTS

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

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