10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2006

OR

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

For the transition period from ___________ to ___________

Commission file number: 0-21324

NYFIX, INC.

(Exact name of registrant as specified in its charter)

Delaware	06-1344888
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

100 Wall Street
New York, New York	10005
(Address of principal executive offices)	(Zip Code)

(646) 525-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $0.001 Per Share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o   No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o  No x

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 o  No x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer   ¨ x Accelerated Filer Non Accelerated Filer   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes o  No x

The aggregate market value of our outstanding common stock held by non-affiliates was approximately $144,234,000 as of June 30, 2006, based on the closing market price of our common stock. The amount shown is based on the closing price of NYFIX common stock as reported on the National Quotation Bureau “pink sheet” service.

There were 35,948,706 shares of our common stock outstanding on June 30, 2007.

TABLE OF CONTENTS
PART I	3
Item 1.     Business	3
Item 1A.  Risk Factors	25
Item 1B.  Unresolved Staff Comments	34
Item 2.    Properties	35
Item 3.   Legal Proceedings	36
Item 4.   Submission of Matters to a Vote of Security Holders	39
PART II	40
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	40
Item 6.   Selected Consolidated Financial Data	43
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk	66
Item 8.  Financial Statements and Supplementary Data	67
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	68
Item 9A.Controls and Procedures	69
Item 9B.Other Information	75
PART III	76
Item 10.Directors, Executive Officers and Corporate Governance	76
Item 11.Executive Compensation.	81
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	103
Item 13.Certain Relationships and Related Transactions.	107
Item 14.Principal Accountant Fees and Services.	109
PART IV	111
Item 15.Exhibits and Financial Statement Schedules	111
SIGNATURES	117
EXHIBIT INDEX	119

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PRELIMINARY NOTES

When we use the terms “NYFIX”, the “Company”, “we”, “us” and “our”, we mean NYFIX, Inc. and its consolidated subsidiaries.

Forward-Looking Statements

This report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are intended to be covered by the safe harbors created thereby. This report on Form 10-K may include forward-looking statements about future Securities and Exchange Commission (the “SEC”) filings, future restatements and related charges, future activities of new employees and the impact thereof on us. From time to time our management may make, or in the past has made, forward-looking statements on telephone or conference calls, by webcast or emails, in person, in presentations or written material, or otherwise. Forward-looking statements include statements other than historical information or statements of current conditions and may relate to our future plans, operations and objectives and results, among other things, and may also include our belief regarding the effect of proposed transactions or various legal proceedings, as well as the impact of our ability to meet periodic filing deadlines, initiatives that may impact future business activities, and future disclosure practices. We have no duty to update these statements. Actual future events, circumstances, performance and trends could materially differ from those set forth in these statements (including those discussed in Item 1A.Risk Factors and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K), due to various factors, including but not limited to: general economic conditions; the impact of our recording a significant impairment charge relating to our goodwill because we are not profitable; the effects of current, pending and future legislation, regulation and regulatory actions; our ability to achieve and maintain effective internal control over financial reporting in accordance with SEC rules promulgated under Section 404 of the Sarbanes-Oxley Act; the impact of accounting for stock-based compensation and ongoing regulatory investigations, including the possibility of new and significant information subsequently arising which could lead to different determinations and require different accounting treatment; actions and initiatives by both current and future competitors; the risks related to our ability to market and develop our products and services; our success in obtaining, retaining and selling additional products and services to clients; the pricing of products and services; stock market activity; the ability of NYFIX Clearing Corporation to clear trades due to maximum limits imposed by the Depository Trust & Clearing Corporation (the “DTCC”) and the need for intra-day funding commitments from third parties; the ability of our Transaction Services Division to maintain third-party assistance to access exchanges and other important trading venues; our ability to comply with the SEC’s net capital rule; the impact of our customers defaulting on their trading obligations; a decline in trading by our buy side clients; changes in technology; the availability of skilled technical associates; our ability to obtain necessary network equipment, technical support or other telecommunications services or our being forced to pay higher prices for such equipment, support or services; the impact of new acquisitions and divestitures; and other risks and uncertainties including those detailed in our SEC filings; as well as future decisions by us. We cannot assure you that any forward-looking statements will prove to be accurate and the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.

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PART I

	Page
Item 1. Business
Overview	3
Recent Developments	4
Industry Overview	8
Impact of Technological Developments	8
Growth in Equity Trading Volume	9
Markets and Customers -see specific Division discussion
Division Overview	9
FIX Division	9
Transaction Services Division	12
Order Management Systems (“OMS”) Division	15
Competition	17
NYFIX Sales and Marketing	18
Technology Operations and Product Development	18
Operation of Our Communications Network and Our Data Centers	18
Application Development	19
Production	20
Product Support and Service	21
Business Continuity and Disaster Recovery Planning Outsourcing	21
Our Reliance upon Large Clients	21
Intellectual Property and Other Property Rights	21
Backlog and Seasonality	22
Employees	22
Regulations and Regulatory Environment	22
Available Information	25

Overview

NYFIX, Inc., a pioneer in electronic trading solutions, continues to transform trading through innovation.  The NYFIX Marketplace^TM is a global community of trading counterparties utilizing innovative services that optimize the business of trading, including trading workstations, middle office trade automation technologies and trade messaging services.  NYFIX Millennium L.L.C. (“NYFIX Millennium®”) provides the NYFIX Marketplace with enhanced methods of accessing liquidity.  NYFIX also provides value-added informational and analytic services and powerful tools for measuring execution quality.  As a trusted business partner and service provider to investment managers, mutual fund, pension fund and hedge fund managers (the “Buy-Side”) and brokerage firms and banks (the “Sell-Side”), NYFIX enables ultra-low touch, low impact market access and end-to-end transaction processing. We refer to ourselves as a “trusted business partner” because our clients depend on our products and services for mission-critical business functions, including order management, order routing and trade execution. And since we act only as agent for our clients and never engage in proprietary trading for the firm’s account, we are viewed as a neutral intermediary and impartial by Buy-Side and Sell-Side alike.

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We design, produce and sell technology-based products and services to professional financial services organizations, including hedge funds, which are engaged in traditional asset management activities (including the trading of those assets), proprietary trading, and/or the handling of client orders in the U.S. and international securities markets.

Value-added innovations to theFIX Protocol

Many of our products and services utilize the Financial Information eXchange (“FIX”) Protocol, which is a messaging standard developed specifically for real-time electronic exchange of securities trading information. NYFIX has been a pioneer in the commercial marketplace for FIX software and services.

We believe our innovative NYFIX products and services deliver value-added improvements in speed, quality of execution and cost efficiency by automating both the work flows at the user work station level and the interactive process of transmitting and executing orders between the Buy-Side institutional investors and the Sell-Side broker-dealers, and through exchanges (e.g., New York Stock Exchange (“NYSE”), American Stock Exchange (“AMEX”), the NASDAQ Stock Market (“Nasdaq”) and other exchanges), the over-the-counter (“OTC”) market, alternative trading systems (“ATSs”) and electronic communication networks (“ECNs”).

History of NYFIX, Inc.

NYFIX, Inc. was formerly known as Trinitech Systems Inc. (“Trinitech”) until 1999.  In 1991, Trinitech Business Systems, Inc. merged into Trans-Aire Electronics, Inc. which changed its name to Trinitech after the merger.  NYFIX, Inc. is a Delaware corporation whose common stock was listed on the Nasdaq National Market in 2000 and traded under the symbol NYFX.  During certain periods in 2004 and 2005 the common stock traded under the symbol NYFXE, indicating that we had not filed timely reports with the SEC and Nasdaq.  On November 1, 2005, our stock was delisted from trading on Nasdaq for failure to file required periodic reports under the Exchange Act (such as our quarterly reports on Form 10-Q) for 2005.  Our stock is now quoted on the Pink Sheets under the symbol NYFX.  With the filing of this report on Form 10-K, we believe that we will have filed information pertaining to all periodic reporting periods through December 31, 2006. 

All references to 2004, 2005 and 2006 refer to our fiscal year ended, or the date, as the context requires, December 31, 2004, December 31, 2005 and December 31, 2006, respectively.

Financial information concerning our business units for each of 2004, 2005 and 2006 is set forth in the Consolidated Financial Statements and the notes thereto. In 2006, 96% of our revenues were derived from our U.S. businesses and 4% from our non-U.S. businesses.

Our headquarters and principal office is on Wall Street in New York City and we have other offices in London’s Financial District, Hong Kong, Boston, MA, Stamford, CT and San Francisco, CA. We operate redundant data centers in the northeastern United States as well as data center hubs in London and Amsterdam.

Recent Developments

2006 was a year of transition for NYFIX as we worked to restore confidence and resolve historical issues, such as those related to stock options and various accounting restatements. We were also successful during 2006 in raising additional capital for general corporate purposes and business development initiatives.  With the recent investment by Warburg Pincus (described below) and the appointment of new leadership, including President and Chief Executive Officer P. Howard Edelstein, we believe that NYFIX can make continued investments in its infrastructure for enhanced scalability and take advantage of its innovative technology and its market position as electronic trading continues to evolve.

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Stock Options and Other Accounting Matters

As previously described in our annual report on Form 10-K for 2005 (filed in March 2007), we restated our historical consolidated financial statements and related financial statement disclosures to reflect adjustments necessary to correct accounting errors in previously reported consolidated financial statements (the “2005 Restatement”). The 2005 Restatement included issues relating to our historical stock option granting processes and related accounting during the period from 1993 to 2004. Our annual report on Form 10-K for 2005 included discussions regarding, among other things, how these matters arose, their impact on our historical consolidated financial statements, investigations conducted by the SEC and by management (as overseen by the Audit Committee and a special Subcommittee of the Audit Committee), the resultant delay in filing our annual report on Form 10-K for 2005, including quarterly periods and our quarterly reports on Form 10-Q for 2006, the resignation of our former independent registered public accounting firm, Deloitte & Touche LLP (“Deloitte”), and their replacement by Friedman LLP (“Friedman”), material weakness in our internal control over financial reporting and remedial actions taken by us. The discussions in our Form 10-K for 2005 also included information about the misstatement of accounting losses incurred by Renaissance Trading Technologies, LLC (“RTT” or “Renaissance”) and EuroLink Network, Inc. (“EuroLink”), incorrect revenue recognition, accounting for income taxes and treasury stock issuances.

Investments in NYFIX

Warburg Pincus Private Equity IX, L.P.

On October 12, 2006, we closed a Securities Purchase Agreement (“SPA”) with Warburg Pincus Private Equity IX, L.P. (“Warburg Pincus”), pursuant to which Warburg Pincus acquired shares of our Series B Voting Convertible Preferred Stock (the “Series B Preferred Stock”) and a warrant (the “Warrant”) to purchase shares of our common stock (the “Preferred Stock SPA”). We are using and will use the net proceeds from the transaction for general corporate purposes and business development.

Under the terms of the Preferred Stock SPA, we sold and issued 1,500,000 shares of Series B Preferred Stock to Warburg Pincus for an aggregate purchase price of $75 million, or $50 per share. Each share of Series B Preferred Stock is convertible, at the option of the holder, initially into 10 shares of our common stock at an initial conversion price of $5.00 per share. The conversion price is subject to adjustment upon certain events, including stock splits or combinations, stock dividends, rights distributions and similar events, certain issuances of our common stock priced below the conversion price, and if certain of our financial representations in the Preferred Stock SPA are proved to be incorrect as of the date they were made in any material respect.

Under the terms of the Preferred Stock SPA, we also issued the Warrant, entitling Warburg Pincus to purchase 2,250,000 shares of our common stock at an exercise price of $7.75. The Warrant is exercisable at the option of Warburg Pincus, in whole or in part, at any time and from time to time prior to the tenth anniversary of the closing of the transaction. The exercise price is subject to adjustment upon certain events, including stock splits or combinations, stock dividends, rights distributions and similar events.

The holders of Series B Preferred Stock have the right to receive semi-annual dividends at an annual rate of 7.0% payable in shares of common stock using the conversion price then in effect (currently $5.00) to determine the number of common shares to be paid. The holders of Series B Preferred Stock will also be entitled to receive any dividends or distributions paid on our common stock on an as-if-converted basis. In the event of a liquidation, dissolution or winding up of the Company, the holders of Series B Preferred Stock will be entitled to receive a liquidation preference payment. Upon a change of control of the Company approved by our Board of Directors, the holders of Series B Preferred Stock may, at their election, (i) treat the Series B Preferred Stock as if converted into common stock and receive the consideration due to the holders of common stock or (ii) receive their liquidation preference, including dividends through the third anniversary of issuance to the extent not previously paid.

At any time following the 18-month anniversary of the closing date, the Series B Preferred Stock will be convertible into shares of common stock at our option, in whole or in part, if the price per share of our common stock reaches certain levels ranging from 3.5 times the conversion price for the period between the 18-month and 36-month anniversaries of the closing date to 2.5 times the conversion price for the period following the 5-year anniversary of the closing date.

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Under the terms of the Preferred Stock SPA, until the 5-year anniversary of the closing date, Warburg Pincus is prohibited, except in certain limited circumstances, from acquiring more than 40% of our outstanding common stock on an as-if-converted basis. If their ownership of our outstanding common stock exceeds 45% of our outstanding common stock on an as-if-converted basis, they would be required to exchange those shares of capital stock exceeding 45% of our outstanding common stock for shares of Series C Non-Voting Convertible Preferred Stock (“Series C Preferred Stock”), which terms are substantially similar to the Series B Preferred Stock except that the shares of Series C Preferred Stock will be non-voting.

The holders of Series B Preferred Stock also have the right, subject to certain requirements, to elect two directors to our Board of Directors (and a third director if certain of our financial representations in the Preferred Stock SPA are proved to be incorrect as of the date they were made in any material respect) and to withhold consent to certain significant transactions, including changes to the terms of the Series B Preferred Stock and certain issuances of securities, subject to certain conditions. The holders of Series B Preferred Stock also have certain subscription rights with respect to additional issuances of equity securities and registration rights with respect to the common stock into which the Series B Preferred Stock may be converted.

We were required to seek and obtain stockholder approval for an increase in our authorized share capital. We obtained stockholder approval at a special meeting of stockholders held on February 27, 2007 to increase the number of authorized shares of our common stock from 60 million to 100 million.

The foregoing discussion is not a complete description of all the terms of the Preferred Stock SPA and related documents and is qualified in its entirety by reference to the complete text of those documents, which are filed as Exhibits 10.45, 10.47 and 10.48 to this report on Form 10-K.

On May 9, 2007, Warburg Pincus purchased an aggregate of 1,207,500 shares of our common stock from Peter K. Hansen, former Chairman and CEO of the Company, for an aggregate purchase price of approximately $6,116,000, in a privately negotiated transaction. The transaction is described in Amendment No. 1 to Schedule 13D filed by the Warburg Pincus on May 10, 2007.

Private Placement

On July 5, 2006 (the “Closing Date”), we closed a Securities Purchase Agreement (“Common Stock SPA”) with certain clients of an investment manager (the “Buyers”), pursuant to which the Buyers acquired 2,713,000 shares of our common stock for an aggregate purchase price of $12.6 million. We also issued an additional 157,693 shares of our common stock at the closing to pay placement agent fees equivalent to 6% of the gross proceeds of the transaction. Pursuant to a registration rights agreement that we entered into with the Buyers, we were obligated to use our best efforts to become current in our reporting obligations under the Exchange Act by September 30, 2006. Our failure to become current in such obligations by December 31, 2006 resulted in our incurring liability to the Buyers in the form of liquidated damages in the amount of 5% of the aggregate purchase price. In the fourth quarter of 2006, we recorded a charge of $631,000 (which was paid in April 2007), as a result of not meeting these filing requirements. In addition, we are obligated to cause a registration statement covering these shares to become effective within 45 days (if the SEC elects not to review such registration statement) or 120 days (if the SEC elects to review the registration statement) following the date that we cure the delinquency in our reporting obligations (such 45 or 120 day deadline, as applicable, the “Effectiveness Deadline”). Failure of the registration statement to become effective by the Effectiveness Deadline would result in our liability to the Buyers for liquidated damages in the amount of 2% of the purchase price for each 30-day period after the Effectiveness Deadline during which the registration statement fails to become effective. Our total liability for liquidated damages in connection with both such deadlines (including the 5% charge recorded in the fourth quarter of 2006) is capped at 13% of the aggregate purchase price. The registration rights agreement also contains customary indemnity and contribution provisions in favor of the investors and us. We are responsible for paying the costs associated with the aforementioned registration statement.

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The foregoing discussion is not a complete description of all the terms of the Common Stock SPA and related documents and is qualified in its entirety by reference to the complete text of those documents, which are filed as Exhibits 10.40 and 10.41 to this report on Form 10-K.

Board and Management Changes

The composition of our Board on June 30, 2007, including date of appointment, was as follows (see also Item 10. Directors and Executive Officers of the Registrant for more detailed information on Board members):

Lon Gorman, Chairman, September 2005 (Chairman since September 2006)

William H. Janeway, October 2006

Cary J. Davis, October 2006

George O. Deehan, August 2000

P. Howard Edelstein, NYFIX President and CEO, October 2006

William C. Jennings, July 2003

William J. Lynch, June 2000

Richard Y. Roberts, September 2005

Thomas C. Wajnert, November 2004

P. Howard Edelstein was appointed our President and Chief Executive Officer in September 2006.

Robert C. Gasser was appointed to the Board in September 2005 and resigned as a Board member, President and CEO in September 2006.

On November 17, 2005, Peter K. Hansen resigned as our President and Chief Executive Officer and was no longer an executive officer. He was succeeded by Robert C. Gasser from November 2005 through September 2006. In September 2006, Mr. Hansen relinquished his position as Board Chairman, and subsequently resigned from the Board on April 10, 2007. The term of Mr. Hansen’s Employment Agreement expired on December 31, 2006.

Steven R. Vigliotti was appointed Chief Financial Officer on January 31, 2006. Mark R. Hahn relinquished his title of Chief Financial Officer and as an Executive Officer of the Company and assumed the role of Senior Vice President - Finance, reporting to Mr. Vigliotti. Mr. Hahn separated from the Company effective as of September 30, 2006. Mr. Vigliotti also assumed responsibility for all aspects of our Finance Department, including all Finance Department functions that previously reported to Jay D. Shaffer.

Jay D. Shaffer joined us as Executive Vice President - Finance and Administration on January 1, 2005 and became Executive Vice President - Administration in January 2006. Pursuant to a severance agreement extended through June 30, 2007, he left the Company.

Pursuant to an agreement in November 2006, Lars Kragh, our former Chief Information Officer, left the Company as of December 31, 2006.

On April 2, 2007, Scott A. Bloom was appointed Secretary, replacing Brian Bellardo, who continues as our General Counsel. On May 15, 2007, Mr. Bellardo relinquished his role as an Executive Officer.

W. Brennan Carley was appointed Executive Vice President, Head of Business Operations and Chief Strategy Officer effective January 1, 2007.

On January 22, 2007, David A. Merrill was named and began his employment as Chief of Client Operations.

Donald P. Henderson, who has been serving as Chief Technology Officer since May 2006, was designated as an Executive Officer of the Company on May 15, 2007.

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Acquisitions

We have made no acquisitions since the filing of our annual report on Form 10-K for 2005.

Divestiture- Sale of NYFIX Overseas

During the third quarter of 2006, we disposed of all of the issued and outstanding capital stock of NYFIX Overseas, Inc. (“NYFIX Overseas”), a wholly-owned subsidiary which previously comprised our OBMS Division. The transaction closed on August 25, 2006. The initial amount paid by G.L. Trade S.A. (“GL”) for the purchase of NYFIX Overseas was $9.0 million. A portion of this amount, $1.3 million, was repaid in April 2007 to GL in settlement of a working capital adjustment. In addition, transaction related fees and expenses aggregating $0.5 million were paid subsequent to closing. We recorded a net gain on this transaction of $4.0 million. There is also an earn-out adjustment, under the terms of which we are eligible for additional earn-out payments based on future revenues of NYFIX Overseas through December 31, 2007. The maximum earn-out payment is $5.1 million, net of additional payments to the management team of NYFIX Overseas.

Litigation, SEC Investigation and Related Contingencies

Lawsuits have arisen in 2006 that involve us, and, in some cases, certain of our directors and officers, as defendants. In addition to various lawsuits and claims pending against us, there are also ongoing SEC and United States Attorney’s Office investigations into our accounting for stock option grants and an SEC investigation into our accounting for the losses incurred by NYFIX Millennium as well as recent inquiries from certain taxing authorities on related matters. For a full discussion of these matters please see:

· Item 1A. Risk Factors - RISKS RELATING TO RESTATEMENTS AND RELATED PENDING LEGAL PROCEEDINGS;

· Item 3. Legal Proceedings;

· Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations; and

· Note 9 to the Consolidated Financial Statements

Industry Overview

Impact of Technological Developments

In the last ten years, market forces and regulations have created an industry wide transition from voice and telephone based securities trading to computerized order-handling, transmission and real-time transaction compliance recording. Innovations in technology and telecommunications have increased the speed of communications and the availability of information, facilitated the globalization of commerce and lowered transaction costs. New methods enable investors to access and participate in the equity securities markets more easily, quickly and less expensively. Electronic markets have reduced the need for intermediaries because they enable participants to connect automatically and determine the best price at which a trade can be executed. Combined with the regulatory changes described above that have encouraged the emergence of ATSs, these developments have led to substantial growth in electronic trading.

The NYFIX suite of products and services makes use of the Internet and other electronic communications networks. We intend to expand our use of these networks. To date, the use of the Internet has been relatively free from regulatory restraints. However, the SEC, SROs and certain states have begun to address regulatory issues that may arise in connection with the use of the Internet. Accordingly, new regulations or interpretations may be adopted that constrain our own and our clients’ abilities to transact business through the Internet or other electronic communications networks.

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Growth in Equity Trading Volume

Although from time to time there have been declines in trading volumes, (e.g., following the events of September 11, 2001), the general volume trend in the U.S. equity markets has been upward. The growth in volume results from a number of factors including strong economic conditions, technological innovations, greater market access, demographic trends, cross-border listings, initial public offerings and merger and acquisition activity. The increasing penetration of electronic trading platforms has reduced transaction costs and further stimulated trading activity. In each of, 2004, 2005 and 2006, the NYSE reported group volume in all issues traded of 460.5 billion, 523.5 billion and 635.1 billion shares, respectively. For the same years, Nasdaq reported trading volume of 450.5 billion, 449.7 billion and 506.2 billion shares, respectively. We believe the general growth trend in equity trading will benefit companies, including NYFIX, offering products and services that enhance electronic trading.

Division Overview

Our products and services are strategically organized in three operating divisions. Financial information by segment and geographic area is set forth in Note 16, Segment Information, of our Notes to Consolidated Financial Statements. We offer products and services that are designed to address the needs of Buy-Side and Sell-Side institutions while providing automatic and seamless unification of the data-elements of trade-management, trade-routing, market access, computerized execution enhancements and real-time transaction analysis. We cross sell our products and services across our community of Buy-Side and Sell-Side institutions, through our three operating divisions:

· FIX Division,

· Transaction Services Division (including NYFIX Millennium), and

· Order Management Systems (“OMS”) Division.

FIX Division

Principal Products

The FIX Division has two major lines of business as well as a nascent information business:

1. We sell a service (“NYFIX Marketplace Service”) that allows clients to communicate with their trading counterparties as members of the NYFIX Marketplace and access value-added services available on our platform. The NYFIX Marketplace Service provides support for FIX and other securities messaging protocols, including a certification process and an expert help desk. Clients communicate with their counterparties through messaging channels of various types. Some examples of messaging channels include exchange and market access gateways and clearing and back-office gateways.

2. We also sell software licenses and provide consultative services to financial institutions and to third-party software vendors that enable them to build and manage securities trading systems and applications using FIX and related messaging services. This includes FIX engines and monitoring products, and a suite of FIX messaging, monitoring and management solutions for firms of all sizes. All of our licensed software products may be used standalone or in conjunction with our NYFIX Marketplace Service.

3. Additionally, we provide information and analytic services that are built on the ability of the NYFIX Marketplace. These include a service to measure transaction cost and a service to measure and monitor FIX messaging performance.

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The NYFIX Marketplace Platform: a Product Distribution Platform and a Service in Itself

The NYFIX Marketplace Platform refers to the infrastructure that is used to deliver the NYFIX Marketplace Service and which forms the underlying platform on top of which other related services are built. “Channels” are services of the NYFIX Marketplace Service, while transaction analysis and similar information/analytic services are built onthe NYFIX Marketplace Platform. Our partners offer products and services including OMS and execution management systems (“EMS”) in which they integrate the NYFIX Marketplace Platform as a part of their offering.

Through our NYFIX Marketplace Platform, we provide the services and infrastructure for trade messaging and global order routing between trading counterparties including Buy-Side institutions, Sell-Side institutions, numerous exchange floors, and other electronic trade execution venues, such as ECNs and ATSs. Managing approximately 7,000 FIX-based messaging channels among approximately 650 financial firms we are a leading supplier of FIX messaging and monitoring services to the financial industry.

Our NYFIX Marketplace Service provides several tiers of services, including:

· Standard FIX Messaging Channels, which provide flexibility of standard FIX messaging with monitoring and end-to-end management. This allows clients to communicate easily with a large number of end-points (counterparties and exchanges) on a secure financial transaction platform. Messaging channels provide a centralized certification of connected parties in compliance with FIX and a simplified, centralized one-to-many communication set-up for each party via the NYFIX Marketplace.

· Enhanced FIX Messaging Channels, which have the same features and capabilities of the standard FIX messaging channels with added capabilities including message storage and forwarding, FIX version translation, message enrichment, real-time storage and recovery of orders and executions, and translation to/from non-FIX messaging standards (e.g. proprietary messaging formats used by various stock exchanges and other intermediaries). Enhanced FIX Messaging Channels save the client the need to support multiple systems for each of its counterparties, and minimize changes to such systems as a result of ongoing advances in technology.

· Advanced Messaging Channels, which have the same features and capabilities of Standard and Enhanced FIX messaging channels plus further advanced functionality to support business workflows and message processing. Current Advanced Messaging Channels include services for Indications of Interest, Advertised Trades, and Advanced Order Routing.

For the Sell-Side community, the FIX Division provides a range of services available through the NYFIX Marketplace. The NYFIX Marketplace Service provides brokerage firms with channels to their Buy-Side clients as well as to various exchanges, ECNs and ATSs.

For Buy-Side institutional investors, we provide domestic and international messaging channels to a large number of Sell-Side brokerage counterparties and access to market venues.

We differentiate ourselves from traditional network providers by:

· Market Knowledge & Expertise: We have experienced people with extensive market and technical knowledge of FIX and other trade messaging, and experience integrating to most Sell-Side and Buy-Side OMS, EMS, and FIX engines. We understand both the technology and how the technology is used to trade, and we help our clients implement effective trading solutions.

· Transparent Counterparty Integration: We have pre-tested and certified our systems/protocols with most of the messaging engines currently in use (e.g. OMS, EMS, and FIX). Although the FIX Protocol is standard, connecting FIX systems to each other requires effort, skill, resources, and knowledge of trade workflows. We have systems integration specialists responsible for enabling channels on the NYFIX Marketplace Platform. We have invested substantially in lab and pre-production facilities to build a documented knowledge base of FIX behaviors that we use to integrate a wide variety of client systems in the NYFIX Marketplace. Each client system must pass a formal certification test before being enabled for production trading using the NYFIX Marketplace Service. This provides streamlined integration and systems testing with counterparties, and simplifies our clients’ operations when their counterparty changes systems or FIX versions.

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· Speed (“Time to trading”): Because of the size of the NYFIX Marketplace and our ability to provide services such as message translation, clients can dramatically shorten the time to implement services and begin trading with their counterparties. This goes well beyond connecting circuits, and addresses the greater challenge of connecting applications.

· Simplicity: Clients can maintain a single FIX session to communicate with the NYFIX Marketplace and through that single FIX session access many channels to many counterparties. This substantially reduces our client’s cost to implement and maintain electronic trading systems.

· Management of Messages: Unlike ordinary network providers, NYFIX proactively monitors and manages the actual trading messages (not just the physical circuits and IP routes). This can include storing and forwarding of messages when counterparties are unavailable.

· Breadth and Integration of Service Offering: We offer a range of products and services complementing our NYFIX Marketplace Service offering, supported by people and expertise. These include our FIX software products, real-time best-execution order monitoring and other information and analytic tools. This one-stop shopping and integrated support model simplifies our clients’ operations.

The NYFIX Marketplace Platform is built on an underlying set of data centers and domestic and international WAN (wide area network) infrastructure. While our business focus is on the NYFIX Marketplace Platform, the successful and high performance operation of that platform depends on the high quality design and operation of our data centers, systems and network. Further information on our data centers, systems and network is outlined under the “Technology Operations and Product Development” section in this report on Form 10-K.

FIX Software

As the operator of the NYFIX Marketplace, the largest community of FIX trading institutions, NYFIX offers a suite of software tools that enable improved time to market. Many of these are the same software tools that we use internally to deliver our services.

Our Appia® product is a FIX engine and enables FIX message handling and connectivity for clients, regardless of whether they are participants in the NYFIX Marketplace. The Appia software supports a wide range of operating systems, databases and extensive lists of APIs for ease of integration. Appia was voted the number one FIX engine globally in a December 2005 FPL and Tower Group Survey, with over 1,000 FIX engines in use and supporting trade messaging around the world.

Tradescope® is an enterprise-wide FIX management and monitoring tool, which allows clients to better manage their in-house FIX infrastructure. Tradescope is compatible with most FIX engine environments, including NYFIX Appia, in-house, and most other third party FIX engines in the market place. Tradescope is also used as a tool by the various groups providing managed services to support our clients’ FIX infrastructure, from IT, operations and help-desk staff, to trading desk support and onboarding/connectivity staff. NYFIX uses Tradescope to monitor our own comprehensive FIX Marketplace Service - monitoring the FIX engines in our real-time production environment.

C-Router, which is a “rules-based” routing module, is an optional enhancement to the Appia FIX engine software. C-Router provides FIX translation and normalization and, similar to Tradescope, can be used either with the NYFIX Marketplace Service or with any other FIX infrastructure. C-Router is used to deliver some of the messaging channels on the NYFIX Marketplace Service, and is sold on a stand-alone basis or as an add-on to the base Appia FIX engine.

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Professional/consultative services are offered to clients who wish to have NYFIX provide training of their staff on FIX, implementation of our software, custom development and integration, and similar services.

Methods of Distribution

We primarily sell products directly to end-clients, and in some markets sell through redistributors.

The NYFIX Marketplace Service is used primarily to enable Buy-Side institutions to do business with Sell-Side brokers, where the decision to use NYFIX is predominantly made by the Buy-Side institution. However, revenues are generated primarily through subscription and maintenance contract sales to the Sell-Side securities brokerage firms who pay for messaging channels to their Buy-Side clients.

In some cases the client contracts for the NYFIX Marketplace Service through their OMS vendor. This may be NYFIX, but because we have an open architecture, it may also be through any of a number of third-party OMS vendors.

FIX Software products are sold directly to financial institutions, and to software vendors who integrate our FIX Software into their systems (e.g. Buy-Side OMS platforms, EMS platforms) which they then sell to their financial clients.

Our NYFIX Marketplace Service interoperates with the products and services of our other business units (Transaction Services and OMS) as well as with third-party transaction businesses and third-party OMS. This creates a seamless flow of trade communications, enabling end-to-end transaction processing.

Our FIX software products may be used in conjunction with the NYFIX Marketplace Service, although some of our clients use only our FIX software products and others use only the Marketplace Service.

Transaction Services Division

Our Transaction Services Division is comprised of the three National Association of Securities Dealers, Inc. (“NASD”) registered broker-dealer subsidiaries, NYFIX Millennium, Transaction Services, Inc. (“NTS”) NTS and NYFIX Clearing Corporation (“NYFIX Clearing”) together with NYFIX International, Ltd., a firm registered with the FSA in the U.K. NYFIX Clearing is also a member of the DTCC.

NYFIX Millennium provides anonymous matching under Regulation ATS and order routing for U.S. equity securities. Its clients are broker-dealers, including NTS.

NTS offers algorithmic trading technology to improve execution results, direct market access, and access to NYFIX Millennium. NTS provides these services to Sell-Side broker-dealers and Buy-Side institutional investors.

NYFIX Clearing settles and clears transactions on behalf of NYFIX Millennium and NTS. It also operates a matched book stock borrow/stock loan business.

NYFIX Millennium and NTS also resell certain products and services offered by the FIX Division and the OMS Division.

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Principal Markets and Clients

The Transaction Services Division primarily generates revenue from the application of commissions charged on executed trades to the following three categories of clients:

· Member, non-Member and non-U.S. securities firms (Sell-Side firms) are either self-clearing or rely on a correspondent clearing firm to clear on their behalf with the Transaction Services Division. We generally bill per share execution commissions to Sell-Side clients on a monthly basis. These securities brokerage firms primarily utilize our NYFIX Millennium, Direct Market Access (“DMA”) and our NEXAS™ algorithmic trading products described below. Many of these clients also use the desktop products provided by the OMS Division.

· U.S. hedge funds (Buy-Side firms) rely on prime brokers to clear their trades. These clients utilize NYFIX Millennium and NEXAS algorithmic trading products, described below. Larger quantitative oriented hedge funds utilize the NYFIX Marketplace Platform for DMA to facilitate these strategies.

· Registered investment advisers (“traditional long-only” Buy-Side firms) rely on custodial banks to clear their trades. These trades are commonly referred to as Delivery vs. Payment and Receive vs. Payment (DVP/RVP) clearing. These are generally net trades in which the Transaction Services Division commission charges are paid through the settlement and clearing process, which is typically three business days after trade date. Registered investment advisers primarily utilize our NYFIX Millennium, DMA and NEXAS algorithmic trading products, described below.

Principal Products and Methods of Distribution

The Transaction Services Division is increasingly leveraging cross-selling opportunities with clients of our FIX Division and our OMS Division, while distributing its transaction products and solutions to its own clients.

In addition to connecting to client in-house systems and FIX engines, the Transaction Services Division tests, certifies and connects to clients using a variety of institutional OMS and quote aggregators such as Eze Castle Software, Charles River Development, INDATA, Line Data, Latent Zero, RealTick, Neovest, FlexTrade, Portware, UNX, BNY Sonic Software, Lava Trading and ITG products (e.g. MacGregor and Radical). The Transaction Services Division also integrates with a variety of Sell-Side OMS including NYFIX’s own OMS as well as BRASS (a subsidiary of SunGard), Fidessa, Lava Trading, Tradeware and Bloomberg. We also provide Transaction Services clients with FIX Division and OMS Division products and services. Our open connectivity business model provides our clients with the freedom to select among a variety of front end user applications or FIX engine products, including those of our competitors.

NYFIX Millennium

NYFIX Millennium developed an ATS focused on the electronic matching of exchange-traded securities. Matching of Nasdaq listed stocks was introduced in late 2005. NYFIX Millennium does not display orders or quotes, and our executions are completely anonymous (commonly referred to as a “dark pool”). Two types of orders are available: (1) pass through and (2) conditional. Pass through orders flow through the matching facility on their way to an exchange, ECN, or ATS. These orders are only executed if they find a match within the National Best Bid and Offer. If there is not a match, these orders are immediately routed to their ultimate destination, thus incurring no opportunity cost. Conditional orders reside in the system and interact with pass through order flow as well as other conditional orders. These orders can be pegged to the bid, offer, last sale, or mid-point. Volume and bid/offer spread constraints can also be attached to these orders.

NYFIX Millennium augments traditional markets by combining the anonymous and electronic execution technology of an ECN with the liquidity of traditional primary markets. NYFIX Millennium attempts to mitigate the negative price impact of traditional fully disclosed searches for liquidity.

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NYFIX Millennium is interposed between the trading parties, extending full anonymity of those parties throughout the clearing and settlement process. NYFIX Clearing provides clearing services for NYFIX Millennium transactions.

We have recently announced the scheduled launch of Euro Millennium, a UK regulated Multi-Lateral Trading Facility (MTF) for non-displayed liquidity in pan-European listed cash equities, in late 2007.

Millennium PLUS™

Millennium PLUS allows participants to generate liquidity alerts to third-party sources known as passive liquidity partners (“PLPs”). PLPs include systematic Buy-Side funds, external dark pools, broker internalization engines, and other pockets of hidden liquidity from across the industry. Unique to NYFIX Millennium, Millennium PLUS liquidity alerts are delivered only to computer-based systems holding live orders, rather than to traders’ screens. As a result, liquidity alerts will not be visible to traders or systems which may cause information leakage or market impact. Both conditional and pass-through orders can be designated as Millennium PLUS orders. Pass-through Millennium PLUS orders are held in NYFIX Millennium for several hundred milliseconds, just long enough for PLPs to receive the liquidity alert and automatically respond. If no response is forthcoming, the order is passed on to the appropriate market center in the usual fashion.

NYFIX Natural™

NYFIX Natural allows Buy-Side orders to be exposed to matching in NYFIX Millennium while generating an IOI message to other Buy-Side participants. NYFIX Natural is a “tradeable” message with minimum quantity size required to generate an IOI message.

NYFIX Direct Market Access (“NYFIXDMA”)

NYFIX DMA is offered via a single FIX destination for both OTC and exchange-traded securities. This enables clients with a FIX connection with NYFIX to send orders to the NYSE, the AMEX, NYSE Archipelago (or “NYSE Arca”), Nasdaq (INET), and other auto-execution destinations or other exchanges.

“DOT” orders are sent directly to the NYSE Direct Order Turnaround system with added ability for a quick price improved execution as a NYFIX Millennium pass through execution.

NYSE Arca orders are sent directly to the NYSE Arca book with full support for all native order types and FIX messages.

Nasdaq/INET Orders are sent directly to the Nasdaq book with full support for all native order types and FIX messages.

NEXAS Algorithmic Trading Products

MILLENNIUM OPTIMIZER Algorithm is a strategy that maintains an order’s exposure to NYFIX Millennium while proactively outbound routing any unexecuted volume. This allows the client to take advantage of natural liquidity in NYFIX Millennium while still participating in a moving market.

VWAP Algorithm is a tactic that uses intelligent order placement (based on historical and real-time trading and market data) in an attempt to match the Volume Weighted Average Price.

TWAP Algorithm is a tactic that evenly distributes the execution of an order over a user-specified period randomizing and thus disguising order size therefore balancing adverse selection and market impact.

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INLINE Algorithm is a tactic that attempts to capture a user-defined percentage of market volume by dynamically altering aggressiveness and speed of trading based on real-time market activity.

CORPORATE BUYBACK Algorithm is a tactic that will keep executions in compliance with SEC Rule 10b-18 (safe harbor) as it pertains to corporate securities repurchase programs. Additional criteria are available to select maximum participation rate and approved end-time.

Securities Lending

NYFIX Clearing operates a matched book of stock borrow/stock loan transactions, with a strong proficiency in matching a borrower and a lender anonymously for small to medium size transactions. Much of the counterparty credit risk associated with this business is mitigated through the daily monitoring of collateral value, frequent counterparty credit reviews and the use of the stock loan program of the Options Clearing Corporation (the “OCC”). The OCC guarantees the required mark-to-market payments related to the fluctuation in market value of the collateral underlying stock borrow/stock loan transactions processed by its members and is considered the principal counterparty to each transaction. At December 31, 2006, approximately 44% of our stock borrow/stock loan transactions outstanding were processed through the OCC.

Operations and Support

Capacity, speed, security and uptime are considered important competitive product parameters of the Transaction Services Division and are available as a result of the large-scale infra-structure we built. All products and services are supported by our help-desks and operations staffs located at our Wall Street office.

Order Management Systems (“OMS”) Division

The OMS Division offers broker-dealers a variety of workstation solutions to enable trading in various market types (including the NYSE, AMEX, Nasdaq, and others). OMS Division products include real-time order management, routing and Straight Through Processing (“STP”), interfaces to back office systems, data storage and retrieval, electronic submission of trade data to NYSE systems and other services to facilitate STP. All OMS Division products enable clients to take advantage of the broad range of products and services.

Principal Markets

The OMS Division offers market access technology designed to address multiple market centers and direct orders to the market center representing the best execution opportunity, while adhering to the compliance and regulatory specifications that are unique to each different market center.

The U.S. equity market is made up of exchange-traded, OTC and third market traded stocks. Exchange-traded stocks are traded on the floors of the NYSE, the AMEX and other exchanges. OTC stocks are traded in electronic market centers such as Nasdaq, NYSE Arca, ECNs and ATSs, which include our NYFIX Millennium. Third market traded stocks are exchange-traded securities that are not traded on the floor of the NYSE or the AMEX and other exchanges.

To trade in any of the markets, orders must be represented by a broker-dealer subject to regulation by the SEC, the NASD and the particular exchange. Those who directly represent orders on an exchange must also be members of that exchange. Brokers who are not exchange members place their orders for that exchange through member brokers.

Electronic exchange markets, market forces, and regulations have resulted in the demand for technology to facilitate all aspects of the trading processes between clients, correspondent brokers, member brokers, the exchanges, Nasdaq, and alternative market venues. This emphasis on computerization and automation is sometimes referred to as “paperless trading” and STP.

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Since 2003, both the NYSE and Nasdaq have experienced significant changes and challenges. ECNs and ATSs have increased the competitive pressures on both the NYSE and Nasdaq, and evolving regulation and demands from Buy-Side institutions have led to changes in the NYSE specialist system. As a result of recent developments such as Regulation NMS and the NYSE Hybrid market, we have discontinued supporting certain exchange floor application products.

Other developments could have a different impact. Increased competition has resulted in quotes for the same stock from multiple market centers with different systems. At the same time, brokers have an obligation to obtain best execution for their clients. In addition, top-tier Sell-Side firms in particular are restructuring their trading desks to organize securities by industry sector rather than by the market in which a given security is traded.

Current Business and Business Development

Our OMS Division generates revenue primarily through subscription sales of its broker desktop products and services to Sell-Side securities brokerage firms in the U.S.

In the U.S. equity markets, our OMS division has derived most of its revenue from our automation products and services for the exchange-traded marketplace, which encompasses trading on the NYSE, the AMEX and other exchanges. Since 2004, we have continued to expand our Sell-Side trader workstation product portfolio to target the Nasdaq OTC market.

We are a leading provider in the U.S. equity market of advanced electronic gateways to connect exchanges, such as the NYSE, and of trader workstation products for “sales” and “block” traders working at the trading desks of large brokerage firms. Via the NYFIX Marketplace Platform, we typically process several hundred million shares per day, representing a significant market share of the NYSE volume. With the movement away from the traditional floor-broker open outcry exchanges to electronic environments, as seen in almost all international equity and derivatives exchanges and increasingly in the U.S., the interaction within and among these markets has changed. We believe this will change further due to the trading system technology that is available coupled with new and updated market regulations. There have been several regulatory changes that we believe favor and ultimately mandate that the type of technologies that we provide be integrated into daily trading processes for both on floor and off floor operations. Examples of SEC regulations and NYSE rules include: NYSE Rule 123, which mandates floor trade reporting requirements and Regulation SHO, which describes short sale handling. Additionally, Regulation NMS which mandates, among other things, intermarket protection against trade-throughs for automated markets, will result in significant change in the physical call auction market currently in place at the NYSE and AMEX (e.g., through the deployment of the NYSE Hybrid market).

Many of our clients have responded to the change in market structure by changing from a structure where trading desks were aligned with market centers (e.g. OTC desks and listed desks) to a converged NYSE/Nasdaq structure aligned along attributes such as market sector. In response, we have developed our “Fusion” product, which enables trading in both quote driven and call auction markets.

While brokers need more sophisticated technology to interact with a much faster hybrid market structure, many institutional investors who use computerized systems to transmit orders to their brokers, and in turn the market, are seeing a changing role for the traditional broker. This narrowing of the gap between the institutional investors’ systems and those of the exchange markets is illustrated, we believe, by the fact that many orders today travel “hands-free” from the institutional investor’s computer systems via broker electronic systems to the exchange or other execution venue and back after execution without any human intervention. For our Sell-Side brokerage clients, we believe that the development of new categories of value added capabilities can provide operating efficiencies that could help them generate cost efficiency from a de-emphasis of their floor based operations. One example is the use of NYFIX proprietary algorithms that simulate the behavior of a human intermediary. Our Transaction Services Division clients pay for the usage of these products on a per share basis as opposed to a fixed cost model.

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Principal Products and Methods of Distribution

We primarily sell products directly to end-clients and provide access to our services through the NYFIX Marketplace. For the Sell-Side community, we provide a range of services, available through our NYFIX Marketplace Platform. Our OMS Division offers a variety of trading workstation products for brokerage firm trading desks, a series of available OMS options and a number of auxiliary services, including interfaces to various back office systems, data storage and retrieval, electronic submission of trade data to NYSE systems and other services to facilitate STP.

Trader Workstation Products

Our trader workstations provide electronic order routing and order management. The workstations are touchpad-based or desktop software applications that enable Sell-Side traders to monitor and manage the flow and execution of equity orders. The OMS workstations use the FIX Protocol to connect to brokerage firms, major global market centers, many other exchanges, ECNs and ATSs.

FIXTrader® provides a complete order management solution for the trading desks of major brokerage firms and institutional investors (upstairs traders), including electronic entry and routing of orders and executions between Buy-Side institutions, sales and block desks and exchange floor booths.

NYFIX Fusion™ is a complete market making OMS that offers Sell-Side broker-dealers access to exchange-traded, OTC and third market trading on a single desktop. NYFIX Fusion™ includes order, execution and risk management, rule-based order processing, and automated preventive compliance handling functions. It also provides access to a full suite of third-party broker and NEXAS algorithms affording the end users multiple options for facilitating and maintaining their best execution and order handling obligations.

The NYFIX portfolio of client trading products is intended to provide enterprise-level electronic trading solutions that meet client needs and industry requirements for front, middle, and back office trade operations.

Competition

Competition within our industry is based on a variety of factors, including product features, product functionality, performance, quality and reliability, price, technical support, and client service. Our competition varies with respect to each of our product and service offerings.

FIX Division

Competition to the products and services of our FIX Division includes potential clients who choose to maintain their own infrastructure and develop their own in-house products and services, third parties such as Transaction Network Services who offer basic IP-based FIX connectivity and application/system vendors who bundle their own network with their application (e.g. the Macgregor Order Management Network). We consider these networks to offer basic (TCP/IP) data transport only and consequently they provide a lower price point. In many cases, clients of IP-based FIX networks use NYFIX FIX software products (e.g. Appia) to provide management of their FIX connections, and as a result, while these networks are sometimes competitors, they are sometimes complementary. While we believe we have captured market share of Buy-Side institutional network clients from competitors during the last year, there is no assurance that this trend will continue. Our primary competitors in the FIX software marketplace are Cameron Systems (acquired by Orc in 2006) and TransactTools (acquired by NYSE Group in 2007).

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Transaction Services Division

Our Transaction Services Division faces competition from a wide variety of correspondent clearing and technology oriented brokerage firms and providers. Examples of our competitors include the Goldman Sachs Group, Inc., Jefferies & Company, Inc., Merrill Lynch & Co., Inc., Investment Technology Group Inc. and Instinet LLC. While brokerages may in some instances compete with our Transaction Services Division, they are also frequently among the largest clients of our Transaction Services Division. NYFIX Millennium specifically faces competition from traditional stock exchanges, the largest of which are Nasdaq and the NYSE, and alternative markets such as ATSs and ECNs. Some of these competitors include Liquidnet, Pipeline, ITG POSIT, and Bloomberg TRADEBOOK.

OMS Division

At the OMS Division, we face competition from potential clients who choose to develop their own in-house products and services. We also face competition from vendors who produce desktop solutions for traders, including BRASS, Fidessa, Lava Trading, Tradeware, Mixit and Bloomberg. While we believe that we compete effectively and continue to install new systems, these vendors or smaller vendors could increase their competitive efforts and, thus, market share at our expense.

NYFIX Sales and Marketing

We generally offer our OMS and NYFIX Marketplace products and services on one to three-year subscription and service agreements. Our Transaction Services Division contracts identify per share commission charges but do not, typically, guarantee order flow. Our sales force is organized into teams by clientsegment or by product/service bundles that work together to provide solutions from the NYFIX offering of products and services. These teams work in close coordination with each other to maximize client acquisition and retention.

We maintain an in-house marketing department responsible for directing marketing activities. Our marketing strategy focuses on direct efforts to reach potential clients through targeted initiatives. We take a multi-pronged approach to marketing encompassing a variety of channels including but not limited to:

· participation in industry events, conferences and exhibitions and securing speaking engagements for key NYFIX executives;

· NYFIX-hosted events for clients and prospects;

· advertising in key trade publications and technology/executions services provider directories;

· proactive media relations policy to obtain press coverage in key media outlets including broadcast, print, and online media; and

· development and production of sales tools, including presentations and product and service brochures; direct mail; product launches; and online initiatives including search engine optimization.

NYFIX participates in approximately 50 events per year on a global basis to publicize our offerings to the various market segments it services.

Technology Operations and Product Development

Operation of Our Communications Network and Our Data Centers

Services offered by NYFIX (e.g. the NYFIX Marketplace Service, NYFIX Millennium, and others) are built on an underlying set of data centers and a domestic and international WAN infrastructure. While our business focus is on the services offered, the successful and high performance delivery of those services depends on the high quality design and operation of data centers, systems and network.

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We rely upon third party telecommunication carriers and our own data centers in operating our NYFIX Marketplace Platform. Because our data volume is significant, and to achieve the highest level of availability, we use multiple telecommunication carriers for data transport between our data centers and to our clients. We utilize several providers including AT&T Inc., MCI Inc., Qwest Communications International Inc., Verizon Communications Inc., Colt Telecom Group plc and Singapore Telecommunications Limited. With this diversity, we decrease our reliance on any single telecommunication service provider without materially losing the benefit of economies of scale.

Our underlying infrastructure implementation procedures involve a modular, or “building block,” standard. A building block standard consists of the amount of storage, processing and network capacity necessary to support a set of clients. As we add clients to our NYFIX Marketplace, building blocks can be inserted into our architecture to accommodate continued expansion. Our building block architecture relies upon advanced technology standards, including storage area network architecture, which is employed for high-performance database access and transaction processing. We currently maintain two data centers, either of which can support our critical production operations and provide redundancy for a majority of our clients. We also currently maintain our own WAN. An automated system continuously monitors our NYFIX Marketplace Service and the underlying network and data center infrastructure, logging the performance of communication lines, equipment and systems and supporting our effort to provide no or minimum disruption of continuous availability of our services.

Our infrastructure supports services that currently process several million orders and executions per day with peak rates of hundreds of orders per second. Critical processes are monitored by the NYFIX Network Operations Center (“NOC”). Hardware and software is continuously upgraded to provide adequate capacity during peak traffic hours.

Our primary data centers are located in two independent, separately located, third-party data center facilities in New Jersey and New York, so-called “redundant centers.” The data centers are serviced by different power companies. The data centers are managed in co-location facilities. By co-locating equipment, we believe that we derive operating economies while obtaining the highest quality of service available in a physical plant. Our data centers’ 24x7 facilities are protected by fire suppression and heating, ventilation, and air conditioning systems and have multiple, uninterruptible sources of power, including backup generators and fully redundant power distribution units. Security personnel, procedures and video surveillance protect against unauthorized physical access to our equipment.

Application Development

We develop software to meet a wide range of requirements, such as regulatory changes, clients’ requests to support new or customized workflows, changes in market structure, opportunities to tap into new markets and businesses for NYFIX and to improve the performance and cost effectiveness of our data centers.

We develop most of our software in-house and employ some staff directly, supplemented by use of contracted off-shore staff in India and the Philippines.

Our development and quality assurance (“QA”) staff works in conjunction with the business product management, sales and production support staffs, and directly with our clients, to identify new products and changes and enhancements to our existing products.

Most of our software is built to support the FIX Protocol and other messaging standards to interface with both external systems and as the internal protocol for communication among our own applications. This end-to-end FIX support enhances our ability to integrate our software with software developed by other vendors or in-house by our clients and to offer our products as large end-to-end solutions or as individual components.

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We develop our software on the two leading operating platforms in our industry: UNIX, including Linux, for server-side mission critical high performance applications, and Windows, for client-side Graphical User Interface, or “GUI”-based applications. We closely follow the pace of evolution of software development technologies and adopt new programming languages and tools as they are established and when we believe they can increase our staff’s productivity.

Our QA staff has access to a laboratory that closely resembles the production environment, where software can be tested for functionality, performance, reliability, recoverability, and interoperability. We employ automated testing tools allowing timely and efficient turnaround of product releases.

We have procedures in place to escalate production issues and other urgent requests to the appropriate development personnel for fast turn-around.

Production

We design, develop and produce our proprietary software and hardware products at our facilities in New York and London, and make use of contract development teams in India, the Philippines, and China. We obtain our materials, supplies and services from a variety of vendors in the U.S., Europe and Asia.

Our manufactured products are based on standard PC components readily available in the consumer market place. All electronic, computer-related components utilized within our products are not manufacturer or supplier specific.

Electronic and computer components utilized within our manufactured products are generally purchased from Tier 2 and Tier 3 suppliers. We define Tier 2 suppliers as manufacturer representatives for multiple product lines who are generally regional or national distributors for those products. They typically maintain an engineering or technical staff for design and specification support and they primarily focus on resellers and manufacturers as a client base. We define Tier 3 suppliers as component level resellers specializing in various product lines procured from multiple Tier 2 distribution sources. They generally do not maintain any engineering or technical staff, and are geared primarily around consumer sales.

For our in-house manufactured hardware (e.g., TouchPad Workstations for traders and floor brokers) and standard PC products used in client installations, we generally do not maintain purchasing or governing agreements with vendors. In some cases, when it is to our economic benefit, we generate a blanket purchase order. The advantage of this is that pricing and product availability is stabilized for the term of the blanket purchase order. Some of the Tier 2 suppliers that we use are: CDW Corporation, MicroDesign, Inc., Dell Inc. and Arrow Electronics, Inc. Each of these resellers stocks products from most of the major computer manufacturers, such as International Business Machines Corp., Aaeon Technology Inc., Intel Corporation, Sony, NEC Corporation, Samsung, Kingston Technology Company, Inc., Elo TouchSystems, Inc. and Advanced Micro Devices, Inc. Tier 3 suppliers for the most part are generally smaller Internet accessible suppliers that deal in a variety of electronic and computer components. These suppliers are only used when Tier 2 suppliers quote extended lead times or pricing not consistent with the current market on preferred products.

Our manufactured products contain several custom parts specific to our design. These parts are limited to sheet metal enclosures and internal wiring. We own the designs for these components and can source them from multiple vendors in our immediate area or throughout the U.S. Currently we maintain relationships with a minimum of two alternate vendors for cabling and sheet metal, either of which can deliver components within standard delivery cycles. For both of these components we use vendors such as CTC, Advantage Sheet Metal and Interface Technology.

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We rely on a number of third parties to supply software and systems, as well as equipment and related maintenance. Our systems are built using a number of commonly used technologies. For example, we use systems and software from International Business Machines Corp., Hewlett-Packard Company, EMC Corporation, Sun Microsystems, Inc., Oracle Corporation, Sybase, Inc., Veritas Software Corporation and Microsoft Corporation. Our products are subject to potential defects in these third party components. Although we exercise strict testing and verification of systems and software, defects can cause disruptions of client service. We have invested in various test systems to make sure our suppliers’ components meet the same high standards as our developed software.

Since we depend on third parties to supply us with underlying software and systems on a reliable, timely basis, we maintain service and maintenance agreements with our key vendors. We have standard service agreements at different levels depending on how critical, in our opinion, the vendor’s system is to the operation of our business. For most systems we have a high level of redundancy, reducing the time critical dependency on any particular vendor. We have service and maintenance agreements with most of our vendors. Because of the diversity in vendors, there is no significant dependence on a single vendor.

Product Support and Service

We are committed to providing our clients with high quality and reliable products and services. As part of our NYFIX Marketplace Service, we provide secure and reliable messaging channels, certify all channels to each firm’s trading counterparties and provide around-the-clock service and support. We maintain redundant data centers as part of the infrastructure that supports our services.

In our industry, service, and specifically quality of service, is measured in response time to resolve a systems issue, which may in turn be causing a trading issue affecting our clients’ business. We maintain four categories of help-desk support to be responsive and efficiently address any systems or trading issue that our clients may encounter. The four categories of support are separated into our NOC team, technical support desk, trading application support desk and execution service and trade processing support desk.

Business Continuity and Disaster Recovery Planning Outsourcing

Following the tragic events of September 11, 2001 and the 2003 blackout in New York City and elsewhere, business continuity and disaster recovery plans have become more important in the technological infrastructure for financial services firms. Globalization and increased reliance on STP and process automation have also increased attention to business continuity and disaster recovery planning.

Supported by two redundant, high-availability data centers, part of our offerings include capabilities for data communication and data storage and the subsequent retrieval of the clients’ current and historical trading data.

Our Reliance Upon Large Clients

For the years ended December 31, 2006, 2005 and 2004 no single client accounted for more than 10% of our consolidated revenue.

Intellectual Property and Other Property Rights

Our success and ability to compete are dependent to a significant degree on our intellectual property, which includes our trademarks, copyrights, proprietary technology, trade secrets and customer base. However, no one patent, trademark or other form of intellectual property is critical to our business.

The trademark NYFIX® is the primary trademark used to identify our goods and services. We are the registered exclusive owner of the trademark as well as additional product brand trademarks. Each of our significant trademarks is registered with the appropriate governmental authority in countries where we do business or is in the process of being registered. We are not aware of any third party infringements of any of our trademarks.

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The core technologies of our business are proprietary software applications built around the FIX messaging specifications, and are protected by copyright, patent, trade secret and contract law. The FIX Protocol technology is available for use by any party indefinitely if used properly. The source and object code for our core proprietary software applications are protected using various applicable modes of intellectual property protection.

It is our practice to enter into confidentiality, intellectual property ownership and/or non-competition agreements with our clients, employees, independent contractors and business partners, and to control access to and distribution of our intellectual property.

Backlog and Seasonality

We do not believe that sales backlog is a meaningful indication of our future revenue, as a substantial portion of our revenue is derived from contracts for which our equipment or software is already installed and we are currently recognizing revenue. In addition, our operations, to date, have not been significantly affected by seasonality.

Employees

As of December 31, 2006, we had 225 full-time employees, including 35 in product development, 72 in operations, 73 in sales, marketing and support and 45 in management, general and administrative functions. None of our employees is covered by a collective bargaining agreement. We believe that our relationships with our employees are good. We believe that we have been able to attract and develop staff, managers and project leaders with extensive technical and brokerage industry experience and have recently recruited a number of experienced technical specialists to enhance our product development efforts.

Regulations and Regulatory Environment

Regulation in the United States

Participants in the U.S. securities industry are subject to extensive regulation under both federal and state laws. Examples of SEC regulations affecting the industry in which we compete include: Exchange Act Rule 15c3-3, which requires the protection of customer funds; Regulation SHO, which describes short sale handling; and Regulation NMS, which provides new order handling rules in addition to other securities market reform. In addition to the SEC, NYSE Regulation, Inc., NASD Regulation, Inc., other Self Regulatory Organizations (“SROs”), such as the various regional stock exchanges, and other regulatory agencies, such as the various state securities authorities, require strict compliance with their rules and regulations. We have subsidiaries that are registered with the SEC and various states as broker-dealers. Much of the regulation of broker-dealers has been delegated by the SEC to SROs, including the NASD, which has been designated by the SEC as our principal examining authority. The NASD adopts rules (subject to approval by the SEC) that regulate broker-dealers who are members of the NASD. These rules regulate the conduct of our U.S. broker-dealer subsidiaries. The NASD, through its regulatory subsidiary, NASD Regulation, Inc., also conducts periodic examinations of the operations of those subsidiaries. The NASD has recently merged regulatory functions with the NYSE. Our U.S. broker-dealers also are registered as broker-dealers in a number of states and are subject to regulation by state securities administrators in states in which they conduct business.

In addition, our U.S. broker-dealer subsidiaries are members of the Securities Investor Protection Corporation which is funded through assessments on registered broker-dealers. The costs associated with compliance therewith (e.g. fees, implementing and following compliance procedures and filing reports) are minimal and do not have a material effect on our profitability.

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Regulation in the United Kingdom

Participants in the United Kingdom securities industry are subject to extensive regulation by the Financial Services Authority (the “FSA”), a governmental agency. The FSA’s primary task is to achieve a marketplace that operates in an efficient, orderly and transparent manner while ensuring that consumers are treated fairly by being properly informed and appropriately protected. The FSA sets the standards that firms must meet and can take action against firms if they fail to meet the required standards. This often involves requiring firms to pay compensation to their customers.

Regulation in the European Union

The European Union (“EU”) has adopted MiFID (Markets in Financial Instruments Directive), which is required to become national law in all EU countries by November 2007. MiFID is intended to create a unified European market, with common regulation regarding investments and trading in EU countries. MiFID is intended to enable much greater competition among exchanges, investment firms who internalize (“systematic internalizers”), and ATS/ECN like platforms (“Multi-Lateral Trading Facilities”). MiFID encourages competition for market data, trade execution, and trade reporting. MiFID also introduces a European-wide requirement for best execution, by requiring investment firms to establish and publish execution policies for all traded instruments.

Regulatory Environment and Other Recent Developments

As a matter of public policy, regulatory agencies in the U.S. and abroad are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of investors participating in those markets. Companies that operate in the securities industry are subject to regulation concerning many aspects of their business, including trade practices, capital structure, record retention and the conduct of directors, officers and employees. As part of this regulation, we are subject to significant intervention by regulatory authorities, including extensive examination and surveillance activity. Starting in 1994, the SEC and the U.S. Department of Justice (“DOJ”) conducted anti-trust investigations of various NASD member firms relating to concerns of fraud, price fixing and collusion. In December 1997, 30 brokerage firms and the U.S. Department of Justice entered into a settlement of these anti-trust proceedings. In response to the findings of these investigations and consistent with the recommendations in the SEC Market 2000 Report issued in 1994, the SEC adopted new rules referred to as the Order Handling Rules. These rules cover how to display and execute a limit order.

In December 1998, following the issuance of the Order Handling Rules, the SEC promulgated Regulation ATS relating to the regulation of certain ATSs, such as NYFIX Millennium. The SEC expanded its interpretation of the definition of “exchange” under the U.S. securities laws to encompass a range of electronic brokerage activities. At the same time, Regulation ATS permits systems to register as broker-dealers, rather than as national securities exchanges, with the SEC, if they comply with the regulation. NYFIX Millennium continues to review and monitor our systems and procedures for compliance with Regulation ATS.

We provide our clients with access to U.S. listed securities, through connectivity to exchanges, their specialists, ECNs, and ATSs. We execute trades in the NYFIX Millennium ATS involving both NYSE and Nasdaq listed stocks on behalf of all of our clients.

SEC Rules 605 and 606 (f/k/a Rules 11Ac1-5 and 11Ac1-6) require many market participants to make detailed public disclosure in electronic form of certain statistical measures of execution quality for orders in equity securities. Market centers must disclose information, categorized by security, size and type of order, about the time frames in which orders are executed and on the prices offered by participants relative to each other and the marketplace. These rules also require securities brokers to provide detailed disclosure regarding their order routing practices. NYFIX Transaction Services, and NYFIX Millennium report their execution quality data to the SEC through Transaction Audit Group, an independent reporting entity.

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In April 2005, the SEC passed a rule set known as Regulation NMS, which addresses three main areas of concern for market participants: i) trade-through reform and market linkage, ii) access fees and standards, and iii) market data pricing and distribution. Parts of Regulation NMS have been implemented while others, including the trade-through reform, are still pending. The “Order Protection Rule” (Rule 611) requires trading centers to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the execution of trades at prices inferior to the protected quotations displayed by other trading centers, subject to an applicable exception. The “Access Rule” (Rule 610) requires fair and non-discriminatory access to quotations, establishes a limit on access fees to harmonize the pricing of quotations across different trading centers, and requires each national securities exchange and association to adopt, maintain, and enforce written rules that prohibit their members from engaging in a pattern or practice of displaying quotations that lock or cross automated quotations. Further, the “Sub-Penny Rule” (Rule 612) prohibits market participants from accepting, ranking, or displaying orders, quotations, or indications of interest in a pricing increment smaller than a penny, except for orders, quotations, or indications of interest that are priced less than $1.00 per share. The NYSE responded to Regulation NMS with a plan named “Hybrid,” which supports auto execution and auto quotation. The NYSE has been implementing the Hybrid market in several phases. We believe Regulation NMS has substantially changed the current exchange floor environment, as was evident by the merger in 2006 of the NYSE with Archipelago Holdings, Inc., an electronic exchange.

On September 29, 2006, the SEC approved the NMS Linkage Plan, which supersedes the Intermarket Trading System (“ITS”). The NMS Linkage Plan enables participant markets (e.g., American Stock Exchange LLC, Boston Stock Exchange, Inc., New York Stock Exchange LLC) to act jointly in planning, developing, operating and regulating the system that will electronically link the participant markets to one another and to facilitate compliance by the participant markets and their respective members with Rules 610 (Access to Quotations) and 611 (Order Protection Rule) under Regulation NMS.

The SEC’s primary rule for the regulation of the financial soundness of broker-dealers is Exchange Act Rule 15c3-1, commonly known as the “Net Capital Rule.” The Net Capital Rule requires that broker-dealers maintain a minimum amount of regulatory net capital. Further, the rule limits broker-dealers’ leverage by maintaining a minimum percentage of net capital to one of two measures of securities business-related indebtedness. In addition, the Net Capital Rule prohibits rapid withdrawals of funds from a broker-dealer by its parent company or other affiliated entities.

The SEC also regulates broker-dealers’ receipt and use of customer information. Broker-dealers and other financial institutions are subject to the USA PATRIOT Act of 2001 (the “PATRIOT Act”), which in conjunction with the Bank Secrecy Act, was designed to detect and deter money laundering and terrorist financing activity. The PATRIOT Act requires broker-dealers to establish anti-money laundering (“AML”) compliance programs which must include policies and procedures to ensure customer identity at account opening and to detect and report suspicious transactions to the government. Those institutions subject to the PATRIOT Act must also implement specialized employee training programs, designate an AML Compliance Officer and submit to audits designed to test the effectiveness of the compliance program. Among other things, we have adopted a Customer Identification Program. Financial institutions and broker-dealers have also become subject to increasingly comprehensive legal requirements concerning the protection of certain customer information including those adopted pursuant to the Gramm-Leach-Bliley Act in the U.S. and the European Union Directive on Data Protection in EU countries. Further, many states have also recently passed new privacy and information security laws. NYSE Rule 123 governs the recording and transmission of orders to and on the NYSE floor. Rule 123 requires all orders received on the NYSE floor to be input into an electronic order management system for better monitoring and tracking of trades, and it also requires that all orders and order details must be capable of being transmitted to a designated NYSE data base within such time frame as the NYSE may prescribe. Rule 123 requires that each order include the symbol, clearing member organization, order identifier, identification of member recording the order details, number of shares, side of market, designation as market, limit, stop, stop limit, any limit price or stock price, time in force, designation as held or not held, special conditions, time of recording order details and modification of terms of the order or cancellation of the order.

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Available Information

We are required to file certain documents with the SEC, as required under Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act. The SEC maintains a website at http://www.sec.gov, which contains reports, proxy and information statements, and other information regarding us. You may also read and copy any document we file with the SEC at its Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549. The SEC may be contacted at 1-800-SEC-0330 for further information on the operation of the Public Reference Room.

Our website can be found at http://www.nyfix.com. Information contained on our website is not a part of this document. We make available free of charge, on or through the Investor Relations section of our website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Upon request we also will provide you with a copy of these filings, including the exhibits to such filings, at no cost, when you contact us at: NYFIX, Inc., 100 Wall Street, New York, NY 10005, Attention: Chief Financial Officer. Our telephone number is 646-525-3000.

Item 1A. Risk Factors

An investment in our securities involves a high degree of risk. The risks described below are not the only ones facing us. Additional risks not presently known to us, or that we currently deem immaterial, may also have a material adverse effect on us. If any of the following risks actually occur, our financial condition, results of operations, cash flows or business could be harmed. In that case, the market price of our securities could decline, and you could lose part or all of your investment.

RISKS RELATED TO OUR BUSINESS

We have been unprofitable in the past and we may not be profitable in the future. If we are required to record an impairment charge relating to our goodwill because we are not profitable, and such charge is sufficiently large, the impact on our consolidated financial statements could be material.

Over the past four years we have made many acquisitions that have negatively impacted our costs. Although we have seen growth in our revenues and have restructured certain office operating leases, we have not been able to generate consistent quarterly profits.

If we are not profitable in the future, we may be required to record an impairment charge relating to our goodwill. If the impairment charge is sufficiently large, the impact on our consolidated financial statements could be material.

In addition, costs incurred for professional fees for outside accountants and lawyers to restate and re-audit financial results, to produce and analyze document requests and to address related litigation have been significant and are expected to be significant in 2007.

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We are highly reliant upon our computer and other electronic systems. A significant power or telecommunications failure, computer virus, increased order volume, software defects, or human error could cause us and our clients to lose revenue and subject us to liability for client losses. A slowdown in the operations of such services could also materially adversely affect our business and our clients.

Our services depend on our ability to store, retrieve, process and manage significant amounts of data and to receive and process trade orders electronically. Our business is based upon our ability to perform such functions rapidly. Our systems and data centers could fail or slow down significantly due to a number of factors, including the volume of orders entered and executed, human error, software defects and power failures, caused by a variety of factors, or outages, caused by high demand placed on the infrastructures of the utilities we use in the Metro New York area. Since it is fairly common for multiple carriers to share the same physical infrastructure such as central offices, telephone poles and below-ground conduit, instances like major cable cuts or regional natural disasters could also cause such power or telecommunications failures. Due to the complexity of these electrical systems, errors or failures could occur which render an entire site to be unusable.

We constantly monitor system loads and performances and upgrade our systems to the extent we determine to be appropriate to handle estimated increases in power consumption. However, we may not be able to accurately predict future demand. To mitigate the impact of power failures, we maintain critical data center facilities at two separate locations in the Metro New York area. Although these data centers are located in the same geographical area, they are serviced via different power companies (i.e. ConEdison and Public Service Electric & Gas). In the event of a power outage at any of our data centers, we use uninterruptible power supplies (“UPS”) to provide limited battery backup for critical systems. We also use diesel-powered generators to backup the UPSs.

In the event of loss of power or telecommunications services at either of these locations, we believe there are sufficient backup facilities in place to give us reasonable time to access, or switch over to, our redundant data center. It is possible that multiple telecommunications vendors could be impacted so severely that the multi-vendor and multi-site strategy would not ensure communications services to our clients.

A computer virus infiltrating our systems through connections to client systems, emails received by us or connectivity to the Internet could also negatively impact the functioning of our computer systems. Although to date, we have not had any incidence of a virus fully penetrating our protective layers and infiltrating our production systems, we continue to review our protective layers and safeguards as our systems are susceptible to the growing number of potential viruses.

Any significant degradation or failure of one or more of our networks could cause our clients to suffer delays in transaction processing, which could damage our reputation, increase our service costs, result in error positions and settlement breaks (potentially causing losses) or cause us to lose clients and revenues.

We depend on a limited number of network equipment and telecommunications suppliers and do not have supply contracts. Our inability to obtain necessary network equipment, technical support or other telecommunications services or being forced to pay higher prices for such equipment, support or services could materially adversely affect our business.

Some key components we use in our networks are available only from a limited number of suppliers. The services required for operation of our networks are also provided to us by a limited number of telecommunication services providers. We do not have long-term supply contracts with the suppliers of the key components of our networks or any other limited source vendors, and we purchase data network equipment on a purchase order basis. We also have no control over the operation, quality or maintenance of the services required to maintain such networks or even the continued performance of such services. If we are unable to obtain sufficient quantities of equipment, required technical support or services, or to develop alternate sources as required in the future, our ability to deploy equipment in and operate our networks could be delayed or reduced, or we may be forced to pay higher prices for our network components or related services. Delays or reductions in supplies or services could lead to slowdowns or failures of our networks.

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We are subject to rapid changes in technology which could impact our profitability and our ability to compete effectively.

Due to the high demand for technology-based services in the securities industry, we are subject to rapid technological change and evolving industry standards. Also, customer demands become greater and more sophisticated as the dissemination of information to clients increases. If we are unable to anticipate and respond to the demand for new services, products and technologies in a timely and cost-effective manner and to adapt to the technological advancements and changing standards, we will be less able to compete effectively, which could have a material adverse effect on our business. Many of our competitors have significantly greater resources than we do to fund such technological advancements. Similarly, the development of technology-based services is a complex and time-consuming process which may not always yield marketable products and services. New products and enhancements to existing products can require long development and testing periods. Significant delays in new product releases or significant problems in creating new products could negatively impact our revenues.

Our clients may develop in-house networks or use network providers other than NYFIX and divert part or all of their data communications from our networks to their networks, which could have a material adverse effect on our business.

Our clients may develop in-house networks or use other network providers because such clients want to connect to destinations not part of our NYFIX Marketplace Service or to only certain, but not all, destinations covered by our NYFIX Marketplace Service. As a result of any of these events, we could experience lower revenues or lost revenues from delays in connecting clients to our NYFIX Marketplace Service indirectly through third party providers rather than directly by us.

A decline in subscription and maintenance revenue, our largest source of revenue, or transaction revenue, could have a material adverse effect on our business.

Subscription and maintenance revenue is our most significant source of revenue. Subscription and maintenance revenue rates are fixed based on a contractual period of time, typically one to three years, and is not affected by trading volumes. However, trading volumes do affect the revenues of our clients and this could affect their future purchases of our technology and services. Pricing pressures due to competition, failure to sign new agreements with clients because of reductions in their new technology spending, and observed consolidation in the financial sector could affect our revenues and profitability. Our costs associated with supporting the subscription and maintenance agreements are generally fixed and thus a loss of revenue would impact profitability.

Transaction revenue has been a growing component of our revenue. There is no assurance, however, that we can continue to grow transaction revenue. As our costs to support transaction revenue are generally fixed, a decline in revenue would directly impact our profitability. Several risk factors apply to the analysis of the potential growth of transaction revenue:

· Competitive pressure created by a proliferation of electronic execution competitors, including NYSE-Arca;

· Potential changes in the U.S. market structure, e.g., the NYSE could establish limits on electronic access or create its own electronic matching order engine; there could be a consolidation of broker-dealers or a decline in the number of hedge funds; and

· Increased client demands for bandwidth and speed, requiring reinvestment in hardware and software.

We have no current plans to transition from the subscription and maintenance or transaction-based revenue model due to general acceptance of it in the marketplace and the current trend of recurring, predictable revenue recognition and cash flows.

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We are exposed to clearance, settlement and credit risk that could materially adversely affect our business.

NYFIX Clearing may have to finance our clients’ unsettled positions and we could be held responsible for the defaults of our clients. Although we regularly review credit exposure, default risk may arise from events or circumstances that may be difficult to detect or foresee. In addition, concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions, which in turn could adversely affect NYFIX.

NYFIX Clearing is restricted to a maximum limit imposed by the DTCC. In addition, to be able to clear trades, NYFIX Clearing may require added commitments from unaffiliated institutions to provide funding during a settlement day (“intra-day funding”). An inability to maintain or raise its maximum limits or to obtain and maintain third-party commitments to support intra-day funding could have an adverse impact on NYFIX Clearing’s ability to maintain or expand its business.

We are exposed to credit risk from third parties that owe us money, securities, or other obligations, including our customers and trading counterparties. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Volatile securities markets, credit markets and regulatory changes increase our exposure to credit risk, which could adversely affect our financial condition and operating results.

Our ability to maintain or expand our brokerage business could be adversely impacted if we do not continue to have third-party assistance to access exchanges and other important trading venues.

Our Transaction Services Division provides execution services with the assistance of third parties who provide us access to exchanges and other important trading venues in the execution business such as ECNs and ATSs. If such third parties, exchanges or regulators determine that our Transaction Services Division must discontinue such indirect access, this could have an adverse impact on our ability to maintain or expand this business.

Our clients may not approve our broker-dealer subsidiaries as counterparties if we are unable to maintain certain levels of capital, fail to file our periodic reports in a timely fashion, fail to obtain Nasdaq relisting, or are the subject of charges resulting from the SEC and DOJ investigations, and we may not be able to expand into other securities businesses without increased capital.

Certain clients have stringent counterparty credit requirements that we may not satisfy if our capital falls below certain levels. If we are unable to satisfy these requirements, the result may be that clients limit the amount of transactions they enter into with us, which in turn would reduce our revenues. In addition, our ability to expand our Transaction Services business into new products and services may be limited by the amount of capital we have on hand. Failure to become and remain current with our periodic filing requirements, as well as the continued delisting of our stock by Nasdaq, might deter clients of our Transaction Services Division from continuing to do business with us.

In addition, our clients may limit the amount of transactions they enter into with us if we are charged by the SEC and/or U.S. Attorney in the investigation into our historical stock option grants.

Our broker-dealer subsidiaries are at risk if their clients default on their trading obligations.

Under applicable regulatory requirements, our broker-dealers are required to cover for their clients if their clients default on their trading obligations by improperly failing to deliver cash or securities on the date when a trade settles. The broker-dealer can pursue its client for losses the broker-dealer sustains by delivering the required cash or securities. Our broker-dealers attempt to manage the risks associated with client trading defaults by conducting a number of background checks on their clients, including financial history, credit, regulatory and legal checks. The broker-dealer decides which background checks to undertake based on the relationship with the client and the nature and extent of the business that the client has with the broker-dealer. In addition, our broker-dealers monitor trades to check that counterparties know and confirm trades before settlement date to minimize market risk to which our broker-dealers can be exposed between trade date and settlement date. Our membership in the stock loan program of the OCC mitigates our risk with respect to our matched-book stock borrow/stock loan business. The OCC guarantees the required mark-to-market payments related to the fluctuation in market value of the collateral underlying stock borrow/stock loan transactions processed by its members and is considered the principal counterparty to each transaction. At December 31, 2006, approximately 44% of our stock borrow/stock loan transactions outstanding were processed through the OCC. Despite these measures to reduce the risk to our broker-dealers from trading defaults by their clients, there can be no assurance that our broker-dealers will avoid such risks entirely or that if losses do occur they will not have a material impact on the financial condition or reputation of the affected broker-dealer.

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The cost structure of our OMS business could negatively impact our profitability if large clients discontinue using our services.

There is a significant cost associated with maintaining and enhancing our order management systems. If a significant share of these clients were to discontinue use of our systems, we will continue to incur the costs associated with supporting our remaining clients, having a negative impact on our profitability.

We might not be able to accommodate increased levels of trading activity and keep current with market data requirements.

There could be an increase in transaction levels driven by market volumes, regulatory changes and industry changes. This increase could jeopardize the ability of our hardware and software to accommodate the increase in the total number of trades, the number of items handled during a given period of time and latency, the time required to deal with a single order. The inability to accommodate these increased transaction levels could result in significant error positions and settlement breaks potentially causing losses.

Live market data is an integral part of certain product offerings of our Transaction Services Division and our OMS Division. The increase in market volumes could impact our ability to keep current with market data requirements which could, in-turn, impact the functionality of certain products causing us to lose clients and revenues.

Regulation NMS and MiFID could significantly alter the market structure and the volume of trading of equities in the U.S. and in the EU which would adversely affect us if we are unable to provide competitive performance, functionality, and capacity.

As a result of the implementation of Regulation NMS, the order flow of our Transaction Services Division might migrate to competitive trading platforms as traders seek to exploit changes in market microstructure with a resulting decline in revenue. Additionally, trading volumes and market data volumes might substantially increase at the NYSE and other markets and, unless our Transaction Services and OMS Divisions are able to implement sufficient systems upgrades and product enhancements, we might be unable to keep up with the increased market volumes and compliance obligations, in which case clients would trade elsewhere. In addition, unless our OMS Division is able to implement product enhancements to provide a Regulation NMS compliant solution to our clients, they may cancel subscriptions to our OMS products.

In the European Union, MiFID is required to become national law in all EU countries by November 2007. MiFID is intended to create a unified European market, with common regulation regarding investments and trading in EU countries. Although the impact of these regulations on NYFIX is uncertain, they could result in increased competition, increased administrative costs and exposure to enforcement actions.

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Our business could be adversely affected by our inability to attract and retain talented employees, including senior management professionals and software developers.

Our business operations require highly specialized knowledge of the financial industry and of technological innovation as it applies to the financial industry. If we were unable to hire or retain the services of talented financial and software professionals, we would be at a competitive disadvantage.

If Warburg Pincus converts the Series B Preferred Stock and exercises the Warrant held by it, it could potentially acquire effective voting control of us. Its interests may or may not be aligned with those of our other stockholders.

If Warburg Pincus converts the Series B Preferred Stock and exercises the Warrant held by it, Warburg Pincus would own approximately 35% of our then outstanding common stock (which includes 1,207,400 shares of common stock, representing approximately 3.4% of the outstanding common stock, purchased by Warburg Pincus on May 9, 2007). Warburg Pincus is permitted under the Preferred Stock - Securities Purchase Agreement to acquire up to 40% of our outstanding common stock, on an as-if-converted basis through September 2011, after which it may acquire up to 45%. Such conversion and exercise in full may enable Warburg Pincus to effectively acquire the ability to elect all of our directors and determine the outcome of other matters submitted to a vote of stockholders. This ability may enable Warburg Pincus to influence management and may discourage a third party from making a significant equity investment in us or seeking to acquire us. Warburg Pincus’ interests may differ from those of our other stockholders in material respects. Additionally, Warburg Pincus may determine that the disposition of some or all of its interests in us would be beneficial to it at a time when such disposition could be detrimental to us or our other stockholders.

RISKS RELATING TO RESTATEMENTS AND RELATED PENDING LEGAL PROCEEDINGS

Our internal review of our historical financial statements, the restatement of our consolidated financial statements, investigations by the SEC and related events have had, and will continue to have, a material adverse effect on us.

By letter dated October 28, 2004, the Division of Enforcement of the SEC informed us that it was conducting an informal investigation related to our stock options granted. On February 25, 2005, we filed a current report on Form 8-K, which indicated that we believed that the matter was a formal inquiry. We are cooperating with the SEC with respect to this matter. We believe we are substantially complete with regard to producing all documents responsive to document requests and subpoenas. The SEC staff has taken testimony from current and/or former officers and/or directors, as well as from third parties, including our former independent registered public accounting firm.

We could be subject to substantial penalties, fines or regulatory sanctions or claims by our former officers, directors or employees for indemnification of costs they may incur in connection with the SEC investigation into our historical stock option granting practices and other related matters described below, which could adversely affect our business and operating results. We are unable to predict the outcome of the SEC investigation into our historical stock option granting practices and whether or not the other restatement items will lead to additional investigations or inquiries.

In connection with the restatement of our 1999 through 2002 consolidated financial statements relating to our accounting for the losses incurred by NYFIX Millennium filed in May 2004, the Division of Enforcement of the SEC informed us by letter dated July 14, 2004 that it was conducting an informal inquiry. On January 25, 2005, we filed a current report on Form 8-K, which indicated that we believed that the matter was a formal inquiry. We have cooperated with the SEC, producing documents in response to document requests and subpoenas and making employees available for interviews and testimony. The SEC staff has taken testimony from current and/or former officers and/or directors, as well as from third parties, including our former independent registered public accounting firm. In March 2006, we announced that the SEC Enforcement Staff had advised that it is recommending that the SEC close its inquiry into this matter without any action being taken against the Company or any individual. As a result of the Staff’s recommendation, which is subject to a formal approval process within the SEC, we have not been required to produce any more documents or provide additional witnesses for testimony in connection with this inquiry.

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The consolidated financial statements included in our annual report on Form 10-K for 2005 restated the results of operations for fiscal years 2004 and 2003 and, in Note 19 to that report, the results for interim periods in 2004 and the quarter ended March 31, 2005 to reflect changes in our accounting for stock options granted, acquisitions and investments, revenue recognition, income taxes and treasury stock issuances. Costs incurred for professional fees for outside accountants and lawyers to restate and re-audit our financial results and to produce and analyze document requests and to address related litigation have been significant and are expected to be significant into 2007.

We are the subject of several legal and administrative proceedings relating to our granting of stock options to certain of our employees, officers and directors. We are unable to predict the outcome of these proceedings and can give no assurances that the outcome of these proceedings will not have a material impact on us or that other proceedings will not be initiated.

In May 2006, we received a grand jury subpoena from the U.S. Attorney for the Southern District of New York.  The subpoena sought documents relating to our granting of stock options.  With the agreement of the Assistant U.S. Attorney, we are responding to the subpoena by producing the documents we produce to the staff of the Division of Enforcement of the SEC. The U.S. Attorney has also conducted interviews with at least one of our current employees and two of our former employees (one of whom is a former officer) and with at least one employee of our former independent registered public accounting firm.

Since June, 2006, we have been served as a nominal defendant in several shareholder derivative actions against us and several of our current and former officers and directors, asserting, among other things, claims under the federal securities laws, corporate waste, fraud and breach of fiduciary duty against all the individual defendants based on claimed backdating of stock option grants to these individuals between 1997 and 2003.  In addition, certain stockholders have made formal inquiries regarding alleged violations of Section 16(b) of the Exchange Act based on the same facts alleged in these actions.

In 2006 and 2007, we have had communications with the United States Internal Revenue Service and the United Kingdom HM Revenue & Customs relating to our potential liability for income and payroll tax withholdings on certain historical stock option grants and exercises.

We are unable to predict the outcome of any of these matters at this time and can give no assurances that the outcome of any of these proceedings will not have a material impact on us or that there will not be other proceedings arising from this restatement or the matters described in this report on Form 10-K.

Many members of our senior management team and our Board of Directors have been and will be required to devote a significant amount of time on matters relating to the continuing SEC investigation, the restatement, our outstanding periodic reports, remedial efforts and related litigation.

Our senior management team and our Board of Directors have devoted a significant amount of time on matters relating to the continuing SEC investigation into our historical stock option grants, the 2005 Restatement, curing the delinquency related to our periodic reports, remedial efforts and related litigation. In addition, certain members of our Board of Directors and our General Counsel are named defendants in one or more legal proceedings asserting claims of federal securities law violations related to the SEC investigation into our historical stock option granting practices. Defending these actions will require significant time and attention from members of our current senior management team and our Board of Directors. If our senior management is unable to devote a significant amount of time in the future developing and attaining our strategic business initiatives and running ongoing business operations, there may be a material adverse effect on our business, financial condition and results of operations.

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We have material weaknesses in our internal control over financial reporting, which could adversely affect our ability to report our financial condition and results of operations accurately and on a timely basis.

In connection with our assessment of internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, we identified material weaknesses including those that may exist or hereafter arise or be identified, which could adversely impact our ability to provide timely and accurate financial information. Additional work remains to be done to address the identified material weaknesses. We may be required to hire additional employees and consultants to address these weaknesses, and may experience higher than anticipated capital expenditures and operating expenses during the implementation of these changes and thereafter. If we are unable to address these weaknesses effectively, or if other material weaknesses develop, there could be a material adverse effect on our business, financial condition and results of operations. If we are unsuccessful in implementing or following our remediation plans, or fail to update our internal control as our business evolves or to integrate acquired businesses into an in-control environment, we may not be able to timely or accurately report our financial condition, results of operations or cash flows or maintain effective disclosure controls and procedures. If we are unable to report financial information timely and accurately or to maintain effective disclosure controls and procedures, we could be subject to, among other things, regulatory or enforcement actions by the SEC, securities litigation, events of default under our long-term debt agreements and the terms of our agreement with the holder of our preferred stock, and a general loss of investor confidence, any one of which could adversely affect our business prospects and the valuation of our common stock. Such weaknesses may impact our ability to list on a national securities exchange, such as Nasdaq.

Furthermore, there are inherent limitations to the effectiveness of any system of controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. We could face additional litigation exposure and a greater likelihood of an SEC enforcement action if further restatements were to occur or other accounting-related problems emerge. In addition, any future restatements or other accounting-related problems may adversely affect our financial condition, results of operations and cash flows.

Our stock is currently delisted from the Nasdaq National Market quotation system and the public float and trading volume of our common stock is limited.

As a result of the delisting of our stock from Nasdaq on November 1, 2005, our common stock is currently traded in the OTC securities market with real-time quotes available on the Pink Sheets electronic quotation service. Stockholders may find it more difficult to obtain accurate quotes and execute trades in the OTC market and the limited public float of our stock could result in increased volatility particularly if larger share trades are executed. In addition, if the market price of our common stock is less than $5.00 per share, our common stock could be considered a penny stock and become subject to the regulations applicable to penny stocks.

Our stock price may decline if current and former employees exercise outstanding options and sell the underlying shares in the market.

As described in more detail in Note 14 to the Consolidated Financial Statements, as of December 31, 2006, there are approximately 3.5 million exercisable options outstanding. As of June 30, 2007, included in the exercisable options outstanding are 1,030,150 shares, underlying options, for which we had been notified of intents to exercise that were not deemed probable of expiring before the Company could issue shares. We have generally been unable to honor Pending Exercises since the third quarter of 2005 as a result of not being current with our periodic filing requirements and therefore not having an effective S-8 registration statement for the underlying shares. We have extended the period these options can be exercised until such time that we are current with our periodic filing requirements and have an effective S-8 registration statement for the underlying shares. If a large number of the shares underlying these options were to be sold in the market, together with shares underlying options to existing employees, the price of our stock may decline.  

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RISKS RELATING TO THE BROKER-DEALER INDUSTRY REGULATIONS

The securities brokerage industry is subject to extensive government and other regulation. If NYFIX Millennium, NTS, NYFIX Clearing or NYFIX International fail to comply with these regulations, they may be subject to disciplinary or other action by regulatory organizations. Changes in such regulations could increase our compliance costs.

We are subject to extensive government and other regulation. NYFIX Millennium, NTS and NYFIX Clearing are subject to extensive regulation under both federal and state laws and NYFIX International is subject to extensive regulation under UK laws. In addition to these laws, we must comply with rules of the SEC, including Regulation ATS for NYFIX Millennium, and the NASD, FSA, various stock exchanges, state securities commissions and other regulatory bodies charged with safeguarding the integrity of the securities markets and other financial markets and protecting the interests of investors participating in these markets. As regulated subsidiaries, NYFIX Millennium, NTS, NYFIX Clearing and NYFIX International are subject to numerous regulations covering the securities business, including:

· marketing practices;

· capital structure, including net capital requirements;

· record keeping; and

· conduct of directors, officers and employees.

The ability of NYFIX Millennium, NTS, NYFIX Clearing and NYFIX International to comply with such regulations depends largely on the establishment and maintenance of an effective compliance system, as well as their ability to attract and retain qualified compliance personnel. If a claim of noncompliance is made by a regulatory authority, the efforts of the management of NYFIX Millennium, NTS, NYFIX Clearing or NYFIX International could be diverted to responding to such claim and they could be subject to a range of possible consequences, including the payment of fines, civil lawsuits and the suspension of one or more portions of their business. In addition, their mode of operation and profitability may be directly affected by:

· additional legislation;

· changes in rules promulgated by the SEC, the Board of Governors of the Federal Reserve System, the NASD, the FSA, the various stock exchanges or other SROs; or

· changes in the interpretation or enforcement of existing laws and rules.

If we are unable to defend against such claims, we may be subject to disciplinary or other action by regulatory organizations, including censure, fines, the issuance of cease-and-desist orders or the suspension, and/or disqualification of our officers, directors or employees. The fines, if material, could have an adverse effect on our earnings because it could greatly increase our capital requirements. If any of our employees were suspended or disqualified, we may be unable to meet the needs of our clients or to solicit new business. This could also have an adverse effect on our earnings. Furthermore, any such penalties could materially harm our reputation in the industry, which could have a long-term effect on our financial growth.

In addition, NYFIX Millennium’s status as a recognized ATS requires that its trade execution and communication systems be able to handle anticipated present and future peak trading volumes. If any of our systems become disabled, the ability to process trades and handle peak trading volumes will be compromised. The status of NYFIX Millennium, NTS and NYFIX Clearing as SEC registered broker-dealers and NASD members and NYFIX International as an FSA registered entity are conditioned, in part, on their ability to process and settle trades.

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In addition, our standing with various bodies that regulate us may be impacted if we are charged by the SEC and/or U.S. Attorney in the investigation into our historical stock option grants.

Our failure to meet Net Capital Rule Requirements, or adverse changes in the Net Capital rules, could restrict our business operations.

The SEC, the FSA and the NASD, as well as other regulatory agencies and securities exchanges within and outside the U.S., have stringent rules with respect to the maintenance of specific levels of net capital by regulated broker-dealers. These rules include the SEC’s net capital rule (15c3-1), to which our U.S. broker-dealer subsidiaries are subject, and the financial resources requirements of the FSA to which our UK registrant is subject. The failure by one of these subsidiaries to maintain its required regulatory net capital or financial resources (collectively, “Net Capital”) may lead to suspension or revocation of its registration by the SEC and its suspension or expulsion by the NASD and other U.S. or international regulatory bodies, and ultimately could require its liquidation. In addition, a change in the Net Capital rules, the imposition of new rules or any unusually large charge against the Net Capital of one of our regulated subsidiaries could limit its operations, particularly those that are capital intensive. A large charge to the Net Capital of one of these subsidiaries could result from an error or other operational failure or a failure of a client to complete one or more transactions, including as a result of that client’s insolvency or other credit difficulties, and we cannot assure you that we would be able to furnish the affected subsidiary with the requisite additional capital to offset that charge. The Net Capital rules could also restrict our ability to withdraw capital from our regulated subsidiaries, which could limit our ability to pay cash dividends if we decided to pay dividends, repay debt or repurchase shares of our outstanding stock. A significant operating loss or any unusually large charge against the Net Capital of any of our regulated subsidiaries could adversely affect our financial position. In addition, as a member of DTCC, our NYFIX Clearing subsidiary is required to maintain excess Net Capital of $10 million. Our NYFIX Clearing subsidiary had excess Net Capital in excess of $25 million at May 31, 2007. At December 31, 2006, our regulated subsidiaries had aggregate Net Capital requirements (including the DTCC requirement for NYFIX Clearing) of $11.3 million. In 2006, we provided an aggregate additional capital of $12.5 million in the form of additional capital contributions to our broker-dealer subsidiaries. If our regulated subsidiaries fall below their minimum regulatory Net Capital and minimum excess regulatory Net Capital requirements, their operations would be restricted by their respective regulatory agencies.

Item 1B.Unresolved Staff Comments

None.

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Item 2. Properties

Our headquarters and principal office is on Wall Street in New York City. Our properties do not exclusively support the operations of any one segment but rather support the global operations of each of our three business segments. We have other offices in London’s Financial District, Hong Kong, Boston, MA, Stamford, CT and San Francisco, CA. We operate redundant data centers in the northeastern United States, as well as data center hubs in London, England and Amsterdam, Netherlands.

U.S. Operations

Our offices on Wall Street in New York City comprise approximately 47,400 square feet of office space on several floors, pursuant to coterminous leases expiring in 2014. This includes 11,600 square feet of office space leased in 2006 concurrent with the closing of our former headquarters office in Stamford. We have sublet another former office on Wall Street, which comprised 23,800 square feet of space, to two third parties, pursuant to a lease (and sub-leases) expiring in 2010.

The office in Stamford, which consisted of 26,500 square feet of leased space, was sublet in its entirety during the second half of 2006, pursuant to a lease (and sub-lease) expiring in 2015.

We also occupy approximately 3,200 square feet of other space in the same Stamford office location, primarily supporting our sales and technical support services teams, pursuant to a lease expiring in 2008.

We opened our office in Boston during 2007, where we occupy approximately 2,800 square feetpursuant to a lease expiring in 2012.

We also maintain a sales office in San Francisco consisting of approximately 1,400 square feet pursuant to a lease expiring in 2008.

We maintain redundant data center facilities in the New York Metropolitan area, consisting of 2,750 square feet (in New York City) expiring in 2011 and 850 square feet (in New Jersey) expiring in 2009.

We also maintain a research, development, and technical support services facility in Lyndhurst, New Jersey,where we occupy approximately 2,150 square feet pursuant to a lease expiring in 2009.

International Operations

We have offices in London, England where we occupy approximately 3,000 square feet pursuant to a lease expiring in 2008. These sales and technical support services offices support our global operations and the operations of NYFIX International and NYFIX Global Services.

We have an office in Hong Kong, where we occupy leased space in support of our global operations and the operations of NYFIX Asia Pacific.

We are currently in the process of consolidating our international data center hub facilities into our two existing locations in London, England and Amsterdam, Netherlands. These data center hub facilities are located within the facilities of third-party operations. The data center facilities leases in Hong Kong and Tokyo were not renewed in 2007 as part of our operational consolidation.

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Item 3. Legal Proceedings

Litigation

On or about June 1, 2006, we were served as a nominal defendant with a complaint (the “Ritchie Complaint”) in a shareholder derivative action titled Ritchie v. Castillo, et al. in the Superior Court for the State of Connecticut.  The Ritchie Complaint also names our former Chairman and Chief Executive Officer, another former Chief Executive Officer and director, our former Chief Information Officer, a former Chief Financial Officer, and six other current directors as defendants. The Ritchie Complaint asserts a claim for breach of fiduciary duty against all the individual defendants and a claim for unjust enrichment against four individual defendants based on claimed backdating of stock option grants to these individuals between 2000 and 2003.  On June 9, 2006, we were named as a nominal defendant in a shareholder derivative action titled McLaughlin v. Castillo, et al. in the same court and with the same substantive allegations as the Ritchie action. In September 2006, the Court consolidated the Ritchie and McLaughlin actions. In October 2006, plaintiffs filed a consolidated complaint (the “State Court Consolidated Complaint”). The State Court Consolidated Complaint contains nine counts (as opposed to the two counts previously alleged in each of two actions), including counts for an accounting of all stock options granted to the individual defendants, breach of fiduciary duty and unjust enrichment, insider trading, rescission and breach of contract. The State Court Consolidated Complaint adds seven additional defendants: three former directors (one of whom is deceased); two former Chief Financial Officers, our current General Counsel and former Secretary and our former Executive Vice President and President of NYFIX Millennium, one of our subsidiaries. The nine counts of the State Court Consolidated Complaint are based on claimed backdating of stock option grants to eleven individual defendants between 1997 and 2003.

On August 30, 2006, we were served as a nominal defendant with a complaint (the “Cattelona Complaint”) in a shareholder derivative action titled Cattelona v. Hansen, et al. in the United States District Court for the District of Connecticut.   The Cattelona Complaint also names our former Chairman and Chief Executive Officer, another former Chief Executive Officer and director, a former Chief Information Officer, a former Chief Financial Officer, and six other current directors as defendants. The Cattelona Complaint asserts counts against the individual defendants for violation of Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, Section 14(a) of the Exchange Act and Section 20(a) of the Exchange Act, and for breach of fiduciary duty, gross mismanagement and corporate waste. In addition, the Cattelona Complaint asserts a count against four of the individual defendants for unjust enrichment based on claimed backdating of stock option grants to the latter individuals between 1999 and 2002. 

On or about September 7, 2006, a complaint (the “Brock Complaint”) was filed in a shareholder derivative action titled Brock v. Hansen, et al. in the United States District Court for the District of Connecticut. The Brock Complaint names us as a nominal defendant, as well as our former Chairman and Chief Executive Officer, another former Chief Executive Officer and director, our former Chief Information Officer, a former Chief Financial Officer, and six other current directors as defendants. The Brock Complaint asserts a count for an accounting of all stock options granted to the individual defendants, and counts against all individual defendants for violation of Section 14(a) of the Exchange Act, breach of fiduciary duty, abuse of control, gross mismanagement, constructive fraud, corporate waste, unjust enrichment, and breach of contract. In addition, the Brock Complaint asserts counts against three individual defendants for rescission and for breach of contract for stock option grants made between 1997 and 2001.

On December 5, 2006, the U.S District Court for the District of Connecticut consolidated the Brock and Cattelona actions. In December 2006, the plaintiffs filed a consolidated complaint (the “Federal Court Consolidated Complaint”). The Federal Court Consolidated Complaint contains twelve counts (as opposed to the eleven counts previously alleged in the Brock Complaint and the seven counts previously alleged in the Cattelona Complaint), including counts against all defendants for: violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; violations of Section 14(a) of the Exchange Act; for an accounting of all stock options granted to the defendants; breach of fiduciary duty and/or aiding and abetting; abuse of control; gross mismanagement; constructive fraud; corporate waste; and unjust enrichment. The Federal Court Consolidated Complaint also contains counts against six of the individual defendants for rescission and for breach of contract. The Federal Court Consolidated Complaint adds four additional defendants: two former directors, a former Chief Financial Officer and a former Executive Vice President of the Company and President of NYFIX Millennium. The twelve counts of the Federal Court Consolidated Complaint are based on claimed backdating of stock option grants to six individual defendants from 1997 to the filing of the Federal Court Consolidated Complaint. In June 2007, plaintiffs filed a corrected amended consolidated complaint (the “Federal Court Amended Consolidated Complaint”). The Federal Court Amended Consolidated Complaint drops eight individual defendants (two current directors, two former directors, a former Chief Executive Officer and director, a former Chief Financial Officer, our former Chief Information Officer and a former Executive Vice President of the Company and President of NYFIX Millennium), two counts for rescission and breach of contract and the count for violation of Section 14(a) of the Exchange Act and adds a count under Section 20 of the Exchange Act. The ten counts of the Federal Court Amended Consolidated Complaint are based on claimed backdating of stock option grants and an allegedly false and misleading Form 10-K filed in June 2005.

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In addition, certain shareholders have made formal inquiries regarding alleged violations of Section 16(b) of the Exchange Act based on the same facts alleged in the Ritchie and McLaughlin suits.

In April 2005, a former employee filed a verified complaint with the New York State Division of Human Rights, alleging discrimination on the basis of race/color, age and opposition to unlawful discriminatory practices.  In June 2005, we filed a position paper with the New York State Division of Human Rights, denying the complainant’s charges in their entirety and requesting that the Division render a determination of “No Probable Cause.”  On December 21, 2006, the Regional Director of the New York State Division of Human Rights made a determination that there was probable cause to support the allegations of the complaint.

In January 2006, a former NYFIX employee filed a state court action in the New York Supreme Court for New York County titled Iovino v. NYFIX, Inc., alleging that he was discriminated against on the basis of his sexual orientation.  He is claiming $50 million in damages.  In April 2006, NYFIX answered the complaint, denying the allegations.

We intend to vigorously defend these actions.

Other

During the normal course of business, we become involved in various routine legal proceedings. We believe that we are not presently a party to any other material litigation, the outcome of which could reasonably be expected to have a material adverse effect on our consolidated financial statements.

SEC Matters

In connection with the restatement of our 1999 through 2002 consolidated financial statements relating to our accounting for the losses incurred by NYFIX Millennium, filed in May 2004, the Division of Enforcement of the SEC informed us by letter dated July 14, 2004, that it was conducting an informal inquiry. On January 25, 2005, we filed a current report on Form 8-K, which indicated that we believed that the matter was a formal inquiry. We cooperated with the SEC, producing documents in response to document requests and subpoenas and making employees available for interviews and testimony. The SEC staff has taken testimony from current and/or former officers and/or directors, as well as from third parties, including our former independent registered public accounting firm. In March 2006, we announced that the SEC Enforcement Staff had advised that it is recommending that the SEC close its inquiry into this matter without any action being taken against us or any individual. As a result of the Staff’s recommendation, which is subject to a formal approval process within the SEC, we have not been required to produce any more documents or provide additional witnesses for testimony in connection with this inquiry.

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By letter dated October 28, 2004, the Division of Enforcement of the SEC informed us that it was conducting an informal investigation, related to our stock options granted. On February 25, 2005, we filed a current report on Form 8-K, which indicated that we believed that the matter was a formal inquiry. We are cooperating with the SEC with respect to this matter. We believe that we are substantially complete with regard to producing all documents responsive to document requests and a subpoena. The SEC staff has taken testimony from current and/or former officers and/or directors, as well as from third parties, including our former independent registered public accounting firm, in this investigation.

We are unable to predict the outcome of either matter at this time and can give no assurances that the outcome of either or both matters will not have a material impact on us. However, as noted in the first paragraph of this section, the SEC Enforcement staff has advised us that it intends to recommend the closure of the NYFIX Millennium inquiry with no action taken against either us or our employees.

Grand Jury Subpoena

In May 2006, we received a grand jury subpoena from the U.S. Attorney for the Southern District of New York.  The subpoena sought documents relating to our granting of stock options.  With the agreement of the Assistant U.S. Attorney, we are responding to the subpoena by producing the documents we produce to the staff of the Division of Enforcement of the SEC. The U.S. Attorney has also conducted interviews with at least one of our current employees and two of our former employees (one of whom is a former officer) and with at least one employee of our former independent registered public accounting firm.

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Item 4.Submission of Matters to a Vote of Security Holders

In January 2007, the Board of Directors approved a resolution to amend the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of the Company’s common stock from 60,000,000 to 100,000,000. As of December 31, 2006, there were 35,521,208 shares of the Company’s common stock outstanding, leaving 23,345,014 shares of common stock authorized but unissued and 1,133,778 shares of common stock held in treasury. However, as of December 31, 2006, the Company had obligations to issue approximately 22.5 million shares of common stock consisting of (i) stock options to purchase approximately 3.7 million shares of its common stock, (ii) 1,324,706 shares of common stock issuable at a conversion rate of approximately $5.66 upon conversion of the Company’s $7,500,000 Convertible Note, (iii) 2,250,000 shares of common stock issuable upon exercise of the Warrant issued in connection with the sale of 1,500,000 shares of Series B Preferred Stock, to Warburg Pincus, (iv) 15,000,000 shares of common stock issuable upon conversion of the shares of Series B Preferred Stock, and (v) 227,500 shares of common stock due to the Warburg Pincus in connection with a semi-annual dividend on the Series B Preferred Stock.

The proposal to amend the Restated Certificate of Incorporation to increase the number of authorized shares of Company common stock required approval by a majority of the aggregate voting power represented by the outstanding shares of common stock and Series B Preferred Stock, voting as a single class, and by a majority of the outstanding shares of common stock, voting as a separate class.

At a special meeting of stockholders held on February 27, 2007, the proposal was so approved by the stockholders as follows:

Vote of the Company’s Common Stock as a Class

For	29,372,641
Against	435,836
Abstain	41,425
Broker Non-votes	0

Vote of the Company’s Common Stock and the Series B Preferred Stock Combined as a Single Class

For	44,372,641
Against	435,836
Abstain	41,425
Broker Non-votes	0

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities

Market Information

Between March 2000 and October 2005, our common stock generally traded on Nasdaq under the symbol NYFX. From April 7, 2005 through July 11, 2005, and from August 16, 2005 through October 31, 2005, our common stock traded on Nasdaq under the symbol NYFXE. The addition of the “E” to our trading symbol indicated that we had not timely filed certain periodic reports with the SEC and Nasdaq. On November 1, 2005, our stock was delisted from trading on Nasdaq.

As described in Note 10, Stockholders’ Equity, of the Notes to the Consolidated Financial Statements, on October 31, 2005, we announced that our common stock was delisted from Nasdaq for noncompliance with Nasdaq listing requirements. Specifically, we were unable to comply with Marketplace Rule 4310(c)(14) because of the inability to file our quarterly report on Form 10-Q for the three months ended June 30, 2005 within the extended deadline previously granted by the Nasdaq Listing Qualifications Panel. This delay was primarily due to the impact of, and uncertainties related to, the ongoing SEC and internal investigation into our accounting for stock option grants.

As a result of this delisting, our common stock is currently traded in the OTC securities market with real-time quotes available on the National Quotation Bureau’s “Pink Sheets”, an electronic quotation service, using the symbol NYFX. Stockholders may find it more difficult to obtain accurate quotes and execute trades in the OTC market. In addition, if the market price of our common stock is less than $5.00 per share, our common stock could be considered a penny stock and become subject to the regulations applicable to penny stocks.

Our common stock had the following high and low intra-day sale prices for the periods indicated.

PRICES OF COMMON STOCK		High		Low
2007	First Quarter	$	6.95	$	5.75
	Second Quarter	$	7.40	$	5.70
2006	First Quarter	$	7.20	$	4.31
	Second Quarter	$	7.51	$	4.20
	Third Quarter	$	6.03	$	4.13
	Fourth Quarter	$	6.45	$	5.25
2005	First Quarter	$	6.27	$	4.01
	Second Quarter	$	6.32	$	3.64
	Third Quarter	$	8.05	$	5.06
	Fourth Quarter	$	5.95	$	2.07

The prices set forth in the table above are as reported by the Nasdaq through October 31, 2005, and as quoted in the Pink Sheets for the subsequent period. OTC market quotations reflect inter-dealer prices, without retail markup, mark-down or commission and may not necessarily represent actual transactions.

The closing price of our common stock, as quoted in the Pink Sheets, was $6.30 and $7.40 per share on December 29, 2006, and June 30, 2007, respectively.

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Holders

At June 30, 2007 the records of our transfer agent indicated that there were 297 holders of record of our common stock.

Dividend Policies and Restrictions

Holders of our common stock are entitled to dividends if and when declared by the Board of Directors out of funds legally available. We have not paid or declared any cash dividends on any class of our common stock since our incorporation and have no present intention of paying cash dividends on our common stock. We intend to utilize any income we may achieve for the development of our business and for working capital purposes.

As further described in Note 10 of the Notes to the Consolidated Financial Statements, on October 12, 2006, we issued shares of Series B Preferred Stock to Warburg Pincus. Holders of outstanding shares of Series B Preferred Stock have the right to receive semi-annual dividends at 7.0% per annum payable in shares of common stock using the conversion price of the Series B Preferred Stock then in effect (currently $5.00) to determine the number of common shares to be paid. Dividends on the Series B Preferred Stock are cumulative and all accumulated but unpaid dividends on the Series B Preferred Stock must be paid before any cash dividends may be paid to holders of our common stock.

The terms of the Series B Preferred Stock include a restriction on the payment of dividends to holders of common stock unless certain financial conditions are met. In addition, we shall not declare or pay any dividends on shares of our common stock unless the holders of the Series B Preferred Stock shall simultaneously receive a dividend on a pro rata basis as if the Series B Preferred Stock had been converted into shares of common stock.

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information regarding our equity compensation plans at December 31, 2006:

Equity Compensation Plan Information
	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance
Plan category:
Equity compensation
plans approved by
security holders (1),(2)		3,347,916	$	9.43		1,237,538
Equity compensation
plans not approved by
security holders (3)		322,864	$	10.67		150,045
Total		3,670,780	$	9.56		1,387,583

(1) Consists of stock options outstanding to purchase 2,076,969 shares and 1,270,947 shares of our common stock under the NYFIX 2001 Stock Option Plan and NYFIX 1991 Stock Option Plan, respectively.

(2) Based on the findings of our internal review of stock option grant practices, certain stock option grants, as described further in Notes 9 and 14 to the Consolidated Financial Statements, may be considered outside certain plans approved by security holders. At this time, such determinations have not been made.

(3) Consists of (i) stock options outstanding to purchase 253,364 shares of our common stock under the Javelin 1999 Stock Option Plan, which was assumed as part of the acquisition of Javelin on March 31, 2002, and (ii) stock options outstanding to purchase 69,500 shares of our common stock that were issued out of the 1991 Stock Option Plan after its expiration. See Note 14 to the Consolidated Financial Statements

Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities

For a description of sales of unregistered securities during 2006, refer to Part II Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds in our quarterly reports on Form 10-Q for the quarters ended March 31, June 30, and September 30, 2006.

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Subsequent Stock Issuances

On January 25, 2007 and June 19, 2007, the Board of Directors declared dividends payable to holders of Series B Preferred Stock in payment of dividends accumulated through December 31, 2006 and June 30, 2007, respectively. As a result, we issued 227,500 and 526,327 restricted shares of common stock, with a fair value of approximately $1,354,000 and $3,426,000, respectively, based on the market price of our common stock on the respective declaration date.  The issuances of the shares were affected in reliance on the exemption set forth in Section 4(2) of the Securities Act. (See the discussion above for additional information regarding the Preferred Stock SPA.)

During the first quarter of 2007, certain stock options aggregating 225,000 shares, held by an accredited investor (and former executive officer), were exercised at $2.00 per share. The $450,000 aggregate exercise price of such shares was paid for with the delivery of 73,171 shares of common stock previously held by the former executive officer for more than six months. The receipt of these shares is reflected in treasury stock. The Company then issued 225,000 restricted shares of common stock from treasury, on the same day, with a fair market value of $6.15 per share on the exercise date. The issuance of the shares was affected in reliance on the exemption set forth in Section 4(2) of the Securities Act.

Also during March 2007, the Company issued 48,169 restricted shares of common stock from treasury to an officer in satisfaction of a provision in his employment agreement requiring the issuance of shares worth $300,000. The issuance of the shares was affected in reliance on the exemption set forth in Section 4(2) of the Securities Act.

Stock Performance Graph

The graph below shows the cumulative total stockholder return assuming the investment of $100 on December 31, 2001 (and the reinvestment of dividends thereafter) in each of NYFIX common stock, the S&P 500 Index, and the Nasdaq Computer Index.

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Item 6.Selected Consolidated Financial Data

The following selected consolidated financial data should be read in conjunction with our Consolidated Financial Statements and related notes thereto and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report on Form 10-K. The information presented in the following tables has been restated to reflect the 2006 disposition of NYFIX Overseas which previously comprised our OBMS Division, as a discontinued operation.

Year Ended December 31,	2006			2005			2004			2003			2002
	(in thousands, except per share amounts)
Consolidated statement of operations data:	(1)			(1)			(1)			(1) (2)			(1) (3)
Revenue:
Subscription and maintenance	$	65,801		$	59,720		$	48,802		$	42,872		$	37,932
Product sales and services		2,943			3,157			2,001			3,300			2,996
Transaction		29,609			26,222			14,827			12,877			7,147
Total revenue		98,353			89,099			65,630			59,049			48,075
Cost of revenue:
Subscription and maintenance		32,638			30,388			25,976			22,413			17,241
Product sales and services		1,824			2,202			1,901			1,861			2,178
Transaction		15,901			15,949			10,161			8,333			7,089
Total cost of revenue		50,363			48,539			38,038			32,607			26,508
Gross profit		47,990			40,560			27,592			26,442			21,567
Operating expense:
Selling, general and administrative		49,237			40,979			36,086			37,615			28,221
Restatement, SEC investigation and related expenses		12,758			3,069			1,260			145			-
Depreciation and amortization		1,185			1,914			2,201			2,594			3,219
Restructuring charge		2,056			-			2,527			-			-
Loss from equity affiliate		-			-			-			2,153			2,704
Loss from operations		(17,246	)		(5,402	)		(14,482	)		(16,065	)		(12,577	)
Interest expense		(1,029	)		(728	)		(773	)		(187	)		(321	)
Investment income		1,894			263			137			605			616
Other income (expense), net		20			(187	)		(93	)		75			(789	)
Loss from continuing operations before income tax provision		(16,361	)		(6,054	)		(15,211	)		(15,572	)		(13,071	)
Income tax provision		189			189			189			47			65
Loss from continuing operations		(16,550	)		(6,243	)		(15,400	)		(15,619	)		(13,136	)
Income (loss) from discontinued operations, including gain on disposal of $4,035 in 2006		3,646			(174	)		1,041			248			2,855
Net loss		(12,904	)		(6,417	)		(14,359	)		(15,371	)		(10,281	)
Accumulated preferred dividends		(1,354	)		-			-			-			-
Beneficial conversion feature on preferred stock		(18,139	)		-			-			-			-
Loss applicable to common stockholders	$	(32,397	)	$	(6,417	)	$	(14,359	)	$	(15,371	)	$	(10,281	)
Basic and diluted loss from continuing operations per common share	$	(1.06	)	$	(0.19	)	$	(0.48	)	$	(0.50	)	$	(0.44	)
Basic and diluted income (loss) from discontinued operations per common share		0.11			(0.01	)		0.03			(0.00	)		0.09
Basic and diluted loss per common share	$	(0.95	)	$	(0.20	)	$	(0.45	)	$	(0.50	)	$	(0.35	)
Basic and diluted weighted average common shares outstanding		34,035			32,509			32,201			31,022			29,670

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At December 31,	2006		2005		2004		2003		2002
	(in thousands)
Consolidated balance sheet data:			(4)		(4)		(4)		(4)
Cash and cash equivalents	$	105,888	$	20,572	$	23,934	$	19,011	$	9,715
Short-term investments		-		500		1,175		2,450		10,727
Accounts receivable, net		13,744		12,564		9,797		7,017		11,219
Clearing broker assets		422,880		456,575		138,906		2,300		-
Working capital		92,527		18,143		15,938		15,034		26,250
Property and equipment, net		14,808		13,721		16,351		16,412		18,013
Goodwill		58,193		58,234		58,275		59,451		53,587
Total assets		629,328		585,783		274,963		134,011		135,456
Clearing broker liabilities		422,429		456,825		138,436		1,700		-
Long-term debt and capital lease obligations, including current portion		9,284		9,578		10,056		3,409		1,753
Stockholders’ equity		163,373		94,948		100,772		111,935		119,669

(1) Includes $1.3 million, $0.2 million, $0.6 million, $3.7 million, and $(2.0) million of stock-based compensation expense for the years ended 2006, 2005, 2004, 2003 and 2002, respectively.

(2) 2003 reflects the full consolidation of Renaissance beginning in July 2003. Prior to that date, 100% of the operating results of Renaissance were recognized under the equity method from the date of initial investment.

(3) 2002 reflects the full consolidation of EuroLink and Javelin Technologies, Inc. beginning in March 2002 upon initial acquisition, 100% of the operating results of Renaissance under the equity method beginning in October 2002 upon initial investment and the full consolidation of NYFIX Millennium beginning in February 2002. Prior to that date, 100% of the operating results of NYFIX Millennium were recognized under the equity method from the date of initial investment.

(4) Excludes amounts attributable to discontinued operations with the exception of total assets and stockholders’ equity.

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Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations

The following discussion contains forward-looking statements within the meaning of Section 21E of the Exchange Act, and Section 27A of the Securities Act. Forward-looking statements are any statements other than statements of historical fact. In some cases, forward-looking statements are identified by words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” and similar expressions. In addition, any statements that refer to our plans, expectations, strategies or other characterizations of future events or circumstances are forward-looking statements. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in Item 1A. Risk Factors. Our business may have changed since the date hereof, and we undertake no obligation to update these forward-looking statements.

You should read this discussion in conjunction with our Consolidated Financial Statements and related notes thereto included in this report on Form 10-K.

Overview

We are a pioneer in electronic trading solutions and we continue to transform trading through innovation.  The NYFIX Marketplace^TM is a global community of trading counterparties utilizing innovative services that optimize the business of trading, including trading workstations, middle office trade automation technologies and trade messaging services.  NYFIX Millennium provides the NYFIX Marketplace^TM with enhanced methods of accessing liquidity.  We also provide value-added informational and analytic services and powerful tools for measuring execution quality.  As a trusted business partner and service provider to investment managers, mutual fund, pension fund and hedge fund managers (the Buy-Side) and brokerage firms and banks (the Sell-Side), NYFIX enables ultra-low touch, low impact market access and end-to-end transaction processing.

We operate businesses that design, produce and sell technology-based products and services to professional financial services organizations that are engaged in trading activities including traditional asset management (including the trading of those assets), proprietary trading, and/or the handling of client orders in the U.S. and international securities markets.

Many of our products and services utilize the FIX Protocol which is a messaging standard developed specifically for real-time electronic exchange of securities trading information.

We believe our innovative NYFIX products and services deliver value-added improvements in speed, quality of execution and cost efficiency by automating both the work flows at the user work station level and the interactive process of transmitting and executing orders between the Buy-Side institutional investors (e.g., hedge funds, investment advisers, mutual funds and pension funds) and the Sell-Side broker-dealers, and through exchanges (e.g., NYSE, AMEX, Nasdaq and other exchanges), the OTC market, ATSs and ECNs.

Business Model

Our revenue is comprised of subscription and maintenance, product sales and services and transaction revenue, as follows:

Subscription and maintenance consists of contracts that provide for the use of our systems and our messaging channels, together with managed services, with a term of generally one to three years.  Additional services, provided under schedules, or addenda to the contracts, are either co-terminus with the original contract or have provisions similar to the original contract.  Under the terms of the subscription contracts and addenda, clients are typically invoiced a flat periodic charge after initial installation and acceptance. Subscription and maintenance also includes maintenance contracts for software under separate, renewable maintenance contracts. Software related maintenance contracts are generally for a term of one year. Revenue related to these contracts and addenda is recognized over the term of the contract, addendum, or service period, on a straight-line basis.  We include within our subscription and maintenance revenue charges for connectivity to the NYFIX trading community. These include the various costs of connecting clients which include telecommunications, installation and maintenance of routers, network management software, and staff, and other costs related to the management of connectivity. The connectivity charges are recognized as the services are provided.  

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Product sales and services are primarily comprised of FIX software licenses, equipment sales and professional services fees. This revenue is recognized when the software and equipment have been shipped and accepted by the client and when other contractual obligations, including installation, if applicable, have been satisfied and collection of the resulting receivable is reasonably assured.

Transaction revenue primarily consists of per-share commissions charged to clients who send and receive a match and execution in our NYFIX Millennium ATS and clients to whom we provide execution and smart order routing technology, gateways to access markets and algorithmic trading ability in: (i) their own name, (ii) a third party name, or (iii) our name. Revenue for these services is generally invoiced monthly in arrears or is obtained through the clearing process within three days of the trade date, and is recognized on a trade date basis, in the period in which it is earned. Transaction revenue also includes the net interest spread on our matched book of securities borrowed/loaned.

Cost of revenue includes the following:

·     Data center operating costs, including salaries, related to equipment, infrastructure and software supporting operations and the NYFIX Marketplace^TM;

·     Managed connectivity costs, including telecommunication and other costs incurred on behalf of clients, and costs to maintain the data centers, including depreciation and amortization of assets utilized by the data centers, which are recognized as either a cost of subscription and maintenance or cost of transaction revenue, as appropriate;

·     Amortization expense of acquired intangible assets and capitalized product enhancement costs relating to the applicable revenue category;

·     Developer and quality assurance personnel labor for client and product support of software products;

·     The cost of leased subscription and service bureau equipment, which is depreciated over the estimated useful life of the equipment. When inventory is leased on a subscription basis, the cost of the inventory is relieved and transferred to property and equipment. The depreciation expense related to this equipment is included in cost of subscription and maintenance revenue; and

·     Execution and clearing costs to access various markets and exchanges and to process and settle transactions.

Transitional Costs

Following the $75.0 million investment by Warburg Pincus in October 2006, we began to incur significant transitional rebuilding and remediation expenses, primarily for consultants. As described below, certain of these costs were incurred during the fourth quarter of 2006 and we expect additional amounts in 2007. In addition, as described below, we incurred significant transitional employment costs during 2006 and expect further amounts in 2007.

Adoption of SFAS 123(R) in 2006

On January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based awards made to employees and directors, including employee stock options and employee stock purchases, based on estimated fair values. Prior to the adoption of SFAS 123(R), we accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”).

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Sale of NYFIX Overseas

During the third quarter of 2006, we disposed of all of the issued and outstanding capital stock of NYFIX Overseas, a wholly-owned subsidiary which previously comprised our OBMS Division. The transaction closed on August 25, 2006. The initial amount paid by to GL for the purchase of NYFIX Overseas was $9.0 million. A portion of this amount, $1.3 million, was repaid to GL in April 2007 in settlement of a working capital adjustment. In addition, transaction related fees and expenses aggregating $0.5 million were paid subsequent to closing.

In connection with the sale, we recorded a gain of $4.0 million.

There is also an earn-out adjustment, under the terms of the Sales Agreement, for which we are eligible for additional earn-out payments based on future revenues of NYFIX Overseas through December 31, 2007. The maximum earn-out payment is $5.1 million, net of additional payments to the management team of NYFIX Overseas.

The disposition of NYFIX Overseas constitutes a discontinued operation and accordingly operating results relative to NYFIX Overseas are presented as a discontinued operation on a historical comparative basis.

SEC Investigation and Related Contingencies

We filed a current report on Form 8-K on February 25, 2005, indicating our belief that the informal investigation related to certain stock option grants initiated by the SEC in October 2004 had become formal. We are cooperating with the SEC with respect to this matter. We believe we are substantially complete with regard to producing all documents responsive to document requests and a subpoena. The SEC staff has taken testimony from current and/or former officers and/or directors, as well as from third parties, including Deloitte & Touche LLP (“Deloitte”), our former independent registered public accounting firm, in this investigation.

We performed an extensive internal review of our historical stock-based compensation awards as well as an overall accounting review. Our consolidated financial statements for the years ended December 31, 2004 and 2003 were re-audited by a newly engaged independent registered public accounting firm. The internal review was overseen by the Audit Committee of the Board of Directors and a special Subcommittee of the Audit Committee formed in connection with a restructuring of the Board and of management that commenced in September 2005.

As a result of this internal review, in our 2005 10-K, we restated previously reported results by a net amount of $42.1 million. The items adjusted consisted of stock-based compensation, acquisitions and investments, revenue recognition, income taxes and treasury stock. The findings of our internal review of historical stock-based compensation awards included (i) grants to officers and directors which were made outside the terms of the stock option plans then in effect; (ii) modifications of grants to Peter Hansen, the Company’s founder, former Chief Executive Officer and Chairman, where evidence could not be located to demonstrate that the modifications were authorized by the Board or Compensation Committee; (iii) retroactive reinstatement of the employment status of Richard Castillo, the Company’s former Chief Financial Officer and Secretary, after he had discontinued providing employee services and the continued vesting of his outstanding awards, (iv) subsequent changing of vesting terms with retroactive documentation as of an earlier date; (v) grant schedules to the minutes of Board or Compensation Committee meetings which included awards that were not initiated until after the dates of these meetings; (vi) grant schedules to the minutes of Board or Compensation Committee meetings which included awards which were modified after the dates of such meetings to increase the number of options granted or to decrease the exercise price, but which were included on such schedules as if they had been granted in modified form on the dates of the Board or Compensation Committee meetings; (vii) options and warrants exercised by officers and directors with non-recourse notes where evidence could not be located to demonstrate that the issuance of such notes was approved by the Board or Compensation Committee; and (viii) other circumstances indicating the issuance of in-the-money grants. The modifications to Mr. Hansen’s grants noted in (ii) above resulted in the recording of a $25.0 million charge in March 2000 based on the incremental intrinsic value on the date assumed to be the modification date.

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The restatement for stock-based compensation included in our 2005 10-K relied upon significant legal and other judgments. These judgments included determinations as to the validity of grants, measurement dates, and other matters, including reliance upon delegated authority with respect to awards issued directly by Mr. Hansen and not later ratified by the Board or Compensation Committee. Any and all of these determinations could be challenged. Additionally, new and possibly significant information may also be located which could lead to different determinations that may require different accounting treatment.

In May 2006, we received a grand jury subpoena from the U.S. Attorney for the Southern District of New York.  The subpoena sought documents relating to our granting of stock options.  With the agreement of the Assistant U.S. Attorney, we are responding to the subpoena by producing the documents we produce to the staff of the Division of Enforcement of the SEC. The U.S. Attorney has also conducted interviews with at least one of our current employees and two of our former employees (one of which is a former officer) and with at least one employee of our former independent registered public accounting firm.

We are a nominal defendant in two separate consolidated shareholder derivative actions, one in the state court of Connecticut and the other in the United States District Court for the District of Connecticut. The complaints in these actions assert counts for an accounting of stock options granted to certain of the individual defendants and counts against all individual defendants for violation of Section 14(a) of the Exchange Act, breach of fiduciary duty, abuse of control, gross mismanagement, constructive fraud, corporate waste, unjust enrichment, and breach of contract.

In 2006 and 2007, we have had communications with the United States Internal Revenue Service (“IRS”) and the United Kingdom HM Revenue & Customs (“Inland Revenue”) relating to historical stock option grants and exercises. These communications involve employment tax returns and the amounts of reported employee compensation and related payroll tax withholdings, as well as deductions on corporate income tax returns. We received, and have produced materials in response to, document requests from the IRS relating to stock option grants and exercises in connection with the IRS examination of our corporate tax returns for the years 2001 and 2004 and of our employment tax returns for the years 2003 through 2005, respectively. Subsequent to the sale of NYFIX Overseas in August 2006, GL forwarded correspondence from the Inland Revenue relating to NYFIX Overseas’ potential liability for payroll tax withholdings on prior option exercises by certain former employees.

We have determined that we have exposure as former management did not properly withhold employee income and related payroll taxes related to historical stock option activity. As a result, we have recorded a liability of $1.0 million related to tax withholdings not made on the exercises of stock options previously classified as Incentive Stock Options (“ISOs”), exposures related to Section 409A of the U.S. Internal Revenue Code (“Section 409A”), and similar exposures related to withholdings and payroll taxes which may be due in the U.K, related to stock option exercises under Pay As You Earn, or PAYE, and National Insurance Contribution provisions (due to our indemnity obligations to GL). In 2006, we remedied the 409A exposure with respect to certain current and former directors and executive officers by increasing exercise prices of affected grants. The remedies that can be taken prior to December 31, 2007, with respect to rank and file employees, relating to 409A exposure are currently being evaluated. Based upon the current information available and the liabilities recognized, we believe the resolution of these tax matters will not have a material adverse effect on our consolidated financial condition or results of operations. However, the ongoing discussions with the taxing authorities could result in new information and higher than anticipated exposures. We are continuing to cooperate with the taxing authorities to resolve these matters.

Due to the fact that we are not current with our SEC reporting obligations, we have generally not issued shares to employees and directors in connection with the exercise of stock options from July 2005 to July 2007. In February 2006, the Compensation Committee of the Board of Directors approved a policy whereby we will honor awards to former employees who have validly notified us in writing of their intent to exercise. These awards will be honored once the Company is current with its periodic SEC reporting requirements and can settle awards under its registration statements. Certain former employees have notified us in writing of their intent to exercise; however, we have not honored such exercises at this time. We have cash exposure if our stock price drops after employees have notified us in writing of their intent to exercise.

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As discussed in more detail in Note 14 to the Consolidated Financial Statements, under SFAS 123(R), this exposure has resulted in liability classification for these modified awards and a net charge recorded through compensation expense for amounts by which the current fair values for these modified awards exceed their related original grant date fair values.

As of December 31, 2006, we had outstanding options covering 1,089,906 shares for which we had been notified of intents to exercise and which were not deemed probable of expiring before the Company could issue shares (“Pending Exercises”). The range of fair market values for our common stock on the dates of these notifications was from $2.90 to $7.35, with a weighted average fair market value for such shares underlying options on the notification dates of $5.99. As discussed in Notes 9 and 10 to the Consolidated Financial Statements, during the first six months of 2007, we were notified of additional intents to exercise and certain pending options expired or were resolved through exercise. Our potential cash exposure as of December 31, 2006 for declines in our stock price after such notifications was estimated at less than $0.1 million, based on the fair market value of $6.30 at December 31, 2006.

As of June 30, 2007, the remaining Pending Exercises, total 1,030,150 shares. The range of fair market values for our common stock on the dates of the corresponding notifications through June 30, 2007 was from $2.90 to $ 7.47, with a weighted average fair market value for such shares on the notification dates of $5.97. Our potential cash exposure as of June 30, 2007 for declines in our stock price after such notifications was estimated at less than $0.1 million, based on the fair market value of $7.40 at June 30, 2007. This cash exposure could, however, significantly increase if the fair market value of our stock declines once option holders are able to exercise and sell the underlying shares.

At December 31, 2006, there were 130,000 shares underlying awards to six optionees, which had either expired or were considered probable of expiring with an aggregate fair value of $0.5 million. During the six months ended June 30, 2007, we paid $0.4 million to cash settle 114,250 options which had reached their 10-year contractual life and expired. At June 30, 2007, liabilities for modified awards to be cash settled, related to expired options covering 21,375 shares, aggregated $0.1 million. We have additional cash exposure if we cannot settle Pending Exercises with stock prior to their expiration going forward.

During the years ended December 31, 2006, 2005 and 2004, we incurred costs totaling $12.8 million, $3.1 million and $1.3 million, respectively, relating to the stock option investigation and subpoenas, a grand jury subpoena, related shareholder derivative litigation, related financial restatements and expenses to resolve related matters, together with an earlier SEC inquiry into former management’s accounting for NYFIX Millennium, related class action litigation and related financial restatement. These costs include outside counsels, contract attorneys, forensic accountants, and other consultants and the cost of re-auditing previously issued financial statements following the resignation of our prior independent registered public accounting firm. These costs do not include any portion of time that our employees have dedicated to these matters. Amounts incurred during 2006 included penalties of $0.6 million due to the delinquency in our periodic reporting obligations under a registration rights agreement related to the private placement transaction which closed on July 5, 2006 and $0.4 million of aggregate expense related to modifications to cash settle expiring stock options and to extend the normal 90-day post-termination exercise period. We will likely continue to incur material amounts of expense associated with these matters until they are resolved.

Other than the amount described above for employee-related taxes for stock options and Pending Exercises, we have not recorded any liability with respect to these matters, as we are currently unable to predict the outcomes and reasonably estimate the amounts of loss, if any. With respect to the SEC investigation of stock option grants, the grand jury subpoena, the State Court Consolidated Complaint, and the Federal Court Consolidated Complaint associated with such matters and other related matters, we could be subject to penalties, fines or regulatory sanctions or claims by current and former officers, directors or employees for indemnification of costs or losses they may incur and such amounts, individually or collectively, could have a material impact on our financial condition. In addition, other actions may be brought against us related to the matters described above.

Please see Item 3. Legal Proceedings and Note 9 to the Consolidated Financial Statements for a more detailed description of these matters.

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Results of Operations for 2006, 2005 and 2004

The following table presents our consolidated results of operations for the periods indicated. These consolidated results of operations are not necessarily indicative of the consolidated results of operations that will be achieved in any future period.

	Year Ended December 31,
				% of						% of						% of
(in thousands, except percentages)	2006			revenue			2005			revenue			2004			revenue
Revenue:
Subscription and maintenance	$	65,801			67	%	$	59,720			67	%	$	48,802			74	%
Product sales and services		2,943			3	%		3,157			4	%		2,001			3	%
Transaction		29,609			30	%		26,222			29	%		14,827			22	%
Total revenue		98,353			100	%		89,099			100	%		65,630			100	%
Cost of revenue:
Subscription and maintenance (1)		32,638			33	%		30,388			34	%		25,976			40	%
Product sales and services (1)		1,824			2	%		2,202			2	%		1,901			3	%
Transaction (1)		15,901			16	%		15,949			18	%		10,161			15	%
Total cost of revenue		50,363			51	%		48,539			54	%		38,038			58	%
Gross profit		47,990			49	%		40,560			46	%		27,592			42	%
Operating expense:
Selling, general and administrative (1)		49,237			50	%		40,979			46	%		36,086			55	%
Restatement, SEC investigation and related expenses (1)		12,758			13	%		3,069			3	%		1,260			2	%
Depreciation and amortization		1,185			1	%		1,914			2	%		2,201			3	%
Restructuring charge		2,056			2	%		-			0	%		2,527			4	%
Loss from operations		(17,246	)		-18	%		(5,402	)		-6	%		(14,482	)		-22	%
Interest expense		(1,029	)		-1	%		(728	)		-1	%		(773	)		-1	%
Investment income		1,894			2	%		263			0	%		137			0	%
Other income (expense), net		20			0	%		(187	)		0	%		(93	)		0	%
Loss from continuing operations before income tax provision		(16,361	)		-17	%		(6,054	)		-7	%		(15,211	)		-23	%
Income tax provision		189			0	%		189			0	%		189			0	%
Loss from continuing operations		(16,550	)		-17	%		(6,243	)		-7	%		(15,400	)		-23	%
Income (loss) from discontinued operations, including gain of $4,035 in 2006 (1)		3,646			NM			(174	)		NM			1,041			NM
Net loss		(12,904	)		NM			(6,417	)		NM			(14,359	)		NM
Accumulated preferred dividends		(1,354	)		NM			-						-
Beneficial conversion feature on preferred stock		(18,139	)		NM			-						-
Loss applicable to common stockholders	$	(32,397	)		NM		$	(6,417	)		NM		$	(14,359	)		NM

NM - not meaningful
Percentage sub-totals may not add due to rounding
(1) Stock-based compensation included in the respective line items above follows:
Cost of revenue:
Subscription and maintenance	$	81	$	48		$	46
Product sales and services		4		2			2
Transaction		9		5			10
Selling, general and administrative		747		159			507
Restatement, SEC investigation and related expenses (a)		396		-			-
Income (loss) from discontinued operations		18		(9	)		24
	$	1,255	$	205		$	589

(a) Relates to expiring options to be cash settled and extending the normal 90 day post-termination exercise period.

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Revenue

The following table presents the components of revenue for the periods indicated (in thousands, except percentages):

	Year Ended December 31,				Increase (Decrease)					Year Ended December 31,				Increase
	2006		2005		$			%		2005		2004		$		%
Subscription and maintenance	$	65,801	$	59,720	$	6,081			10%	$	59,720	$	48,802	$	10,918		22%
Product sales and services		2,943		3,157		(214	)		-7%		3,157		2,001		1,156		58%
Transaction		29,609		26,222		3,387			13%		26,222		14,827		11,395		77%
Total revenue	$	98,353	$	89,099	$	9,254			10%	$	89,099	$	65,630	$	23,469		36%

Subscription and Maintenance

The increase in subscription and maintenance revenue during 2006 was primarily attributable to an increase in subscriptions (and related managed services) of messaging channels offered by our FIX Division. This growth was attributable to an increase in the number of Buy-Side to Sell-Side messaging channels, primarily for order routing, as we continued our efforts to increase the level of business with Buy-Side institutions. Subscriptions (and related managed services) of our OMS Division desktop and floor products decreased $4.1 million to $18.9 million in 2006 compared to $23.0 million in 2005, due primarily to the declining presence of floor traders using our products. Recurring maintenance related to prior software sales was comparable between 2006 and 2005 at $4.1 and $4.2 million, respectively.

During 2007, we expect our OMS Division revenues to decline by approximately 40% due primarily to the discontinuation of certain floor application product offerings as well as cancellations by certain desktop clients.

The increase in subscription and maintenance revenue during 2005 was primarily attributable to an increase in subscriptions (and related managed services) of messaging channels offered by our FIX Division. This growth was attributable to an increase in the number of Buy-Side to Sell-Side messaging channels, primarily for order routing, as we continued our efforts to increase the level of business with Buy-Side institutions. Subscriptions (and related managed services) of our OMS Division desktop and floor products were comparable between 2005 and 2004. Recurring maintenance related to prior software sales was comparable between 2005 and 2004 at $4.2 million and $4.0 million, respectively.

Product Sales and Services

The decrease in product sales and services during 2006 was related to a decrease in sales of software licenses and related services by our FIX Division.

The increase in product sales and services during 2005 was primarily due to a one-time sale of hand-held floor application equipment of $0.3 million and an increase in sales of software licenses and related services by our FIX Division.

Transaction

The increase in transaction revenue during 2006 was attributable to an increase in commissions on trade executions and the ramp up of our securities lending business by our Transaction Services Division. Commissions increased $2.9 million to $28.2 million during 2006, compared to $25.3 million during 2005 due primarily to an $8.1 million increase in commissions from Sell-Side clients offset in part by a $5.8 million decrease in commissions from Buy-Side clients. The increase from Sell-Side clients was due to increased matched volumes in NYFIX Millennium, and the increased use of the NYFIX NEXAS^TM algorithmic trading products. These increased Sell-Side revenues were offset in part by a decline in commissions for direct market access services due to continued price compression and a decline in billed specialist fees. The average daily matched volume in NYFIX Millennium during 2006 was 24.5 million shares, a 111% increase over the average of 11.6 million shares during 2005. This increase reflects the increased popularity of dark pool matching venues for trading and algorithmic trading solutions sponsored by broker dealers. The increased popularity of these third-party algorithmic trading solutions with Buy-Side clients has had the effect of disintermediating our direct Buy-Side sales efforts, resulting in lower share volumes and commissions from these clients. Our securities lending business generated net interest spread on its matched book stock borrow/stock loan portfolio of $1.4 million during 2006 compared to $0.9 million during 2005. This increase was due to the hiring of a new sales team in mid-2005.

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The increase in transaction revenue during 2005 was attributable to an increase in commissions on trade executions and the ramp up of our securities lending business by our Transaction Services Division. Commissions increased $10.6 million to $25.3 million during 2005, compared to $14.7 million during 2004 due primarily to a $6.7 million increase in commissions from Buy-Side clients and a $3.9 million increase in commissions from Sell-Side clients. The increase in commissions from Buy-Side clients resulted from our efforts in 2005 to increase the level of business with these institutions. The increase from Sell-Side clients was due to increased matched volumes in NYFIX Millennium, a full year’s activity from the NYFIX NEXAS^TM algorithmic trading products, which were rolled out in the fourth quarter of 2004, and an increase in billed specialist fees. These increased Sell-Side revenues were offset in part by a decline in commissions for DMA services due to continued price compression. The average daily matched volume in NYFIX Millennium during 2005 was 11.6 million shares, a 68% increase over the average of 6.9 million shares during 2004. Our securities lending business generated net interest spread on its matched book stock borrow/stock loan portfolio of $0.9 million during 2005 compared to $0.1 million during 2004. This increase was due to the hiring of a new sales team in mid-2005.

Included in the NYFIX Millennium volume figures reported above are conditional orders executed against pass-through orders and other conditional orders, and third market trades crossed by clients and reported by NYFIX Millennium to Nasdaq.

Costs and Expenses

Cost of Revenue

The following table presents cost of revenue for the periods indicated (in thousands, except percentages):

	Year Ended December 31,						Increase (Decrease)					Year Ended December 31,						Increase
	2006			2005			$			%		2005			2004			$		%
Subscription and maintenance	$	32,638		$	30,388		$	2,250			7%	$	30,388		$	25,976		$	4,412		17%
Product sales and services		1,824			2,202			(378	)		-17%	$	2,202			1,901			301		16%
Transaction		15,901			15,949			(48	)		0%	$	15,949			10,161			5,788		57%
Total cost of revenue	$	50,363		$	48,539		$	1,824			4%	$	48,539		$	38,038		$	10,501		28%
Percent of total revenue		51.2	%		54.5	%							54.5	%		58.0	%

Subscription and Maintenance

The increase in subscription and maintenance cost of revenue during 2006 was primarily attributable to investments in our subscription-based products, including higher personnel costs of $2.3 million, increased fees of $0.7 million paid to third-party order management system providers to establish messaging channels with their clients, and higher amortization of capitalized enhancements of $0.5 million, offset in part by a decrease in depreciation and amortization of $0.9 million, primarily as a result of subscribed OMS equipment becoming fully depreciated, and decreases in various other costs. As a percentage of subscription and maintenance revenue, these costs declined to 50% in 2006, compared to 51% in 2005.

The increase in subscription and maintenance cost of revenue during 2005 was primarily attributable to investments in our subscription-based products, including higher personnel costs of $1.8 million, increased telecommunication costs of $1.3 million, an increase in fees paid of $1.1 million to third-party order management system providers to establish messaging channels with their clients, and higher amortization of capitalized enhancements of $0.3 million, slightly offset by decreases in various other costs. As a percentage of subscription and maintenance revenue, these costs declined to 51% in 2005, compared to 53% in 2004.

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Product Sales and Services

The decrease in product sales and services cost of revenue during 2006 was primarily attributable to lower amortization of capitalized enhancement costs of $0.1 million and lower personnel costs of $0.2 million, offset in part by increases in various other costs. These costs were also higher in 2005 by $0.2 million related to the cost of equipment inventory sold as described above. As a percentage of related revenue, these costs decreased to 62% in 2006 compared to 70% for 2005.

The increase in product sales and services cost of revenue during 2005 was primarily attributable to investments in our licensed products and services offered, including higher amortization of capitalized enhancement costs of $0.3 million, offset in part by decreases in various other costs. These costs were also higher in 2005 by $0.2 million related to the cost of equipment inventory sold as described above. As a percentage of related revenue, these costs decreased to 70% in 2005 compared to 95% for 2004.

Transaction

The decrease in transaction cost of revenue during 2006 primarily related to decreases in losses incurred on trades executed in error of $0.6 million, allocated data center charges of $0.6 million, and depreciation and amortization expenses of $0.3 million, offset in part by higher execution and clearing fees of $1.4 million associated with the growth in transaction volumes. As a percentage of related revenue, these costs decreased to 54% for 2006 compared to 61% for 2005.

The increase in transaction cost of revenue during 2005 primarily related to increased execution and clearing fees of $3.1 million associated with the growth in transaction volumes. These costs also increased in 2005 from higher fees of $0.7 million associated with the growth of commission sharing arrangements, losses incurred on trades executed in error of $0.6 million (including a single occurrence of $0.5 million in April 2005) and various other costs. As a percentage of transaction revenue, transaction cost of revenue declined to 61% for 2005, compared to 69% for 2004.

Selling, General and Administrative Expenses (SG&A)

The following table presents components of our selling, general and administrative expense for the periods indicated (in thousands, except percentages):

	Year Ended December 31,						Increase (Decrease)					Year Ended December 31,						Increase (Decrease)
	2006			2005			$			%		2005			2004			$			%
Compensation and related	$	28,009		$	23,555		$	4,454			19%	$	23,555		$	19,768		$	3,787			19%
Occupancy and related		2,632			2,765			(133	)		-5%		2,765			3,361			(596	)		-18%
Marketing, travel and
entertainment		2,693			2,718			(25	)		-1%		2,718			2,675			43			2%
Professional fees (including
consulting)		7,940			6,108			1,832			30%		6,108			4,293			1,815			42%
Stock-based compensation		747			159			588			370%		159			507			(348	)		-69%
General and other		7,216			5,674			1,542			27%		5,674			5,482			192			4%
Total SG&A	$	49,237		$	40,979		$	8,258			20%	$	40,979		$	36,086		$	4,893			14%
Percent of total revenue		50.1	%		46.0	%							46.0	%		55.0	%

Compensation and Related

The increase in the portion of compensation and related costs included in SG&A during 2006 was primarily due to the impact of salary increases, growth in headcount, increased incentive compensation associated with higher revenue levels, increased costs for employee benefits and $1.9 million of transitional severance costs incurred during 2006. As our transitional efforts continue throughout 2007, we expect to incur additional transitional related compensation costs in 2007 in excess of $3.0 million.

The increase in the portion of compensation and related costs included in SG&A during 2005 was primarily due to the impact of salary increases, growth in headcount, increased incentive compensation associated with higher revenue levels, increased costs for employee benefits and $0.6 million of severance costs incurred during 2005.

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Occupancy and Related

The decrease in occupancy and related costs during 2006 was primarily attributable to the impact of closing an office in Stamford, CT in September 2006 and the consolidation of those operations into our 100 Wall Street location. See Restructuring Charge below for a discussion of the restructuring charge recorded during 2006 regarding this office closing.

The decrease in occupancy and related costs during 2005 was primarily attributable to the impact of closing an office in lower Manhattan during 2004 and the consolidation of those operations into our 100 Wall Street location. See Restructuring Charge below for a discussion of the restructuring charge recorded during 2004 regarding this office closing.

Marketing, Travel and Entertainment

Marketing, travel and entertainment expenses during 2006, 2005 and 2004 were comparable reflecting our continued efforts to market and sell our products, including our initiative to increase the level of business we do with Buy-Side institutions and our efforts to expand globally.

Professional Fees

The increase in professional fees incurred during 2006 was primarily due to the use of consultants to address administrative and operational weaknesses and deficiencies and to recast historical results by division in the manner currently used by management. Consultants and outside legal counsels were also engaged to supplement day-to-day management activities while the restatements and related legal issues were being addressed by management. These costs do not include the time spent by outside consultants and advisors on the restatements and related legal issues as such costs have been separately categorized below.

During the fourth quarter of 2006, we incurred $0.8 million of transitional rebuilding and remediation expenses, primarily for consulting, and we expect to incur in excess of $6.0 million of such costs during 2007.

The increase in professional fees incurred during 2005 was primarily due to the use of consultants to begin addressing administrative and operational weaknesses and deficiencies and to recast historical results by division in the manner currently used by management. Consultants and outside legal counsels were also engaged to supplement day-to-day management activities while the restatements and related legal issues were being addressed by management. These costs do not include the time spent by outside consultants and advisors on the restatements and related legal issues as such costs have been separately categorized below.

Stock-based Compensation

The increase in non-cash stock-based compensation for 2006 was primarily attributable to the change in accounting from the intrinsic value based methodology prescribed under APB 25 compared to the fair value method as prescribed by SFAS 123(R).

The decrease in non-cash stock-based compensation for 2005 was primarily attributable to the impact of awards with initial measurement date intrinsic values becoming fully vested in earlier years.

General and Other

The increase in general and other expenses during 2006 and 2005 primarily reflected increased costs for temporary administrative help, higher corporate insurance costs and various other general expenses.

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Other Operating Expenses

Other operating expenses consist of the following for the periods indicated (in thousands):

	Year Ended December 31,				Increase (Decrease)			Year Ended December 31,				Increase (Decrease)
	2006		2005		$			2005		2004		$
Restatement, SEC investigation and
related expenses	$	12,758	$	3,069	$	9,689		$	3,069	$	1,260	$	1,809
Depreciation and amortization		1,185		1,914		(729	)		1,914		2,201		(287	)
Restructuring charge		2,056		-		2,056			-		2,527		(2,527	)

Restatement, SEC Investigation and Related Expenses

During 2006, 2005 and 2004, we incurred costs relating to the stock option investigation and subpoenas, a grand jury subpoena, related shareholder litigation, related financial restatements and expenses to resolve related matters, together with the NYFIX Millennium SEC inquiry, related class action litigation and related financial restatement. These costs include outside counsels, contract attorneys and forensic accountants, other consultants and the cost of re-auditing previously issued financial statements following the resignation of our prior independent registered public accounting firm. These costs do not include any portion of time that our employees have dedicated to these matters. We will continue to incur expenses associated with these matters until they are resolved. The amount of such expenses will likely vary and may be material.

The increases during 2006 and 2005 were the result of significant costs incurred in connection with the SEC investigation into prior stock option grants and related restatements, including the 2004 restatement of our consolidated financial statements (the “2004 Restatement”) and the 2005 Restatement. Amounts incurred during 2006 included penalties of $0.6 million due to the delinquency in our periodic reporting obligations under a registration rights agreement related to the private placement transaction which closed on July 5, 2006 and $0.4 million of aggregate expense related to modifications to cash settle expiring stock options and to extend the normal 90-day post-termination exercise period.

Depreciation and Amortization

The declines in the portions of depreciation and amortization included in SG&A during 2006 and 2005 were the result of an increase in the amount of general overhead assets that have become fully depreciated.

Restructuring Charge

The restructuring charge in 2006 was the result of relocating our corporate headquarters from Stamford, Connecticut to 100 Wall Street, New York City. This charge reflected the fair value of the remaining rent payments for the closed office, net of sublease income, plus real estate commissions, leasehold improvements for the subtenant, employment costs, moving costs and write-offs of property and equipment.

The restructuring charge in 2004 was the result of closing an office in lower Manhattan and the consolidation of those operations into expanded space at our 100 Wall Street location. This charge reflected the fair value of the remaining rent payments for the closed office, net of sublease income, plus severance costs and write-offs of property and equipment.

We believe these consolidations of our office space will provide for substantial operational efficiencies as we better centralize our administrative and management functions across our entire organization.

Non-Operating Income (Expense)

Non-operating income (expense) items are as follows for the periods indicated (in thousands):

	Year Ended December 31,						Increase (Decrease)		Year Ended December 31,						Increase (Decrease)
	2006			2005			$		2005			2004			$
Interest expense	$	(1,029	)	$	(728	)	$	301	$	(728	)	$	(773	)	$	(45	)
Investment income		1,894			263			1,631		263			137			126
Other income (expense), net		20			(187	)		207		(187	)		(93	)		(94	)

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Interest Expense

The increase in interest expense in 2006 was primarily attributable to additional interest incurred of $0.5 million as a result of our failure to register the shares underlying the $7.5 million convertible note issued on December 30, 2004, offset in part by decreases in interest expense on sales tax obligations and on reduced acquisition related notes outstanding.

The decrease in interest expense in 2005 was primarily attributable to decreases in interest expense on sales tax obligations and on reduced acquisition related notes outstanding, which also incurred accelerated interest in 2004 as a result of defaults relating to SEC reporting obligations. These decreases were partially offset by an increase in 2005 of $0.4 million associated with the $7.5 million convertible note issued on December 30, 2004.

Investment Income

The increase in 2006 and 2005 reflected higher average cash balances invested during the year.

Other Income (Expense), Net

The change in the net expense in 2006 and 2005 was primarily due to the write-off of deferred financing costs of $0.2 million associated with the deemed debt extinguishment of the $7.5 million convertible note from the conversion price reduction in June 2005.

Income Tax Provision

The income tax provisions for 2006, 2005 and 2004 were solely attributable to the impact of deducting goodwill with the Renaissance acquisition in our tax filings. All other tax effects during 2006, 2005 and 2004 have been netted out in our deferred tax asset valuation reflecting our view that historical pre-tax book income and historical income for tax purposes are not sufficient to support a conclusion that the value of our net deferred tax assets are more likely than not to be realized. Until we achieve and sustain an appropriate level of profitability, we plan to maintain a valuation allowance on our net deferred tax assets.

Income (Loss) from Discontinued Operations

As a result of the sale of NYFIX Overseas, the operating results and gain on sale of our OBMS Division have been reclassified and presented as discontinued operations. Fiscal year 2006 includes these results through the August 25, 2006 closing date.

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Liquidity and Capital Resources

	As of December 31,
(in thousands)	2006		2005		2004
Cash and cash equivalents	$	105,888	$	20,572	$	23,934
Short-term investments		-		500		1,175
Total cash, cash equivalents and short-term investments	$	105,888	$	21,072	$	25,109

	Year Ended December 31,
		2006		2005			2004
Net cash provided by continuing operating activities	$	3,288	$	4,244		$	3,037
Net cash (used in) provided by continuing investing activities		717		(6,180	)		(9,094	)
Net cash (used in) provided by continuing financing activities		80,458		(297	)		7,439
Discontinued operations		193		(1,027	)		2,362
Effect of exchange rate changes on cash		166		(438	)		(384	)
Net increase (decrease) in cash and cash equivalents	$	84,822	$	(3,698	)	$	3,360

Liquidity

We derive our liquidity and capital resources primarily from our cash flows from operations, from long-term borrowings and from the issuance of capital stock. At March 31, 2007 and December 31, 2006, we had cash and cash equivalents of $94.6 million and $105.9 million, respectively. We believe resources available at December 31, 2006 together with anticipated cash generated from operations will be sufficient to finance our current investing, transitional rebuilding, remediation and other costs and operating needs as well as the net capital requirements of our broker-dealer subsidiaries. At March 31, 2007 and December 31, 2006, $31.0 million and $32.1 million, respectively, of our total cash, cash equivalents and short-term investments were held in our broker-dealer subsidiaries to help meet their regulatory capital requirements.

In December 2006 we infused an additional $12.5 million of cash into our broker-dealer subsidiaries to provide additional excess regulatory capital to allow for business expansion and to provide our broker-dealer transaction counterparties with a better capitalized business partner.

Operating Activities

The following table sets forth our net loss adjusted for non-cash items, such as depreciation, amortization, deferred taxes, provision for doubtful accounts and stock-based compensation; and the effect on cash generated by operating activities of changes in working capital and other operating accounts between years.

	Year Ended December 31,
(in thousands)	2006			2005			2004
Loss from continuing operations adjusted for non-
cash items	$	(2,301	)	$	7,187		$	1,404
Effect of changes in working capital and other
operating accounts		5,589			(2,943	)		1,633
Net cash provided by continuing operating activities	$	3,288		$	4,244		$	3,037

Changes in working capital and other operating accounts affected cash flows during the years ended December 31, 2006, 2005 and 2004 primarily as a result of changes in the levels of accounts receivable, accounts payable and accrued expenses between periods. These changes resulted primarily from increasing levels of sales, offset in part by increasing levels of expenditures and from cash management efforts affecting the timing of payments.

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Broker-Dealer Operations

Clearing broker assets reflect amounts on hand to support our ability to self-clear the transactions of NYFIX Millennium and NYFIX Transaction Services, such as receivables from clearing organizations and deposits with clearing firms, as well as balances to support our matched-book stock borrow/stock loan business. Our matched-book balances include offsetting stock borrowed and stock loaned and offsetting securities failed-to-deliver and securities failed-to-receive. At December 31, 2006, the net balance for clearing broker assets and clearing broker liabilities was a net receivable of $0.5 million.

Securities borrowed and securities loaned are recorded at the amount of cash collateral provided for securities borrowed transactions and received for securities loaned transactions, plus accrued interest. We monitor the market value of securities borrowed and loaned on a daily basis with additional collateral obtained or refunded as necessary. At December 31, 2006, clearing broker assets include stock borrows of $421.4 million and clearing broker liabilities include stock loans of $422.4 million. We expect these balances to continue to grow in 2007 as a result of the $12.5 million capital infusion described above under Liquidity.

NYFIX Millennium, NYFIX Transaction and NYFIX Clearing are U.S. registered broker-dealers required to maintain levels of regulatory net capital under Rule 15c3-1 of the Exchange Act. NYFIX Clearing’s DTCC membership, used to self-clear securities transactions, requires it to maintain $10 million in excess of its required net capital. NYFIX International is a registered ISD Category B firm with the FSA, required to maintain financial resources generally equal to three months average expenditures, subject to a minimum of €125,000, plus a proportion of less liquid assets on hand. At December 31, 2006, the aggregate regulatory net capital/resources of our regulated subsidiaries in the U.S. and U.K. were $30.0 million, $18.7 million in excess of our aggregate requirement of $11.3 million (including the $10 million excess required by DTCC).

Investing Activities

Investments in current technology to maintain our infrastructure and to enhance our products remain an important requirement for our available cash resources.

Net cash provided by continuing investing activities in 2006 was $0.7 million. This consisted primarily of proceeds net of cash disposed from the sale of NYFIX Overseas of $8.4 million, substantially offset by capital expenditures for property and equipment, principally for data center equipment and software, of $5.8 million and capitalized product enhancement costs of $2.4 million. In April 2007, $1.3 million of the proceeds from the sale of NYFIX Overseas were repaid in settlement of a working capital adjustment. In addition, transaction related fees and expenses on the sale of NYFIX Overseas aggregating $0.1 million were paid subsequent to year end.

Net cash used in continuing investing activities in 2005 was $6.2 million. This consisted primarily of capital expenditures for property and equipment, principally for data center equipment and software, of $3.4 million and capitalized product enhancement costs of $3.5 million. These amounts were partially offset by proceeds from the net sales of short-term investments of $0.7 million.

Net cash used in continuing investing activities in 2004 was $9.1 million. This consisted of capital expenditures, primarily for data center equipment and software, of $6.6 million, and capitalized product enhancement costs of $5.1 million. These amounts were partially offset by proceeds from the net sales of short-term investments of $1.3 million and by cash acquired from acquisitions of $1.2 million, which represented a return of funds held in escrow pursuant to a settlement agreement with a representative of the former shareholders of Javelin.

Financing Activities

Our financing activities primarily consist of long-term debt issued for acquisitions, capital lease obligations used for equipment purchases, long-term debt issued for working capital purposes and the issuance of capital stock for general corporate purposes and business development activities. At December 31, 2006, we had long-term debt and capital lease obligations outstanding of $7.6 million and $1.7 million, respectively (including current portions).

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At December 31, 2006, we had outstanding a $7.5 million convertible note with an interest rate of 5%, due in December 2009. At December 31, 2006, the price at which the lender could convert the convertible note into shares of our common stock was $5.66 per share. The conversion price may be reduced if we issue shares of common stock at a price below the conversion price in effect, excluding stock option exercises, the settlement of obligations outstanding as of the date of the convertible note and other transactions previously approved by our Board of Directors.

At the option of the lender, we may issue to the lender up to an additional $2.5 million note under terms substantially similar to those described above (see Note 8 to the Consolidated Financial Statements for a more extensive description of the terms of the convertible note).

Net cash provided by continuing financing activities in 2006 was $80.5 million consisting primarily of net proceeds of $69.1 million from the private placement of 1.5 million shares of our Series B Preferred Stock (including a warrant for the purchase of 2.25 million shares of common stock), net proceeds of $12.5 million from the private placement of 2.7 million shares of our common stock (plus an additional 0.2 million shares for placement agent fees) (see Note 10 to the Consolidated Financial Statements for a description of the private placements of our stock). In 2006, we repaid long-term borrowings of $0.3 million (by issuing our stock) and the principal value of capital lease obligations of $0.7 million.

Net cash used in continuing financing activities in 2005 was $0.3 million, consisting primarily of principal payments under capital lease obligations of $0.6 million and payments under long-term borrowings of $0.1 million, partially offset by proceeds from the exercise of stock options by employees of $0.1 million and other long-term obligations of $0.3 million.

Net cash provided by continuing financing activities in 2004 was $7.4 million, consisting primarily of net proceeds from long-term borrowings of $7.2 million and proceeds of $0.4 million from the issuance of common stock resulting from the exercise of stock options and other long-term obligations of $0.4 million, offset by principal payments under capital lease obligations of $0.6 million.

Nasdaq Delisting Proceeding

On October 12, 2005, the Nasdaq Listing Qualifications Panel determined to continue the listing of our securities on Nasdaq, subject to our filing of our quarterly report on Form 10-Q for the three months ended June 30, 2005, on or before October 31, 2005. As a result of additional questions raised during the ongoing SEC investigation into our accounting for stock option grants (see Notes 9 and 14 to the Consolidated Financial Statements and Item 3. Legal Proceedings), these filings were not made by October 31, 2005 and our common stock was delisted from the Nasdaq on November 1, 2005. As a result of this delisting, our common stock is currently traded in the OTC securities market with real-time quotes available on the Pink Sheets electronic quotation service using the symbol NYFX.

Commitments, Contingencies and Future Obligations

Commitments and Contingencies

There are various lawsuits and claims pending against us as well as ongoing SEC and United States Attorney’s Office investigations into our accounting for stock option grants and an SEC investigation into our accounting for the losses incurred by NYFIX Millennium. We are currently unable to predict the outcomes and reasonably estimate the amounts of loss, if any, with respect to these matters. With respect to certain of these matters, we could be subject to penalties, fines or regulatory sanctions or claims by current and former officers, directors or employees for indemnification of costs or losses they may incur and such amounts, individually or collectively, could have a material impact on our financial condition. In addition, other actions may be brought against us related to these matters.

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See also Item 3. Legal Proceedings and Note 9 to the Consolidated Financial Statements.

Future Obligations

The following table summarizes our material contractual obligations at December 31, 2006, and the effect such obligations are expected to have on our liquidity and cash flows in future periods. Additional disclosures relating to our long-term debt, capital lease obligations and commitments appear in Notes 8 and 9 to the Consolidated Financial Statements.

Contractual Obligations

	Payments due by period
			Less than						More than
	Total		1 year		1-3 years		3-5 years		5 years
			(in thousands)
Long-term debt	$	7,693	$	193	$	7,500	$	-	$	-
Capital lease obligations		1,771		1,300		471		-		-
Operating lease obligations		27,426		5,362		9,381		6,497		6,186
Other long-term obligations		1,422		754		483		185		-
Purchase obligations		1,928		623		1,022		139		144
Total	$	40,240	$	8,232	$	18,857	$	6,821	$	6,330

· Long-term debt consists of payments on promissory notes issued in connection with acquisitions and the convertible note, described above. Under the terms of the long-term debt instruments, we may elect to make payments in shares of our common stock instead of cash, which would reduce the amounts shown above and lessen the effect on liquidity and cash flows.

· Operating lease obligations include minimum lease obligations with remaining terms in excess of one year primarily related to office and data center space as well as certain equipment.

· Other long-term obligations consist primarily of software financing arrangements.

· Purchase obligations include minimum purchase obligations with remaining terms in excess of one year to certain telecommunication providers in exchange for pricing discounts and a software licensing arrangement with a minimum licensing fee.

Seasonality and Inflation

We believe that our operations have not been significantly affected by seasonality or inflation.

Off-balance Sheet Arrangements

We have no material off-balance sheet arrangements other than those related to the contingent obligations under the $7.5 million convertible note as described above and under the terms of our Series B Preferred Stock as described in Notes 8 and 10 to the Consolidated Financial Statements.

Critical Accounting Policies and Estimates

 The preparation of our financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates that are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of revenue and expenses that are not readily apparent from other sources. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such difference could be material. Our significant accounting policies are discussed in Note 1 to the Consolidated Financial Statements. Management believes the accounting estimates described in the following narrative to be the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed the accounting policies and critical accounting estimates and related disclosures with our independent registered public accounting firm and the Audit Committee of our Board of Directors. The following narrative describes the critical accounting policies and estimates, the judgments and assumptions and the effect if actual results differ from these assumptions.

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Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed and determinable, and collectibility is reasonably assured.

Our revenue is comprised of: subscription and maintenance, product sales and services and transaction revenue, as follows:

Subscription and maintenance consists of contracts that provide for the use of our systems and our messaging channels, together with managed services, with a term of generally one to three years. Additional services, provided under schedules, or addenda to the contracts, are either co-terminus with the original contract or have provisions similar to the original contract. Under the terms of the subscription contracts and addenda, clients are typically invoiced a flat periodic charge after initial installation and acceptance. Subscription and maintenance also includes maintenance contracts for software under separate renewable maintenance contracts. Software related maintenance contracts are generally for a term of one year. Revenue related to these contracts and addenda is recognized over the term of the contract, addendum, or service period, on a straight-line basis. We include within our subscription and maintenance revenue charges for connectivity to the NYFIX trading community. These include the various costs of connecting clients which include telecommunications, installation and maintenance of routers, network management software and staff, and other costs related to the management of connectivity. The connectivity charges are recognized as the services are provided.

Product sales and services are primarily comprised of software licenses, equipment sales and professional services fees. This revenue is recognized when the software and equipment have been shipped and accepted by the customer and when other contractual obligations, including installation if applicable, have been satisfied and collection of the resulting receivable is reasonably assured. We recognize revenue from software arrangements in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended,under which revenue is recognized when persuasive evidence of an arrangement exists, the fee is fixed or determinable, delivery has occurred, collectibility is reasonably assured and the arrangement does not require significant customization or modification of the software.

Transaction revenue primarily consists of per-share commissions charged to clients who send and receive a match and execution within our ATS and clients to whom we provide execution and smart order routing technology, gateways to access markets and algorithmic trading ability in: (i) their own name, (ii) a third party name, or (iii) our name. Revenue for these services is generally invoiced monthly in arrears or is obtained through the clearing process within three days of the trade date and is recognized on a trade date basis, in the period in which it is earned.

Amounts invoiced in advance of the service being performed are deferred until earned and are included in deferred revenue. Installation charges, if any, are generally invoiced to a client and are included in revenue upon completion of the installation.

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Allowance for Doubtful Accounts

We are required to estimate the collectibility of our trade receivables and a considerable amount of judgment is required in assessing the ultimate realization of receivables, including the current credit-worthiness of each client. Allowances are established for those amounts that we believe are uncollectible due to the inability of clients to make required payments or because of billing adjustments. These allowances are estimated by considering a number of factors, including the length of time the accounts are past due, our previous loss history, the client’s current ability to pay its obligations and the condition of the general economy and the industry as a whole. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major client’s ability to meet its financial obligations to us), our estimates of the recoverability of amounts due to us could be reduced by a material amount.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation. Depreciation of property and equipment is provided using the straight-line method over the assets’ estimated useful lives. Leasehold improvements are amortized over the shorter of the assets’ economic lives or the lease term. Changes in circumstances such as technological advances, changes to our business model or changes in the capital strategy could result in the actual useful lives differing from initial estimates. In those cases where we determine that the useful life of a long-lived asset should be revised, we depreciate the net book value in excess of the estimated residual value over its revised remaining useful life.

Acquisitions and Goodwill

Net assets of companies we acquired have been recorded at their fair value at the date of acquisition. Goodwill represents the excess of the purchase price over the fair value of tangible and intangible assets acquired in an acquisition. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), we perform an impairment review of goodwill on an annual basis or more frequently if circumstances change. The provisions of SFAS 142 require that we allocate our goodwill to our various reporting units, determine the carrying value of those businesses, and estimate the fair value of the reporting units so that a two-step goodwill impairment test can be performed. Our reporting units represent components of our operating segments and are the same as the reportable segments identified in Note 16 to the Consolidated Financial Statements. The two-step impairment review process is as follows:

· Step 1—We compare the fair value of our reporting units to the carrying value, including goodwill, of each of these units. For each reporting unit where the carrying value, including goodwill, exceeds the unit’s fair value, we move on to Step 2. If the unit’s fair value exceeds the carrying value, no further work is performed and no impairment expense is necessary.

· Step 2—If we determine in Step 1 that the carrying value of a reporting unit exceeds the fair value, we perform an allocation of the fair value of the reporting unit to its identifiable tangible and non-goodwill intangible assets and liabilities as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. This results in an implied fair value for the reporting unit’s goodwill. We then compare the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of the goodwill, an impairment loss is recognized for the excess.

  In the absence of circumstances requiring impairment testing on a quarterly or other more frequent basis, our annual impairment testing date is the beginning of our fourth quarter, which is October 1. For the years ended December 31, 2006, 2005 and 2004, there was no indication of impairment for any of our reporting units as the present value of the discounted future cash flows of each reporting unit with allocated goodwill exceeded their carrying values as of October 1st of each respective year, the date of our annual impairment analysis. Fair value assessments inherently involve estimates and judgments involving the amount and timing of cash flows that could materially differ with changes in circumstances.

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Product Enhancement Costs

Costs incurred in the research, design and development of software for sale to others as a separate product or embedded in a product and sold as part of the product as a whole are charged to expense until technological feasibility is established.  Thereafter, software development costs, consisting primarily of payroll and related costs, purchased materials and services and software to be used within our products, which significantly enhance the marketability or significantly extend the life of our products are capitalized, and amortized to cost of revenue on a straight-line basis over three years, beginning when the products are offered for sale or when the enhancements are integrated into the product. We are required to use professional judgment in determining whether product enhancement costs meet the criteria for immediate expense or capitalization, in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.

Long-Lived Assets

We review the carrying value of long-lived assets, including property and equipment; intangible assets; investments, and capitalized product enhancement costs for impairment whenever events or circumstances indicate that the carrying amount may not be fully recoverable. If such an event or circumstances occur, the related estimated fair value of the assets would be compared to the carrying amount, and if needed, we would record an impairment to the extent by which the carrying amount exceeded the fair value of the assets. We test intangible assets with indefinite lives annually for impairment using a fair value methodology such as discounted cash flows. There was no impairment of our long-lived assets recorded for the years ended December 31, 2006, 2005 and 2004. Fair value assessments inherently involve estimates and judgments involving the amount and timing of cash flows that could materially differ with changes in circumstances.

Income Taxes

We account for income taxes using the asset and liability method prescribed in SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). SFAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the recognition of tax effects for financial statement and income tax reporting purposes by applying enacted income tax rates applicable to future years to differences between the financial statement carrying amounts and tax bases of existing assets and liabilities. A valuation allowance is recorded to reduce net deferred tax assets to only that portion that is judged more likely than not to be realized. Where there are cumulative losses in recent years, SFAS 109 requires, except in very limited circumstances, that a valuation allowance be established. Until we can achieve and sustain an appropriate level of profitability, we plan to maintain a valuation allowance on the realizable value of our net deferred tax assets.

Contingencies

Contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is at least a reasonable possibility that a loss has been incurred or that the ultimate loss may exceed the recorded provision. We use outside counsel to assist us in various matters including regulations, acquisitions, trademark, patent, personnel and other matters. We rely on the professional judgment of outside counsel as well as our own assessment in determining whether contingencies should be recorded.

Stock-Based Compensation

We adopted SFAS 123(R), on January 1, 2006 using the modified-prospective-transition method. Under the fair value recognition provisions of SFAS 123(R), stock based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the vesting period. Determining the fair value of share-based awards at the grant date requires assumptions and judgments about expected volatility and forfeiture rates, among other factors. If actual results differ significantly from these estimates, our results of operations could be materially impacted.

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Prior to January 1, 2006, we accounted for stock-based compensation for employees under the recognition and measurement provisions of APB 25 and related interpretations and elected the disclosure-only alternative under SFAS No. 123, Accounting for Stock-Based Compensation. Stock-based compensation expense of $0.2 million and $0.6 million was included in our operating results for the years ended December 31, 2005 and 2004, respectively, relating to the intrinsic value of certain stock options where the fair value of our common stock on the measurement date was in excess of the exercise price. In accordance with SFAS No. 148, Accounting for Stock Based Compensation-Transition and Disclosure, we have disclosed the required pro forma information in the notes to the Consolidated Financial Statements.

With respect to certain awards, we have been confronted with various situations under which the required factual documentation necessary to determine measurement criteria was either inconsistent, incomplete or could not be located, and other situations relating to the validity and/or authorization of the grant. In these situations, our treatment is consistent with the SEC Staff guidance to industry dated September 19, 2006.

For instances where there are issues as to validity and/or authorization of grants, we have accounted for such awards as fixed options using as the measurement date the date that we have determined to be the date on which the terms and recipients were established with finality.

For instances where we have difficulty locating documentation to determine precisely the first date on which both the number of shares and exercise prices were known, we have determined measurement dates based upon the documentation available as to when the grants were included in our books and records or using assumptions based on the historical documentation on other grants with similar characteristics. These determinations require significant judgments.

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS No. 157, Fair Value Measurements, and SFAS No. 107, Disclosures about Fair Value of Financial Instruments. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We will adopt SFAS 159 on January 1, 2008 and do not anticipate adoption to materially impact our consolidated financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements for fair value measurements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. SFAS 157 does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We will adopt SFAS 157 on January 1, 2008 and anticipate that the adoption will not materially impact our consolidated financial position or results of operations.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold for tax positions taken or expected to be taken in a tax return. FIN 48 requires that entities recognize in their financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The cumulative effect of applying the provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings upon adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN 48 on January 1, 2007 and the adoption did not materially impact our consolidated financial position or results of operations.

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In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments (“SFAS 155”). SFAS 155 is an amendment of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”) and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”) and allows companies to elect to measure at fair value entire financial instruments containing embedded derivatives that would otherwise have to be accounted for separately. SFAS 155 also requires companies to identify interest in securitized financial assets that are freestanding derivatives or contain embedded derivatives that would have to be accounted for separately, clarifies which interest- and principal-only strips are subject to SFAS 133, and amends SFAS 140 to revise the conditions of a qualifying special purpose entity due to the new requirement to identify whether interests in securitized financial assets are freestanding derivatives or contain embedded derivatives. SFAS 155 is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. We adopted SFAS 155 on January 1, 2007 and the adoption did not materially impact our consolidated financial position or results of operations.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risk generally represents the risk of loss that may be expected to result from the potential change in value of a financial instrument as a result of fluctuations in credit ratings of the issuer, equity prices, interest rates or foreign currency exchange rates.

Interest Rates

Our long-term debt bears interest at fixed rates. Consequently, we do not believe we are currently exposed to any material interest rate or market risk in connection with our long-term debt.

Foreign Currency Risk

Our earnings are affected by fluctuations in the value of the U.S. dollar as compared with foreign currencies, which are primarily the British pound and the Euro, due to our operations in the United Kingdom and Europe.

We manage foreign currency risk through the structure of our business. In the substantial majority of our transactions, we receive payments denominated in the U.S. dollar, British pounds sterling or the Euro. Therefore, we do not rely on international currency markets to obtain and pay illiquid currencies. The foreign currency exposure that does exist is limited by the fact that the majority of transactions are paid according to our standard payment terms, which are generally short-term in nature.

Securities Market and Credit Risk

NYFIX Clearing is subject to market risk when a counterparty does not deliver cash or securities to it as expected and NYFIX Clearing holds cash (in lieu of securities) or securities (in lieu of cash) at any point in time. This risk arises from the potential inability of the counterparty’s clearing agent to meet its settlement obligation by delivering cash or securities, as required, which is a credit risk. NYFIX Clearing is a member of several highly rated clearing organizations, which have margin requirements and other mechanisms that are designed to substantially mitigate this risk.

When necessary, NYFIX Clearing can liquidate or purchase securities in the market to close out the position at the prevailing market price. NYFIX Clearing’s stock lending practice is to maintain collateral in excess of the contract value and to request additional collateral whenever necessary. NYFIX Clearing seeks high-quality, creditworthy counterparties and has controls in place that are designed to monitor and limit this exposure.

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Item 8.Financial Statements and Supplementary Data

Financial statements required pursuant to this Item are presented beginning on page F-1 of this report on Form 10-K.

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Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On October 27, 2005, we announced that Deloitte & Touche LLP, effective October 26, 2005, had resigned as our independent registered public accounting firm.

Deloitte’s reports on our consolidated financial statements for the years ended December 31, 2004 and 2003 did not contain adverse opinions or disclaimer of opinions and such opinions were not qualified or modified as to uncertainty, audit scope or accounting principles. Deloitte’s report (dated June 28, 2005) addressed the restatement of our consolidated financial statements as of December 31, 2003 and for the years ended December 31, 2003 and 2002 and Deloitte’s report on our internal control over financial reporting as of December 31, 2004, expressed an adverse opinion on the effectiveness of our internal control over financial reporting because of a material weakness. Specifically, we did not design and implement adequate policies and procedures to review certain transactions to determine that they are accounted for in compliance with generally accepted accounting principles; those transactions and the resultant accounting errors having been discussed with the Audit Committee in connection with the 2004 audit. On October 20, 2005, we filed a Form 8-K under Item 4.02(a), dated October 19, 2005, which disclosed that we expected to restate our consolidated financial statements referred to above and that these consolidated financial statements should no longer be relied upon.

During the years ended December 31, 2004 and 2003 and the interim period from January 1, 2005 through March 31, 2005, there were no disagreements between us and Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope of procedure. Deloitte has not completed any audit or review for the Company with respect to any period subsequent to March 31, 2005. Deloitte also did not communicate any disagreements between us and Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope of procedure during the period from April 1, 2005 to October 26, 2005, the date of Deloitte’s resignation.

We have determined that the matters set forth below represented a reportable event under Item 304(a) (1) (v) of Regulation S-K.

At a meeting with our Audit Committee held on August 1, 2005, Deloitte requested that the Audit Committee perform an investigation regarding the timing and accuracy of certain stock options granted in prior years and the accounting thereof, and the adequacy of our disclosure of information to Deloitte in connection with its earlier audits. Deloitte’s request followed its review of documents from earlier periods that Deloitte asserted it had not seen in connection with its prior audits. Also on August 1, 2005, Deloitte informed the Audit Committee that it was suspending all audit and review services to us including the interim review of the second quarter ended June 30, 2005, until the investigation was completed to its satisfaction and completion of any remedial actions.

On September 15, 2005, Deloitte informed the Audit Committee that its investigation should also focus on additional documents that Deloitte asserted were not previously provided to Deloitte in connection with its prior audits or in connection with the June 2005 Restatement of the consolidated financial statements for the years ended December 31, 2003 and 2002.

The Audit Committee orally reported the results of its investigation to Deloitte on October 18, 2005. A written report, dated October 21, 2005, from our former management to the Audit Committee was submitted to Deloitte on October 21, 2005.

During the course of the investigation, our former management determined and advised Deloitte that we had incorrectly accounted for compensation expense attributable to certain stock options previously granted. On October 19, 2005, we announced that we expected to restate our consolidated financial statements as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004 and our consolidated financial statements as of and for the three months ended March 31, 2005. In a Form 8-K under Item 4.02(a) we filed on October 20, 2005, we disclosed that we expected to restate these consolidated financial statements and that such consolidated financial statements should no longer be relied upon. In the Form 8-K filed on October 20, 2005, we also disclosed that we believed this restatement reflected a material weakness in internal controls.

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On October 26, 2005, in a discussion with the Chair of our Audit Committee, Deloitte reported that it was unwilling to continue as our independent registered public accountants or to rely on the representations of our former management. On October 27, 2005, Deloitte delivered a letter dated October 26, 2005 to the Company confirming that conclusion. Deloitte has not further elaborated to the Company on its reasons for being unwilling to continue as the independent registered public accounting firm of NYFIX or to rely on the representations of our former management. We have not placed any limitation on Deloitte in responding fully to the inquiries of the successor independent registered public accounting firm for us.

During the course of preparing our financial statements for the year ended December 31, 2004, we identified and reported a material weakness in our internal control over financial reporting relating to the design and implementation of adequate policies and procedures to review certain transactions for compliance with generally accepted accounting principles. The material weakness resulted in the misapplication of generally accepted accounting principles related to accounting for compensation expense attributable to stock options granted, a tenant allowance and the recognition of rent expense as of the lease commencement date contained in an operating lease and deferred income taxes in connection with certain acquisitions.

On November 18, 2005, we announced that on November 17, 2005 our Audit Committee had engaged Friedman LLP as our independent registered public accounting firm. Prior to this engagement, Friedman had not provided accounting or other services to us or any of our subsidiaries.

Item 9A.Controls and Procedures

Disclosure Controls and Procedures

In connection with the preparation of this report on Form 10-K, our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2006. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, are controls and other procedures that are designed to provide reasonable assurance that the information that we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s Rules and Forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Based on the results of this evaluation, the material weaknesses in our internal control over financial reporting discussed below, and because we were unable to file this annual report on Form 10-K and our quarterly reports on Form 10-Q for the interim periods ended March 31, 2006, June 30, 2006 and September 30, 2006 within the filing time periods specified in the SEC’s Rules, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of December 31, 2006.

Management’s Report on Internal Control Over Financial Reporting

Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with existing policies or procedures may deteriorate.

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Under the supervision of our Chief Executive Officer and our Chief Financial Officer, our management conducted an assessment of our internal control over financial reporting as of December 31, 2006, based on the framework and criteria established in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. We reported several material weaknesses in our 2005 10-K. Remediation of the 2005 material weaknesses was initiated during 2006. In connection with management’s assessment of our internal control over financial reporting described above, management has identified the following material weaknesses in our internal control over financial reporting as of December 31, 2006 (consisting of certain of the 2005 material weaknesses which have not yet been remediated):

(1) We did not maintain an effective control environment based on the criteria established in Internal Control — Integrated Framework, issued by the COSO because of the following weaknesses:

(a) We did not fully establish, or update when necessary, certain policies and procedures and did not effectively communicate certain established policies and procedures addressing, among other topics, accounting policy and procedure, Information Technology (“IT”) security and Human Resources (“HR”) related topics.

(b) We did not effectively monitor accounting operations throughout the organization to ensure accounting controls were in place and operating effectively.

This material weakness in our control environment contributed to the existence of the following material weaknesses.

(2) We did not maintain effective IT general or application controls because of the following weaknesses:

(a) Access to code, information and applications - Job descriptions and/or internal procedures did not always establish job entitlements or report employment status to be used as the basis for granting, canceling or changing access to financial or production systems, controlling passwords or controlling spreadsheets containing key financial data.

(b) Change management - Change management/emergency change management procedures were not formally documented or consistently applied.  Version controls were not always maintained, changes could be moved into production without formal review and approval and documentation is not always maintained for changes made. Change authorizations were not formally tracked and approved by assigned, authorized individuals. Installation rollout/rollback procedures were not incorporated in formalized release process. System deployment planning was accomplished informally, with management responsibility for the process shared amongst multiple groups.

(c) Application Security - Systems and networks were not isolated by function thereby allowing universal access to all systems serving disparate functions. Individuals and groups could not be appropriately confined by security policy to given systems, networks and application domains. Authentication and credentials were granted in multiple places, by multiple administrators, with disparate coordination and control mechanisms between administrative groups.

(3) We did not maintain effective controls to ensure that new and cancellations of prior subscribed services were reflected on invoices and in our accounting records accurately and/or timely.

(4) We did not consistently follow procedures related to the acquisition, tracking and disposition of property and equipment.

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(5) We did not maintain adequate documentation and controls to properly value and disclose the impact of income tax timing differences in consolidated financial statements.

As a result of the material weaknesses described above, our management concluded that, as of December 31, 2006, we did not maintain effective internal control over financial reporting based on the criteria established in Internal Control — Integrated Framework, issued by the COSO.

Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006, has been audited by Friedman, our independent registered public accounting firm, as stated in their report, which is included herein.

Interim Measures to Ensure the Accuracy of Financial Reporting

In response to the material weaknesses identified as a result of management’s assessment of internal control over financial reporting, our management, with oversight from our Audit Committee, has implemented expanded and compensating measures to help ensure the accuracy of our financial reporting until such time as we are able to further improve our control environment and remedy our material weaknesses, including, among other things:

· expansion of our period-end closing procedures,

· enhanced monitoring and communications,

· additional analyses and cross team reviews,

· the dedication of significant internal resources,

· the engagement of external consultants, and

· additional top level management reviews of financial information and related disclosures.

As a result of these expanded and compensating procedures, we concluded that the consolidated financial statements included in this report on Form 10-K present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

The certifications of our principal executive officer and principal financial officer required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this report on Form 10-K. The disclosures set forth in this Item 9A contain information concerning the evaluation of our disclosure controls and procedures and our internal control over financial reporting, referred to in the certifications. Those certifications should be read in conjunction with this Item 9A for a complete understanding of the matters covered by the certifications.

Changes in Internal Control Over Financial Reporting

During 2006 and through the date of this report, we have initiated changes to address previously reported material weaknesses in internal control over financial reporting that have a material effect or are reasonably likely to have a material effect on our internal control over financial reporting. Our efforts have focused and continue to focus, on:

(i)  Expanding our organizational capabilities to improve our control environment;

(ii)  Implementing process changes to strengthen our internal control and monitoring activities; and

(iii)  Implementing adequate IT general and application controls.

Initial Remediation Activities Related to Identified Material Weaknesses

During 2006 and through the date of this report, our remedial actions and interim measures reflect our decision to first complete our internal accounting review and the correction of errors in prior period financial reporting, while addressing organizational capabilities and key common control deficiencies (which as remedied would raise control awareness and thus improve the control environment). The steps we have taken, among other things, include the actions summarized below.

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To expand our capabilities from an organizational leadership perspective, we, among other things:

· Appointed a new Chairman of the Board in October 2006 and subsequently appointed two new outside directors to the Board,

· Appointed a new Chief Financial Officer, and

· Hired a Chief Technology Officer, a newly created position, who leads the centralized IT department (which combines Company-level IT activities related to product operations and implementation of new product strategy).

To strengthen our internal controls and monitoring activities over financial reporting, we, among other things:

· Retained personnel with appropriate accounting knowledge, experience and training in the application of GAAP commensurate with our financial reporting requirements, including:

· adding a new Controller and Senior Accountant and upgrading our accounting staff, and

· engaging a professional services firm to perform internal audit and Sarbanes-Oxley compliance reviews;

· Initiated several changes to internal control processes, including:

· implementing a monthly financial close process, controls over journal entries, a series of proofs and reconciliations and a formal monthly review of the financial results (including a monthly analytical review of revenue at the customer and product level),

· segregating duties over disbursements and cash processing, and

· consolidating domestic financial activities into one location co-located with senior management;

· Engaged consultants and accounting professionals to assist in the overall accounting review, the forensic review of our historical stock option grants, and the restatement of our prior period financial statements since 1993; and

· Addressed material weaknesses related to our stock option granting processes, including:

· adopting, in February 2007, Equity Award Guidelines (the “Guidelines”) addressing the authorization, timing, documentation and verification of equity awards, and

· suspending the granting of new stock-based compensation awards pending resolution of related matters and adoption of the Guidelines.

To strengthen our IT controls overall and address the material weaknesses related to our IT operations and general application controls, we, among other things:

· Retained personnel with appropriate IT operations knowledge, experience and training commensurate with the financial services industry, including a new Chief System Architect, Chief Information Security Officer, Head of Quality Control, and a Program Management Officer; and

· Initiated several changes to IT-related control processes, including:

· implementing a new consolidated authentication and access control technology to monitor and manage access to production systems,

· moving corporate systems within class 1 datacenter environments to ensure availability and business continuity, thereby making a substantial investment in our Data Center infrastructure and management tools and processes to ensure availability of increased core infrastructure services including power, space, and environmentals,

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· engaging external consultants to conduct security and process reviews and make appropriate recommendations and to establish appropriate data management and backup policies related to critical production databases and storage, and

· engaging professional consultants to support financial reporting systems.

Ongoing Remediation of Material Weaknesses

While we believe our ongoing efforts have improved our internal control over financial reporting, we have not completed the redesign and/or programming of all necessary procedures and controls nor our documentation and testing of the processes. Accordingly, we will continue to perform the interim measures described above and monitor the effectiveness of our internal control over financial reporting in the areas impacted by the material weaknesses discussed above.

We continue to have extensive work remaining and management has increased the resources dedicated to our remediation program following completion of our internal accounting review in February 2007, and the resultant restatement of our financial results for prior periods.

We believe that these remedial actions have improved and that further planned actions will continue to improve our internal control over financial reporting, as well as our disclosure controls and procedures. However, we do not believe that all of these material weaknesses, including certain of those involving our IT infrastructure and related controls, will be fully remediated by December 31, 2007. We expect that we will need a period of time over which to demonstrate that these controls are functioning appropriately to conclude that we have adequately remediated the weaknesses. Accordingly, we expect to report that our internal control over financial reporting and our disclosure controls and procedures remain ineffective as of December 31, 2007.

Certain of the planned remediation efforts will require significant ongoing effort and investment. Our management, with the oversight of our Audit Committee, will continue to identify and take steps to remedy known material weaknesses as expeditiously as possible and enhance the overall design and capability of our control environment.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of NYFIX, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that NYFIX, Inc. and subsidiaries (the “Company”) did not maintain effective internal control over financial reporting as of December 31, 2006, because of the effect of the material weaknesses identified in management’s assessment based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of control effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment as of December 31, 2006:

(1) The Company did not maintain an effective control environment based on the criteria established in Internal Control — Integrated Framework, issued by the COSO because of the following weaknesses:

(a) The Company did not fully establish, or update when necessary, certain policies and procedures, and did not effectively communicate certain established policies and procedures addressing, among other topics, accounting policy and procedure, IT security and HR-related topics.

(b) The Company did not effectively monitor accounting operations throughout the organization to ensure accounting controls were in place and operating effectively.

This material weakness in the Company’s control environment contributed to the existence of the following material weaknesses.

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(2) The Company did not maintain effective IT general or application controls because of the following weaknesses:

(a) Access to code, information and applications - Job descriptions and/or internal procedures did not always establish job entitlements or report employment status to be used as the basis for granting, canceling or changing access to financial or production systems, controlling passwords or controlling spreadsheets containing key financial data.

(b) Change management - Change management/emergency change management procedures were not formally documented or consistently applied.  Version controls were not always maintained, changes could be moved into production without formal review and approval and documentation is not always maintained for changes made. Change authorizations were not formally tracked and approved by assigned, authorized individuals. Installation rollout/rollback procedures were not incorporated in formalized release process. System deployment planning was accomplished informally, with management responsibility for the process shared amongst multiple groups.

(c) Application Security - Systems and networks were not isolated by function thereby allowing universal access to all systems serving disparate functions. Individuals and groups could not be appropriately confined by security policy to given systems, networks and application domains. Authentication and credentials were granted in multiple places, by multiple administrators, with disparate coordination and control mechanisms between administrative groups.

(3) The Company did not maintain effective controls to ensure that new and cancellations of prior subscribed services were reflected on invoices and in its accounting records accurately and/or timely.

(4) The Company did not consistently follow procedures related to the acquisition, tracking and disposition of property and equipment.

(5) The Company did not maintain adequate documentation and controls to properly value and disclose the impact of income tax timing differences in consolidated financial statements.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2006 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

In our opinion, management’s assessment that NYFIX, Inc. and subsidiaries did not maintain effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the COSO. Also, in our opinion, because of the effects of the material weaknesses described above on the achievement of the objectives of the control criteria, NYFIX, Inc. and subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of NYFIX, Inc. and subsidiaries as of December 31, 2006 and 2005 and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive loss, and cash flows for each of the three years in the period ended December 31, 2006 and our report dated August 1, 2007 expressed an unqualified opinion thereon.

/s/ Friedman LLP

East Hanover, New Jersey

August 1, 2007

Item 9B.Other Information

Not applicable.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

Set forth below are the name, age and position of each of our directors and executive officers as of May 31, 2007:

Name	Age	Position
Lon Gorman	58	Chairman of the Board of Directors
P. Howard Edelstein	52	President, Chief Executive Officer andDirector
Steven R. Vigliotti	40	Chief Financial Officer
Donald P. Henderson	45	Chief Technology Officer
W. Brennan Carley	45	Executive Vice President, Head of Business Operations and Chief StrategyOfficer
David Merrill	45	Executive Vice President, Chief of Client Operations
Scott A. Bloom	40	Executive Vice President, Corporate Development and Chief AdministrativeOfficer and Secretary
Cary J. Davis	40	Director
George O. Deehan	64	Director
William H. Janeway	64	Director
William C. Jennings	67	Director
William J. Lynch	65	Director
Richard Y. Roberts	55	Director
Thomas C. Wajnert	63	Director

There are no family relationships among any of the above-named directors or executive officers.

Our Board of Directors currently consists of nine members, all of whom will serve until their reelection at our next annual meeting of stockholders or until the election and qualification of their successors or until their prior resignation, removal, or death.  Our Board of Directors has determined that all directors, other than Mr. Edelstein, are independent under Nasdaq Rule 4200(a) (15), based on information known to us.

The following are brief biographies of each of our current directors and executive officers (including present principal occupation or employment, and material occupations, positions, offices or employments for at least the past five years).

Lon Gorman has served as a director since September 2005 and as Chairman of the Board since September 2006.  Mr. Gorman is a member of the Audit and Compensation Committees of the Board of Directors. Mr. Gorman is the retired Vice Chairman of The Charles Schwab Corporation, a holding company whose subsidiaries engage in securities brokerage and financial services. Mr. Gorman served as Vice Chairman of The Charles Schwab Corporation from July 1999 until November 2004, and served as President of Charles Schwab Institutional and Asset Management and President of Schwab Capital Markets L.P. following 16 years at Credit Suisse First Boston ("CSFB"), where he was Managing Director and head of global equity trading. Prior to CSFB, he was a partner at F. Eberstadt & Co., Inc. with responsibility for institutional sales and trading. Mr. Gorman currently serves on the Board of Directors of the Nasdaq Stock Market, Inc. He has also served as Vice Chairman of the Board of Directors of the Securities Industry Association ("SIA"), Co-Chairman of the SIA Market Structure Committee, and as a member of the SIA Public Trust & Confidence Committee and the New York Stock Exchange and Nasdaq Quality of Markets committees. He attended Adelphi University.

P. Howard Edelstein has served as President and Chief Executive Officer since September 2006. Mr. Edelstein served as an entrepreneur-in-residence at Warburg Pincus & Co. from January 2006 through September 2006.  Mr. Edelstein was President, Chief Executive Officer and a director of Radianz from July 2003 to December 2005. From January 2002 until July 2003, Mr. Edelstein was an entrepreneur-in-residence with Warburg Pincus & Co. From June 1993 to April 2001, Mr. Edelstein served as President and Chief Executive Officer of Thomson Financial ESG, which he founded and which later merged with the Depository Trust & Clearing Corp.’s TradeSuite business to create Omgeo, an industry utility for straight-through processing. Previously, Mr. Edelstein held senior positions at firms such as Dow Jones Telerate and Knight-Ridder. Mr. Edelstein is a director of SkillSoft Corporation and of Alacra Inc., a private company providing business and professional information.  Mr. Edelstein earned a Master of Science degree in Electrical Engineering from Stanford University and a Bachelor of Engineering degree in Electrical Engineering from City College of New York.

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Steven R. Vigliotti has served as Chief Financial Officer since January 2006. Mr. Vigliotti served as the Chief Financial Officer of Maxcor Financial Group Inc. (“Maxcor”), from November 2001, and Treasurer of that company from December 1998, until May 2005, when Maxcor (a former Nasdaq listed company) was sold. Mr. Vigliotti was employed by Maxcor until August 2005. Mr. Vigliotti also served as the Chief Financial Officer of Euro Brokers, a wholly-owned subsidiary of Maxcor, from May 1998, and as the Chief Financial Officer of a number of Euro Brokers’ subsidiaries from July 1998 until May 2005. From 1991 to 1998, Mr. Vigliotti was employed by the accounting firm of BDO Seidman, LLP, lastly as an Audit Partner in that firm’s financial services group. Mr. Vigliotti is a certified public accountant and received his B.B.A. degree in accounting from Hofstra University in 1990.

Donald P. Henderson has served as our Chief Technology Officer since May 2006 and as an executive officer since May 15, 2007. From January 2005 to May 2006, Mr. Henderson was the head of the consulting planning practice and business development for information technology consultant RipTyde Partners, LLC. From March 1993 to August 2004, Mr. Henderson held a number of technology-related positions at Bear Stearns & Co. Inc., rising to the level of Co-Chief Technology Officer and head of the infrastructure technology planning group. During his tenure at Bear Stearns, he headed the design and migration planning of the information technology infrastructure for the firm’s new corporate headquarters at 383 Madison Ave. Mr. Henderson earned his Bachelor of Arts degree in Economics from Rutgers University.

W. Brennan Carley has served as Executive Vice President, Head of Business Operations and Chief Strategy Officer since January 12, 2007. Through his consulting company, Benchris Inc., Mr. Carley served as a consultant for the Company from September 2006 through December 2006. From January 2006 through August 2006, Mr. Carley served as an Entrepreneur in Residence with Warburg Pincus & Co. through Benchris, Inc. Prior to working with Warburg Pincus & Co., Mr. Carley was Chief Technology Officer and Chief Strategy Officer at BT Radianz from June 2000 until December 2005. Mr. Carley’s other notable experience includes serving as Senior Vice President of network strategy for Reuters and Senior Vice President and Head of IT for Instinet Corporation. Early in his career, he also served in various engineering and management capacities for IBM Corporation. Mr. Carley also serves as an independent director on the board of Yipes Enterprise Services, a private company and global provider of managed, end-to-end Ethernet solutions. He is a Magna Cum Laude graduate of New York University, with a degree in Economics.

David A. Merrill has served as our Chief of Client Operations since January 22, 2007. From April 2005 to January 2007, Mr. Merrill was employed by Moody’s KMV, where he was responsible for Moody’s KMV’s customer organization in the Americas (Client Solutions, Credit Risk Specialists, Marketing, Support and Training), among other responsibilities. Prior to joining Moody’s KMV, Mr. Merrill was the principal of Merrill Consulting, from May 2004 until April 2005, advising and assisting financial services technology firms in local and global expansion. From 1994 until May 2004, Mr. Merrill held sales and managing director positions with Omgeo, a global post-trade pre-settlement solutions provider, culminating in the position of Omgeo’s Managing Director of Global Operations from 2002 until 2004. Previously, among other positions, Mr. Merrill spent eight years at Thomson Financial Services in sales and market development roles of increasing responsibility. He holds a B.S. in Business and Marketing from the University of Rhode Island.

Scott A. Bloom has served as our Executive Vice President, Corporate Development, Chief Administrative Officer and Secretary since April 2, 2007. From 2005 until March 2006, Mr. Bloom served as Executive Vice President, Corporate Development and Human Resources and General Counsel of Dictaphone Corporation, after having served as Senior Vice President, Corporate Development and Human Resources and General Counsel of Dictaphone from 2004 to 2005. Mr. Bloom was a Director of Finance at AT&T Corp. from 2003 until 2004. Prior to joining AT&T, Mr. Bloom had served in a series of increasingly responsible legal, financial and management positions, since beginning his career as a practicing attorney in 1991. Mr. Bloom holds an MBA in Finance from The Wharton School and a JD from the College of William & Mary.

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Cary J. Davis has served as a director since October 2006 and is member of the Compensation Committee of our Board of Directors. Mr. Davis is Managing Director of Warburg Pincus LLC and a partner of Warburg Pincus & Co. and is responsible for investments in software and financial technology companies. Mr. Davis was designated to serve as one of our directors by Warburg Pincus Private Equity IX, L.P. Mr. Davis joined Warburg Pincus in 1994 and became a partner in 1999. Prior to joining Warburg Pincus, Mr. Davis was executive assistant to Michael Dell at Dell Computer and a consultant at McKinsey & Company. He also serves as a director of Secure Computing and several private companies and has been involved in a number of Warburg Pincus’ prior investments including OpenVision Technologies (now VERITAS Software) and BEA Systems. Mr. Davis received a B.A. in economics from Yale University and his M.B.A. from Harvard Business School.

George O. Deehan has served as a director since August 2000.  Mr. Deehan serves as Chairman of the Compensation Committee and a member of the Nominating and Corporate Governance Committee of our Board of Directors.  From August 2005 to August 2006, he was the Chief Executive Officer and a board member of Sunset Financial Resources, a REIT and a publicly traded NYSE company.  From October 2003 to October 2004, he was the Chief Executive Officer and Chairman of the Board of Paragon Financial Corporation, a specialty residential mortgage banker.  From February 2002 to the present, Mr. Deehan has been a board member of Technology Investment Partners, a private leasing company.  From March 2002 to September 2003, he was a consultant for and investor in eOriginal, Inc., a software development company. Mr. Deehan was President of eOriginal, Inc. from August 2000 until March 2002.  He was President and Chief Executive Officer of Advanta Leasing Services, the business equipment leasing unit of Advanta Business Services, from August 1998 until August 2000.  Prior to joining Advanta, Mr. Deehan served as President and Chief Operating Officer of Information Technology Services for AT&T Capital.  He earned a bachelor’s degree from Lenoir-Rhyne College.

William H. Janeway has served as a director since October 2006 and is a member of the Nominating and Corporate Governance Committee of our Board of Directors. Mr. Janeway is a partner of Warburg Pincus & Co. and a member and Senior Advisor of Warburg Pincus LLC. Mr. Janeway was designated to serve as one of our directors by Warburg Pincus Private Equity IX, L.P. Mr. Janeway joined Warburg Pincus in 1988 to develop the firm’s investment activities in Information and Communications Technology. Prior to joining Warburg Pincus, he was Vice President and Director of Corporate Finance at F. Eberstadt & Co., Inc. He currently serves on the Board of Directors for BEA, Fortent, Nuance Communications Inc., O’Reilly Media Inc. and Wall Street Systems. He is Chairman of the Board of Trustees of Cambridge in America and co-chair of Cambridge’s 800th Anniversary Campaign. Mr. Janeway was Valedictorian of the Class of 1965 at Princeton University and received his Ph.D. in economics from Cambridge, which he attended as a Marshall Scholar.

William C. Jennings has served as a director since July 2003. Mr. Jennings serves as Chairman of the Audit Committee and a member of the Nominating and Corporate Governance Committee of our Board of Directors. Mr. Jennings is an audit committee financial expert as defined in Item 401 of Regulation S-K promulgated by the SEC and is independent as defined in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. Mr. Jennings is a retired partner of PricewaterhouseCoopers LLP, a global accounting and advisory firm, where he led the risk management and internal control consulting practice from 1992 until his retirement in 1999. Prior to that, Mr. Jennings served as a senior audit partner at Coopers & Lybrand (now, PricewaterhouseCoopers LLP), as a senior executive vice president at Shearson Lehman Brothers, responsible for quality assurance, internal audit and compliance, and as an executive vice president and Chief Financial Officer of Bankers Trust. Since retiring from PricewaterhouseCoopers, Mr. Jennings provided independent consulting services to a number of companies. He is also a director of Silgan Holdings Inc. and Axcelis Technologies, Inc., both publicly traded companies. Mr. Jennings received a BA in business administration from the University of Akron and an MBA from the University of Florida.

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William J. Lynch has served as a director since June 2000. Mr. Lynch serves as Chairman of the Nominating and Corporate Governance Committee and a member of the Compensation Committee of our Board of Directors. Mr. Lynch is a Senior Advisor to Catterton Partners, a private equity fund, and has served in a similar position since January 2001. Mr. Lynch earned a bachelor’s degree from the College of the Holy Cross and a J.D. from Harvard Law School.

Richard Y. Roberts has served as a director since October 2005 and is a member of the Nominating and Corporate Governance Committee of our Board of Directors. Since February 2006, Mr. Roberts has operated Roberts, Raheb & Gradler LLC, a consulting firm, and has been a partner in Roberts & Associates, a law firm, both in Washington, DC. From 1996 to February 2006, Mr. Roberts was a partner with Thelen Reid & Priest LLP. From 1990 to 1995, Mr. Roberts served as a Commissioner of the SEC. Mr. Roberts is currently a director of Automated Trading Desk Inc., Endeavor Acquisition Corporation, and Victory Acquisition Corporation. Mr. Roberts is a member of the Advisory Board of the International Journal of Disclosure and Governance, of Securities Regulation and Law Report, and of the Municipal Finance Journal. Mr. Roberts has served as a member of the NASD’s District 10 Regional Consultative Committee, Market Regulation Advisory Board, and Legal Advisory Board. Mr. Roberts is a graduate of Auburn University where he earned a Bachelor of Science degree in Electrical Engineering. He received his Juris Doctorate from the University of Alabama School of Law and his Master of Laws from The George Washington University Law Center.

Thomas C. Wajnert has served as a director since October 2004. Mr. Wajnert serves as our Lead Director and a member of the Audit Committee of our Board of Directors. Mr. Wajnert is self employed and provides advisory services within the financial services industry. He currently serves as a Senior Advisor to Bear Stearns Merchant Banking. Mr. Wajnert had been Managing Director of Fairview Advisors, LLC, a merchant bank, from January 2002 to July 2006. He was Chairman and Chief Executive Officer of SEISMIQ, Inc, a provider of advanced technology to the commercial finance and leasing industry, from its founding in April 2000 until December 2001. Mr. Wajnert also was the Chairman of EPIX Holdings, Inc., a professional employer organization, from March 1998 until November 2003, where he also served as Chief Executive Officer from March 1998 to April 1999. Previously, Mr. Wajnert was Chairman of the Board of Directors from January 1992 until December 1997, and Chief Executive Officer from November 1984 until December 1997, of AT&T Capital Corporation (NYSE), a commercial finance and leasing company. He was self-employed from December 1997 to March 1998. Mr. Wajnert serves on the boards of directors of Reynolds American, Inc. (NYSE) and United Dominion Realty (NYSE). Mr. Wajnert received a B.S. in business from the Illinois Institute of Technology and an M.B.A. from Southern Methodist University.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our officers and directors, and persons who are beneficial owners of more than ten percent of a registered class of our outstanding common stock to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC and Nasdaq. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

To our knowledge, based solely on review of the copies of these reports furnished to us and the written representations that no other reports were required, during 2006 all Section 16(a) filing requirements applicable to our executive officers and directors were complied with except as noted below.

Peter K. Hansen a former director, who also served as our President and Chief Executive Officer, failed to respond to the Company’s inquiries regarding his compliance with Section 16(a). Mr. Hansen did not file an amended Form 4 with respect to stock options whose exercise prices were modified by our Board of Directors in 2006.

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Steven R. Vigliotti did not timely file his Form 3 in 2006 in connection with his initial hiring. He did not have any ownership of equity securities to report; when the oversight was discovered, he filed his Form 3.

David Merrill inadvertently filed his Form 3 one day late following his initial hiring. He did not have any ownership of equity securities to report.

Forms 4/A for Brian Bellardo, George O. Deehan, William C. Jennings and William J. Lynch disclosing our Board of Directors’ action increasing the exercise price of certain stock options were inadvertently filed approximately one week late. The filing of the Forms 4/A was preceded by a timely filed Form 8-K that disclosed the same information.

Code of Business Conduct and Ethics

We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, including our principal executive officer and principal financial and accounting officer. The full text of our Code of Business Conduct and Ethics is available on our web site at www.nyfix.com under “About NYFIX, Corporate Governance, Code of Conduct.” We intend to disclose future amendments to certain provisions of our Code of Business Conduct and Ethics, or waivers of such provisions granted to executive officers and directors, on this web site within five business days following the date of such amendment or waiver.

Audit Committee and Audit Committee Financial Expert

Our Audit Committee members are Mr. Jennings, its Chairman; Mr. Wajnert; and Mr. Gorman. Each of the members of our Audit Committee is “independent” of management as independence for audit committee members is defined by Nasdaq rules and under the SEC’s Audit Committee independence standards. Our Board of Directors has determined that Mr. Jennings is an “audit committee financial expert”, as that term is defined under Item 407(d)(5) of Regulation S-K. Stockholders should understand that this designation is a disclosure requirement of the SEC related to Mr. Jennings’s experience and understanding with respect to certain accounting and auditing matters. The designation does not impose on Mr. Jennings any duties, obligations or liability that are greater than those generally imposed on him as a member of the Audit Committee and Board of Directors, and his designation as an Audit Committee financial expert pursuant to this SEC requirement does not affect the duties, obligations or liability of any other member of the Audit Committee or Board of Directors.

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Item 11.Executive Compensation

The compensation discussion and analysis below and the tables that follow describe our compensation program and, specifically, the elements of compensation awarded to, earned by or paid to each person serving as our Chief Executive Officer and each person serving as our Chief Financial Officer during the year ended December 31, 2006, our three most highly compensated executive officers, other than our Chief Executive Officer and Chief Financial Officer, whose salary and bonus exceeded $100,000 with respect to the year ended December 31, 2006 and who were serving as executive officers on December 31, 2006, and one former executive officer who had served as an executive officer during 2006 and who would have been a highly compensated executive officer if he had been serving as an executive officer at the end of 2006 (collectively the “Named Executive Officers” or “NEOs” ).

Compensation Discussion and Analysis

This Compensation Discussion and Analysis describes the compensation program for our Named Executive Officers. The Compensation Committee of our Board of Directors, acting on information provided by management and consultants, makes recommendations to our Board of Directors regarding salary, benefits, incentive compensation, perquisites and severance to be paid to our Named Executive Officers. Our Board of Directors, acting on the Compensation Committee’s recommendations, ultimately determines the elements and levels of compensation for our Named Executive Officers. The Compensation Committee administers the compensation program for certain executives other than our Named Executive Officers. The Compensation Committee also administers our equity compensation plans.

The Compensation Committee is presently composed of Messrs. Deehan, Gorman, Lynch and Davis. Mr. Davis was appointed to the Compensation Committee on November 21, 2006, after the last Compensation Committee meeting of 2006 and participated in the Committee’s decisions made in 2007 with respect to bonuses for 2006. Each of the members of the Compensation Committee is a non-employee director as defined under Rule 16b-3 of the Exchange Act and an “independent director” (as defined under Section 162(m) of the Internal Revenue Code (the “Code”). Mr. Deehan serves as Chairman of the Compensation Committee. During the year ended December 31, 2006, the Compensation Committee met twelve (12) times and on four (4) occasions approved resolutions by unanimous written consent.

Compensation Philosophy and Objectives

The various elements of the compensation paid to our Named Executive Officers are, in the aggregate, intended to (i) attract and retain executive officers with the skills and qualities necessary to achieve the Company’s near-term and long-term goals, (ii) align the interests of our NEOs with the interests of our stockholders and (iii) reward performance that enhances stockholder value. During the year ended December 31, 2006, the elements of our compensation program were: base salary; Annual Incentive Plan payments; bonuses and benefits. As discussed in more detail below, we believe that the elements of our compensation program further the objectives of the Company.

We have not established a policy with regard to Section 162(m) of the Code.

Role of Compensation Consultants

In April 2005, the Compensation Committee engaged Towers Perrin (“Towers”) to assist us in evaluating our compensation program for our Named Executive Officers and senior management as well as compensation for the Company’s directors, and to recommend changes to our compensation program that would increase its effectiveness in achieving our compensation objectives. Towers matched our Named Executive Officer positions and other key positions to those of published market compensation surveys based on job duties, responsibilities, qualifications and reporting relationships, and gathered information on salaries, total cash compensation and total direct compensation for the matched positions from companies in the computer hardware, software and services sector (the “Market Sector”). The Market Sector includes companies such as DST Systems Inc., Instinet Group, SAVVIS Communications Corporation, Archipelago Holdings Inc., Investment Technology Group Inc. and DATATRACK International Inc. Towers then analyzed and compared the gathered information to information provided by management about our then compensation program. In February 2006, Towers reported its findings to the Compensation Committee and the Board of Directors, and recommended certain changes to our compensation program that are discussed in more detail below.

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Salaries

Base salary is the guaranteed element of a Named Executive Officer’s annual cash compensation. The base salary of each of our Named Executive Officers is reviewed annually by the Compensation Committee, and any recommendations of the Compensation Committee regarding changes to base salary are considered by the Board of Directors, which may then make changes to base salaries. For the year ended December 31, 2006, we relied upon the comparative analysis performed by Towers in determining whether adjustments to base salaries would be appropriate.

Towers found that our base salaries were generally in line with median levels in the Market Sector. Accordingly, upon receiving the Towers report the Compensation Committee did not recommend an adjustment to the base salaries of our Named Executive Officers during the year ended December 31, 2006. However, Towers also found that the total compensation that we paid to our executives was 33.2% below the median for the Market Sector. Consequently, the Compensation Committee recommended the adoption of the annual incentive plan described in the subsection entitled “Annual Incentive Plan” below.

A new President and Chief Executive Officer and a new Chief Financial Officer joined us during the year ended December 31, 2006. The base salary for these new executives was negotiated with each officer, was approved by the Compensation Committee and the Board and is set forth in their employment agreements.

One of the closing conditions of the Securities Purchase Agreement between us and Warburg Pincus required that our Board of Directors appoint Mr. Edelstein as our Chief Executive Officer. On September 4, 2006, Mr. Gasser stepped down as President and Chief Executive Officer, and the Board of Directors appointed Mr. Edelstein as President and Chief Executive Officer effective September 5, 2006. Mr. Edelstein’s employment agreement (the “Edelstein Agreement”) provides for an annual base salary of $495,000, which, is generally in line with median levels in the Market Sector as determined by Towers and, like all components of his compensation package, was negotiated by independent directors and approved by the Compensation Committee and the Board.

Mr. Hahn stepped down as our Chief Financial Officer on January 31, 2006. In connection with his resignation, we and Mr. Hahn entered into an Executive Agreement (the “Hahn Agreement”), which was to expire on June 30, 2006 and subsequently a Separation Agreement related to his services through September 30, 2006 and his separation from the company (described further below). The Hahn Agreement provided for an annualized base salary of $330,750, a 5% increase over his previous salary, which had not been increased since January 1, 2004. The Hahn Agreement was negotiated by former management and approved by the Compensation Committee and the Board.

Mr. Vigliotti joined us as Chief Financial Officer effective January 31, 2006, under an employment agreement (the “Vigliotti Agreement”) that runs through December 31, 2007. Mr. Vigliotti’s employment agreement sets his minimum annual base salary at $400,000, which is generally in line with median levels in the Market Sector as determined by Towers. The Vigliotti Agreement was negotiated by former management and approved by the Compensation Committee and the Board.

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Stock Option Plans

It is the philosophy of the Compensation Committee that stock options should be awarded to employees to assist in the retention of such employees and to promote long-term alignment between the interests of our employees and our stockholders through an equity interest in the Company. The Compensation Committee believes the potential for equity ownership by management is beneficial in aligning management’s and stockholders’ interests in the enhancement of stockholder value. Historically, we have granted stock options to new hires and have made grants to reward, motivate or retain employees.

During the year ended December 31, 2006, the 2001 Plan and the Javelin Plan were potential sources of employee stock options available for grant to our employees. Under the 2001 Plan we may not grant stock options at less than fair market value on the date of grant. Although the Javelin Plan permits the award of options with exercise prices less than the fair market value of our stock on the grant date, our policy is to grant options with exercise prices no lower than fair market value. Since February 2004, we have defined fair market value as the average of the closing price of our common stock on each of the 5 business days prior to the date of grant.

During the year ended December 31, 2006, we did not grant any new employee stock options since we were still reviewing our historical stock option grants and the procedures under which those grants had been made.

As is discussed in detail in the sections below entitled “Repricing of Options/SARs of Named Executive Officers” and “Repricing of Options/SARs of Directors,” on June 27, 2006, our Board of Directors increased the exercise price of certain option grants to Messrs. Hansen, Gasser, Hahn, Bellardo, Deehan, Jennings and Lynch, and declared certain option grants to Mr. Gasser to be void.

Stock Ownership Guidelines

We believe that stock ownership by management is beneficial in aligning management’s and stockholders’ interests in the enhancement of stockholder value. However, we have not set specific guidelines for management’s ownership of our stock.

Incentive Bonuses

Annual Incentive Plan (“AIP”)

Prior to 2006, the Company did not have a program for annual incentives for NEOs and other senior management. Towers found that, although our base salaries were generally in line with median levels in the Market Sector, our total cash compensation to our Named Executive Officers and senior management fell 16.5% below the median of companies in the Market Sector. Towers further found that our total direct compensation fell 33.2% below the median. Towers concluded that our compensation program was not competitive with compensation programs offered by other companies within the Market Sector.

Based on its analysis, Towers recommended that we adopt an Annual Incentive Plan (“AIP”). On February 28, 2006, our Board of Directors, at the recommendation of the Compensation Committee, adopted the AIP substantially in the form recommended by Towers. The Board of Directors, acting on the recommendation of the Compensation Committee, administers the AIP. The AIP is described in more detail in the section below entitled “Grants of Plan-Based Awards in 2006 - Annual Incentive Plan.”

The AIP was implemented in April 2006 for Messrs. Gasser, Shaffer, Kragh and Bellardo and senior management. The employment agreements of Messrs. Edelstein and Vigliotti specified their respective 2006 bonuses.

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In October 2006, the Compensation Committee determined that the metric used for the funding trigger and to measure each executive’s performance included elements over which certain executives had little or no control. The Compensation Committee redefined the metric to exclude those elements. The Compensation Committee also determined that the initial performance goals were unlikely to be met and did not provide the executives an appropriate incentive to improve performance during the fourth quarter of 2006. Consequently, the Compensation Committee reset the performance goals to more attainable levels. In addition, as a partial offset to the reduction in performance goals, the Compensation Committee reduced the target payouts to 95% of the original amounts.

The Compensation Committee has retained Frederic W. Cook & Co., Inc. as compensation consultants to assist in the design and implementation of an incentive bonus plan in 2007.

In February 2007, management, under the supervision of the Compensation Committee, determined the bonuses with respect to 2006 for participants in the AIP except for those participants who were direct reports of the CEO. Acting on the recommendation of the Compensation Committee, the Board of Directors awarded bonuses to certain of the CEO’s direct reports on February 27, 2007, and to Mr. Edelstein and the remainder of the CEO’s direct reports on March 29, 2007. Mr. Bellardo was awarded a bonus in total of $135,000, consisting of his AIP bonus and an additional discretionary bonus of approximately $50,000 in recognition of his efforts during the year ended December 31, 2006 in connection with the Company’s review of its historical stock option grants, governmental investigations and lawsuits concerning stock options and our initiatives to attract additional capital.

Contractual and Other Incentive Bonus Awards

The Edelstein Agreement provides that Mr. Edelstein was eligible for an annual incentive bonus commencing in 2007. In addition, Mr. Edelstein was eligible for a bonus for 2006, which was to be no less than 50% (100% if we did not grant him stock options during 2006) of his base salary pro rated to reflect the number of days Mr. Edelstein was employed by us during the year (approximately $160,000). On March 29, 2007, the Board of Directors, acting on the recommendation of the Compensation Committee, awarded Mr. Edelstein a bonus in total of $200,000, including an additional discretionary bonus of approximately $40,000 in recognition of Mr. Edelstein’s efforts during the year ended December 31, 2006 in refocusing the Company on the business and growth and in realigning and expanding the management team.

The Vigliotti Agreement provided that Mr. Vigliotti would receive between 50% and 200% of his target annual bonus. The Vigliotti Agreement provided that, for the year ended December 31, 2006, his target annual bonus would be $100,000 and the specified Company performance goal would be the earnings before interest, taxes, depreciation and amortization (EBITDA) from normal recurring operations (excluding among others, restructuring costs, professional fees and other costs associated with the ongoing SEC investigation and financial restatements and compensation expense associated with grants under our stock option plans) established in the 2006 budget provided to him on December 28, 2005.

On March 29, 2007, the Board of Directors, acting on the approval and the recommendation of the Compensation Committee, awarded Mr. Vigliotti a bonus in total of $225,000. This amount was above the amount required by the Vigliotti Agreement, and $50,000 above the amount that Mr. Vigliotti would have earned under an AIP-type calculation had it been applicable to his bonus. The discretionary portion of this award was based upon Mr. Vigliotti’s individual efforts during the year ended December 31, 2006 in connection with the Company’s review of its historical stock option grants, governmental investigations and lawsuits concerning stock options, the financial statement restatements and our initiatives to attract additional capital.

Other Discretionary Bonuses

Mr. Gasser’s employment agreement provided that he would receive an annual bonus in the amount of 2% of pre-tax earnings of NYFIX Millennium, part of our Transaction Services Division. In February 2006, the Compensation Committee and the Board approved a bonus of $250,000 for Mr. Gasser, reflecting his efforts during the year ended December 31, 2005 and his appointment as the NYFIX, Inc. CEO in November of that year.

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Effective January 31, 2006, in connection with Mr. Hahn’s resignation as our Chief Financial Officer, we negotiated an extension of his employment agreement that provided, with the approval of the Compensation Committee and the Board of Directors, a bonus of $52,650 for Mr. Hahn, payable on January 31, 2006, for his extended efforts prior to January 31, 2006, and a bonus of $25,000 payable if certain conditions were met. The conditions for the $25,000 bonus were not met and that bonus was not paid.

Severance and Change in Control Provisions

We do not have a severance or change in control plan. Instead, any severance or change in control provisions are set forth in the Named Executive Officers’ individual employment agreements or severance agreements, described in detail below, each of which was negotiated by management under the supervision of the Compensation Committee. Change in control language generally promises a financial settlement in terms of salary and/or benefits to an employee who experiences a termination of employment, usually by the Company without cause or by the executive with reason within a defined period after a reorganization of the Company, such as a substantial change in the membership of the Board of Directors, a merger or a disposition of substantial assets. Change in control provisions give the executive an incentive to focus on the Company’s best interests, even where those interests lead to a change in control event that could potentially result in the executive’s termination. Change in control provisions are increasingly common in executive agreements in dynamic industries such as ours and we believe that change in control language may be appropriate and necessary to attract and retain the skilled executives we need to meet our objectives.

Each of the Named Executive Officers is entitled to receive certain severance payments and other benefits upon a termination of his employment in specified circumstances. Additionally, upon the occurrence of a change in control of the Company, as defined in their respective employment agreements, equity grants to Mr. Edelstein will immediately vest and Mr. Vigliotti will receive a specified multiple of the sum of his current base salary plus his target bonus (if he has been granted an equity compensation award that is at least 50% vested as of the termination of his employment, the multiple is two; if he has not been granted an equity compensation award that is at least 50% vested as of the termination of his employment, the multiple is three). These payments and benefits are described in detail in the subsection entitled “Potential Payments Upon Termination or Change in Control.” The payments and benefits were individually negotiated at the time each Named Executive Officer was hired or at some point after the Named Executive Officer began employment with us and were approved by the Compensation Committee.

Severance Agreements

On September 4, 2006, Mr. Gasser resigned as our President and Chief Executive Officer. On the same day, we entered into a separation and release agreement with Mr. Gasser (the “Gasser Separation Agreement”). Under the Gasser Separation Agreement, we agreed to pay Mr. Gasser's salary and premiums for specified benefits through October 4, 2006. The parties agreed that no severance payment would be made to Mr. Gasser. All of Mr. Gasser's stock options that had not vested by October 4, 2006, lapsed without vesting.

Under the Gasser Separation Agreement, Mr. Gasser released all claims he may have had against us and agreed to the following obligations, among others:

· non-solicitation of Company employees for a period of 2 years,

· non-disclosure of Company confidential information, and

· non-disparagement of the Company.

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On December 1, 2006, we and Mr. Hahn entered into a Separation Agreement and General Release (the “Hahn Separation Agreement”), which took effect as of September 30, 2006, and under which we agreed to pay Mr. Hahn severance in the amount of $330,750, which was equal to one year’s base salary, by the end of January 2007, and to continue certain health benefits until March 31, 2008, all in accordance with provisions in his employment agreement, as amended. The Hahn Separation Agreement was negotiated by management under the supervision of the Compensation Committee.

Under the Hahn Separation Agreement, Mr. Hahn released all claims he may have had against us and agreed to the following obligations, among others:

· non-solicitation of Company employees for a period of 12 months,

· non-disclosure of Company confidential information, and

· non-disparagement of the Company.

In March 2007, Mr. Kragh delivered an executed Separation Agreement and General Release (the “Kragh Agreement”) with the Company and on April 10, 2007 delivered certain patent assignments which, as agreed to by the Company and Mr. Kragh, were a condition to the effectiveness of the Kragh Agreement, which was effective retroactive to December 31, 2006. Pursuant to the Kragh Agreement, the Company agreed to: (i) match Mr. Kragh’s 401(k) contribution subject to limits imposed by the Internal Revenue Code, through December 31, 2006, (ii) pay Mr. Kragh his base salary through December 31, 2007, (iii) pay Mr. Kragh $68,811 (an amount equivalent to his 2006 target AIP award) on March 31, 2007, (iv) pay Mr. Kragh the equivalent of 4 weeks vacation, (v) pay Mr. Kragh his monthly car contribution through December 31, 2007 and (vi) reimburse Mr. Kragh for the cost of certain insurance benefits through December 31, 2007. The payments to Mr. Kragh were made to compensate him for a general release he provided the Company and the early termination of his employment agreement, which was to run until December 31, 2007. The Kragh Agreement was negotiated by management under the supervision of the Compensation Committee.

Under the Kragh Agreement, Mr. Kragh released all claims he may have had against us and agreed to the following obligations, among others:

· non-competition through May 31, 2007,

· non-solicitation of Company employees for a period of 12 months,

· non-disclosure of Company confidential information, and

· non-disparagement of the Company.

Benefits

As salaried, U.S.-based employees, the Named Executive Officers participate in a variety of health and welfare, transit and retirement benefits designed to enable us to attract and retain our workforce in a competitive marketplace. Health and welfare benefits help ensure that the Company has a productive and focused workforce through reliable and competitive health and welfare benefits. The transit benefits allow our employees to save on transit expenses by making a portion of their transit purchases with pre-tax dollars.

Our qualified defined contribution plan (our 401(k) Plan) allows all of our employees, including our Named Executive Officers, to contribute a percentage or dollar amount of their base salary, up to the annual limits imposed by the Internal Revenue Code, on a pre-tax basis. The Company provides, at the discretion of the Board of Directors, a matching contribution. For the year ended December 31, 2006, the Company provided a 50 % match on eligible employee contributions up to the first 3% of the employee’s compensation or the limits imposed by the Code, whichever is lower. The Company’s contribution vests ratably over 5 years. The maximum matching contribution for the year ended December 31, 2006 was $6,600.

These benefits are provided to all employees on a uniform basis. They are the same types of benefits generally provided by most U.S. public companies.

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Perquisites

We provided a car allowance to Mr. Kragh, one of the founders of the Company, pursuant to his January 1, 2003 employment agreement. During the year ended December 31, 2006, he received a car allowance of $1,937.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this annual report on Form 10-K with the Company’s management in accordance with the SEC’s disclosure requirements for executive compensation and, based on such review and discussion, the Compensation Committee recommended to the Company’s Board of Directors that the Compensation Discussion and Analysis be included in this annual report on Form 10-K for the year ended December 31, 2006.

The Compensation Committee

George O. Deehan, Chairman

Lon Gorman

William J. Lynch

Cary J. Davis

Compensation Committee Interlocks and Insider Participation

From January 1, 2006 until November 21, 2006, the Compensation Committee consisted of George O. Deehan, Lon Gorman and William J. Lynch. On November 21, 2006, the Board of Directors, on the recommendation of its Corporate Governance and Nominating Committee, appointed Cary J. Davis as an additional member of the Compensation Committee. None of the members of the Compensation Committee is or formerly was an employee or officer of the Company. None of the executive officers of the Company served as a member of the Compensation Committee (or other Board committee performing equivalent functions or, in the absence of any such committee, the entire Board of Directors) of another entity, one of whose executive officers served as a director of the Company.

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Compensation Tables

Summary Compensation Table

The following table provides a summary of the elements of compensation earned by our Named Executive Officers during the year ended December 31, 2006.

SUMMARY COMPENSATION TABLE FOR FISCAL YEAR 2006

Name and Principal Position	Base Salary			Bonus			Option Awards			Non-Equity Incentive Plan Compensation			Other Compensation			Total
P. Howard Edelstein, Chief Executive Officer and President	$	159,923	(1)	$	200,000	(1)		-			-		$	150,000	(1)	$	509,923
Robert Gasser, former Chief Executive Officer and President	$	330,750		$	250,000	(2)	$	2,129	(3)		-			-		$	582,879
Steve Vigliotti, Chief Financial Officer	$	367,692	(4)	$	225,000	(5)		-			-		$	6,600	(6)	$	599,292
Mark Hahn, former Chief Financial Officer	$	259,547	(7)	$	52,650		$	14,392	(3)		-		$	330,750	(8)	$	657,339
Lars Kragh, former Chief Information Officer	$	275,625			-		$	14,392	(3)	$	68,811	(12)	$	8,537	(9)	$	367,365
Jay Shaffer, former ChiefAdministrative Officer	$	341,250			-		$	76,951	(10)	$	78,375	(12)	$	6,600	(6)	$	503,176
Brian Bellardo, General Counsel and former Secretary	$	248,063		$	50,000	(11)	$	14,392	(3)	$	85,000	(11)	$	6,600	(6)	$	404,055

(1) Mr. Edelstein’s employment commenced in September 2006. Amounts reflect his pro-rated compensation and bonus, other compensation related to a moving allowance, pursuant to Mr. Edelstein’s employment agreement, plus an additional award in recognition of his efforts during the year ended December 31, 2006, as described above.

(2) Represents Mr. Gasser’s bonus awarded in recognition of his efforts during the year ended December 31, 2005 and his appointment as the NYFIX, Inc. CEO in November of that year. The 2005 10-K did not disclose this payment under the previous reporting requirements as it was declared and paid in 2006.

(3) Represents the dollar amount recognized for financial statement reporting purposes under SFAS 123(R) rather than an amount paid to or realized by the Named Executive Officer, with respect to the 2006 fiscal year for the fair value of the grant of an option for 10,000 shares of our common stock on February 23, 2004, vesting over 3 years, at an exercise price of $7.056 per share. There can be no assurance that the SFAS 123(R) amounts will ever be realized.

(4) Mr. Vigliotti’s employment commenced on January 31, 2006.

(5) Mr. Vigliotti’s bonus represents amounts required by the Vigliotti Agreement, plus an additional award in recognition of his efforts during the year ended December 31, 2006, as described above.

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(6) Represents our matching contribution to the employee’s 401(k) plan account for contributions made during fiscal year 2006.

(7) Mr. Hahn’s employment terminated effective as of September 30, 2006.

(8) Represents severance earned pursuant to the Hahn Separation Agreement (approximately $102,000 was paid in 2006).

(9) Represents $1,937 car allowance and our matching contribution to Mr. Kragh’s 401(k) plan account.

(10) Represents the dollar amount recognized for financial statement reporting purposes under SFAS 123(R), rather than an amount paid to or realized by Mr. Shaffer, with respect to the 2006 fiscal year for the fair value of a grant of an option for 75,000 shares of our common stock on January 14, 2005, at an exercise price of $5.36 per share. Of the options granted, 25,000 vested on January 14, 2006, 20,000 vested on January 14, 2007, and 15,000 were scheduled to vest on each of January 14, 2008 and January 14, 2009. The remaining 30,000 unvested options were canceled when Mr. Shaffer's employment ended on June 30, 2007.

(11) Mr. Bellardo’s bonus represents his incentive bonus earned under the Annual Incentive Plan plus an additional award in recognition of his efforts during the year ended December 31, 2006, as described above.

(12) Represents incentive bonus earned under the AIP.

Employment Agreements with Our Named Executive Officers

Messrs. Edelstein, Vigliotti, Shaffer and Bellardo have entered into employment agreements with the Company. The following descriptions of those agreements do not include the provisions thereof regarding payments upon termination or following a change in control of the Company, which are described in “Potential Payments upon Termination or Change in Control” below.

Employment Agreement with Mr. Edelstein -The Edelstein Agreement was executed on September 4, 2006, with a commencement date of September 5, 2006, and continues until it is terminated pursuant to its terms. Under the Edelstein Agreement, Mr. Edelstein serves as President and Chief Executive Officer, with an annualized base salary of not less than $495,000. Mr. Edelstein is eligible for an annual incentive bonus commencing in 2007. The target annual bonus for each year shall be 100% of base salary; provided, however, that the annual bonus payable for 2007 shall not be less than 50% (100% if we did not grant him stock options during 2007) of base salary. In addition, Mr. Edelstein was eligible for a bonus for 2006, which was to be no less than 50% (100% if we did not grant him stock options during 2006) of his base salary pro rated to reflect the number of days Mr. Edelstein was employed by us during the year. In addition, on March 29, 2007, the Board of Directors, acting on the approval and recommendation of the Compensation Committee, awarded Mr. Edelstein a discretionary bonus of approximately $40,000, as described above. We also provided Mr. Edelstein a one-time moving allowance in the amount of $150,000. We have committed to grant Mr. Edelstein, as soon as practicable after September 5, 2006, significant equity compensation in the form of either stock options or restricted stock. Any grants of equity compensation to Mr. Edelstein will be determined by our Compensation Committee or Board. If, during the fiscal year ending December 31, 2007, Mr. Edelstein has not received the equity compensation provided for in the Edelstein Agreement, his guaranteed annual bonus for 2007 (as described above) shall be 100% of base salary.

Employment Agreement with Mr. Vigliotti - The initial term of the Vigliotti Agreement expires on December 31, 2007. Thereafter, the Vigliotti Agreement renews annually unless it has been terminated in accordance with its terms. Under the Vigliotti Agreement, Mr. Vigliotti’s minimum annual base salary is $400,000. The Vigliotti Agreement provided that Mr. Vigliotti would receive between 50% and 200% of his target annual bonus. The Vigliotti Agreement provided that, for the year ended December 31, 2006, his target annual bonus would be $100,000 and the specified Company performance goal would be the earnings before interest, taxes, depreciation and amortization (EBITDA) from normal recurring operations (excluding among others, restructuring costs, professional fees and other costs associated with the ongoing SEC investigation and financial restatements and compensation expense associated with grants under our stock option plans) established in the 2006 budget provided to him on December 28, 2005.

On March 29, 2007, the Board of Directors, acting on the approval and recommendation of the Compensation Committee, awarded Mr. Vigliotti a bonus in the total of $225,000, as described above. This amount was above the amount required by the Vigliotti Agreement, and $50,000 above the amount that Mr. Vigliotti would have earned under an AIP-type calculation had it been applicable to his bonus. The discretionary portion of this award was based upon Mr. Vigliotti’s individual efforts during the year ended December 31, 2006 in connection with the Company’s review of its historical stock option grants, governmental investigations and lawsuits concerning stock options, the financial statement restatements and our initiatives to attract additional capital.

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In subsequent years, Mr. Vigliotti’s target bonus will be at least 25% of his annual base salary and will be based on individual and corporate goals agreed to by our Compensation Committee or Board and Mr. Vigliotti prior to, or within two months after the start of, each calendar year.

Agreements with Mr. Shaffer - Mr. Shaffer served as our Executive Vice President - Finance & Administration pursuant to an employment agreement, dated January 1, 2005. This agreement was for a term of one year, renewing annually unless terminated in accordance with its terms. The agreement set Mr. Shaffer's annual base salary at $325,000. Effective July 1, 2005, the Compensation Committee increased Mr. Shaffer’s base salary to $341,250. Effective as of January 2006, Mr. Shaffer agreed to serve as Executive Vice President - Administration and, effective as of August 1, 2006, to no longer serve as an executive officer. During 2006, we and Mr. Shaffer entered into two amendments to his employment agreement that extended the term until January 2, 2007, unless extended by mutual agreement for a further term not to exceed six months. In March 2007, pursuant to a severance agreement, we extended his employment term through June 30, 2007.

Employment Agreement with Mr. Bellardo - Mr. Bellardo has served as General Counsel since March 2003, and served as our Secretary from June 2003 until April 1, 2007. Effective August 1, 2006, we executed an employment agreement with Mr. Bellardo that was to run through July 31, 2007 (the “2006 Bellardo Agreement”), pursuant to which Mr. Bellardo continued as our General Counsel and as an Executive Officer. Under the 2006 Bellardo Agreement, Mr. Bellardo's annual base salary was $248,063 and he had a target bonus for 2006 of 35% of his base salary ($86,822). His actual bonus for 2006 was to be calculated on the basis of our success in achieving certain goals specified in our AIP, and was to vary between 50% and 200% of the target bonus.

On May 15, 2007, we and Mr. Bellardo entered into an employment agreement (the "2007 Bellardo Agreement") that supersedes the 2006 Bellardo Agreement and, effective as of May 15, 2007, Mr. Bellardo agreed to no longer serve as an executive officer. Under the 2007 Bellardo Agreement Mr. Bellardo's base salary will continue to be $248,063 his annual bonus will continue to be no less than 35% of his then current annualized base salary and Mr. Bellardo will continue his employment with us until either party gives at least sixty days notice of termination. If Mr. Bellardo has not terminated his employment and we have not terminated his employment for Cause (defined as a misappropriation of funds from us) on or before June 30, 2007, we will pay Mr. Bellardo a cash bonus equal to three months of his base salary.

For a description of the severance agreements entered into with Messrs. Gasser, Hahn and Kragh, see the section above entitled “Compensation Discussion and Analysis - Severance Agreements”

For a description of options that were repriced during 2006, see “Repricing of Options/SARs of Named Executive Officers” below.

Grants of Plan-Based Awards in 2006

During 2006, we did not make any equity incentive plan awards and did not make any stock or option awards. The following describes the plan-based non-equity incentive awards granted to the Named Executives Officers relating to 2006.Annual Incentive Plan Related Awards.

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On February 28, 2006, our Board of Directors, at the recommendation of the Compensation Committee, adopted an AIP, which was implemented in April 2006 for Messrs. Gasser, Shaffer, Kragh and Bellardo, as well as other senior management. The employment agreements of Messrs. Edelstein and Vigliotti specified their respective minimum 2006 bonuses. The Board of Directors, acting on the recommendation of the Compensation Committee, administers the AIP.

The AIP provides the opportunity for a cash bonus based on the performance of (i) the Company overall, (ii) the specific business unit of the executive, and (iii) the individual performance of the executive (collectively, the “Performance Factors”). The Performance Factors (A) are intended to clearly state the outcome to be achieved, (B) can be quantitatively determined, (C) are based on metrics that will respond to the executive’s performance of his or her responsibilities, (D) have a reasonable chance of being attained and (E) specify a time frame in which results should be achieved. Performance Factors are intended to be determined each year based upon input from management guided by our annual and long-term goals.

The amount of any actual payout under the AIP depends on the extent to which the applicable Performance Factors are achieved. Participants can earn from 0% to 200% of their target bonuses for achievement of pre-set weighted goals for company, business unit and individual performance. For our Named Executive Officers, the 2006 goal mix was weighted 80% for Company and 20% for individual performance. In April 2006, the Compensation Committee set the metric for the year ended December 31, 2006 as the 2006 budget for controllable margin from operations (“CMO”), defined initially as revenues less divisional direct costs (including direct cost of revenue and direct SG&A). The Compensation Committee believed that the use of the 2006 budget for CMO resulted in Performance Factors that could be quantitatively determined, were based on metrics that would respond to the executive’s performance of his or her responsibilities and had a reasonable chance of being attained. The AIP also included a funding trigger that required that the Company achieve positive net income after AIP payments in order to pay an AIP amount, regardless of Company, business unit or individual performance scores.

The AIP has a non-linear payout curve, which provides a 1:1 incentive leverage for performance between 90% and 110% of goal and a 9:1 incentive leverage for performance below 90% and above 110%. As compared to a linear payout curve, the non-linear payout curve provides a stronger disincentive for performance below 90% of goal and provides a stronger incentive to achieve performance above 110% of goal.

In October 2006, the Compensation Committee determined that the CMO, as then defined, included costs over which certain executives had little or no control. The Compensation Committee redefined the CMO to exclude non-operating, non-recurring extraordinary items, such as the expenses associated with the SEC inquiries and the 2005 Restatement, extraordinary payments made in connection with the $7.5 million convertible debt agreement, management severance costs, the costs of relocating our headquarters from Stamford, Connecticut, to New York, New York, and non-cash stock-based compensation from both the net income funding trigger and the CMO calculations. The Compensation Committee also determined that the initial performance goals were unlikely to be met and did not provide the executives an appropriate incentive to improve performance during the fourth quarter. Consequently, the Compensation Committee reset the performance goals to the mid-point between the original budget CMO and a revised forecast CMO. In addition, as a partial offset to a reduction in performance goals, the Compensation Committee reduced the target payouts to 95% of the original amounts.

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In February 2007, management, under the supervision of the Compensation Committee determined the AIP bonus for participants in the AIP except for those participants who were direct reports of the CEO. Acting on the recommendation of the Compensation Committee, the Board of Directors awarded bonuses to certain of the CEO’s direct reports on February 27, 2007 and to the remainder of the CEO’s direct reports on March 29, 2007. Mr. Bellardo was awarded a bonus totaling $135,000, consisting of his AIP bonus and an additional discretionary bonus in recognition of his efforts during the year ended December 31, 2006, as described above.

The following table sets forth the amounts of the non-equity plan-based incentive awards granted to the Named Executives Officers relating to their 2006 service (as described above):

Name	Payouts During 2007 Under Non-Equity Incentive Plan Awards
P. Howard Edelstein		-
Robert Gasser		-
Steven Vigliotti		-
Mark Hahn		-
Lars Kragh	$	68,811
Jay Shaffer	$	78,375
Brian Bellardo	$	85,000

Outstanding Equity Awards at Fiscal Year End

The following table sets forth the number of shares of our common stock underlying unexercised options held by the Named Executive Officers on December 31, 2006:

			Number of Securities Underlying Unexercised Options
Name	Grant Date		Exercisable		Not Exercisable		Option Exercise Price($)			Option Expiration Date
P. Howard Edelstein		-		-		-		-			-
Robert Gasser		9/21/2001		225,000		-	$	14.04	(1)		1/2/2007	(2)
		8/16/2002		100,000		-	$	5.25	(3)		8/15/2012	(4)
		2/23/2004		6,667		-	$	7.056	(5)		1/2/2007	(2)
Steven Vigliotti		-		-		-		-			-
Mark Hahn		9/16/2002		60,000		-	$	5.32	(6)		9/15/2012	(7)
		1/2/2003		75,000		-	$	4.50			1/01/2013	(7)
Lars Kragh		1/3/1997		225,000		-	$	2.00			1/02/2007	(8)
		4/13/1999		2,250		-	$	3.00			3/31/2007	(9)
		6/1/1999		54,000		-	$	6.55			3/31/2007	(10)
		10/23/2001		12,500		-	$	12.02			3/31/2007	(10)
		8/16/2002		16,000		-	$	3.92			3/31/2007	(9)
		8/16/2002		4,000		-	$	5.25	(11)		3/31/2007	(9)
		2/23/2004		6,667		3,333	$	7.056	(5)		3/31/2007	(10)
Brian Bellardo		3/21/2003		25,000		-	$	6.20	(12)		3/20/2013
		2/23/2004		6,667		3,333	$	7.056	(5)		2/22/2014	(13)
Jay Shaffer		1/14/2005		25,000		50,000	$	5.36			1/13/2015	(14)

(1) On June 27, 2006, the Board of Directors, with the approval of and on the recommendation of the Compensation Committee, approved a change in the exercise price of this grant to Mr. Gasser from $12.80 per share to $14.04.

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(2) This grant expired unexercised on January 2, 2007, 90 days following Mr. Gasser’s departure from the Company.

(3) On June 27, 2006, the Board of Directors, with the approval of and on the recommendation of the Compensation Committee, approved a change in the exercise price of this grant to Mr. Gasser from $3.92 per share to $5.25.

(4) Mr. Gasser has indicated his intent to exercise this option. The request is expected to be honored once the Company is current with its periodic SEC reporting requirements and the S-8 registration statements applicable to the equity plans are again available to cover option exercises.

(5) The fair market value for this grant was defined as the average of the closing price of our common stock on each of the 5 business days prior to the date of grant.

(6) On June 27, 2006, the Board of Directors, with the approval of and on the recommendation of the Compensation Committee, approved a change in the exercise price of this grant to Mr. Hahn from $4.22 per share to $5.32.

(7) Mr. Hahn has indicated his intent to exercise this option. The request is expected to be honored once the Company is current with its periodic SEC reporting requirements and the S-8 registration statements applicable to the equity plans are again available to cover option exercises.

(8) Under the 1991 Plan, as amended, Mr. Kragh had 90 days to exercise the option following his departure from the Company on December 31, 2006; as an accredited investor, he exercised this option on March 29, 2007.

(9) Mr. Kragh has indicated his intent to exercise this option. The request is expected to be honored once the Company is current with its periodic SEC reporting requirements and the S-8 registration statements applicable to the equity plans are again available to cover option exercises.

(10) This grant expired unexercised on March 31, 2007, 90 days following Mr. Kragh’s departure from the Company. The unvested portion of the grant was forfeited on December 31, 2006.

(11) On December 15, 2006, Mr. Kragh consented to an increase in the exercise price of this portion of his August 16, 2002 grant from $3.92 per share to $5.25.

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(12) On June 27, 2006, the Board of Directors, with the approval of and on the recommendation of the Compensation Committee, approved a change in the exercise price of this grant to Mr. Bellardo from $4.02 per share to $6.20.

(13) The 3,333 options that were not vested as of December 31, 2006 vested on February 23, 2007.

(14) An additional 20,000 options that were not vested as of December 31, 2006 vested on January 14, 2007. The remaining 30,000 unvested options, which were scheduled to vest 15,000 on each of January 14, 2008 and January 14, 2009, were cancelled when Mr. Shaffer's employment ended on June 30, 2007.

Repricing of Options/SARs of Named Executive Officers

On June 27, 2006, our Board of Directors, with the approval of and on the recommendation of the Compensation Committee, approved the following changes to stock option grants previously made to certain of our Named Executive Officers, none of which had been exercised:

Mr. Bellardo - raised the exercise price on an option grant effective March 21, 2003, of 25,000 shares to $6.20 per share from $4.02.

Mr. Gasser - raised the exercise price on an option grant effective September 21, 2001, of 325,000 shares to $14.04 per share from $12.80, declared null and void a modification to the vesting provision applicable to 100,000 options under this grant that would have provided for vesting on September 26, 2001 (thus retaining only that portion of the vesting provision that conditioned vesting on the attainment of certain performance goals); voided an option grant of 25,000 shares effective October 23, 2001; and raised the exercise price on an option grant effective August 16, 2002, of 100,000 shares to $5.25 per share from $3.92.

Mr. Hahn - determined that the grant date for an option grant of 60,000 shares was August 23, 2002 rather than the initially recorded grant date of September 16, 2002 and accordingly raised the exercise price to $5.32 per share from $4.22,.

On November 29, 2006, we offered to increase the exercise price of options for 4,000 shares of our common stock granted to Mr. Kragh (which represented a portion of a 20,000 share grant made to Mr. Kragh effective August 16, 2002) to $5.25 per share from $3.92. On December 15, 2006, Mr. Kragh consented to the increase.

Option Exercises and Stock Vested

None of our Named Executive Officers exercised any options or had any stock awards vest during the year ended December 31, 2006.

Pension Benefits

The Company does not maintain a pension plan.

Nonqualified Deferred Compensation Plans

The Company does not maintain any non-qualified defined contribution or deferred compensation plans, and none of the Named Executive Officers had any non-qualified deferred compensation with us.

Potential Payments upon Termination or Change in Control

Mr. Edelstein. The Edelstein Agreement provides that upon any termination of Mr. Edelstein’s employment, he is entitled to:

· accrued base salary through the date of termination,

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· payment of unpaid or unreimbursed expenses incurred in accordance with Company policy (to the extent the expenses were incurred prior to termination), and

· any termination benefits provided under our employee benefit plans, in accordance with the terms of the applicable plans.

In addition, if Mr. Edelstein's employment is terminated by us without “Cause” or by Mr. Edelstein with “Good Reason” (as each term is defined in the Edelstein Agreement), Mr. Edelstein is entitled to:

· any unpaid annual bonus in respect of any completed year prior to termination,

· a pro rata annual bonus with respect to the year in which termination occurs, based on actual achievement of applicable annual performance objectives,

· twelve (12) month continuation of base salary,

· twelve (12) month continuation of health and life insurance benefits,

· the greater of:

· two (2) times his annual bonus for the immediately preceding fiscal year, or

· 150% of base salary, and

· reimbursement for reasonable executive outplacement assistance expenses.

If Mr. Edelstein’s employment is terminated by us without Cause or by Mr. Edelstein with Good Reason within the twelve (12) month period following a Change of Control (as defined in the Edelstein Agreement and summarized below), all of our equity grants to him vest immediately.

In consideration for his employment and severance benefits, Mr. Edelstein has agreed to execute a release acceptable to us and has agreed to be subject to the following obligations, among others:

· he will not work for a competitor during the “Restricted Period” (the 12 months following termination, extendable by up to another 12 months at the election of the Company upon payment of 1/12th of Mr. Edelstein’s base salary for each additional month),

· he will not solicit our consultants and employees during the Restricted Period, and

· he will not disclose our confidential information.

For purposes of the Edelstein Agreement, “Change of Control” means:

· the acquisition by any person of 50% or more of our outstanding common stock,

· a consolidation, merger or other transaction in which our stockholders retain less than 40% of the stock of the surviving entity,

· a transfer of substantially all of our assets, or

· a change in our Board of Directors in which the directors as of October 12, 2006, plus the directors appointed by Warburg Pincus, cease to constitute a majority of the members of our Board of Directors.

If we had terminated Mr. Edelstein without Cause or he had terminated his employment for Good Reason, as of December 31, 2006, he would have been entitled to:

· the bonus payable in respect of 2006 in the amount of $159,923,

· severance in the amount of $1,237,500 (base salary plus 150% of base salary), and

· continuation of health benefits and life insurance for 12 months (for a cost to us of approximately $18,000).

Mr. Edelstein has not been awarded any equity in the Company; consequently, the Change of Control provisions in Mr. Edelstein’s employment agreement would not have had any impact on his severance.

Mr. Vigliotti. Under the Vigliotti Agreement, unless we terminate his employment for “Cause” or he terminates his employment without “Good Reason” (as each term is defined in the Vigliotti Agreement), Mr. Vigliotti is entitled to a severance equal to his base salary for the remainder of the term of the agreement, or one year, whichever is greater and eighteen (18) months continued participation in health and life insurance benefits.

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If we terminate Mr. Vigliotti’s employment other than for Cause or he terminates his employment for any reason within one year after a “Change in Control” (as defined in the Vigliotti Agreement and summarized below), he is entitled to a severance (in lieu of continued base salary) as follows:

· if he has been granted equity compensation awards that are at least 50% vested as of the termination of his employment, two (2) times the sum of his base salary plus either his annualized target bonus or, if greater, the actual bonus he received during the preceding year, on an annualized basis, or

· if he has not been granted equity compensation awards that are at least 50% vested as of the termination of his employment, three (3) times the sum of his base salary plus either his annualized target bonus or, if greater, the actual bonus he received during the preceding year, on an annualized basis.

In consideration for his employment and severance benefits, Mr. Vigliotti has agreed to be subject to the following obligations, among others:

· he will not solicit business or accept orders for products or services competitive with our products or services from any of our actual or prospective clients with whom he has dealt while employed by us, or solicit our employees to leave us, during the 6 months following termination after a Change in Control, and the lesser of 12 months or the period for which Mr. Vigliotti is entitled to severance following a termination other than after a Change in Control,

· he will not disclose our confidential information, and

· he will not disparage the Company.

For purposes of the Vigliotti Agreement, “Change in Control” means:

· the acquisition by any person of more than 50% of the voting power or value of our stock,

· the acquisition by any person during a 12 month period of more than 35% of the voting power of our stock,

· the replacement during a 12 month period of a majority of the members of our Board of Directors by directors who are not endorsed by a majority of the members of our Board of Directors prior to the appointment or election, or

· a transfer of more than 40% of our assets measured by their gross fair market value.

If we had terminated Mr. Vigliotti’s employment agreement without Cause or he had terminated his employment for Good Reason as of December 31, 2006, Mr. Vigliotti would have been entitled to compensation in the amount of $400,000 (one year base salary), and continuation of health benefits through June 2008 (for a cost to us of approximately $27,000). If Mr. Vigliotti had been terminated without Cause or he had terminated his employment for any reason on December 31, 2006, after a Change in Control, he would have been entitled to compensation in the amount of $1,500,000 (three times the sum of his base salary plus target bonus), and continuation of health benefits through June 2008 (for a cost to us of approximately $27,000).

The Vigliotti Agreement provides that we and Mr. Vigliotti will negotiate in good faith an agreement under which, unless the Vigliotti Agreement is terminated by us for Cause or by Mr. Vigliotti for Good Reason, Mr. Vigliotti would provide consulting services to us for up to one year, at Mr. Vigliotti’s election, following the termination of the Vigliotti Agreement.

Mr. Shaffer. Mr. Shaffer’s employment agreement, dated January 1, 2005, as amended on February 28, 2006 and August 1, 2006 (the “Shaffer Agreement”), provided that if we terminate his employment without “Cause” or he terminates his employment with “Good Reason”, Mr. Shaffer will receive his base salary through the respective expiration dates, a lump sum payment, as severance, equal to three months of his base salary plus continuation of health benefits for up to three months after termination, and, in certain circumstances, for a longer period of time, all as set forth in the Shaffer Agreement. The Shaffer Agreement did not contain a change in control provision.

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If we had terminated Mr. Shaffer’s employment on December 31, 2006, without Cause, Mr. Shaffer would have been entitled to severance in the amount of approximately $87,182, and continuation of health benefits through March 2007 (for a cost to us of approximately $3,000).

On March 16, 2007, we entered into a severance agreement with Mr. Shaffer (the “Shaffer Severance Agreement”), under which Mr. Shaffer’s employment with us terminated on June 30, 2007. Under the Shaffer Severance Agreement, Mr. Shaffer will receive severance of six (6) months base salary and reimbursement of certain health insurance premiums for six (6) months.

In consideration for his severance benefits, Mr. Shaffer has executed a general release in favor of us and has agreed to be subject to the following obligations, among others:

· during the 6 months following termination of his employment with us, he will not work for certain of our competitors or in any position in which it would be reasonably expected that he would use or disclose confidential information related to us,

· during the 12 months following termination of his employment with us, he will not solicit any person to leave our employ, and

· he will not disclose our confidential information.

Mr. Bellardo. The initial term of the 2006 Bellardo Agreement, effective August 1, 2006, was to expire on July 31, 2007. Under the 2006 Bellardo Agreement, we could have terminated Mr. Bellardo’s employment prior to July 31, 2007 in limited circumstances specified in that agreement. After July 31, 2007, the 2006 Bellardo Agreement would have extended on an annual basis for an additional year unless either party provided notice of non-renewal as specified in the 2006 Bellardo Agreement. Unless we had terminated Mr. Bellardo's employment for “Cause” or Mr. Bellardo had terminated his employment without “Good Reason” (as each term is defined in the 2006 Bellardo Agreement), upon a termination of employment, Mr. Bellardo would have been entitled to severance equal to his base salary for the remainder of the term of the 2006 Bellardo Agreement, or one year, whichever was greater, plus continued health benefits for the same period of time. A change in control of the Company would not have impacted the amount of severance to which Mr. Bellardo would have been entitled.

If we had terminated Mr. Bellardo’s employment under the 2006 Bellardo Agreement without Cause as of December 31, 2006, Mr. Bellardo would have been entitled to severance of $248,063, (his annual base salary), and continuation of health benefits for one year (for a cost to us of approximately $6,000).

Under the 2006 Bellardo Agreement, “Good Reason” included a material change in Mr. Bellardo’s reporting responsibilities or a change in his status as an Executive Officer. Beginning April 1, 2007, Mr. Bellardo has no longer been reporting to our Chief Executive Officer and has been reporting to Scott Bloom, Executive Vice President, Corporate Development and Chief Administrative Officer. Effective May 15, 2007, Mr. Bellardo is no longer serving as one of our Executive Officers.

On May 15, 2007, we and Mr. Bellardo entered into the 2007 Bellardo Agreement, which supersedes the 2006 Bellardo Agreement. Under the 2007 Bellardo Agreement, commencing on the Effective Date (the last day of Mr. Bellardo’s employment), unless his employment is terminated for Cause, Mr. Bellardo will receive an amount equal to his then current base salary, less applicable withholdings, for a period of twelve months (15 months if the Effective Date is after September 30, 2007). In addition, Mr. Bellardo will be entitled to receive a pro rata annual bonus under our annual bonus plan at target through the end of his employment with respect to the calendar year in which the Effective Date occurs. The 2007 Bellardo Agreement contains a general release of claims against the Company.

In consideration for his employment and severance benefits, Mr. Bellardo has agreed the following obligations, among others:

· he will not work for certain competitors during the 6 month period following termination of his employment with us,

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· he will not solicit anyone to leave our employ during the 12 month period following termination of his employment with us,

· he will not disclose our confidential information, and

· he will not disparage the Company.

For a description of the severance agreements entered into with Messrs. Gasser, Hahn and Kragh, see the section above entitled “Compensation Discussion and Analysis - Severance Agreements.”

Other Agreements

In 2007, Messrs. Carley, Merrill and Bloom joined us as executive officers, and Mr. Henderson was appointed an executive officer. We have entered into the following agreements with these current executive officers:

Employment Agreement with Mr. Carley: In January 2007, we entered into an Employment Agreement, effective January 1, 2007, with W. Brennan Carley (the “Carley Agreement”), pursuant to which Mr. Carley is employed as Executive Vice President, Head of Business Operations and Chief Strategy Officer of the Company. Pursuant to the Carley Agreement, Mr. Carley’s annual base salary for 2007 is $300,000 and we paid Mr. Carley a signing bonus of $100,000, which is subject to repayment if Mr. Carley is no longer employed by us on January 1, 2008 (unless he is terminated by the Company without “Cause” or leaves for “Good Reason”, as each term is defined in the Carley Agreement). Mr. Carley has a target bonus for 2007 of $225,000 and for subsequent years of not less than 75% of his annual base salary. In each year, Mr. Carley’s target bonus will be based on goals and objectives adopted by us, consistent with the manner of adoption of goals and objectives for other senior management employees. Mr. Carley’s actual bonus in each year will be calculated on the basis of achievement of the specified goals and objectives. In addition, if we do not grant Mr. Carley an award of stock options during 2007, Mr. Carley will be entitled to a minimum bonus of $275,000.

The Carley Agreement provides that if we terminate Mr. Carley’s employment without Cause or he terminates his employment for Good Reason (as defined in the Carley Agreement), he will be entitled to receive a severance equal to his base salary for one year, plus, if the first tranche of any equity award made to him has not yet vested, an amount equal to his target bonus, pro-rated for the length of the Severance Period (as defined in the Carley Agreement).

Employment Agreement with Mr. Merrill: In January 2007, we executed an Offer Letter with David A. Merrill (the “Merrill Offer Letter”) pursuant to which Mr. Merrill became our Chief of Client Operations, effective January 22, 2007. Pursuant to the Merrill Offer Letter, Mr. Merrill’s base salary for 2007 is $300,000 per annum. Mr. Merrill has a target bonus for 2007 of $225,000, with the actual bonus varying based upon performance against targets to be determined by us. If we do not award Mr. Merrill equity during 2007, Mr. Merrill’s bonus will be targeted at not less than $275,000. For calendar year 2007, we will pay Mr. Merrill an additional bonus based upon incremental revenue growth over calendar year 2006 as follows: one percent (1%) of the first $10 million; two percent (2%) of the next $5 million; two and one half percent (2.5%) of the next $5 million; and one percent (1%) of any amount in excess of $20 million. If we adopt an Equity Incentive Plan, Mr. Merrill will be entitled to equity awards that would reflect Mr. Merrill’s senior role with us. In addition, if we adopt an Equity Incentive Plan that provides for the award of restricted stock, Mr. Merrill will be entitled to a one-time restricted stock grant with a value of $300,000 on the date of grant, which will vest 12 months following the date of grant. Mr. Merrill will forfeit the grant if he is not employed by us on the date the award vests (unless he is terminated by the Company without “Cause”, as defined in the Merrill Offer Letter). The Merrill Offer Letter provides that if we do not make an award of restricted stock with a market value of $300,000 within three (3) months of the start date of his employment with us, Mr. Merrill will be entitled to a cash payment of $300,000, which is subject to repayment if Mr. Merrill is not employed by us twelve months after this payment (unless we terminate his employment without Cause, as defined in the Merrill Offer Letter). On March 29, 2007, we awarded Mr. Merrill 48,169 shares of our restricted stock, with a market value of approximately $300,000 on that date, which award will vest on March 29, 2008.

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The Merrill Offer Letter provides that if we terminate his employment without Cause, he will be entitled to receive a severance equal to his base salary for one year.

Employment Agreement with Mr. Bloom: In March 2007, we executed an Offer Letter with Scott A. Bloom (the “Bloom Offer Letter”). Pursuant to the Bloom Offer Letter, Mr. Bloom joined us in April 2007, with a base salary for 2007 payable at an annual rate of $300,000. Mr. Bloom has an annual target bonus of 60% of his base salary, subject to proration for 2007. Mr. Bloom’s bonus will be based upon performance against targets to be determined by us. In addition, if we do not grant Mr. Bloom an equity award during 2007, Mr. Bloom’s bonus for 2007 will be targeted at $230,000 (rather than 60% of his base salary), subject to proration, based upon performance against the targets established. In addition, we have agreed to reimburse Mr. Bloom for reasonable out-of-pocket relocation costs of $100,000, if incurred prior to the first anniversary of the commencement of his employment; provided that his new residence is closer to our offices in New York, NY than his current residence. This reimbursement is subject to repayment in the event that Mr. Bloom voluntarily terminates his employment without “Good Reason” or is terminated for “Cause” (as each term is defined in the Bloom Offer Letter) prior to the first anniversary of the commencement of his employment.

The Bloom Offer Letter provides that if we terminate his employment without Cause or he terminates his employment with Good Reason, he will continue to receive his base salary for twelve (12) months. If Mr. Bloom’s employment is terminated by him for Good Reason, or by us without Cause, within one year following a Change of Control (as defined in the Bloom Offer Letter), Mr. Bloom will also be entitled to:

· a pro-rata annual bonus, plus,

· if the termination occurs prior to the time at which the first tranche of any equity compensation granted to him vests, an amount equal to his target bonus, pro-rated over the twelve month severance period, and

· reimbursement for his share of premiums for basic health and dental insurance benefits.

Employment Agreement with Mr. Henderson: In May, 2006, we entered into an employment agreement with Mr. Henderson (the “Henderson Agreement”). The initial term of the Henderson Agreement expires on December 31, 2007, renewing annually unless terminated pursuant to the terms set forth in the Henderson Agreement. Pursuant to the Henderson Agreement, Mr. Henderson’s annual base salary is $350,000 and his annual bonus is calculated on the basis of our AIP, with a target bonus of 50% of base salary.

Under the Henderson Agreement, unless we terminate his employment for “Cause” or he terminates his employment without “Good Reason" (each as defined in the Henderson Agreement), Mr. Henderson will be entitled to receive a severance equal to his base salary for the remainder of the term of the agreement, or one year, whichever is greater and twelve (12) months continued participation in health and life insurance benefits.

If we terminate Mr. Henderson’s employment other than for Cause or he terminates his employment for Good Reason within the twelve (12) month period following a Change in Control (as defined in the Henderson Agreement), he will be entitled to a severance (in lieu of continued base salary) as follows:

· if he has been granted equity compensation awards that are at least 50% vested as of the termination of his employment, two (2) times the sum of his base salary plus either his annualized target bonus or, if greater, the actual bonus he received during the preceding year, on an annualized basis, or

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· if he has not been granted equity compensation awards that are at least 50% vested as of the termination of his employment, three (3) times the sum of his base salary plus either his annualized target bonus or, if greater, the actual bonus he received during the preceding year, on an annualized basis.

Mr. Henderson was designated as an Executive Officer of the Company on May 15, 2007.

Director Compensation

In April 2005, the Compensation Committee engaged Towers Perrin (“Towers”) to assist us in evaluating compensation for the Company’s directors. In July 2005, Towers reported its findings regarding director compensation to the Compensation Committee and the Board of Directors, and recommended certain changes to director compensation, including Board and Committee meeting fees and certain Committee Chair retainers. The Board of Directors, on the recommendation and approval of the Compensation Committee, adopted these changes.

Directors who are Company employees do not receive any additional compensation for their services as such, and directors who are not Company employees receive retainers and meeting fees for their services as such as shown in the chart below:

Schedule of Director Fees

Compensation Item	Amount
Annual retainers
Board member	$	25,000
Board Chair		150,000	(1)(3)
Lead Director		25,000	(2)(3)
Audit Committee Chair		15,000	(3)
Compensation Committee Chair		10,000	(2)(3)
Corporate Governance and Nominating Committee Chair		5,000	(2)(3)
Per meeting fees
Board		1,000	(2)
Committee		750	(2)

(1) In February 2007, the Board of Directors resolved that the non-executive Board Chair shall be compensated (i) at the rate of $150,000 per annum, effective March 1, 2007, and (ii) in the amount of $75,000 for service during the period September 4, 2006 through February 28, 2007. Previously, the Board Chair was an employee of the Company and accordingly was not separately compensated for services as Board Chair.

(2) Effective July 28, 2005.

(3) This retainer is paid in addition to the retainer for service as a Board member.

Directors who are not Company employees are also expected to receive annual stock-based awards. In 2005 and 2006, however, cash awards were made in lieu of such annual stock-based awards since the stockholder-approved equity plan in effect did not provide for the issuance of restricted stock awards, which the Board was considering at that time. In July 2005, Messrs. Wajnert, Lynch, Deehan and Jennings each received, in lieu of an annual stock-based award, a cash award of $55,000 with a one-year vesting requirement, which was paid in 2006. In November 2006, Messrs. Deehan, Gorman, Jennings, Lynch, Roberts and Wajnert each received, in lieu of an annual stock-based award, a cash award of $55,000, which was paid in 2006.

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Director compensation during the year ended December 31, 2006 is shown in the table below.

DIRECTOR COMPENSATION FOR FISCAL YEAR 2006

Name	Director Fees Earned (1)		Cash Award in lieu of Equity Award (2)				Option Awards (3)				All Other Compensation				Total
Cary Davis	$	1,000		-				-				-			$	1,000
George Deehan	$	60,750	$	86,500	(2.a  (2.b	) )		-	(4	)		-			$	147,250
Lon Gorman	$	124,000	$	55,000	(2.b	)		-				-			$	179,000
Peter Hansen (5)		-		-			$	14,337	(5	)	$	440,981	(6	)	$	455,318
William Janeway	$	1,000		-				-				-			$	1,000
William Jennings	$	68,000	$	86,500	(2.a  (2.b	) )	$	31,192	(7	)		-			$	185,692
William Lynch	$	59,000	$	86,500	(2.a  (2.b	) )		-	(8	)		-			$	145,500
Richard Roberts	$	38,000	$	55,000	(2.b	)		-			$	74,059	(9	)	$	167,059
Tom Wajnert	$	90,750	$	86,500	(2.a  (2.b	) )	$	58,950	(10	)					$	236,200

(1) Includes director fees earned in 2006 (and paid in 2007). Does not include director fees earned in 2005 and paid in 2006.

(2) Includes cash awards (in lieu of equity awards) earned in 2006. Does not include amounts related to such cash awards earned in 2005 and paid in 2006.

.a) Includes $31,500 (of a $55,000 cash award) granted in 2005 to Messrs. Wajnert, Deehan, Lynch and Jennings that vested during a 12-month period ending in 2006.

.b) In November 2006, Messrs Deehan, Gorman, Jennings, Lynch, Roberts and Wajnert each received, in lieu of an equity grant, a cash award of $55,000, which was paid in 2006.

(3) Represents the stock-based compensation expense amounts recognized for financial statement reporting purposes under SFAS 123(R), rather than an amount paid to or realized by the named directors. There can be no assurance that the SFAS 123(R) amounts will ever be realized.

(4) Mr. Deehan held options to purchase 124,000 shares of our common stock as of December 31, 2006.

(5) Mr. Hansen stepped down as our President and Chief Executive Officer in November 2005 and ceased to be an executive officer at that time. His employment with us ended on December 31, 2006. He resigned as a director on April 10, 2007. Mr. Hansen held options to purchase 222,500 shares of our common stock as of December 31, 2006 of which 3,333 shares vested in 2006.

(6) Represents amounts paid under the terms of Mr. Hansen’s employment agreement through December 31, 2006 including compensation paid in 2006 of $420,000, 401(k) matching contribution of $6,600, life insurance premiums paid by the Company of $816 and health insurance premiums paid by the Company of $13,565.

(7) Mr. Jennings held options to purchase 60,000 shares of our common stock as of December 31, 2006 of which 40,000 vested in prior years and 20,000 vested in 2006.

(8) Mr. Lynch held options to purchase 124,000 shares of our common stock as of December 31, 2006.

(9) Represents amounts paid during 2006 for legal services provided by Mr. Roberts through Roberts & Associates and Richard Y. Roberts, Attorney at Law.

(10) Mr. Wajnert held options to purchase 70,000 shares of our common stock as of December 31, 2006 of which 40,000 shares vested in 2005, 15,000 shares vested in 2006, and 15,000 shares will vest in 2007.

Repricing of Options/SARs of Directors

On June 27, 2006, our Board of Directors, with the approval of and on the recommendation of the Compensation Committee, approved the following changes to stock option grants previously made to certain members of our Board of Directors, none of which had been exercised:

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Mr. Deehan - raised the exercise price on an option grant effective October 23, 2001, of 25,000 shares to $17.80 from $12.02 and on an option grant effective August 16, 2002, of 24,000 shares to $5.25 per share from $3.92.

Mr. Hansen - raised the exercise price on an option grant effective October 23, 2001, of 112,500 shares to $17.80 per share from $12.02 and on an option grant effective August 16, 2002, of 100,000 shares to $5.25 per share from $3.92.

Mr. Jennings - raised the exercise price on an option grant effective April 29, 2003, of 60,000 shares to $6.76 per share from $4.74.

Mr. Lynch - raised the exercise price on an option grant effective October 23, 2001, of 25,000 shares to $17.80 per share from $12.02 and on an option grant effective August 16, 2002, of 24,000 shares to $5.25 per share from $3.92.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth information regarding beneficial ownership of the common stock and Series B Preferred Stock of the Company as of May 31, 2007 by:

· each person known by us to be the beneficial owner of more than 5% of the Company’s outstanding shares of common stock or Series B Preferred Stock, as the case may be (based solely upon the amounts and percentages contained in public filings made by such persons with the SEC under the Exchange Act),

· each of our Named Executive Officers and directors; and

· all of our executive officers (including our Named Executive Officers and all of our current executive officers) and directors as a group.

The amounts set forth in the table as beneficially owned by the persons indicated include shares which may be acquired by such persons within 60 days of May 31, 2007. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock or Series B Preferred Stock beneficially owned by them.

	Common Stock		Series B Preferred Stock
Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership	Percent of Class(1)	Amount and Nature of Beneficial Ownership	Percent of Class
Named Executive Officers
P. Howard Edelstein C/O NYFIX, Inc. 100 Wall Street, 26th Floor New York, NY 10005	0	0%	0	0%
Robert Gasser C/O NYFIX, Inc. 100 Wall Street, 26th Floor New York, NY 10005	155,000 (2)	<1%	0	0%
Steven R. Vigliotti C/O NYFIX, Inc. 100 Wall Street, 26th Floor New York, NY 10005	0	0%	0	0%
Mark Hahn C/O NYFIX, Inc. 100 Wall Street, 26th Floor New York, NY 10005	135,000 (3)	<1%	0	0%
Lars Kragh C/O NYFIX, Inc. 100 Wall Street, 26th Floor New York, NY 10005	330,041 (4)	<1%	0	0%
Jay Shaffer C/O NYFIX, Inc. 100 Wall Street, 26th Floor New York, NY 10005	45,000 (5)	<1%	0	0%
Brian Bellardo C/O NYFIX, Inc. 100 Wall Street, 26th Floor New York, NY 10005	35,000 (6)	<1%	0	0

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	Common Stock		Series B Preferred Stock
Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership	Percent of Class(1)	Amount and Nature of Beneficial Ownership	Percent of Class

Directors
Cary Davis (7) 466 Lexington Ave New York, NY 10017	0	0%	0	0%
George Deehan C/O NYFIX, Inc. 100 Wall Street, 26th Floor New York, NY 10005	129,000 (8)	<1%	0	0%
Lon Gorman C/O NYFIX, Inc. 100 Wall Street, 26th Floor New York, NY 10005	0	0%	0	0%
William Janeway (9) 466 Lexington Ave New York, NY 10017	0	0%	0	0%
William Jennings C/O NYFIX, Inc. 100 Wall Street, 26th Floor New York, NY 10005	62,000 (10)	<1%	0	0%
William Lynch C/O NYFIX, Inc. 100 Wall Street, 26th Floor New York, NY 10005	124,000 (11)	<1%	0	0%
Richard Roberts C/O NYFIX, Inc. 100 Wall Street, 26th Floor New York, NY 10005	0	0%	0	0%
Tom Wajnert C/O NYFIX, Inc. 100 Wall Street, 26th Floor New York, NY 10005	55,000 (12)	<1%	0	0%
All Directors and Executive Officers as a Group (19 Persons)	118,210(13)	3.1%	0	0%

>5% Ownership

Warburg Pincus PrivateEquity IX, LP 466 Lexington Ave New York, NY 10017	18,685,000 (14)	35.1%	1,500,000 (15)	100%
Warburg Pincus IX, LLC 466 Lexington Ave New York, NY 10017	18,685,000 (14)	35.1%	1,500,000 (15)	100%
Warburg Pincus & Co. 466 Lexington Ave New York, NY 10017	18,685,000 (14)	35.1%	1,500,000 (15)	100%
Warburg Pincus LLC 466 Lexington Ave New York, NY 10017	18,685,000 (14)	35.1%	1,500,000 (15)	100%
Warburg Pincus PartnersLLC 466 Lexington Ave New York, NY 10017	18,685,000 (14)	35.1%	1,500,000 (15)	100%
Joseph Landy C/O Warburg Pincus & Co. 466 Lexington Ave New York, NY 10017	18,685,000 (14)	35.1%	1,500,000 (15)	100%
Charles R. Kaye C/O Warburg Pincus & Co. 466 Lexington Ave New York, NY 10017	18,685,000 (14)	35.1%	1,500,000 (15)	100%
Wellington Management Company, LLP 75 State Street Boston, MA 02109	4,854,339 (16)	13.1%	0	0%
Carl Warden C/O NYFIX, Inc. 100 Wall Street, 26th Floor New York, NY 10005	3,183,078 (17)	8.9%	0	0%

(1) Based on 35,948,706 shares of our common stock issued and outstanding as of May 31, 2007.

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(2) Includes 55,000 shares of our common stock and 100,000 shares of our common stock underlying options exercisable within 60 days based upon Company records and the Form 4/A filed by Mr. Gasser with the SEC on July 10, 2006.

(3) Represents 135,000 shares of our common stock underlying options exercisable within 60 days based upon Company records and the most recent Form 4 filed by Mr. Hahn with the SEC on February 25, 2004.

(4) Includes 307,791 shares of our common stock and 22,250 shares of our common stock underlying options exercisable within 60 days based upon Company records, the most recent Form 4 filed by Mr. Kragh with the SEC on February 25, 2004, and communications with Mr. Kragh.

(5) Represents 45,000 shares of our common stock underlying options exercisable within 60 days based upon Company records and the most recent Form 4 filed by Mr. Shaffer with the SEC on January 18, 2005.

(6) Represents 35,000 shares of our common stock underlying options exercisable within 60 days based upon Company records and the most recent Form 4/A filed by Mr. Bellardo with the SEC on July 10, 2006.

(7) Mr. Davis, who became a director of NYFIX, Inc. on October 12, 2006, is a partner of WP (as defined below in Note 15) and a member and Managing Director of WP LLC (as defined below in Note 15). As such, Mr. Davis may be deemed to have an indirect pecuniary interest (within the meaning of Rule 16a-1 under the Exchange Act) in an indeterminate portion of the securities reported as beneficially owned by WP IX (as defined below in Note 15). Mr. Davis disclaims beneficial ownership of such securities, except to the extent of any indirect pecuniary interest therein. Mr. Davis does not directly own any shares of Series B Preferred Stock or our common stock.

(8) Includes 5,000 shares of our common stock and 124,000 shares of our common stock underlying options exercisable within 60 days based upon Company records and the Form 4/A filed by Mr. Deehan with the SEC on July 10, 2006.

(9) Mr. Janeway, who became a director of NYFIX, Inc. on October 12, 2006, is a partner of WP (as defined below in Note 15) and a member and Senior Advisor of WP LLC (as defined below in Note 15). As such, Mr. Janeway may be deemed to have an indirect pecuniary interest (within the meaning of Rule 16a-1 under the Exchange Act) in an indeterminate portion of the securities reported as beneficially owned by WP IX (as defined below in Note 15). Mr. Janeway disclaims beneficial ownership of such securities, except to the extent of any indirect pecuniary interest therein. Mr. Janeway does not directly own any shares of Series B Preferred Stock or our common stock.

(10) Includes 2,000 shares of our common stock and 60,000 shares of our common stock underlying options exercisable within 60 days based upon Company records and the Form 4/A filed by Mr. Jennings with the SEC on July 10, 2006.

(11) Represents 124,000 shares of our common stock underlying options exercisable within 60 days based upon Company records and the Form 4/A filed by Mr. Lynch with the SEC on July 10, 2006.

(12) Represents 55,000 shares of our common stock underlying options exercisable within 60 days based upon Company records and the Form 4/A filed by Mr. Wajnert with the SEC on June 30, 2005.

(13) Includes 700,250 shares of our common stock underlying options exercisable within 60 days. The figure set forth includes shares owned by the Named Executive Officers and our current executive officers and directors. Certain of the Named Executive Officers no longer served in those positions as of May 31, 2007. Our current executive officers and directors (identified in Item 10 of this Report on Form 10-K) beneficially owned approximately 1.2% of our common stock as of May 31, 2007.

(14) Represents the aggregate of (i) 1,435,000 shares of our common stock, (ii) warrants to purchase 2,250,000 shares of our common stock and (iii) 1,500,000 shares of Series B Preferred Stock convertible into 15,000,000 shares of our common stock.

(15) Warburg Pincus Private Equity IX, L.P., a Delaware limited partnership ("WP IX"), is the direct record owner of 1,435,000 shares of our common stock, 1,500,000 shares of Series B Preferred Stock, which is convertible into 15,000,000 shares of our common stock and the Warrant for the purchase of 2,250,000 shares of our common stock. The sole general partner of WP IX is Warburg Pincus IX, LLC, a New York limited liability company ("WP IX LLC"); Warburg Pincus Partners, LLC, a New York limited liability company ("WPP LLC"), is the sole member of WP IX LLC; Warburg Pincus & Co., a New York general partnership ("WP"), is the managing member of WPP LLC; Warburg Pincus LLC, a New York limited liability company ("WP LLC"), manages WP IX; and Charles R. Kaye and Joseph P. Landy are each Managing General Partners of WP and Co-Presidents and Managing Members of WP LLC. By reason of the provisions of Rule 16a-1 of the Exchange Act, WP, WP LLC, WPP LLC, WP IX LLC, Mr. Kaye and Mr. Landy may be deemed to be the beneficial owners of any securities that may be deemed to be beneficially owned by WP IX. Each of WP, WP LLC, WPP LLC, WP IX LLC, Mr. Kaye and Mr. Landy disclaim beneficial ownership of all shares of the Series B Preferred Stock beneficially owned by WP IX, except to the extent of any indirect pecuniary interest therein.

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(16) Based upon the Form 13G/A filed by Wellington Management Company LLP on February 14, 2007.

(17) Based upon the Form 13D filed by Mr. Warden on December 15, 2005, includes (i) 100,000 shares of our common stock held by The Carl and Vicki Warden Family Foundation (the "Foundation"), of which Mr. Warden is the trustee, (ii) 551,626 shares of our common stock held in a multi-generational trust (the "Trust") and (iii) 606,292 shares of our common stock for which Mr. Warden has a power of attorney (the "Power of Attorney Shares") which enables him to vote and dispose of such shares. Mr. Warden disclaims beneficial ownership of the shares held by the Foundation and the Trust, as well as the Power of Attorney Shares. Does not include an aggregate of 1,613,810 shares of our common stock held by certain adult members of Mr. Warden’s family and their children.

The Company is not aware of any arrangements the operation of which may at a subsequent date result in a change in control of the Company.

Information regarding securities authorized for issuance under our equity compensation plans is set forth in Part II, Item 5 of this report on Form 10-K and is incorporated by reference in this section.

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Item 13. Certain Relationships and Related Party Transactions, and Director Independence

Certain Relationships and Related Party Transactions

During 2006, Richard A. Castillo, a former Chief Financial Officer, was indebted to us under two promissory notes in the original principal amounts of $76,000 and $318,000, respectively. These notes, which were originally issued to us in July 2004 to replace earlier notes from Mr. Castillo, bore interest at the rate of 4.0% per annum, and were collateralized by assets in a brokerage account owned by Mr. Castillo, which consisted primarily of shares of our common stock. The largest aggregate principal amount outstanding under these notes during 2006 was $371,000. The principal amounts of this note plus interest were paid in full at their maturity in July 2006.

Richard Y. Roberts has served as a director since October 2005. During January and February of 2006, Mr. Roberts was a partner with Thelen Reid & Priest LLP (“Thelen”). We paid Thelen an aggregate of approximately $227,000 for legal services and related expenses provided by Thelen to the Company during 2006. Following his departure from Thelen, Mr. Roberts practiced law as Richard Y. Roberts, Attorney at Law, and as a partner in a successor firm, Roberts & Associates (jointly, the “Roberts Law Firm”). During 2006, the Roberts Law Firm provided approximately $74,000 of legal services to us.

From February 2006 until May 2006, we engaged RipTyde Partners, LLC (“RipTyde”), as consultants. Donald Henderson, who has served as our Chief Technology Officer since May 15, 2006, was a member and 25% owner of RipTyde. We paid approximately $120,000 in consulting fees to RipTyde for their services during 2006.

Pursuant to an agreement dated September 4, 2006, on October 12, 2006, we sold 1.5 million shares of Series B Preferred Stock to Warburg Pincus Private Equity IX, L.P, an investment vehicle affiliated with Warburg Pincus & Co., for an aggregate purchase price of $75,000,000. Each share of Series B Preferred Stock is convertible into 10 shares of our common stock at an initial conversion price of $5.00 per share. Dividends accrue on the Series B Preferred Stock at the rate of 7% per annum payable in shares of common stock determined based on the conversion price then in effect (currently $5.00). As part of the transaction, we also issued to Warburg Pincus Private Equity IX, L.P. warrants to purchase 2.25 million shares of our common stock at an exercise price of $7.75 per share. Cary J. Davis and William H. Janeway, who became Directors upon the closing of this transaction on October 12, 2006, are partners of Warburg Pincus & Co.

On May 9, 2007, Warburg Pincus purchased an aggregate of 1,207,500 shares of common stock from Peter K. Hansen, former Chairman and CEO of the Company, for an aggregate purchase price approximating $6,116,000 in a privately negotiated transaction. The transaction is described in Amendment No. 1 to Schedule 13D filed by Warburg Pincus on May 10, 2007.

Generally speaking, we review relationships and transactions in which the Company and our directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest. Directors and executive officers must disclose to our General Counsel any situations which may involve such a material transaction or relationship and our General Counsel will notify the Corporate Governance and Nominating Committee of any transactions or relationships disclosed to him or of which he becomes aware. The Company will determine, based on the particular facts and circumstances, whether the Company or the related party has a direct or indirect material interest in the proposed transaction or relationship. Transactions that are determined to involve such a direct or indirect material interest on the part of the Company or the related person will be disclosed in accordance with SEC rules. The Corporate Governance and Nominating Committee may approve or ratify any such material transaction or relationship that it reviews.

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 The July 2004 transaction with Mr. Castillo described above was reviewed by the Compensation Committee, whose members were the same as the members of the Corporate Governance and Nominating Committee at the time, except that Mr. Hansen was not a member of the former committee, and the Board in connection with their consideration of matters related to Mr. Castillo’s stock options. The Board and the Corporate Governance and Nominating Committee reviewed the provision of legal services by Mr. Roberts and the law firms with which he was associated in connection with the determinations in 2006 regarding Mr. Roberts’ independence as a director.  The transactions with RipTyde Partners described above were not subject to these procedures because they occurred before Mr. Henderson was employed by the Company. The sale of Series B Preferred Stock to Warburg Pincus was approved by the Board of Directors prior to the election of Messrs. Davis and Janeway as directors. The transaction between Warburg Pincus and Mr. Hansen was not subject to these procedures because the Company was not a party to the transaction.

Director Independence

The members of our Board of Directors are Lon Gorman, its Chairman, Cary Davis, George Deehan, Howard Edelstein, William Janeway, William Jennings, William Lynch, Richard Roberts and Thomas Wajnert. Our Board of Directors has determined that all directors, other than Mr. Edelstein, are independent under Nasdaq Rule 4200(a)(15), based on information known to us. Our Audit Committee members are Mr. Jennings, its Chairman, Mr. Wajnert, and Mr. Gorman. Each of the members of our Audit Committee is “independent” of management as independence for audit committee members is defined by Nasdaq rules.

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Item 14. Principal Accountant Fees and Services

Our current independent registered public accounting firm is Friedman LLP, who has served in this role since November 2005. Deloitte & Touche LLP was our former independent registered public accounting firm and audited our financial statements for the years ended December 31, 1999 through December 31, 2004.

The following table sets forth the aggregate fees billed by Friedman LLP and Deloitte & Touche LLP for audit services rendered in connection with the reports on fiscal 2006 and 2005 and for tax and other services rendered during fiscal years 2006 and 2005 on behalf of NYFIX and its subsidiaries, as well as all out-of-pocket costs incurred in connection with these services (in thousands):

Audit Fees:	2006		2005
Deloitte & Touche LLP	$	-	$	20
Friedman LLP	$	550	$	1,962
Audit-Related Fees:
Deloitte & Touche LLP	$	-	$	18
Friedman LLP	$	85	$	61
Tax Fees:
Deloitte & Touche LLP	$	-	$	399
Friedman LLP	$	-	$	-
All Other Fees:
Deloitte & Touche LLP	$	-	$	143
Friedman LLP	$	-	$	-
Total Fees	$	635	$	2,603

Audit Fees: Consists of fees for professional services rendered for the audits of NYFIX’s consolidated financial statements and review of the interim condensed consolidated financial statements included in our annual reports on Form 10-K and quarterly reports on Form 10-Q, as well as other services related to:

· the 2005 Restatement related to our 1993 through 2004 consolidated financial statements included in our annual report on Form 10-K for 2005;

· the audit of management’s assessment of the effectiveness of internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and the effectiveness of internal control over financial reporting, including approximately $200,000 and $240,000, related to fiscal years 2006 and 2005, respectively.

Audit-Related Fees: Consists of fees for assurance related services including accounting consultations in connection with acquisitions, divestitures and professional services concerning financial accounting and reporting standards, consents, and the audit of our employee benefit plan.

Tax Fees: Consists of fees for tax compliance/preparation including income tax consulting, planning, and research and development tax studies for our U.S. and foreign subsidiaries

All Other Fees: Consists of fees for all other services other than those reported above. This fee category includes other specialized consulting services and fees incurred related to the independent registered public accounting firm assisting with and or responding to SEC investigations, the Audit Committee and the Company’s internal review.

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Audit Committee Pre-approval Policies and Procedures

The Audit Committee of our Board of Directors pre-approves on an annual basis the audit, audit-related, tax and other non-audit services to be rendered by our independent registered public accounting firm based on historical information and anticipated requirements for the following fiscal year. The Audit Committee pre-approves specific types or categories of engagements constituting audit, audit-related, tax and other non-audit services as well as the range of fee amounts corresponding to each such engagement. To the extent that our management believes that a new service or the expansion of a current service provided by our independent registered public accounting firm is necessary or desirable, such new or expanded services are presented to the Audit Committee for its review and approval, or to an Audit Committee member by delegation who reports any such review and approval to the Audit Committee at its next meeting, prior to our engagement of our independent registered public accounting firm to render such services.

The Audit Committee has determined the rendering of the non-audit services referenced above is compatible with maintaining the independent registered public accounting firm’s independence under applicable rules and regulations promulgated by the SEC and Nasdaq.

Audit-related fees, relating to our employee benefit plan, aggregating $15,000 and $18,000, were approved by the Audit Committee, rather than being waived pursuant to Rule 2-01, paragraph (c)(7)(i)(C) of SEC Regulation S-X, during the years ended December 31, 2006 and 2005, respectively.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)Documents filed as part of this report on Form 10-K.

(1) Financial Statements.

See Index to Consolidated Financial Statements on page F-1 of this report on Form 10-K.

(2) Financial Statement Schedules.

None. Financial statement schedules are omitted because they are not required, inapplicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.

(b)Exhibits

3.1	Restated Certificate of Incorporation of the Registrant. Incorporated herein by reference from Appendix B to the Registrant’s Proxy Statement filed September 3, 2003 (File Number 000-21324).
*3.2	Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant.
3.3	Amended By-Laws of the Registrant. Incorporated herein by reference from Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on October 18, 2006 (File Number 000-21324).
3.4	Certificate of Designations, Number, Voting Powers, Preferences and Rights of Series B Voting Convertible Preferred Stock and Series C Non-Voting Convertible Preferred Stock of the Registrant. Incorporated herein by reference from Exhibit 3.2 of Registrant’s Current Report on Form 8-K filed on October 18, 2006 (File Number 000-21324).
4.1	Rights Agreement between Chase Mellon Shareholder Services, L.L.C. (now known as Mellon Investor Services) and the Registrant dated September 1, 1997. Incorporated herein by reference from Exhibit 2 to the Registrant’s registration statement on Form 8-A12B filed September 10, 1997 (File Number 001-12292).
4.2	First Amendment to Rights Agreement between Chase Mellon Shareholder Services, L.L.C. (now known as Mellon Investor Services) and the Registrant dated October 25, 1999. Incorporated herein by reference from Exhibit 3 to the Registrant’s registration statement on Form 8-A12B/A filed November 3, 1999 (File Number 001-12292).
4.3	Second Amendment to Rights Agreement between Mellon Investor Services, LLC (formerly known as Chase Mellon Shareholder Services, L.L.C.) and the Registrant dated as of September 4, 2006. Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 15, 2006 (File Number 000-21324).
10.1	Limited Liability Company Operating Agreement of NYFIX Millennium, L.L.C. Incorporated herein by reference from Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999 (File Number 001-12292).
10.2	Subordinated Loan Agreement for Equity Capital, dated October 30, 2001, between the Registrant and NYFIX Millennium, L.L.C. Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Form 8-K filed February 14, 2002 (File Number 000-21324).

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10.3	Agreement and Plan of Merger among the Registrant, NYOlympus, Inc. and Javelin Technologies, Inc. dated as of March 12, 2002. Incorporated herein by reference from Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed April 15, 2002 (“Javelin 8-K”) (File Number 001-12292).
10.4	Amendment No. 1 to Agreement and Plan of Merger among the Registrant, NYOlympus, Inc. and Javelin Technologies, Inc. dated as of March 20, 2002. Incorporated herein by reference from Exhibit 2.2 to the Javelin 8-K (File Number 001-12292).
10.5	Amendment No. 2 to Agreement and Plan of Merger among the Registrant, NYOlympus, Inc. and Javelin Technologies, Inc. dated as of March 26, 2002. Incorporated herein by reference from Exhibit 2.3 to the Javelin 8-K (File Number 001-12292).
10.6	Employment Agreement between Peter K. Hansen and the Registrant dated June 24, 1991. Incorporated herein by reference from Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005 (“2005 10-K”) (File Number 000-21324).
10.7	Amendment No. 1, dated November 4, 2004, to the Employment Agreement between Peter K. Hansen and the Registrant dated June 24, 1991. Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2004 (File Number 000-21324).
10.8	Amended and Restated 1991 Incentive Stock Option Plan of the Registrant. Incorporated herein by reference from Exhibit 10.3 to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 1996 (File Number 001-12292).
10.9	Amendment No. 1 to Amended and Restated 1991 Incentive and Nonqualified Stock Option Plan of the Registrant. Incorporated herein by reference from Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000 (“2000 10-K”) (File Number 001-12292).
10.10	Amendment No. 2 to Amended and Restated 1991 Incentive and Nonqualified Stock Option Plan of the Registrant. Incorporated herein by reference from Exhibit 10.5 to the 2000 10-K (File Number 001-12292).
10.11	NYFIX, Inc. 2001 Stock Option Plan. Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2001 (File Number 001-12292).
10.12	Amendment No. 1 to NYFIX, Inc. 2001 Stock Option Plan. Incorporated herein by reference from Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (“2002 10-K”) (File Number 000-21324).
10.13	Employment Agreement between Robert C. Gasser and the Registrant dated September 21, 2001. Incorporated herein by reference from Exhibit 10.18 to 2002 10-K (File Number 000-21324).
10.14	Separation and Release Agreement between Robert C. Gasser and the Registrant dated as of September 4, 2006. Incorporated herein by reference from Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on September 8, 2006 (File Number 000-21324).
10.15	Purchase Agreement, dated as of October 2, 2002, between Edward Brandman, Daniel Ryan, Ken DeGiglio and the Registrant relating to Renaissance Trading Technologies LLC (“RTT”). Incorporated herein by reference from Exhibit 10.13 to the 2002 10-K (File Number 000-21324).

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10.16	Convertible Secured Promissory Note from RTT to the Registrant, dated as of October 2, 2002, in the principal amount of $1.5 million. Incorporated herein by reference from Exhibit 10.14 to the 2002 10-K (File Number 000-21324).
10.17	Amended and Restated Limited Liability Company Operating Agreement of RTT. Incorporated herein by reference from Exhibit 10.15 to the 2002 10-K (File Number 000-21324).
10.18	Secured Promissory Note from RTT to the Registrant, dated as of March 12, 2003, in the principal amount of $1.0 million. Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2003 (File Number 000-21324).
10.19	Purchase Agreement, dated as of September 26, 2003, by and between the Registrant and the sellers of RTT. Incorporated herein by reference from Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2003 (File Number 000-21324).
10.20	Employment Agreement between Lars Kragh and the Registrant dated January 1, 2003. Incorporated herein by reference from Exhibit 10.16 to the 2002 10-K (File Number 000-21324).
10.21	Separation Agreement and General Release, dated as of December 31, 2006, between NYFIX, Inc. and Lars Kragh. Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K/A filed April 16, 2007 (File Number 000-21324).
10.22	Form of Agreement and Plan of Merger between NYFIX, Inc., a New York Corporation, and NYFIX (Delaware) Inc. Incorporated herein by reference from Appendix A to the Registrant’s Proxy Statement filed September 3, 2003 (File Number 000-21324).
10.23	Form of Option to Purchase Common Stock of EuroLink Network, Inc. Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2003 (File Number 000-21324).
10.24	Business Continuity Services Master Agreement, dated October 15, 1997, between Comdisco, Inc. (Predecessor to Sungard) and Trinitech Systems, Inc. (Predecessor to NYFIX, Inc.). Incorporated herein by reference from Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 (“2003 10-K”) (File Number 000-21324).
10.25	Advanced Recovery (AR) Schedule, dated February 15, 2000, to the Master Agreement dated October 15, 1997 between Comdisco, Inc. (Predecessor to Sungard) and NYFIX, Inc. listing additional equipment and extending the term of the agreement through February 15, 2005. Incorporated herein by reference from Exhibit 10.25 to the2003 10-K (File Number 000-21324).
10.26	Addendum to Advanced Recovery (AR) Schedule, dated February 15, 2000, to the Master Agreement dated October 15, 1997 between Sungard Recovery Services LP and NYFIX Millennium, LLC, dated December 31, 2003, extending the term of the agreement through February 14, 2009 and changing the monthly Subscription Fees. Incorporated herein by reference from Exhibit 10.26 to the2003 10-K (File Number 000-21324).

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10.27	Purchase Agreement, dated December 30, 2004, by and between the Registrant and Whitebox Convertible Arbitrage Partners L.P. (“Whitebox”) incorporated herein by reference from Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed on January 5, 2005 (File Number 000-21324).
10.28	Convertible Promissory Note, dated December 30, 2004, by and between the Registrant and Whitebox, Incorporated herein by reference from Exhibit 99.3 to the Registrant’s Current Report on Form 8-K filed on January 5, 2005 (File Number 000-21324).
10.29	Registration Rights Agreement, dated December 30, 2004, by and between the Registrant and Whitebox. Incorporated herein by reference from Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 (“2004 10-K”) (File Number 000-21324).
10.30	Agreement, dated March 30, 2005, by and between the Registrant and Whitebox extending the Election Period on the Convertible Promissory Note. Incorporated herein by reference from Exhibit 10.33 to the2004 10-K (File Number 000-21324).
10.31	Agreement to Amend Convertible Promissory Note and Registration Rights Agreement and to Waive Breaches, dated June 24, 2005, by and between Registrant and Whitebox. Incorporated herein by reference from Exhibit 10.34 to the2004 10-K (File Number 000-21324).
10.32	Employment Agreement between Jay D. Shaffer and the Registrant dated January 1, 2005. Incorporated herein by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on January 6, 2005 (File Number 000-21324).
10.33	Amendment No. 1 to January 1, 2005 Executive Agreement between Jay D. Shaffer and the Registrant, effective as of February 23, 2006. Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 24, 2006 (File Number 000-21324).
10.34	Amendment No. 2 to January 1, 2005 Executive Agreement between Jay D. Shaffer and the Registrant, effective as of August 1, 2006. Incorporated herein by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on August 4, 2006 (File Number 000-21324).
10.35	Employment Agreement between Steven R. Vigliotti and the Registrant dated January 31, 2006. Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 1, 2006 (File Number 000-21324).
10.36	Executive Agreement effective January 31, 2006 between NYFIX, Inc. and Mark R. Hahn. Incorporated herein by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 1, 2006 (File Number 000-21324).
10.37	Amendment No. 1, dated August 1, 2006, to Executive Agreement dated January 31, 2006 between Mark R. Hahn and the Registrant. Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 4, 2006 (File Number 000-21324).
10.38	Separation Agreement and General Release between Mark R. Hahn and the Registrant dated December 1, 2006. Incorporated herein by reference from Exhibit 10.43 to the 2005 10-K (File Number 000-21324).
10.39	Separation and General Release, dated as of February 17, 2006, by and between the Registrant and Keith R. Jamaitis. Incorporated herein by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 24, 2006 (File Number 000-21324).

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10.40	Securities Purchase Agreement between the Registrant and certain clients of an institutional investor, dated June 29, 2006. Incorporated herein by reference from Exhibit 10.41 to the 2005 10-K (File Number 000-21324).
10.41	Registration Rights Agreement between the Registrant, certain clients of an institutional investor and Rhone Group Advisors, LLC dated July 5, 2006. Incorporated herein by reference from Exhibit 10.42 to the 2005 10-K (File Number 000-21324).
10.42	Employment Agreement between Brian Bellardo and the Registrant dated August 1, 2006. Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 4, 2006 (File Number 000-21324).
10.43	Agreement between the Registrant and Brian Bellardo dated May 15, 2007. Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed May 21, 2007 (File Number 000-21324).
10.44	Purchase Agreement between the Registrant, NYFIX Overseas, Inc. and G.L. Trade S.A. dated August 25, 2006. Incorporated herein by reference from Exhibit 10.2 to the 2005 10-K (File Number 000-21324).
10.45	Securities Purchase Agreement, dated as of September 4, 2006, by and between Warburg Pincus Private Equity IX, L.P. and the Registrant. Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 8, 2006 (File Number 000-21324).
10.46	Employment Agreement between Howard Edelstein and the Registrant dated September 4, 2006. Incorporated herein by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on September 8, 2006 (File Number 000-21324).
10.47	Warrant, dated October 12, 2006, issued by the Registrant to Warburg Pincus Private Equity IX, L.P. Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 18, 2006 (File Number 000-21324).
10.48	Registration Rights Agreement, dated October 12, 2006, between the Registrant and Warburg Pincus Private Equity IX, L.P. Incorporated herein by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on October 18, 2006 (File Number 000-21324).
10.49	Indemnification Agreement, dated October 12, 2006, between the Registrant and Cary Davis. Incorporated herein by reference from Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on October 18, 2006 (File Number 000-21324).
10.50	Indemnification Agreement, dated October 12, 2006, between the Registrant and William Janeway. Incorporated herein by reference from Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on October 18, 2006 (File Number 000-21324).
10.51	Employment Agreement between the Registrant and W. Brennan Carley effective as of January 1, 2007. Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K/A filed January 16, 2007 (File Number 000-21324).
10.52	Agreement between the Registrant and David Merrill dated January 5, 2007. Incorporated herein by reference from Exhibit 10.2 to the Registrant’s Current Report on Form 8-K/A filed January 16, 2007 (File Number 000-21324).

-115-

10.53	Agreement between the Registrant and Scott A. Bloom dated March 15, 2007. Incorporated herein by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed April 4, 2007 (File Number 000-21324).
*10.54	Employment Agreement between the Registrant and Donald Henderson dated May 25, 2006.
21	Subsidiaries of the Registrant. Incorporated herein by reference from Exhibit 21.1 to the 2005 10-K (File Number 000-21324).
*23	Consent of Friedman LLP
*24	Power of Attorney (See signature page).
*31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Filed herewith

(c) Financial Statement Schedules

See Item 15(a) (2).

-116-

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	NYFIX, INC.
Dated: August 6, 2007	By:	/s/ P. Howard Edelstein
		P. Howard Edelstein Title: President, Chief Executive Officer and Director

KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below hereby constitutes and appoints P. Howard Edelstein and Steven R. Vigliotti, and each of them individually, his or her true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to (i) act on, sign and file with the Securities and Exchange Commission any and all amendments to this Report together with all schedules and exhibits thereto, (ii) act on, sign and file with the Securities and Exchange Commission any and all exhibits to this Report and any and all exhibits and schedules thereto, (iii) act on, sign and file any and all such certificates, notices, communications, reports, instruments, agreements and other documents as may be necessary or appropriate in connection therewith and (iv) take any and all such actions which may be necessary or appropriate in connection therewith, granting unto such agents, proxies and attorneys-in-fact, and each of them individually, full power and authority to do and perform each and every act and thing necessary or appropriate to be done, as fully for all intents and purposes as he or she might or could do in person, and hereby approving, ratifying and confirming all that such agents, proxies and attorneys-in-fact, any of them or any of his, her or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signatures	Title	Date
/s/ Lon Gorman	Chairman of the Board of Directors	August 6, 2007
Lon Gorman
/s/ P. Howard Edelstein	President and Chief Executive Officer andDirector	August 6, 2007
P. Howard Edelstein
/s/ Steven R. Vigliotti	Chief Financial Officer (Principal Financial Officer)	August 6, 2007
Steven R. Vigliotti
/s/ Cary J. Davis	Director	August 6, 2007
Cary J. Davis
/s/ George O. Deehan	Director	August 6, 2007
George O. Deehan

-117-

 

Signatures Title Date

/s/ William H. Janeway	Director	August 6, 2007
William H. Janeway
/s/ William C. Jennings	Director	August 6, 2007
William C. Jennings
/s/ William J. Lynch	Director	August 6, 2007
William J. Lynch
/s/ Richard Y. Roberts	Director	August 6, 2007
Richard Y. Roberts
/s/ Thomas C. Wajnert	Director	August 6, 2007
Thomas C. Wajnert

-118-

EXHIBIT INDEX

*3.2	Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant.
*10.54	Employment Agreement between the Registrant and Donald Henderson dated May 25, 2006.
*23	Consent of Friedman LLP
*24	Power of Attorney (see signature page)
*31.1	Certification of Chief Executive Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2	Certification of Chief Financial Officer pursuant to Rules 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Filed herewith

-119-

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	PAGE
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2006 and 2005	F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2006, 2005 and 2004	F-4
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive
Loss for the Years Ended December 31, 2006, 2005 and 2004	F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
2006, 2005 and 2004	F-6
Notes to Consolidated Financial Statements	F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

NYFIX, Inc:

We have audited the accompanying consolidated balance sheets of NYFIX, Inc. and subsidiaries, as of December 31, 2006 and 2005 and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive loss and cash flows for each of the three years in the period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the Standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of NYFIX, Inc. and subsidiaries as of December 31, 2006 and 2005, and the consolidated results of its operations and cash flows for each of the three years in the period ended December 31, 2006, in conformity with U. S. generally accepted accounting principles.

As discussed in Notes 1 and 14 to the consolidated financial statements, the Company changed its method of accounting for stock-based compensation during the year ended December 31, 2006.

We also have audited, in accordance with the Standards of the Public Company Accounting Oversight Board (United States), the effectiveness of NYFIX, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated August 1, 2007 expressed an unqualified opinion on management’s assessment of internal control over financial reporting and an adverse opinion on the effectiveness of internal control over financial reporting.

/s/ Friedman LLP

East Hanover, New Jersey

August 1, 2007 

F-2

NYFIX, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

	December 31,
	2006			2005
Assets
Current assets:
Cash and cash equivalents	$	105,888		$	20,572
Short-term investments		-			500
Accounts receivable, less allowances of $316 and $580, respectively		13,744			12,564
Clearing broker assets		422,880			456,575
Prepaid expenses and other current assets		4,435			4,680
Current assets of discontinued operations		-			3,310
Total current assets		546,947			498,201
Property and equipment, net		14,808			13,721
Product enhancement costs, net		5,900			7,229
Goodwill		58,193			58,234
Acquired intangible assets, net		1,966			4,202
Other assets, net		1,514			1,675
Long-term assets of discontinued operations		-			2,521
Total assets	$	629,328		$	585,783
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses	$	25,133		$	13,932
Clearing broker liabilities		422,429			456,825
Current portion of capital lease obligations		1,223			690
Current portion of long-term debt		188			259
Current portion of other long-term liabilities		1,235			1,174
Deferred revenue		4,212			3,868
Current liabilities of discontinued operations		-			2,396
Total current liabilities		454,420			479,144
Long-term portion of capital lease obligations		461			956
Long-term debt		7,412			7,673
Other long-term liabilities		3,662			3,062
Total liabilities		465,955			490,835
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value; 5,000,000 shares authorized:
Series A, none issued		-			-
Series B Voting Convertible, 1,500,000 and no shares issued and outstanding;
liquidation preference of $76,137 and none, respectively		62,092			-
Series C Non-Voting Convertible, none issued		-			-
Common stock, $0.001 par value; 60,000,000 shares authorized; 36,654,986 shares and 33,784,293 shares issued, respectively		256,835			238,498
Accumulated deficit		(139,309	)		(125,883	)
Treasury stock, 1,133,778 and 1,188,290 shares, respectively, at cost		(16,224	)		(17,004	)
Notes receivable issued for common stock		-			(70	)
Accumulated other comprehensive loss		(21	)		(593	)
Total stockholders' equity		163,373			94,948
Total liabilities and stockholders' equity	$	629,328		$	585,783

 

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

F-3

NYFIX, Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share amounts)

	Year Ended December 31,
	2006			2005			2004
Revenue:
Subscription and maintenance	$	65,801		$	59,720		$	48,802
Product sales and services		2,943			3,157			2,001
Transaction		29,609			26,222			14,827
Total revenue		98,353			89,099			65,630
Cost of revenue:
Subscription and maintenance		32,638			30,388			25,976
Product sales and services		1,824			2,202			1,901
Transaction		15,901			15,949			10,161
Total cost of revenue		50,363			48,539			38,038
Gross profit		47,990			40,560			27,592
Operating expense:
Selling, general and administrative		49,237			40,979			36,086
Restatement, SEC investigation and related expenses		12,758			3,069			1,260
Depreciation and amortization		1,185			1,914			2,201
Restructuring charge		2,056			-			2,527
Loss from operations		(17,246	)		(5,402	)		(14,482	)
Interest expense		(1,029	)		(728	)		(773	)
Investment income		1,894			263			137
Other income (expense), net		20			(187	)		(93	)
Loss from continuing operations before income tax provision		(16,361	)		(6,054	)		(15,211	)
Income tax provision		189			189			189
Loss from continuing operations		(16,550	)		(6,243	)		(15,400	)
Income (loss) from discontinued operations, including gain on
sale of $4,035 in 2006		3,646			(174	)		1,041
Net loss		(12,904	)		(6,417	)		(14,359	)
Accumulated preferred dividends		(1,354	)		-			-
Beneficial conversion feature on preferred stock (Note 10)		(18,139	)		-			-
Loss applicable to common stockholders	$	(32,397	)	$	(6,417	)	$	(14,359	)
Basic and diluted loss from continuing operations per common
share (net of accumulated preferred dividends and beneficial
conversion feature on preferred stock)	$	(1.06	)	$	(0.19	)	$	(0.48	)
Basic and diluted income (loss) from discontinued operations per
common share		0.11			(0.01	)		0.03
Basic and diluted loss per common share	$	(0.95	)	$	(0.20	)	$	(0.45	)
Basic and diluted weighted average common shares outstanding		34,035			32,509			32,201

 

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

 

F-4

NYFIX Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Loss

For the years Ended December 31, 2006, 2005 and 2004

(in thousands, except share amounts) 

																	Notes
	Series B Voting																receivable
	Convertible																issued			Accumulated
	preferred stock					Common											for			other			Total
	issued					stock  issued					Accumulated			Treasury			common			comprehensive			Stockholders'
	Shares		Amount			Shares		Amount			Deficit			Stock			stock			loss			Equity
Balance December 31, 2003		-	$	-			33,222,475	$	235,008		$	(103,506	)	$	(19,480	)	$	(74	)	$	(13	)	$	111,935
Comprehensive loss:
Net loss		-		-			-		-			(14,359	)		-			-			-			(14,359	)
Foreign currency translation adjustment		-		-			-		-			-			-			-			(138	)		(138	)
Total comprehensive loss		-		-			-		-			-			-			-			-			(14,497	)
Exercise of stock options		-		-			103,211		396			-			-			-			-			396
Issuance of common stock and treasury stock
(34,070 shares) for debt repayment		-		-			427,174		2,175			(321	)		488			-			-			2,342
Stock-based compensation expense		-		-			-		589			-			-			-			-			589
Repayment of notes issued for purchase of
common stock		-		-			-		-			-			-			10			-			10
Interest accrued on notes for common stock,
net of payments		-		-			-		-			-			-			(3	)		-			(3	)
Balance December 31, 2004		-		-			33,752,860		238,168			(118,186	)		(18,992	)		(67	)		(151	)		100,772
Comprehensive loss:
Net loss		-		-			-		-			(6,417	)		-			-			-			(6,417	)
Foreign currency translation adjustment		-		-			-		-			-			-			-			(442	)		(442	)
Total comprehensive loss		-		-			-		-			-			-			-			-			(6,859	)
Exercise of stock options		-		-			31,433		125			-			-			-			-			125
Issuance of treasury stock f or debt repayment
(138,940 shares)		-		-			-		-			(1,280	)		1,988			-			-			708
Stock-based compensation expense		-		-			-		205			-			-			-			-			205
Interest accrued on notes for common stock,
net of payments		-		-			-		-			-			-			(3	)		-			(3	)
Balance December 31, 2005		-		-			33,784,293		238,498			(125,883	)		(17,004	)		(70	)		(593	)		94,948
Comprehensive loss:
Net loss		-		-			-		-			(12,904	)		-			-			-			(12,904	)
Foreign currency translation adjustment		-		-			-		-			-			-			-			572			572
Total comprehensive loss		-		-			-		-			-			-			-			-			(12,332	)
Issuance of treasury stock for debt repayment
(54,512 shares)		-		-			-		-			(522	)		780			-			-			258
Private placement of common stock
(including 157,693 shares issued for placement
fees)		-		-			2,870,693		12,540			-			-			-			-			12,540
Private placement of convertible preferred
stock and common stock warrant		1,500,000		62,092			-		7,041			-			-			-			-			69,133
Record beneficial conversion feature related to
preferred stock		-		(18,139	)		-		18,139			-			-			-			-			-
Amortize beneficial conversion feature related
to preferred stock		-		18,139			-		(18,139	)		-			-			-			-			-
Beneficial conversion feature related to
convertible note		-		-			-		103			-			-			-			-			103
Stock-based compensation expense		-		-			-		859			-			-			-			-			859
Modification of stock options		-		-			-		(2,206	)		-			-			-			-			(2,206	)
Repayment of note issued for purchase of
common stock		-		-			-		-			-			-			71			-			71
Interest accrued on notes for common stock,
net of payments		-		-			-		-			-			-			(1	)		-			(1	)
Balance December 31, 2006		1,500,000	$	62,092			36,654,986	$	256,835		$	(139,309	)	$	(16,224	)	$	-		$	(21	)	$	163,373

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

F-5

 

NYFIX, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

	Year Ended December 31,
	2006			2005			2004
Operating activities:
Net loss	$	(12,904	)	$	(6,417	)	$	(14,359	)
Adjustments to reconcile net loss to cash provided by operating activities:
(Income) loss from discontinued operations		(3,646	)		174			(1,041	)
Depreciation and amortization		11,156			12,684			12,692
Restructuring charge		2,056			-			2,527
Stock-based compensation expense		859			205			589
Amortization of debt discounts and premiums		30			43			93
Deferred income taxes		148			148			148
Provision for doubtful accounts		2			97			555
Loss on debt extinguishment		-			255			-
Other, net		(2	)		(2	)		200
Changes in assets and liabilities:
Accounts receivable		(1,147	)		(2,887	)		(3,375	)
Prepaid expenses and other assets		707			(561	)		(543	)
Clearing broker assets		33,695			(317,669	)		(136,606	)
Deferred revenue		348			1,200			395
Accounts payable, accrued expenses and other
liabilities		6,382			(1,415	)		5,026
Clearing broker liabilities		(34,396	)		318,389			136,736
Net cash provided by continuing operating activities		3,288			4,244			3,037
Net cash provided by discontinued operating activities		791			327			3,864
Net cash provided by operating activities		4,079			4,571			6,901
Investing activities:
Proceeds from sale of discontinued operations, net of cash disposed		8,439			-			-
Net sales of short-term investments		500			675			1,283
Capital expenditures for property and equipment		(5,819	)		(3,404	)		(6,557	)
Capitalization of product enhancement costs		(2,444	)		(3,492	)		(5,087	)
Tax benefit attributable to goodwill		41			41			41
Cash acquired from acquisitions, net of payments		-			-			1,226
Net cash provided by (used in) continuing investing activities		717			(6,180	)		(9,094	)
Net cash used in discontinued investing activities		(598	)		(1,354	)		(1,502	)
Net cash provided by (used in) investing activities		119			(7,534	)		(10,596	)
Financing activities:
Proceeds from long-term debt		-			-			7,500
Financing costs		-			-			(283	)
Repayment of long-term debt		(2	)		(53	)		-
Principal payments under capital lease obligations		(689	)		(649	)		(573	)
Repayment of notes issued for purchase of common stock		71			-			10
Proceeds from issuance of common stock, net of issuance costs		12,540			125			396
Proceeds from issuance of preferred stock, net of issuance costs		69,133			-			-
Other, net		(595	)		280			389
Net cash provided by (used in) continuing financing activities		80,458			(297	)		7,439
Effect of exchange rate changes on cash		166			(438	)		(384	)
Net increase (decrease) in cash and cash equivalents		84,822			(3,698	)		3,360
Cash and cash equivalents, beginning of year		21,066			24,764			21,404
Cash and cash equivalents, end of year		105,888			21,066			24,764
Less cash and cash equivalents of discontinued operations, end of year		-			494			830
Cash and cash equivalents of continuing operations, end of year	$	105,888		$	20,572		$	23,934

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

F-6

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Nature of Operations

NYFIX, Inc. (together with its consolidated subsidiaries, “NYFIX” or the “Company”) provides trading workstations, middle office trade automation technologies and trade messaging services to domestic and international market participants. In addition, NYFIX’s registered broker-dealer subsidiaries also provide automated trade execution services to institutional counterparties and operate a matched-book stock borrow/stock loan business.

The Company has its headquarters and principal office on Wall Street in New York City, and has other offices in London’s Financial District, Hong Kong, Boston, MA, Stamford, CT, and San Francisco, CA. The Company operates redundant data centers in the northeastern United States as well as data center hubs in London and Amsterdam.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of NYFIX, Inc. and its majority-owned and wholly-owned subsidiaries and any other subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Reclassifications

The disposition of NYFIX Overseas, Inc. (“NYFIX Overseas”), as more fully described in Note 3, was accounted for as a discontinued operation for all periods presented. Unless otherwise indicated, all amounts in the accompanying footnotes relate to continuing operations.

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenue and expense during the reporting periods. Actual results could differ materially from those estimates.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed and determinable, and collectibility is reasonably assured.

The Company’s revenue is comprised of: subscription and maintenance, product sales and services and transaction revenue, as follows:

Subscription and maintenance consists of contracts that provide for the use of the Company’s systems and its messaging channels, together with managed services, with a term of generally one to three years. Additional services, provided under schedules, or addenda to the contracts, are either co-terminus with the original contract or have provisions similar to the original contract. Under the terms of the subscription contracts and addenda, clients are typically invoiced a flat periodic charge after initial installation and acceptance. Subscription and maintenance also includes maintenance contracts for software under separate renewable maintenance contracts. Software related maintenance contracts are generally for a term of one year. Revenue related to these contracts and addenda is recognized over the term of the contract, addendum, or service period, on a straight-line basis. The Company includes within its subscription and maintenance revenue charges for connectivity to the NYFIX trading community (the “NYFIX Marketplace”). These include the various costs of connecting clients which include telecommunications, installation and maintenance of routers, network management software and staff, and other costs related to the management of connectivity. The connectivity charges are recognized as the services are provided.

F-7

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Product sales and services are primarily comprised of software licenses, equipment sales and professional services fees. This revenue is recognized when the software and equipment have been shipped and accepted by the customer and when other contractual obligations, including installation if applicable, have been satisfied and collection of the resulting receivable is reasonably assured. The Company recognizes revenue from software arrangements in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended,under which revenue is recognized when persuasive evidence of an arrangement exists, the fee is fixed or determinable, delivery has occurred, collectibility is reasonably assured and the arrangement does not require significant customization or modification of the software.

Transaction revenue primarily consists of per-share commissions charged to clients who send and receive a match and execution in the Company’s Alternative Trading System (“ATS”) and clients to whom the Company provides execution and smart order routing technology, gateways to access markets and algorithmic trading ability in: (i) their own name, (ii) a third party name, or (iii) the Company’s name. Revenue for these services is generally invoiced monthly in arrears or is obtained through the clearing process within three days of the trade date and is recognized on a trade date basis, in the period in which it is earned.

Amounts invoiced in advance of the service being performed are deferred until earned and are included in deferred revenue. Installation charges, if any, are generally invoiced to a client and are included in revenue upon completion of the installation.

Cost and Expense

Cost of revenue includes:

·   Data center operating costs, including salaries, related to equipment, infrastructure and software supporting operations and the NYFIX Marketplace.

·   Managed connectivity costs, including telecommunication and other costs incurred on behalf of clients and costs to maintain the data centers, including depreciation and amortization of assets utilized by the data centers, which are recognized as either a cost of subscription and maintenance or cost of transaction revenue, as appropriate.

·   Amortization expense of acquired intangible assets and capitalized product enhancement costs relating to the applicable revenue category.

·   Developer and quality assurance personnel labor for client and product support of software products.

·   The cost of leased subscription and service bureau equipment which is depreciated over the estimated useful life of the equipment. When inventory is leased on a subscription basis, the cost of the inventory is relieved and transferred to property and equipment. The depreciation expense related to this equipment is included in cost of subscription and maintenance revenue.

·   Execution and clearing costs to access various markets and exchanges and to process and settle transactions.

Inventory consists of parts, finished goods and materials and is stated at the lower of cost, determined on a weighted average cost basis, or market and is included in prepaid expenses and other current assets. Inbound freight charges are included in inventory. When inventory is sold, the cost of inventory, including the inbound freight charges, is relieved and charged to cost of revenue.

F-8

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Provisions, when required, are made to reduce excess and obsolete inventories to their estimated net realizable values. Inventory provisions are calculated using management’s best estimate of inventory value based on the age of the inventory, quantities on hand compared with historical and projected usage and current and anticipated demand.

The Company expenses advertising costs, primarily consisting of trade show promotions, as incurred. Advertising expense, which is included in selling, general and administrative expense, was $1.2 million, $1.2 million and $1.0 million, for the years 2006, 2005 and 2004, respectively.

Net Loss Per Share

Earnings (loss) per common share is calculated in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per Share (“SFAS 128”). Under SFAS 128, public companies are required to report both basic and diluted income (loss) per common share. Basic and diluted net loss per share is computed by dividing the net loss applicable to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share gives effect to potential common shares; however, potential common shares are excluded if their effect is antidilutive. Potential common shares are composed of convertible preferred stock, a convertible note payable and incremental shares of common stock issuable upon the exercise of stock options and warrants.

Operating Leases

Minimum rental expenses are recognized over the term of the lease. When a lease contains a predetermined fixed escalation of the minimum rent, the Company recognizes the related rent expense on a straight-line basis and records the difference between the recognized rental expense and the amounts payable under the lease as deferred lease credits. The Company recognizes tenant allowances as an asset until reimbursement is received from the landlord and as a deferred lease credit at lease inception. The tenant allowances are amortized as a reduction to rent expense on a straight-line basis over the term of the lease.

Cash, Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Short-term investments consist of auction rate certificates with original maturities of less than twelve months. Such investments are stated at fair value, which approximates cost, as determined by the most recently traded price of each security at the balance sheet date. The Company’s short-term investments are classified as available-for-sale securities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.Short-term investments aggregating $0.4 million were pledged as security against certain obligations of the Company at December 31, 2005.

Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Available-for-sale securities are carried at fair value, with the unrealized gains or losses, net of tax, if any, reported as other comprehensive income (loss), which is a separate component of stockholders’ equity. Sales of securities are recorded by the specific identification method.

Accounts Receivable

Accounts receivable are stated at net realizable value by recording allowances for those amounts that the Company believes are uncollectible due to the inability of clients to make required payments or because of billing adjustments. These allowances are estimated by considering a number of factors, including the length of time the amounts are past due, the Company’s previous loss history, the client’s current ability to pay its obligations and the condition of the general economy and the industry as a whole. As of December 31, 2006 and 2005, no single client accounted for more than 10% of accounts receivable.

F-9

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Securities Lending Activities

Included in clearing broker assets and clearing broker liabilities are securities borrowed and securities loaned. Securities borrowed and securities loaned are recorded at the amount of cash collateral provided for securities borrowed transactions and received for securities loaned transactions, plus accrued interest. The net effect of interest earned on cash provided to counterparties as collateral for stock borrowed and interest expense incurred on cash received as collateral for securities loaned is included in transaction revenue. The Company monitors the market value of securities borrowed and loaned on a daily basis with additional collateral obtained or refunded as necessary.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation. Depreciation of property and equipment is provided using the straight-line method over the assets’ estimated useful lives. Leasehold improvements are amortized over the shorter of the assets’ economic lives or the lease term. In situations where the Company determines that the useful life of a long-lived asset should be revised, the Company depreciates the net book value in excess of the estimated residual value over its revised remaining useful life.

Product Enhancement Costs

Costs incurred in the research, design and development of software for sale to others as a separate product or embedded in a product and sold as part of the product as a whole are charged to expense until technological feasibility is established.  Thereafter, product enhancement costs, consisting primarily of payroll and related costs, purchased materials and services and software to be used within the Company’s products that significantly enhance the marketability or significantly extend the life of the products are capitalized and amortized to cost of revenue on a straight-line basis over three years, beginning when the products are offered for sale or the enhancements are integrated into the products. Management is required to use its judgment in determining whether product enhancement costs meet the criteria for immediate expense or capitalization, in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.

Research and development costs, which are included in selling, general and administrative expense, consisting primarily of salaries and related costs for technical and programming personnel, are expensed as incurred and were $0.2 million, $0.2 million, and $0.9 million for the years 2006, 2005 and 2004, respectively.

Acquisitions

The Company accounts for business acquisitions under the purchase method of accounting in accordance with SFAS No. 141, Business Combinations. The total cost of acquisitions is allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items.

F-10

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Goodwill

Goodwill represents the excess of the purchase price over the fair value of tangible and intangible assets acquired in an acquisition. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company performs an impairment review of goodwill on an annual basis or more frequently if circumstances change.

The impairment review involves a two-step process as follows:

·   Step 1—The Company compares the fair value of its reporting units to the carrying value, including goodwill, of each of these units. For each reporting unit where the carrying value, including goodwill, exceeds the unit’s fair value, the Company moves on to Step 2. If the unit’s fair value exceeds the carrying value, no further work is performed and no impairment expense is necessary.

·   Step 2—If the Company determines in Step 1 that the carrying value of a reporting unit exceeds the fair value, the Company performs an allocation of the fair value of the reporting unit to its identifiable tangible and non-goodwill intangible assets and liabilities as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. This results in an implied fair value for the reporting unit’s goodwill. The Company then compares the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of the goodwill, an impairment loss is recognized for the excess.

Intangible Assets

Intangible assets, including purchased technology and other intangible assets, are carried at cost less accumulated amortization. The Company amortizes intangible assets on a straight-line basis over their estimated useful lives. The range of estimated useful lives for the Company’s identifiable intangible assets is five to fourteen years.

Impairment of Long-Lived Assets

Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Determination of recoverability is generally based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition, as well as specific appraisal in certain instances. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset as estimated using a discounted cash flow model. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

Income Taxes

The Company accounts for income taxes using the asset and liability method prescribed in SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). SFAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the recognition of tax effects for financial statement and income tax reporting purposes by applying enacted income tax rates applicable to future years to differences between the financial statement carrying amounts and tax bases of existing assets and liabilities. A valuation allowance is recorded to reduce net deferred tax assets to only that portion that is judged more likely than not to be realized. The provision for income taxes is comprised of the current tax liability, the net change in deferred tax assets and liabilities and the tax benefit applied to reduce goodwill.

F-11

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Treasury Stock

Shares of common stock repurchased are recorded at cost as treasury stock. When shares are reissued, the weighted average cost method is used for determining cost. In accordance with Accounting Principles Board (“APB”) Opinion No. 6, Status of Accounting Research Bulletins (as amended), the excess of the acquisition cost over the reissuance price of treasury stock, if any, is charged to additional paid-in capital, limited to the amount previously credited to additional paid-in capital, if any. Any excess is charged to accumulated deficit.

Debt Issuance Costs

Debt issuance costs incurred in connection with the issuance of long-term debt are included in other non-current assets and are amortized over the term of the related agreements. Modifications to existing debt arrangements, including changes to conversion options, resulting in a greater than 10% change in the net present value of future cash flows are accounted for as debt extinguishments pursuant to EITF No. 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments. Accordingly, the Company expenses previously unamortized debt issuance costs when modifications of existing debt arrangements are considered to result in a debt extinguishment.

Foreign Currency Translation

Gains and losses on foreign currency translation of the financial statements of foreign operations whose functional currency is other than the U.S. dollar, together with the after-tax effect of exchange rate changes on intercompany transactions of a long-term investment nature, are included in accumulated other comprehensive income (loss). Assets and liabilities of foreign operations are translated at year-end exchange rates and revenue and expense are translated at average rates in effect during the year. Foreign currency exchange gains and losses from transactions and balances denominated in a currency other than the functional currency are recorded in the consolidated statement of operations. Transaction gains and (losses) included in selling, general and administrative expense were $(0.1) million, $0.1 million and $ 0.3 million in 2006, 2005 and 2004, respectively.

Comprehensive Income (Loss)

The Company reflects other comprehensive income (loss), which consists of unrealized gains and losses on available-for-sale securities and foreign currency translation adjustments, as a separate component of stockholders’ equity as required by SFAS No. 130, Reporting Comprehensive Income.

Stock-Based Compensation

The Company adopted the fair value recognition provisions of SFAS 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”) on January 1, 2006. SFAS 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity for goods or services; addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments; and focuses primarily on accounting for transactions in which an entity obtains employee services in stock-based compensation transactions. The fundamental premise of SFAS 123(R) requires that companies recognize the fair value of employee stock-based compensation awards as compensation cost in the financial statements, beginning on the grant date and it does not allow the previously permitted pro forma disclosure-only method as an alternative to financial statement recognition. Compensation cost is based on the fair value of the awards the Company expects to vest, amortized straight-line to expense over the vesting period (typically three to five years) or service period for each award.

In addition, the compensation expense for stock-based awards includes an estimate for forfeitures recognized over the expected term of the award. Prior to the adoption of SFAS 123(R), the Company recognized actual forfeitures when they occurred. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The cumulative effect adjustment, to record the impact of estimated forfeitures on the unvested portion of options with an intrinsic value on the grant date, was determined to be immaterial.

F-12

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The fair value of options is estimated using the Black-Scholes option-pricing model which considers, among other factors, the expected life of the award and the expected volatility of the Company’s stock price. Although the Black-Scholes model meets the requirements of SFAS 123(R) and SAB 107 (defined below), the fair values generated by the model may not be indicative of the actual fair values of the Company’s awards, as it does not consider other factors important to those stock-based compensation awards, such as continued employment, periodic vesting requirements, and limited transferability.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payment (“SAB 107”). SAB 107 provides guidance regarding the interaction between SFAS 123(R) and certain SEC rules and regulations. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

The Company elected the modified prospective transition method provided for under SFAS 123(R), and consequently prior period results have not been restated to reflect, and do not include, the impact of SFAS 123(R). Under this transition method, compensation cost associated with stock-based awards recognized beginning in 2006 now includes:

1.   compensation expense related to the grant date fair value for the remaining unvested portion of stock-based awards granted prior to December 31, 2005; and

2.   compensation expense related to stock-based awards granted subsequent to December 31, 2005.

As of December 31, 2005, there were unvested options outstanding representing a total of approximately 666,000 shares. The unamortized stock-based compensation expense for these options, as previously calculated as of their grant date under SFAS 123, adjusted for estimated forfeitures at 6%, was $1.1 million. These costs are expected to be recognized over a weighted average period of 1.1 years.

The Company expects the adoption of SFAS 123(R) and SAB 107 to have a material impact on its consolidated financial statements in the future (after it resumes granting stock options as a component of employee compensation); however, the Company has suspended stock option granting activities since April 2005, as previously explained in its 2005 10-K. As a result, the impact of adopting SFAS 123(R) (including modification charges) on the Company’s operating results for the year ended December 31, 2006, was not materially different than had it continued to account for share-based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretations including Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 44, Accounting for Certain Transactions Involving Stock Compensation, An Interpretation of APB Opinion No. 25 (“FIN 44”).

Prior to adopting SFAS 123(R), the Company accounted for stock-based compensation to employees and directors using the intrinsic value method prescribed in APB 25, and related interpretations with the pro-forma disclosures permitted under SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure (“SFAS 148”). Under APB 25, compensation cost for stock-based compensation is measured as of the date the number of shares and exercise price become fixed. The terms of an award are generally fixed on the date of grant, requiring the stock option to be accounted for as a fixed award. For fixed awards, compensation expense is measured based on the amount by which the quoted market price of the Company’s stock on the measurement dates exceeds the exercise price of the option granted, commonly referred to as the intrinsic value. No compensation expense is recognized if the exercise price is equal to or greater than the quoted market price of the Company’s stock on the measurement date. In those cases where the terms of an award were modified after the initial grant, such grants were remeasured to determine if additional compensation expense was needed. Modifications include, but are not limited to: acceleration of vesting, extension of the life (exercise period) during employment and extensions beyond 90 days following termination of employment, changes to the number of shares, and changes to the exercise price. Compensation expense, if any, for modified awards was determined in accordance with the provisions of FIN 44.

F-13

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On November 10, 2005, the FASB issued FASB Staff Position (“FSP”) SFAS No.123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards (“FSP 123(R)-3”). The Company has elected to adopt the alternative simplified transition method provided in FSP 123(R)-3 for calculating the beginning balance of the additional paid in capital pool (or “APIC pool”) of excess tax benefits available to absorb tax deficiencies recognized subsequent to its adoption. In addition, in accordance with SFAS 123(R), SFAS No. 109, Accounting for Income Taxes (“SFAS 109”), and EITF Topic D-32, Intra-period Tax Allocation of the Tax Effect of Pretax Income from Continuing Operations, the Company has elected to recognize excess income tax benefits from stock option exercises in additional paid-in capital only if an incremental income tax benefit would be realized after considering all other tax attributes presently available to the Company.

Pro Forma Net Loss and Loss per Share

The following table illustrates the effect on net loss and loss per common share for 2005 and 2004, respectively, as if the Company had applied the fair value recognition provisions of SFAS 123. The Company has estimated fair value using the Black-Scholes option pricing model.

(in thousands, except per share amounts)	2005			2004
Net loss	$	(6,417	)	$	(14,359	)
Add: Stock-based compensation expense included in net
loss, zero tax effect		205			589
Deduct: Stock-based compensation expense determined
under the fair value method, zero tax effect		(2,339	)		(4,162	)
Pro forma net loss	$	(8,551	)	$	(17,932	)
Basic and diluted loss per common share:
As reported	$	(0.20	)	$	(0.45	)
Pro forma	$	(0.26	)	$	(0.56	)
Basic and diluted weighted average common
shares outstanding		32,509			32,201

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS No. 157, Fair Value Measurements, and SFAS No. 107, Disclosures about Fair Value of Financial Instruments. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company will adopt Statement 159 on January 1, 2008 and does not anticipate adoption to materially impact its consolidated financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements for fair value measurements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. SFAS 157 does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company will adopt SFAS 157 on January 1, 2008 and anticipates that the adoption will not materially impact its consolidated financial position or results of operations.

F-14

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold for tax positions taken or expected to be taken in a tax return. FIN 48 requires that entities recognize in their financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The cumulative effect of applying the provisions of FIN 48 will be reported as an adjustment to the opening balance of retained earnings upon adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on January 1, 2007 and the adoption has not materially impacted its consolidated financial position or results of operations.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments (“SFAS 155”). SFAS 155 is an amendment of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”) and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS 140”) and allows companies to elect to measure at fair value entire financial instruments containing embedded derivatives that would otherwise have to be accounted for separately. SFAS 155 also requires companies to identify interest in securitized financial assets that are freestanding derivatives or contain embedded derivatives that would have to be accounted for separately, clarifies which interest- and principal-only strips are subject to SFAS 133, and amends SFAS 140 to revise the conditions of a qualifying special purpose entity due to the new requirement to identify whether interests in securitized financial assets are freestanding derivatives or contain embedded derivatives. SFAS 155 is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. The Company adopted SFAS 155 on January 1, 2007 and the adoption has not materially impacted its consolidated financial position or results of operations.

2. Property and Equipment

Property and equipment consisted of the following at December 31, 2006 and 2005:

					Useful Lives
(in thousands )	2006		2005		(Years)
Computer software	$	5,641	$	3,572		4 - 5
Leasehold improvements		2,776		3,741		2 - 10
Furniture and equipment		4,145		4,673		3 - 7
Subscription and data center equipment		35,059		31,845		3 - 5
Total property and equipment, gross		47,621		43,831
Less: Accumulated depreciation		32,813		30,110
Total property and equipment, net	$	14,808	$	13,721

F-15

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Assets held under capital leases, included in the above, consisted of the following at December 31, 2006 and 2005:

					Useful Lives
(in thousands )		2006		2005	(Years)
Furniture and equipment	$	63	$	64	5
Data center equipment		2,886		2,289	3 - 5
Total property and equipment held under
capital leases, gross		2,949		2,353
Less: Accumulated depreciation		1,046		459
Total property and equipment held under
capital leases, net	$	1,903	$	1,894

Depreciation and amortization expense for property and equipment was $5.0 million, $6.9 million and $7.8 million for the years ended December 31, 2006, 2005 and 2004, respectively. Of these amounts, $3.8 million, $5.0 million and $5.6 million for the years ended December 31, 2006, 2005 and 2004, respectively, were included in cost of revenue. Amortization expense for assets held under capital leases included above was $0.6 million, $0.8 million and $0.9 million for the years ended December 31, 2006, 2005 and 2004, respectively.

3.Acquisitions and Dispositions

Acquisition of EuroLink

On March 6, 2002, the Company acquired a convertible preferred stock interest in EuroLink Network, Inc. (“EuroLink”), with its operations based in Madrid, Spain, for $2.0 million in cash. The preferred stock automatically converted into a 40% common stock interest on March 6, 2004.

Although the Company did not initially own a majority of the voting interest, the Company deemed it appropriate to consolidate the balance sheet and results of operations of EuroLink as it had control over the operating decisions of EuroLink. In addition to the Company providing substantially all of the financial support to EuroLink, the Company provided the technological infrastructure and expertise used in the business. Since there was no equity attributable to the other shareholders’ interests, there was no minority interest to absorb any portion of the losses of EuroLink.

The Company’s key consideration for taking control of EuroLink was to help expand the Company’s business into Europe.

Effective March 29, 2004, the Company acquired the remaining 60% of EuroLink that it did not already own for $24,000 in cash and promissory notes issued and payable in the Company’s common stock or cash, at the Company’s option, in the aggregate having a fair value of $0.5 million.

The $0.5 million purchase price for the remaining interest has been assigned to 60% of the fair value of an intangible asset acquired, which under step acquisition accounting takes into account the interest acquired, with the balance of $0.1 million recorded as goodwill.

F-16

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The purchase price of the acquisition of the minority interest of EuroLink in 2004 has been allocated to the assets acquired and liabilities assumed based on the fair values at the date of acquisition, as follows:

(in thousands)
Assets:
Intangible assets	$	408
Goodwill		116
Total assets acquired		524
Liabilities:
Current liabilities		50
Total liabilities assumed		50
Net assets acquired	$	474

Sale of NYFIX Overseas

In August 2006, the Company disposed of all of the issued and outstanding capital stock of NYFIX Overseas, a wholly-owned subsidiary which previously comprised the Company’s Order Book Management Systems (“OBMS”) Division. Pursuant to terms of the agreement which closed August 25, 2006(the “Sale Agreement”), the initial amount paid by G.L. Trade S.A. (“GL”) for the purchase of NYFIX Overseas was $9.0 million. A portion of this amount, $1.3 million, was repaid to GL in April 2007 in settlement of a working capital adjustment. In addition, transaction related fees and expenses aggregating $0.5 million were paid subsequent to closing.

There is also an earn-out adjustment, under the Sale Agreement, which provides eligibility for additional earn-out payments based on future revenues of NYFIX Overseas through December 31, 2007. The maximum earn-out payment is $5.1 million, net of additional payments to the management team of NYFIX Overseas.

The Company recorded a net gain on this transaction of $4.0 million.

The Company has agreed to indemnify GL for certain claims made through December 31, 2007, as well as for losses arising out of or resulting from (1) any misrepresentation or breach of warranties; (2) any breach of a covenant or agreement made or to be performed by the Company under the Sale Agreement; (3) certain patent settlements; (4) the lack of recording stock-based compensation expense related to stock options granted to the employees of NYFIX Overseas by the Company; (5) specified taxes of NYFIX Overseas pre-closing that were not previously paid or adequately reserved for by NYFIX Overseas, and (6) any obligations relating to options to purchase shares of common stock of the Company held by employees of NYFIX Overseas.

For two years following the closing and subject to certain exceptions, under the Sale Agreement, the Company has agreed not to develop or market any product that is directly competitive with the OBMS product of NYFIX Overseas.

The disposition of NYFIX Overseas constitutes a discontinued operation and accordingly all financial statements presented reflect amounts relative to NYFIX Overseas, except for previously allocated overhead charges, as a discontinued operation.

The net assets of NYFIX Overseas were as follows as of December 31, 2005:

F-17

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in thousands)
Cash and cash equivalents	$	494
Accounts receivable, net		2,804
Prepaid expenses and other current assets		12
Property and equipment, net		403
Other assets, net		2,118
Accounts payable and accrued expenses		(1,808	)
Deferred revenue		(588	)
Net assets	$	3,435

Revenue and income (loss) before income tax provision of NYFIX Overseas, excluding previously allocated overhead charges, through the date of disposition in 2006 and for the years ended December 31, 2005 and 2004 were as follows:

	Year Ended December 31,
(in thousands)	2006(a)			2005			2004
Revenue	$	4,988		$	8,518		$	9,186
(Loss) Income before income tax provision excluding
gain on sale	$	(389	)	$	(174	)	$	1,041
Gain on sale		4,035			-			-
Income (loss) before income tax provision including
gain on sale in 2006	$	3,646		$	(174	)	$	1,041

(a) Includes operations through August 25, 2006

4.Goodwill and Acquired Intangible Assets

Goodwill and acquired intangible assets relate to past acquisitions, including the acquisitions of EuroLink, Renaissance Trading Technologies, LLC (“Renaissance”), NYFIX Millennium, L.L.C. (“NYFIX Millennium”) (see Note 10) and Javelin Technologies, Inc. (“Javelin”). In the absence of circumstances requiring impairment testing on a quarterly or other more frequent basis, the Company has set October 1 as its annual testing date for goodwill impairment. As of October 1, 2006, 2005 and 2004, the Company performed its annual tests for impairment on a reporting unit basis using the discounted cash flow method. There was no indication of impairment to the value of goodwill for the years ended December 31, 2006, 2005 and 2004.

The tax basis of goodwill related to the Company’s acquisition of Renaissance exceeded the book basis of goodwill by approximately $0.8 million. As the tax benefits of the deductible goodwill are realized on the Company’s tax returns, the tax benefits attributable to the excess tax basis are recognized for financial reporting purposes as reductions of goodwill in accordance with SFAS 109.

The following table presents the changes in the carrying amount of goodwill by reportable segment (reporting unit - see Note 16) for the years ended December 31, 2006 and 2005.

F-18

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

				Transaction
	FIX			Services
(in thousands)	Division			Division			Total
Balance as of December 31, 2004	$	48,424		$	9,851		$	58,275
Renaissance (adjustment for tax benefits)		(20	)		(21	)		(41	)
Balance as of December 31, 2005		48,404			9,830			58,234
Renaissance (adjustment for tax benefits)		(21	)		(20	)		(41	)
Balance as of December 31, 2006	$	48,383		$	9,810		$	58,193

Acquired intangible assets consisted of the following at December 31, 2006 and 2005:

	2006				2005
	Gross				Gross				Useful
	Carrying		Accumulated		Carrying		Accumulated		Lives
(in thousands)	Amount		Amortization		Amount		Amortization		(Years)
Existing technology	$	8,500	$	7,460	$	8,500	$	5,864		5 - 7
Customer related intangibles		3,138		2,590		3,108		2,008		5
Trademarks and other		800		422		800		334		6 - 14
Total	$	12,438	$	10,472	$	12,408	$	8,206

Amortization expense of acquired intangible assets was $2.3 million for each of the years ended December 31, 2006, 2005 and 2004, and is included in cost of revenue.

The Company’s estimate of future amortization expense for acquired intangible assets that exist at December 31, 2006, is as follows:

(in thousands)
2007	$	1,134
2008		293
2009		238
2010		150
2011		28
Thereafter		123
Total	$	1,966

F-19

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. Broker-Dealer Operations

Clearing Broker Assets and Liabilities

Clearing broker assets and liabilities consisted of the following at December 31, 2006 and 2005:

(in thousands)	2006		2005
Securities borrowed	$	421,435	$	454,098
Securities failed-to-deliver		-		357
Deposits with clearing organizations and others		1,061		1,209
Receivables from clearing organizations		384		911
Total clearing broker assets	$	422,880	$	456,575
Securities loaned	$	422,429	$	456,431
Securities failed-to-receive		-		394
Total clearing broker liabilities	$	422,429	$	456,825

Securities Lending

The Company receives collateral under securities borrowed transactions which it is allowed by contract or custom to sell or repledge. As of December 31, 2006, securities borrowed with a fair value of $405.0 million were repledged for securities loaned. The gross amounts of interest earned on cash provided to counterparties as collateral for securities borrowed and interest incurred on cash received from counterparties as collateral for securities loaned and the resulting net amount included in transaction revenue for the years ended December 31, 2006 and 2005 were as follows:

(in thousands)	2006			2005
Interest earned	$	14,697		$	7,567
Interest incurred		(13,287	)		(6,682	)
Net	$	1,410		$	885

Regulatory Net Capital Requirements

U.S. registered broker-dealer subsidiaries - NYFIX Clearing Corporation (“NYFIX Clearing”), NYFIX Transaction Services, Inc. (“NYFIX Transaction”), and NYFIX Millennium are subject to the SEC’s Uniform Net Capital Rule (15c3-1), which requires the maintenance of minimum regulatory net capital. NYFIX Clearing has elected to use the alternative method, as permitted by the rule, which requires the maintenance of minimum regulatory capital, as defined, equal to the greater of $250,000 or 2% of aggregate debit items arising from customer transactions, as defined. NYFIX Clearing’s membership in the Depository Trust & Clearing Corporation (the “DTCC”) requires it to maintain excess regulatory net capital of $10.0 million. NYFIX Transaction and NYFIX Millennium have elected to use the aggregate indebtedness standard, which requires that the ratio of aggregate indebtedness to regulatory net capital, both as defined, shall not exceed 15 to 1. The regulatory net capital ratios for NYFIX Transaction and NYFIX Millennium at December 31, 2006 were 2.17 to 1 and 0.98 to 1, respectively.

Foreign registered subsidiaries - NYFIX International, Ltd. (“NYFIX International”) is an ISD Category B registered firm of the Financial Services Authority (“FSA”) in the U.K. NYFIX International is required to maintain financial resources generally equal to three months average expenditures, subject to a minimum of €125,000, plus a proportion of less liquid assets on hand.

F-20

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of December 31, 2006, the regulatory net capital/resources and excess amounts were as follows:

	Regulatory Net		Excess RegulatoryNet
(in thousands)	Capital/Resources		Capital/Resources
NYFIX Clearing	$	25,430	$	25,180
NYFIX Transaction		269		230
NYFIX Millennium		2,831		2,646
		28,530		28,056
NYFIX International		1,434		599
	$	29,964	$	28,655

Credit Risk

In the normal course of business, the Company settles securities transactions with counterparties in connection with its execution businesses and its matched-book stock borrow/stock loan business. This activity may expose the Company to off-balance sheet risk arising from the potential that counterparties may fail to satisfy their obligations. In the event counterparties fail to satisfy their obligations, the Company may be required to purchase or sell financial instruments, at unfavorable market prices, to satisfy those obligations. The Company also clears certain of its securities transactions with its institutional counterparties through third-party clearing firms on a fully disclosed basis. These agreements provide that the clearing firms may have the right to charge the Company for losses that result from a counterparty's failure to fulfill its contractual obligations. The Company mitigates the risk of counterparty nonperformance by reviewing, on an ongoing basis, the credit standing of its counterparties and by its membership in the stock loan hedge program of the Options Clearing Corporation (the “OCC”). The OCC guarantees the required mark-to-market payments related to the fluctuation in market value of the collateral underlying stock borrow/stock loan transactions processed by its members and is considered the principal counterparty to each transaction. At December 31, 2006, approximately 44% of the Company’s stock borrow/stock loan transactions outstanding were processed through the OCC. The Company believes that the settlement of these transactions will not have a material effect on the Company’s financial position.

The Company is a member of various clearing organizations that trade and clear securities transactions and guarantee certain member obligations. Associated with its memberships, the Company may be required to pay a proportionate share of the financial obligations of another member who may default on its obligations to the exchange. While the rules governing different exchange memberships vary, in general the Company’s guarantee obligations would arise only if the exchange had previously exhausted its resources. In addition, any such guarantee obligation would be apportioned among the other non-defaulting members of the exchange. Any potential contingent liability under these membership agreements cannot be fully estimated. The Company has not recorded any contingent liability in the statement of financial condition for these agreements, and believes that any potential requirement to make payments under these agreements is remote.

6.Restructuring Costs

Effective February 1, 2004, the Company entered into an agreement to lease additional space at its New York City offices at 100 Wall Street. In connection with this agreement, the Company ceased use, in the second quarter of 2004, of one of its other offices on Wall Street, consolidated its operations into the new space and eliminated 14 staff positions. The Company recorded a restructuring charge of $2.5 million in June, 2004, which included the fair value of the remaining rent payments (net of estimated sub-lease income), severance and write-offs of property and equipment. The restructuring activities were substantially completed at December 31, 2004.

F-21

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

During 2006, the Company relocated its corporate headquarters from Stamford, Connecticut to New York City, signed an agreement to sublet the office space previously occupied in Stamford and reached an agreement to lease additional space at its New York City office at 100 Wall Street. The Company recorded a restructuring charge of $2.1 million in September 2006, which consisted primarily of the fair value of the remaining rent payments (net of estimated sub-lease income), plus real estate commissions, leasehold improvements for the sub-tenant, employment costs, moving costs and write-offs of property and equipment. The restructuring activities were substantially completed at December 31, 2006.

The liabilities related to the restructuring charges are included in current portion of other long-term liabilities and other long-term liabilities. The following table summarizes the total restructuring costs incurred, costs paid or otherwise settled, and the remaining unpaid or otherwise unsettled accrued liabilities as of December 31, 2006 and 2005.

(in thousands)		Lease costs, net of sublease income			Property and equipment write-offs			Severance			Total
2004 restructuring costs	$	2,097		$	319		$	111		$	2,527
Cash payments		(501	)		-			(96	)		(597	)
Non-cash charges and other		144			(319	)		(15	)		(190	)
Remaining liability at December 31, 2004		1,740			-			-			1,740
Cash payments		(601	)		-			-			(601	)
Non-cash charges and other		55			-			-			55
Remaining liability at December 31, 2005		1,194			-			-			1,194
Cash payments		(237	)		-			-			(237	)
Non-cash charges and other		50			-			-			50
Remaining liability at December 31, 2006		1,007			-			-			1,007
2006 restructuring costs		1,201			855			-			2,056
Cash payments		(665	)		-			-			(665	)
Non-cash charges and other		668			(855	)		-			(187	)
Remaining liability at December 31, 2006		1,204			-			-			1,204
Total restructuring liability at
December 31, 2006	$	2,211		$	-		$	-			2,211
Less: current portion											(481	)
Long-term portion										$	1,730

7.Other Balance Sheet Information

Prepaid expenses and other current assets consisted of the following at December 31, 2006 and 2005:

F-22

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in thousands)	2006		2005
Income taxes receivable	$	1,078	$	1,071
Prepaid expenses		1,828		1,289
Inventory		102		557
Other		1,427		1,763
Total prepaid expenses and other current assets	$	4,435	$	4,680

Inventory consisted of the following at December 31, 2006 and 2005:

(in thousands)	2006		2005
Parts and materials	$	319	$	739
Work in process		3		7
Finished goods		36		120
Total inventory, gross		358		866
Less: Allowance for obsolescence		256		309
Total inventory, net	$	102	$	557

The capitalized cost and accumulated amortization related to product enhancement costs were as follows at December 31, 2006 and 2005:

(in thousands)	2006		2005
Product enhancement costs, gross	$	22,039	$	19,604
Less: Accumulated amortization		16,139		12,375
Product enhancement costs, net	$	5,900	$	7,229

Amortization expense of product enhancement costs of $3.8 million, $3.4 million and $2.6 million for the years ended December 31, 2006, 2005 and 2004, respectively, is included in cost of revenue. Amortization expense of other assets of $83,000, $83,000 and $29,000 for the years ended December 31, 2006, 2005 and 2004, respectively, was included in cost of revenue, and $0, $35,000 and $29,000 for the years ended December 31, 2006, 2005 and 2004, respectively, was included in depreciation and amortization expense.

Accounts payable and accrued expenses consisted of the following at December 31, 2006 and 2005:

(in thousands)	2006		2005
Accounts payable	$	11,052	$	7,646
Taxes, other than income and payroll taxes		834		1,252
Compensation and related		6,276		3,122
Modification of stock-based awards (Note 14)		2,601		-
Sale of NYFIX Overseas working capital adjustment (Note 3)		1,318		-
Penalties on reporting delinquency (Note 10)		631		-
Other		2,421		1,912
Total accounts payable and accrued expenses	$	25,133	$	13,932

F-23

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. Long-Term Debt and Capital Lease Obligations

Long-term debt consisted of the following at December 31, 2006 and 2005:

(in thousands)		2006			2005
EuroLink Notes	$	-		$	67
Renaissance Notes		188			365
5% Convertible Note		7,500			7,500
Less: unamortized discount on 5% Convertible Note		(88	)		-
		7,600			7,932
Less: Current portion		(188	)		(259	)
Long-term debt	$	7,412		$	7,673

Convertible Note

At December 31, 2006 and 2005, the Company had outstanding a $7.5 million convertible note with an interest rate of 5%, due in December 2009. This note was issued in December 2004 through a private placement to a lender. As a result of the restatements of the Company’s financial statements for the year ended December 31, 2003, the Company was in breach of certain representations and warranties relating to those financial statements that constituted events of default under this note. This note was amended on June 24, 2005, at which time the lender waived all existing defaults, extended the requirement to have a registration statement be effective for the shares of the Company's common stock that may be issued as payment of principal or interest and the conversion price was reduced (as amended, the “Note”).

The interest is payable in cash or, at the Company’s option as described below, by the issuance of shares of its common stock, semi-annually in arrears on June 30 and December 30 of each year, beginning June 30, 2005.

The Note is subordinated to all existing and future secured indebtedness of the Company. The lender has certain rights which require the Company to register the common stock to be issued upon conversion of the Note or for payment of interest, under the Securities Act of 1933, as amended (the “Securities Act”). Such registration statement was to be effective by March 31, 2006 and since it was not, the Company is required to pay additional interest, in cash, for each month the effectiveness is delayed. The additional interest varies by month and has an aggregate cap of $500,000 for the duration of the Note. The Company paid $338,000 of such additional interest in 2006 and accrued the remaining $162,000 of additional interest during the fourth quarter of 2006.

The entire outstanding principal amount of the Note, together with all accrued but unpaid interest is due in cash on December 30, 2009; and except under certain conditions, the Company has no right of early prepayment on the Note.

In exchange for the June 2005 amendment, the Company agreed to reduce the price at which the lender can convert the Note into its common stock from $6.94 to $5.75 per common share (the “Conversion Price”), a 16% premium over the average of the Company’s common stock closing price for the five trading days preceding June 24, 2005. This modification to the Note resulted in a greater than 10% change in the fair value of the embedded conversion feature and accordingly was considered a debt extinguishment. As a result, the unamortized debt issuance costs as of June 24, 2005 of $255,000 were written off.

The Conversion Price may be reduced if the Company issues shares of common stock at a price below the Conversion Price then in effect, excluding stock option exercises, the settlement of obligations outstanding as of the date of the Note and other transactions previously approved by the Company’s Board of Directors. Upon the private placement of the Company’s common shares which closed in July 2006 (see Note 10), the conversion price was reduced from $5.75 per common share before the issuance to the current $5.66 per common share. As a result, the Company recorded a discount to the convertible note of approximately $0.1 million related to a beneficial conversion feature which was triggered by the adjustment to the conversion price. The beneficial conversion feature was calculated as the incremental shares into which the convertible note could be converted based on the revised conversion price multiplied by the market price of the Company’s common stock on the commitment date. The discount is being accreted over the remaining term of the note.

F-24

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Note is not considered to be conventional convertible debt, as it is not convertible into a fixed number of shares. Therefore, the embedded conversion option and other derivatives of the Note are subject to the requirements of EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. However, since the circumstances under which the conversion price can be reset are within the control of the Company and the additional interest payments required for not timely registering the shares is a reasonable estimation of the difference between registered and unregistered securities, separate accounting for embedded derivatives is not required.

At the option of the Company, the Note is convertible into its common stock at the lender’s conversion rate at any time provided the Company’s common stock has exceeded 150% of the Conversion Price, or $8.49 per common share, for at least ten trading days in the thirty day trading period ending within five trading days prior to the date the Company gives notice of the conversion and provided that the Company has an effective registration statement covering the public resale of such shares. If the Company converts the Note prior to December 30, 2007, the Company is required to pay an additional make-whole interest payment equal to the present value of the remaining interest payments in either cash or the Company’s stock at the Company’s discretion.

If the Company issues its common stock in lieu of cash to convert the Note or to make interest payments, or any portion thereof, the Company is required to have an effective registration statement covering the public resale of such shares and pay a 5% premium based on an average of the closing price of its common stock for the previous ten trading days.

At the option of the lender, the Company may issue to the lender up to an additional $2.5 million note under terms substantially similar to those described above.

Renaissance Notes

At December 31, 2006 and 2005, the Company had $188,000 and $365,000, respectively, outstanding in principal value due on notes issued in connection with the 2003 acquisition of the remaining 82% of the membership units of Renaissance. The notes, which were originally issued with a face value of $3.0 million, were discounted at 5.5% to $2.7 million, and are payable in annual installments through June 2007 at the Company’s option in its common stock or cash. In July 2006, the Company issued 40,491 shares from treasury stock with an aggregate market price of $191,000 as a scheduled payment to the remaining noteholders of the Renaissance promissory notes. During 2006, $14,000 of interest accreted on these notes.

EuroLink Notes

At December 31, 2005, the Company had $67,000 in outstanding principal value on notes issued in connection with the acquisition of the remaining 60% of EuroLink (see Note 3). The notes, which were originally issued with a face value of $0.5 million, were discounted at 5.5% to $474,000 and were payable at the Company‘s option in its common stock or cash on April 28, 2005. During 2006, the Company issued 14,021 shares from treasury stock to a EuroLink promissory noteholder as final payment towards the note with an aggregate market value agreed in April 2005 of $67,000.

F-25

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Annual maturities on long-term debt

Annual maturities on long-term debt outstanding at December 31, 2006 were as follows:

(in thousands)
2007	$	193
2008		-
2009		7,500
Total payments		7,693
Less amount reflecting accreted interest and unamortized discounts		(93	)
Principal balance outstanding at December 31, 2006	$	7,600

Long-term debt has an estimated fair value of $11.2 million at December 31, 2006. The fair value of the $7.5 million convertible note was estimated using current market interest rates and the Black-Scholes option pricing model on the conversion option using the following assumptions:

Estimated risk-free interest rate	5.0	%
Expected term, equals life of convertible debt (in years)	3
Expected volatility	60	%
Expected dividend yield	0	%

The carrying value of the Renaissance Notes approximates fair value.

Capital Lease Obligations

At December 31, 2006, the Company was committed under capital lease obligations with interest rates ranging from 5.00% to 9.34% with maturities ranging from May 20, 2007 to June 1, 2008. At December 31, 2006 and 2005, capital lease obligations were $1.7 million and $1.6 million, respectively, of which $1.2 million and $0.7 million, respectively, was classified as a current liability. Future minimum lease payments under capital leases at December 31, 2006 were as follows:

(in thousands )
2007	$	1,300
2008		471
Total minimum payments		1,771
Less: amount representing interest		87
Present value of minimum capital lease payments		1,684
Less: Current portion		(1,223	)
Long-term portion of capital lease obligations	$	461

9. Commitments and Contingencies

The Company is obligated under certain non-cancelable operating leases for office space and equipment, under telecommunication services contracts and under software purchase, license and maintenance agreements.

Operating leases for office space contain escalation clauses for base rent, maintenance and real estate tax increases.

F-26

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Future minimum obligations under operating leases and purchase obligations with remaining terms in excess of one year, net of sublease income, approximate the following:

				Minimum
		Minimum		Sublease
(in thousands )		Payments		Income			Net
2007	$	5,985	$	(1,053	)	$	4,932
2008		6,006		(1,063	)		4,943
2009		4,397		(1,072	)		3,325
2010		3,749		(872	)		2,877
2011		2,887		(602	)		2,285
Thereafter		6,330		(2,177	)		4,153
Total	$	29,354	$	(6,839	)	$	22,515

Rent expense was $4.4 million, $4.6 million and $4.6 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Stock-based Compensation Related Matters

SEC Investigation

By letter dated October 28, 2004, the Division of Enforcement of the SEC informed the Company that it was conducting an informal investigation related to certain stock option grants. On February 25, 2005, the Company filed a current report on Form 8-K, which indicated that the Company believed that the matter was a formal inquiry. The Company is cooperating with the SEC with respect to this matter. The Company believes it is substantially complete with regard to producing all documents responsive to document requests and a subpoena. The SEC staff has taken testimony from current and/or former officers and/or directors, as well as from third parties, including the Company’s former independent registered public accounting firm.

Grand Jury Subpoena

In May 2006, the Company received a grand jury subpoena from the U.S. Attorney for the Southern District of New York.  The subpoena sought documents relating to the Company’s granting of stock options.  With the agreement of the Assistant U.S. Attorney, the Company is responding to the subpoena by producing the documents it produces to the staff of the Division of Enforcement of the SEC. The U.S. Attorney has also conducted interviews with at least one current employee and two former employees (one of whom is a former officer) and with at least one employee of the Company’s former independent registered public accounting firm.

Shareholder Derivative Actions

On or about June 1, 2006, the Company was served as a nominal defendant with a complaint (the “Ritchie Complaint”) in a shareholder derivative action titled Ritchie v. Castillo, et al. in the Superior Court for the State of Connecticut.  The Ritchie Complaint also names the Company’s former Chairman and Chief Executive Officer, another former Chief Executive Officer and director, the Company’s former Chief Information Officer, a former Chief Financial Officer, and six other current directors as defendants. The Ritchie Complaint asserts a claim for breach of fiduciary duty against all the individual defendants and a claim for unjust enrichment against four individual defendants based on claimed backdating of stock option grants to these individuals between 2000 and 2003.  On June 9, 2006, the Company was named as a nominal defendant in a shareholder derivative action titled McLaughlin v. Castillo, et al. in the same court and with the same substantive allegations as the Ritchie action. In September 2006, the Court consolidated the Ritchie and McLaughlin actions. In October 2006, plaintiffs filed a consolidated complaint (the “State Court Consolidated Complaint”). The State Court Consolidated Complaint contains nine counts (as opposed to the two counts previously alleged in each of two actions), including counts for an accounting of all stock options granted to the individual defendants, breach of fiduciary duty and unjust enrichment, insider trading, rescission and breach of contract. The State Court Consolidated Complaint adds seven additional defendants: three former directors (one of whom is deceased); two former Chief Financial Officers, the Company’s current General Counsel and former Secretary and the Company’s former Executive Vice President and President of NYFIX Millennium. The nine counts of the State Court Consolidated Complaint are based on claimed backdating of stock option grants to eleven individual defendants between 1997 and 2003.

F-27

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On August 30, 2006, the Company was served as a nominal defendant with a complaint (the “Cattelona Complaint”) in a shareholder derivative action titled Cattelona v. Hansen, et al. in the United States District Court for the District of Connecticut.   The Cattelona Complaint also names the Company’s former Chairman and Chief Executive Officer, another former Chief Executive Officer and director, a former Chief Information Officer, a former Chief Financial Officer, and six other current directors as defendants. The Cattelona Complaint asserts counts against the individual defendants for violation of Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and Section 14(a) of the Exchange Act and Section 20(a) of the Exchange Act, and for breach of fiduciary duty, gross mismanagement and corporate waste. In addition, the Cattelona Complaint asserts a count against four of the individual defendants for unjust enrichment based on claimed backdating of stock option grants to the latter individuals between 1999 and 2002. 

On or about September 7, 2006, a complaint (the “Brock Complaint”)was filed in a shareholder derivative action titled Brock v. Hansen, et al. in the United States District Court for the District of Connecticut. The Brock Complaint names the Company as a nominal defendant, as well as the Company’s former Chairman and Chief Executive Officer, another former Chief Executive Officer and director, the Company’s former Chief Information Officer, a former Chief Financial Officer, and six other current directors as defendants. The Brock Complaint asserts a count for an accounting of all stock options granted to the individual defendants, and counts against all individual defendants for violation of Section 14(a) of the Exchange Act, breach of fiduciary duty, abuse of control, gross mismanagement, constructive fraud, corporate waste, unjust enrichment, and breach of contract. In addition, the Brock Complaint asserts counts against three individual defendants for rescission and for breach of contract for stock option grants made between 1997 and 2001.

On December 5, 2006, the U.S. District Court for the District of Connecticut consolidated the Brock and Cattelona actions. In December 2006, the plaintiffs filed a consolidated complaint (the “Federal Court Consolidated Complaint”). The Federal Court Consolidated Complaint contains twelve counts (as opposed to the eleven counts previously alleged in the Brock Complaint and the seven counts previously alleged in the Cattelona Complaint), including counts against all defendants for: violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; violations of Section 14(a) of the Exchange Act; for an accounting of all stock options granted to the individual defendants; breach of fiduciary duty and/or aiding and abetting; abuse of control; gross mismanagement; constructive fraud; corporate waste; and unjust enrichment. The Federal Court Consolidated Complaint also contains counts against six of the individual defendants for rescission and for breach of contract. The Federal Court Consolidated Complaint adds four additional defendants: two former directors, a former Chief Financial Officer and a former Executive Vice President of the Company and President of NYFIX Millennium. The twelve counts of the Federal Court Consolidated Complaint are based on claimed backdating of stock option grants to six individual defendants from 1997 to the filing of the Federal Court Consolidated Complaint. In June, 2007, plaintiffs filed a corrected amended consolidated complaint (the “Federal Court Amended Consolidated Complaint” and with the Federal Court Consolidated Complaint, the “Federal Court Consolidated Complaints”). The Federal Court Amended Consolidated Complaint drops eight individual defendants (two current directors, two former directors, a former Chief Executive Officer and director, a former Chief Financial Officer, a former Chief Information Officer and a former Executive Vice President of the Company and President of NYFIX Millennium), two counts for rescission and breach of contract and the count for violation of Section 14(a) of the Exchange Act and adds a count under Section 20 of the Exchange Act. The ten counts of the Federal Court Amended Consolidated Complaint are based on claimed backdating of stock option grants and an allegedly false and misleading Form 10-K filed in June 2005.

F-28

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In addition, certain shareholders have made formal inquiries regarding alleged violations of Section 16(b) of the Exchange Act based on the same facts alleged in the Ritchie and McLaughlin suits.

Related Tax Matters

In 2006 and 2007, the Company has had communications with the United States Internal Revenue Service (“IRS”) and the United Kingdom HM Revenue & Customs (“Inland Revenue”) relating to historical stock option grants and exercises. These communications involve employment tax returns and the amounts of reported employee compensation and related payroll tax withholdings, as well as deductions on corporate income tax returns. The Company has received document requests from the IRS relating to stock option grants and exercises in connection with the IRS examination of the Company’s corporate tax returns for the years 2001 and 2004 and of the Company’s employment tax returns for the years 2003 through 2005, respectively. Subsequent to the sale of NYFIX Overseas in August 2006, GL forwarded correspondence from the Inland Revenue relating to NYFIX Overseas’ potential liability for payroll tax withholdings on prior option exercises by certain former employees.

The Company has determined that it has exposure as former management did not properly withhold employee income and related payroll taxes related to historical stock option activity. As a result, the Company has recorded a liability of $1.0 million related to tax withholdings not made on the exercises of stock options previously classified as Incentive Stock Options (“ISOs”), exposures related to Section 409A of the U.S. Internal Revenue Code (“Section 409A”), and similar exposures related to withholdings and payroll taxes which may be due in the U.K. related to stock option exercises under Pay As You Earn, or PAYE, and National Insurance Contribution provisions (due to the Company’s indemnity obligations to GL). In 2006, the Company remedied the 409A exposure with respect to certain current and former directors and executive officers by increasing exercise prices of affected grants. The remedies that can be taken prior to December 31, 2007, with respect the 409A exposure related to rank and file employees, are currently being evaluated.

Based upon the current information available and the liabilities recognized, the Company believes the resolution of these tax matters will not have a material adverse effect on its consolidated financial condition or results of operations. However, the ongoing discussions with the taxing authorities could result in new information and higher than anticipated exposures. The Company is continuing to cooperate with the taxing authorities to resolve these matters.

Pending Exercises

Since the Company has not been current with its SEC reporting obligations, it generally did not issue shares to employees and directors in connection with the exercise of stock options from July 2005 to July 2007. In February 2006, the Compensation Committee of the Board of Directors approved a policy whereby the Company will honor awards to former employees who have validly notified the Company in writing of their intent to exercise. (See Note 14 for a more detailed discussion)

The Company has cash exposure to these option holders equal to the difference between the fair market value of the Company’s common stock on the original exercise notification date and the fair market value of the Company’s common stock on the actual date of exercise if the price declines.

As of December 31, 2006, the Company had outstanding options covering 1,089,906 shares for which it had been notified of intents to exercise and which were not deemed probable of expiring before the Company could issue shares (“Pending Exercises”). Fair market values of the Company’s common stock on the dates of these notifications ranged from $2.90 to $7.35. The weighted average fair market value for such shares underlying options on the respective notification dates was $5.99 . At December 31, 2006, the fair market value of the Company’s common stock was $6.30. The Company estimated that its potential cash exposure as of December 31, 2006, due to declines in its stock price after such notifications, was less than $0.1 million.

F-29

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

During the first six months of 2007, the Company was notified of additional intents to exercise. As discussed further in Note 10, during the first six months of 2007 certain pending notifications were resolved through exercise. As of June 30, 2007, Pending Exercises totaled 1,030,150 shares. The range of fair market values for the Company’s common stock on the dates of the corresponding notifications through June 30, 2007 was from $2.90 to $7.47, with a weighted average fair market value for such shares underlying options on their notification dates of $5.97. The Company estimated that its potential cash exposure as of June 30, 2007, due to declines in its stock price after such notifications, was less than $0.1 million, based on the fair market value of $7.40 at June 30, 2007. This cash exposure could, however, significantly increase if the fair market value of the Company’s stock declines once option holders are able to exercise and sell the underlying shares.

During the six months ended June 30, 2007, the Company paid $0.4 million to cash settle 114,250 options which had reached their 10-year contractual life and expired. At June 30, 2007, liabilities for modified awards to be cash settled, related to expired options covering 21,375 shares, aggregated $0.1 million. The Company has additional cash exposure if it cannot settle Pending Exercises with stock prior to their expiration going forward.

Internal Accounting Review and Restatements

The Company performed an extensive internal review of its historical stock-based compensation awards as well as an overall accounting review. The consolidated financial statements for the years ended December 31, 2004 and 2003 were re-audited by a newly engaged independent registered public accounting firm. The internal review was overseen by the Audit Committee of the Board of Directors and a special Subcommittee of the Audit Committee formed in connection with a restructuring of the Board and of management that commenced in September 2005.

As a result of this internal review, in its 2005 10-K, the Company restated its consolidated financial statements for prior periods and related financial statement disclosures to reflect adjustments necessary, reducing its previously reported results by a net amount of $42.1 million (the “2005 Restatement”). The items adjusted consisted of stock-based compensation, acquisitions and investments, revenue recognition, income taxes and treasury stock. The findings of the Company’s internal review of historical stock-based compensation awards included (i) grants to officers and directors which were made outside the terms of the stock option plans then in effect; (ii) modifications of grants to Peter Hansen, the Company’s founder, former Chief Executive Officer and Chairman, where evidence could not be located to demonstrate that the modifications were authorized by the Board or Compensation Committee; (iii) retroactive reinstatement of the employment status of Richard Castillo, the Company’s former Chief Financial Officer and Secretary, after he had discontinued providing employee services and the continued vesting of his outstanding awards, (iv) subsequent changing of vesting terms with retroactive documentation as of an earlier date; (v) grant schedules to the minutes of Board or Compensation Committee meetings which included awards that were not initiated until after the dates of these meetings; (vi) grant schedules to the minutes of Board or Compensation Committee meetings which included awards which were modified after the dates of such meetings to increase the number of options granted or to decrease the exercise price, but which were included on such schedules as if they had been granted in modified form on the dates of the Board or Compensation Committee meetings; (vii) options and warrants exercised by officers and directors with non-recourse notes where evidence could not be located to demonstrate that the issuance of such notes was approved by the Board or Compensation Committee; and (viii) other circumstances indicating the issuance of in-the-money grants. The modifications to Mr. Hansen’s grants noted in (ii) above resulted in the recording of a $25.0 million charge in March 2000, based on the incremental intrinsic value on the date assumed to be the modification date.

F-30

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The restatement for stock-based compensation included in the Company’s 2005 10-K relied upon significant legal and other judgments. These judgments included determinations as to the validity of grants, measurement dates, and other matters, including reliance upon delegated authority with respect to awards issued directly by Mr. Hansen and not later ratified by the Board or Compensation Committee. Any and all of these determinations could be challenged. Additionally, new and possibly significant information may also be located which could lead to different determinations that may require different accounting treatment.

NYFIX Millennium - SEC Inquiry

In connection with the restatement of the Company’s 1999 through 2002 consolidated financial statements relating to its accounting for the losses incurred by NYFIX Millennium filed in May 2004, the Division of Enforcement of the SEC informed the Company by letter dated July 14, 2004 that it was conducting an informal inquiry. On January 25, 2005, the Company filed a current report on Form 8-K, which indicated that the Company believed that the matter was a formal inquiry. The Company cooperated with the SEC, producing documents in response to document requests and subpoenas and making employees available for interviews and testimony. The SEC staff has taken testimony from current and/or former officers and/or directors, as well as from third parties, including the Company’s former independent registered public accounting firm. In March 2006, the Company announced that the SEC Enforcement Staff had advised that it is recommending that the SEC close its inquiry into this matter without any action being taken against the Company or any individual. As a result of the Staff’s recommendation, which is subject to a formal approval process within the SEC, the Company has not been required to produce any more documents or provide additional witnesses for testimony in connection with this inquiry.

Other

In November 2005, Tradition - UK, a London client of NYFIX Overseas, sent a letter of claim, alleging breach of warranty and negligence in the performance of NYFIX Overseas under a Purchase and License Agreement and Service Agreement relating to the furnishing of an order book management system provided by NYFIX Overseas to Tradition - UK.  Tradition - UK sought reimbursement of all payments it had made, totaling ₤475,000 plus an estimated further ₤2 million for loss of revenue and damage to reputation.  The Company and NYFIX Overseas responded in February 2006, stating that Tradition - UK’s claims are entirely without merit and asserting claims against Tradition - UK for non-payment of amounts owed.  To the Company’s knowledge, NYFIX Overseas has heard nothing further from Tradition - UK on this matter.

In January 2006, a former NYFIX employee filed a state court action in the New York Supreme Court for New York County titled Iovino v. NYFIX, Inc., alleging that he was discriminated against on the basis of his sexual orientation.  He is claiming $50 million in damages.  In April 2006, NYFIX answered the complaint, denying the allegations.

In June 2006, a former independent contractor in Madrid, Spain commenced a proceeding in Social Court No. 29 of Madrid, Spain in connection with the closing of EuroLink Network, Inc.’s (“EuroLink”) Madrid office.  He alleged that he was an employee, not an independent contractor, and that under Spanish law he was entitled to certain employee benefits.  In October 2006, the Company settled this matter, paying this individual €260,000.

In April 2005, a former employee filed a verified complaint with the New York State Division of Human Rights, alleging discrimination on the basis of race/color, age and opposition to unlawful discriminatory practices.  In June 2005, the Company filed a position paper with the New York State Division of Human Rights, denying the complainant’s charges in their entirety and requesting that the Division render a determination of “No Probable Cause.”  On December 21, 2006, the Regional Director of the New York State Division of Human Rights made a determination that there was probable cause to support the allegations of the complaint. The Company intends to vigorously defend these actions.

During the normal course of business, the Company becomes involved in various other routine legal proceedings, including issues pertaining to patent infringement, customer disputes and employee matters. The Company does not believe that the outcome of these matters will have a material adverse effect on its financial condition.

F-31

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As noted separately in the consolidated statements of operations, the Company incurred $12.8 million, $3.1 million and $1.3 million for the years ended December 31, 2006, 2005 and 2004, respectively, relating to the stock option investigation and subpoenas, a grand jury subpoena related to its stock option grants, related shareholder derivative litigation, related financial restatements and expenses to resolve related matters, together with the NYFIX Millennium SEC inquiry, related class action litigation and related financial restatement These costs include outside counsels, contract attorneys and forensic accountants, other consultants and the cost of re-auditing previously issued financial statements following the resignation of the Company’s former independent registered public accounting firm. These costs do not include any portion of time that the Company’s employees have dedicated to these matters. Amounts incurred during the year ended December 31, 2006 also included penalties of $0.6 million due to the Company’s delinquency in its periodic reporting obligations under a registration rights agreement related to the private placement transaction which closed on July 5, 2006, and $0.4 million of aggregate expense related to modifications to cash settle expiring stock options and to extend the normal 90-day post-termination exercise period. The Company will likely continue to incur material amounts of expense associated with these matters until they are resolved.

Other than the amount described above for employee-related taxes for stock options and pending exercises, the Company, in accordance with SFAS No. 5, Accounting for Contingencies, has not recorded any liability with respect to these matters as it is currently unable to predict the outcomes and reasonably estimate the amounts of loss, if any. With respect to the SEC investigation of stock option grants, the grand jury subpoena, the State Court Consolidated Complaint, and the Federal Court Consolidated Complaint associated with such matters and other related matters, the Company could be subject to penalties, fines or regulatory sanctions or claims by current and former officers, directors or employees for indemnification of costs or losses they may incur and such amounts, individually or collectively, could have a material impact on the Company’s financial condition. In addition, other actions may be brought against the Company related to the matters described above.

10. Stockholders’ Equity

Nasdaq Delisting Proceeding

On October 12, 2005, the Nasdaq Listing Qualifications Panel determined to continue the listing of the Company’s securities on the Nasdaq National Market, subject to the Company’s filing of its quarterly report on Form 10-Q for the three months ended June 30, 2005, on or before October 31, 2005. As a result of additional questions raised during the ongoing SEC and internal investigation into the Company’s accounting for stock option grants (see Note 9), the Company was unable to make this filing by October 31, 2005 and the Company’s common stock was delisted from the Nasdaq National Market on November 1, 2005.

As a result of this delisting, the Company’s common stock is currently traded in the over-the-counter (“OTC”) securities market with real-time quotes available on the Pink Sheets electronic quotation service using the symbol NYFX. Stockholders may find it more difficult to obtain accurate quotes and execute trades in the OTC market. In addition, if the market price of the Company’s common stock is less than $5.00 per share, the Company’s common stock could be considered a penny stock and become subject to the regulations applicable to penny stocks.

Preferred Stock

The Company is authorized to issue 5 million shares of preferred stock. The Company’s Board of Directors has designated 0.1 million shares as Series A Preferred Stock for issuance in connection with the Stockholders’ Rights Plan discussed below. In connection with the private placement of convertible preferred stock discussed below, 1.5 million shares were designated as Series B Voting Convertible Preferred Stock and0.5 million as Series C Non-Voting Convertible Preferred Stock.

F-32

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Stockholders’ Rights Plan

On September 1, 1997, the Board of Directors declared a dividend of a preference share purchase right (a “Right”) for each outstanding share of common stock of the Company held by stockholders of record on September 19, 1997 (the “Rights Agreement”). The number of outstanding Rights was adjusted for the two stock splits of 1.5 to 1.0 occurring in 1999 and 2000. Each share of common stock issued by the Company after such record date has the same Right attached thereto. Each Right entitles the registered holder to purchase from the Company, at any time after a stockholder acquires 20% or more of the Company's outstanding common stock, as set forth in the Rights Agreement, shares of the Company's Series A Preferred Stock (“Preference Stock”). The purchase price is $40 per one one-hundredth of a share of Preference Stock, subject to adjustment as set forth in the Rights Agreement.

Each share of Preference Stock will be entitled to a minimum preferential quarterly dividend payment of $1 per share but will be entitled to an aggregate dividend of one hundred times the dividend declared per share of common stock. In the event of liquidation, the holders of the Preference Stock will be entitled to a minimum preferential liquidation payment of $100 per share but will be entitled to an aggregate payment of one hundred times the payment made per share of common stock. Each share of Preference Stock will have one hundred votes, voting together with the shares of common stock. In the event of any merger, consolidation or other transaction in which shares of common stock are exchanged, each share of Preference Stock will be entitled to receive one hundred times the amount received per share of common stock.

Because of the nature of the Preference Stock’s dividend, liquidation and voting rights, the value of one one-hundredth interest in a share of Preference Stock purchasable upon exchange of each Right should approximate the value of one share of common stock.

On September 4, 2006, the Rights Agreement was amended to exclude the acquisition by Warburg Pincus Private Equity IX, L.P. (“Warburg Pincus”) of the 1.5 million shares of Series B Voting Convertible Preferred Stock issued on October 12, 2006 (see Private Placements) from triggering the exercise period for the Rights.

Private Placement- Convertible Preferred Stock

On October 12, 2006 (the “Commitment Date”), the Company closed a Securities Purchase Agreement (“SPA”) with Warburg Pincus, pursuant to which Warburg Pincus acquired 1.5 million shares of the Company’s preferred stock designated as Series B Voting Convertible Preferred Stock (the “Series B Preferred Stock”) and a warrant to purchase shares of common stock of the Company (the “Warrant”) for $75 million (the “Preferred Stock SPA”). The Company intends to use the proceeds, after deducting a 6% placement agent fee and other transaction related expenses aggregating $5.9 million, for general corporate purposes and business development activities.

The holders of the Series B Preferred Stock are entitled to vote with the holders of common stock on all matters submitted to a vote of the holders of common stock on an as-if-converted basis, with the exception of the election of directors. With respect to the election of directors, for so long as Warburg Pincus continues to hold more than 50% of Series B Preferred Stock initially issued to it pursuant to the Preferred Stock SPA, the holders of Series B Preferred Stock shall have the right, voting separately as a class, to appoint and elect two directors of the Company.  In addition, if certain financial representations in the Preferred Stock SPAare proved to be incorrect as of the date it was made in any material respect, the holders of Series B Preferred Stock shall have the right, voting separately as a class, to appoint and elect a third director of the Company. 

Pursuant to the Registration Rights Agreement entered into (in connection with the Preferred Stock SPA), the Company is obligated to use reasonable business efforts to (become current with regard to its periodic reporting with the SEC under the Exchange Act) obtain authorization for its common stock to be relisted on a “Principal Market”, as defined in the Registration Rights Agreement. Beginning on the first anniversary of the closing date of the Preferred Stock SPA, Warburg Pincus has the right to make a written request to the Company to register “Registrable Securities,” as defined in the Registration Rights Agreement. “Registrable Securities” include shares of the Company’s common stock: that are issued upon conversion of the Series B Preferred Stock, issued as a dividend, and any other shares held or acquired by Warburg Pincus.

F-33

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Dividends on the Series B Preferred Stock are payable semiannually in shares of the Company’s common stock. The number of shares issuable in payment of dividends is determined at an annual rate of 7% of the purchase price per share, or $50, divided by the conversion price then in effect (currently $5.00). Dividends on the Series B Preferred Stock are cumulative and all accumulated but unpaid dividends on the Series B Preferred Stock must be paid before any cash dividends may be paid to holders of common stock.

In addition, the terms of the Series B Preferred Stock include a restriction on the payment of dividends to holders of common stock unless certain financial conditions are met. In addition, the Company shall not declare or pay any dividends on shares of common stock unless the holders of the Series B Preferred Stock shall simultaneously receive a dividend on a pro rata basis as if the Series B Preferred Stock `had been converted into shares of common stock.

In the event of a liquidation, dissolution or winding up of the Company, the holders of the Series B Preferred Stock are entitled to receive a liquidation preference payment of an amount in cash per share equal to the greater of i) the initial purchase price of the Series B Preferred Stock plus dividends in arrears or ii) the payment that would be received by the holders if the Series B Preferred Stock were converted into common stock immediately prior to such liquidation, dissolution or winding up and the holders had received all dividends in arrears in shares of common stock through the date of the liquidation. The holders of the Series B Preferred Stock may also elect to receive a liquidation preference payment (including dividends through the third anniversary of issuance to the extent not previously paid) upon the occurrence of an event constituting a change in control, provided such event is approved by the Company’s Board of Directors. Since the triggering event for this redemption feature is within control of the Company, the Series B Preferred Stock is considered permanent equity of the Company.

Each share of Series B Preferred Stock is convertible at any time, initially into 10 shares of common stock at an initial conversion price of $5.00 per common share. The conversion price is subject to adjustment to provide for anti-dilution protection upon certain events, including stock splits or combinations, stock dividends, rights distributions and similar events. The conversion price is also subject to adjustment in the case of certain issuances of the Company’s common stock which are at a price below the conversion price then in effect and if certain of the Company’s financial representations in the Preferred Stock SPA are proved to be incorrect in any material respect as of the date they were made. Since the conversion option is clearly and closely related to the Series B Preferred Stock, separate accounting for the conversion option is not required.

At any time following the 18-month anniversary of the closing date, the Series B Preferred Stock will be convertible into shares of common stock at the option of the Company, in whole or in part, if the price per share of the Company’s common stock reaches certain levels ranging from 3.5 times the conversion price for the period between the 18-month and 36-month anniversaries of the closing date to 2.5 times the conversion price for the period following the 5-year anniversary of the closing date.

If Warburg Pincus becomes the beneficial owner of 45% or more of the common stock of the Company on an as-if-converted fully diluted basis, Warburg Pincus must exchange the shares of capital stock of the Company owned in excess of 45% for Series C Non-Voting Convertible Preferred Stock (the “Series C Preferred”). The terms of the Series C Preferred are substantially similar to the terms of the Series B Preferred Stock except that the holders of Series C Preferred will not be entitled to any voting rights.

The Warrant issued in connection with this transaction entitles Warburg Pincus to purchase 2.25 million shares of the Company’s common stock at an exercise price of $7.75 per share. The Warrant is exercisable at the option of Warburg Pincus, in whole or in part, at any time prior to the tenth anniversary of the closing of the transaction. The exercise price is subject to adjustment to provide for anti-dilution protection upon certain events, including stock splits or combinations, stock dividends, rights distributions and similar events.

F-34

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Pursuant to the Preferred Stock SPA, the Company held a stockholders meeting on February 27, 2007, at which a proposal to increase the Company’s number of authorized shares of common stock from 60 million to 100 million was approved.

Beneficial Conversion Feature - Convertible Preferred Stock

Upon the issuance of the Series B Preferred Stock, the Company recorded a beneficial conversion feature (“BCF”) charge to loss applicable to common stockholders of $18.1 million. The BCF charge considered in the calculation of the loss per common share for the year ended December 31, 2006, resulted in an additional loss per basic and diluted common share of $0.54. The BCF was calculated using the fair market value of the Company’s common stock on the Commitment Date, subtracting the accounting conversion price and then multiplying the resulting amount by the sum of the number of shares of common stock into which the convertible preferred stock is convertible.

The determination of the accounting conversion price requires an allocation of the equity proceeds between the Series B Preferred Stock and the Warrant based on their relative fair values. The fair value of the Series B Preferred Stock was determined based on the fair market value of the underlying common stock of the Company as of the Commitment Date, into which it was immediately convertible. The fair value of the Warrant was calculated using a Black-Scholes option pricing model with the following assumptions:

Estimated risk-free interest rate	5.0	%
Expected term, equals life of warrant (in years)	10
Expected volatility	70	%
Expected dividend yield	0	%

Common Stock and Treasury Stock

At December 31, 2003, the Company had outstanding 31,861,175 shares of common stock, with 1,361,300 held in treasury.

Private Placement - Common Stock

In a private placement transaction which closed on July 5, 2006 (the “Closing Date”), the Company issued 2,713,000 shares of its common stock to certain clients of an investment manager (the “Buyers”) for an aggregate purchase price of $12.6 million (the “Common Stock SPA”). The Company also issued 157,693 shares of its common stock to pay placement agent fees equivalent to 6% of the gross proceeds.

Pursuant to a registration rights agreement entered into on the Closing Date (in connection with the Common Stock SPA), the Company was obligated to use its best efforts to become current in its reporting obligations under the Exchange Act by September 30, 2006. The Company failed to become current in such obligations by December 31, 2006, which resulted in the Company incurring a liability to the Buyers in the form of liquidated damages in the amount of 5% of the aggregate purchase price. In the fourth quarter of 2006, the Company recorded a charge of $631,000 (which was paid in April 2007) as a result of not meeting these filing requirements. In addition, the Company is obligated to cause a registration statement covering these shares to become effective within 45 days (if the SEC elects not to review such registration statement) or 120 days (if the SEC elects to review the registration statement) following the date that the Company cures the delinquency in its periodic reporting obligations (such 45- or 120-day deadline, as applicable, the “Effectiveness Deadline”). Failure of the registration statement to become effective by the Effectiveness Deadline would result in a liability of the Company to the Buyers for liquidated damages in the amount of 2% of the purchase price for each 30-day period after the Effectiveness Deadline during which the registration statement fails to become effective. The Company’s total liability for liquidated damages in connection with both such deadlines (including the 5% charge recorded in the fourth quarter of 2006) is capped at 13% of the aggregate purchase price. The registration rights agreement also contains customary indemnity and contribution provisions in favor of the investors and the Company. The Company is responsible for paying the costs associated with the registration statement.

F-35

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Other Uses and Repurchases - Common Stock and Treasury Stock

In July 2004, the Company issued 51,828 shares of its common stock to certain noteholders of Renaissance as the first principal payment under the promissory notes, valued at $246,000. In April and September 2004, pursuant to notice from certain noteholders after the Company’s technical default, as to timely periodic reporting, on the promissory notes, the Company issued, in the aggregate, 388,616 shares of its common stock (of which 13,270 shares were issued from its treasury stock) as payment for $2.0 million in principal amount of such notes. In October 2004, the Company issued an additional 20,800 shares of its common stock, from its treasury stock to certain unitholders of Renaissance in connection with a price protection provision. The excess of the average cost of treasury shares over the fair value of such shares on the reissuance dates of $321,000 during 2004 was charged directly to retained earnings. In addition, during 2004, the Company issued an aggregate of 103,211 shares pursuant to the exercise of employee stock options.

During 2005, the Company issued 85,738 shares from treasury stock to the EuroLink promissory noteholders as payment towards the notes with an aggregate market value agreed in April 2005 of $408,000. Pursuant to receiving default notices from certain of the Renaissance noteholders, as a result of not being current with SEC filings, the Company, in April 2005, issued 16,801 shares from treasury stock with an aggregate market price of $84,000 in full settlement of certain notes. In July 2005, the Company issued 36,401 shares from treasury stock with an aggregate market price of $216,000 as a scheduled payment to the remaining noteholders of the Renaissance promissory notes. The excess of the average cost of treasury shares over the fair value of such shares on the reissuance dates of $1,280,000 during 2005 was charged directly to retained earnings. In addition, during 2005, the Company issued an aggregate of 31,433 shares pursuant to the exercise of employee stock options.

During 2006, the Company issued 40,491 shares from treasury stock with an aggregate market price of $191,000 as a scheduled payment to the remaining noteholders of the Renaissance promissory notes. In August 2006, the Company issued 14,021 shares from treasury stock to a EuroLink promissory noteholder as final payment towards the note with an aggregate market value agreed in April 2005 of $67,000. The excess of the average cost of treasury shares over the fair value of such shares on the reissuance dates during 2006, or $522,000, was charged directly to retained earnings.

As a result of the foregoing activity, including the 2006 private placement of common stock, the Company had the following common shares issued, held in treasury and outstanding as of the years ended December 31, 2006, 2005 and 2004:

	2006			2005			2004
Common shares issued		36,654,986			33,784,293			33,752,860
Common shares held in treasury		(1,133,778	)		(1,188,290	)		(1,327,230	)
Common shares outstanding		35,521,208			32,596,003			32,425,630

Subsequent Stock Issuances

On January 25, 2007 and June 19, 2007, the Board of Directors declared dividends payable to holders of Series B Preferred Stock in payment of dividends accumulated through December 31, 2006 and June 30, 2007, respectively. As a result, the Company issued 227,500 and 526,327 restricted shares of common stock, with fair values of approximately $1,354,000 and $3,426,000, respectively, based on the market price of its common stock on the respective declaration dates. These accumulated dividends are reflected as a charge to loss applicable to common stockholders in calculating the basic and diluted loss per common share (see Note 15).

F-36

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

During the first quarter of 2007, certain stock options on the pending list aggregating 225,000 shares, held by an accredited investor (and former executive officer), were exercised at $2.00 per share. The $450,000 aggregate exercise price of such shares was paid for with the delivery of 73,171 shares of common stock previously held by the former executive officer for more than six months. The receipt of these shares is reflected in treasury stock. The Company then issued 225,000 restricted shares of common stock from treasury, on that same day, with a fair market value of $6.15 per share on the exercise date.

Also during March 2007, the Company issued 48,169 restricted shares of common stock from treasury to an officer in satisfaction of a provision in his employment agreement requiring issuance of shares worth $300,000.

Minority Interest

In 1999, the Company and seven global investment banks and brokerage firms formed NYFIX Millennium, a broker-dealer that offers a real-time anonymous automated matching and routing system for equity trading. In 2001, four additional global investment banks and brokerage firms were admitted as partners to NYFIX Millennium. All eleven partners were paid an option premium in the form of the Company’s stock to allow the Company to increase its ownership interest in NYFIX Millennium from 50% to 80%. Since the value of the Company’s stock used as consideration for the option premium exceeded the cash equity investments by the partners, the option transaction was deemed to lack economic substance as the partners lacked any investment risk in NYFIX Millennium. As a result, the Company accounted for the cash contributed to NYFIX Millennium by the partners as its investment and has included 100% of the losses incurred by NYFIX Millennium since inception in its financial statements. In 2002, the Company exercised its option to increase its ownership interest in NYFIX Millennium to 80%. If and when NYFIX Millennium achieves profitability on a cumulative basis and has the ability to repay all debt outstanding, 24% of such profits will be allocated to the other partners in accordance with the contractual agreement among the parties.

11. Income Taxes

Significant components of the income tax provision were as follows for the years ended December 31, 2006, 2005 and 2004:

F-37

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in thousands )	2006		2005		2004
Current tax provision:
Federal	$	-	$	-	$	-
State		-		-		-
Foreign		-		-		-
		-		-		-
Deferred tax provision:
Federal		109		109		109
State		39		39		39
Foreign		-		-		-
		148		148		148
		148		148		148
Benefit applied to reduce goodwill		41		41		41
Income tax provision	$	189	$	189	$	189

The United States and foreign components of loss from continuing operations before income tax provision were as follows for the years ended December 31, 2006, 2005 and 2004:

(in thousands)	2006			2005			2004
United States	$	(16,456	)	$	(6,606	)	$	(14,991	)
Foreign		95			552			(220	)
Total	$	(16,361	)	$	(6,054	)	$	(15,211	)

The Company’s effective tax (benefit) rate differs from the federal statutory rate of 35% as follows for the years ended December 31, 2006, 2005 and 2004:

	2006			2005			2004
Statutory federal tax (benefit) rate		(35	)%		(35	)%		(35	)%
State and local taxes, net of federal benefit		(7	)%		(7	)%		(7	)%
Foreign tax rate differential		0	%		0	%		0	%
Valuation allowance		42	%		43	%		42	%
Other		1	%		2	%		1	%
Effective tax rate		1	%		3	%		1	%

The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities consisted of the following at December 31, 2006 and 2005:

F-38

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in thousands)	2006			2005
Deferred tax assets:
Bad debt expense	$	238		$	241
Deferred revenue		987			1,159
Intangible asset amortization		872			606
Compensation expense attributable to stock options		3,513			4,739
Restructuring charge		932			503
Capitalized product enhancement costs		1,520			1,170
Net operating loss carryforwards		22,243			15,872
Basis difference in NYFIX Millennium		2,457			3,080
Research and development tax credit carryforwards		1,600			1,600
Basis difference in discontinued operation		-			2,016
Capital loss carryforward		325			-
Other		507			630
Total deferred tax assets		35,194			31,616
Deferred tax liabilities:
Depreciation and amortization		555			497
Amortization of goodwill related to Renaissance		480			332
Other		56			56
Total deferred tax liabilities		1,091			885
Net deferred tax assets		34,103			30,731
Valuation allowance		(34,583	)		(31,063	)
Net deferred tax liabilities	$	(480	)	$	(332	)

At December 31, 2006, the Company had federal net operating loss carryforwards (“NOLs”) of $51.5 million, which may be used to offset future taxable income, if any. The Company’s federal NOLs expire between 2022 and 2026. A portion of the Company’s federal NOLs ($4.1 million) associated with the Javelin acquisition is subject to an annual limitation of $2.2 million, as defined in Section 382 of the Internal Revenue Code. At December 31, 2006, the tax benefits available on state and local returns for NOLs were $6.5 million, with portions expiring at various dates from 2009 to 2026. Portions of the federal and state research and development tax credit carryforwards outstanding at December 31, 2006 expire at various dates from 2016 to 2023. As described in Note 1, the Company maintains a valuation allowance in accordance with SFAS 109 of $34.6 million and $31.1 million on its net deferred tax assets at December 31, 2006 and 2005, respectively. These amounts exclude the offsetting impact of the deferred tax liability for amortization of goodwill related to Renaissance due to its indefinite life. Until the Company achieves and sustains an appropriate level of profitability, it plans to maintain a valuation allowance on its net deferred tax assets. The net deferred tax liabilities as of December 31, 2006 and 2005 are included in other long term liabilities in the accompanying consolidated balance sheets.

The exercise of non-qualified stock options and the disqualifying dispositions of incentive stock options under the Company’s stock option plans give rise to compensation which is includable in the taxable income of the recipients and deductible by the Company for federal and state income tax purposes.

Compensation expense attributable to non-qualified stock options granted gives rise to a temporary difference and is not deductible by the Company for federal and state income tax purposes until stock options are exercised. When stock options are canceled prior to being exercised, the Company does not receive any tax benefit and records the reduction of the deferred tax asset, with an offsetting reduction to the valuation allowance. Such reductions in deferred tax assets related to awards that were either cancelled or voided were $1.9 million and $12.5 million during the years ended December 31, 2006 and 2005, respectively.

F-39

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. Related Party Transactions

During 2005 and part of 2006, Richard Y. Roberts, who has served as a director since October 2005, was a partner of Thelen Reid & Priest, LLP (“Thelen”), a firm which represented the Company in various matters. During 2006 and 2005, the Company incurred approximately $227,000 and $322,000, respectively, in connection with legal services (and related expenses) provided to the Company by Thelen. During 2006, Mr. Roberts was a partner in Roberts & Associates. In 2006, the Company incurred approximately $74,000 collectively in connection with legal services (and related expenses) that Mr. Roberts, Attorney-at-Law and Roberts & Associates provided to the Company.

During 2004, the Company had a note receivable of $70,000, plus accrued interest, from a former Chief Financial Officer in connection with his exercise of options for the Company’s common stock, with an annual interest rate of 5.5%, and a maturity date of May 13, 2004. In addition, the Company had a note receivable of $300,000, plus accrued interest from the same former officer, with an annual interest rate of 5.5%, and a maturity date of July 2, 2004.

On July 27, 2004, the Company received notes from the same former officer for $76,000 and $318,000 to replace notes that matured on May 13, 2004 and July 2, 2004, respectively. Both notes matured on July 27, 2006, accrued interest annually at 4.0% and were collateralized by assets in a brokerage account of the former officer, which consisted of shares of the Company’s stock. The $76,000 note was related to the former officer’s previous exercise of options for the Company’s common stock. Subsequent to July 27, 2004 and through December 31, 2004, repayments were made on each of these two notes in the amounts of $10,000 and $33,000, respectively. The remaining balance of such notes was paid in full in July 2006.

13. Employee Benefit Plans

The Company sponsors a 401(k) retirement plan (the “401(k) Plan”) covering substantially all of its United States employees who meet eligibility requirements. The 401(k) Plan permits participants to contribute a percentage of their annual compensation, as defined, not to exceed the Federal limits. The 401(k) Plan permits the Company to match a portion of the employees' contributions. The Company matched employees’ contributions up to 3% of their annual compensation, subject to limitations, in each of 2006, 2005 and 2004. The Company’s contributions under the 401(k) Plan are discretionary.

The Company also maintains various benefit plans for its international employees. The Company may make discretionary contributions to these plans.

The aggregate cost of contributions made by the Company to all employee benefit plans were $0.7 million, $0.5 million and $0.6 million in 2006, 2005 and 2004, respectively.

14. Stock Option Plans

 As described in Note 9, the Company has performed a detailed forensic review of its historical stock-based awards. As a result of this review, the Company has identified certain stock option grants that may not comply with certain terms of the respective stock option plans then in effect. For employees not involved in the grant approval process, the Company has determined it appropriate to honor all such awards as they appear in the Company’s records. For directors and for officers involved in the grant approval process, the Company has either voided or adjusted the exercise prices for such awards where, based on the state of the documentation or process involved, there is doubt as to the appropriateness of the Company’s prior practices regarding grant date and/or exercise price. In addition, the Company has determined that stock options issued to employees directly by Mr. Hansen, as CEO, and not later ratified by the Board of Directors or the Compensation Committee were validly issued under a long standing practice of implied delegated authority.

F-40

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Although not specifically stated in the 2001 Plan and the 1991 Plan, the Company’s practice was to allow option recipients who terminated their employment for any reason other than disability, death or misconduct to have a 90 day period following the date of termination in which to exercise any options that had vested prior to the termination of service.

2001 Stock Option Plan

On March 13, 2001, the Company’s Board of Directors adopted the 2001 Stock Option Plan (the “2001 Plan”) under which a total of 2,000,000 shares of the Company’s common stock were authorized for issuance. The 2001 Plan was approved at the Company’s Annual Meeting of Stockholders held on June 4, 2001. In 2002, the Company amended the 2001 Plan to increase the total number of shares of the Company’s common stock available for issuance to 3,500,000 shares. This amendment was approved at the Company’s Annual Meeting of Stockholders held on June 10, 2002. Pursuant to the 2001 Plan, as amended, the Company may grant stock options and stock purchase rights to the Company’s employees, officers, directors and consultants. The Board of Directors, or a committee to whom the Board of Directors has delegated authority, selects individuals to whom options are granted. Generally, options become exercisable over a three-year period and expire in ten years. The exercise price of stock options granted under the 2001 Plan must be at least equal to the fair market value of the Company’s stock at the date of grant, as defined. The 2001 Plan became effective on May 1, 2001 and expires on April 30, 2011. The Company intends to file a Form S-8 Registration Statement in 2007 to register the additional 1,500,000 authorized shares related to the 2002 amendment to the 2001 Plan. At December 31, 2006, stock options to purchase 2,076,969 shares of the Company’s common stock under the 2001 Plan were outstanding.

Javelin Stock Option Plan

As a result of the Company’s acquisition of Javelin on March 31, 2002, the Company assumed the Javelin 1999 Stock Option Plan, as amended (the “Javelin Plan”). The Javelin Plan authorized grants of options to purchase the common stock of Javelin, and after the acquisition authorized grants of options to purchase the common stock of the Company. At the acquisition date, the Javelin options then outstanding were converted into options to purchase the common stock of the Company at a conversion rate of 0.51 to one and the converted options had a term equal to the then remaining term of the Javelin options. The options outstanding under the Javelin Plan were fully vested at the time of the Company’s acquisition of Javelin pursuant to a change of control clause within the Javelin Plan. Generally, options granted under the Javelin Plan have a term of ten years. The exercise price per share may be less than, equal to or greater than the fair market value per share of the Company’s common stock on the grant date. Pursuant to the Javelin Plan, the Company may grant stock options and stock purchase rights to the Company’s employees, officers, directors and consultants. The Javelin Plan became effective on July 1, 1999 and expires on June 30, 2009. At December 31, 2006, stock options to purchase 253,364 shares of the Company’s common stock under the Javelin Plan were outstanding.

1991 Stock Option Plan

On March 30, 1999, the Company’s Board of Directors adopted the first amendment to the Amended and Restated 1991 Incentive and Nonqualified Stock Option Plan (the “1991 Plan”). The 1991 Plan was amended to increase the number of shares of common stock available for issuance upon exercise of options granted thereunder from 1,500,000 shares to 2,500,000 shares. This amendment was approved at the Company’s Annual Meeting of Stockholders held on June 7, 1999. The number of shares authorized for issuance increased from 2,500,000 to 3,750,000 due to a 3 for 2 stock split effective November 15, 1999. The number of shares authorized for issuance under the 1991 Plan increased from 3,750,000 to 5,625,000 due to a 3 for 2 stock split effective April 4, 2000. On March 29, 2000, the Board of Directors adopted the second amendment to the 1991 Plan. Under this amendment, the number of shares authorized for issuance was increased from 5,625,000 shares to 6,625,000 shares of common stock. This amendment was approved at the Company’s Annual Meeting of Stockholders held on June 5, 2000. Generally, options granted became exercisable over a three-year period and expire in ten years. The 1991 Plan expired on June 23, 2001. At December 31, 2006, stock options to purchase 1,270,947 shares of the Company’s common stock under the 1991 Plan were outstanding.

F-41

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Equity Compensation Not Approved by the Company’s Stockholders

In 2001, the Company intended to issue stock options to purchase 171,176 shares, reflecting the then estimation of the remaining amount available under the 1991 Plan. However, by the time former management had determined the grantees and completed the granting process, the 1991 Plan had expired. Of the 171,176 options, 103,176 options were granted by year-end 2001 and 68,000 in 2002. As a result, these awards are now considered issued outside of a shareholder approved plan. At December 31, 2006, stock options to purchase 69,500 shares from this issuance remain outstanding.

As a result of the findings of the Company’s internal review over historical stock-based compensation awards (described in Note 2 of its 2005 Form 10-K), certain of the awards disclosed above as outstanding at December 31, 2006 from the 2001 Plan and the 1991 Plan may also be considered as having been made outside of a shareholder approved plan. Based on the SEC Staff guidance to industry dated September 19, 2006, any such legal determination would not impact the Company’s accounting for such awards as the Company has consistently honored these awards through the issuance of stock and intends to continue to do so in the future. 

A summary of activity under stock option plans for 2006, 2005 and 2004, follows:  

	2006					2005					2004
				Weighted					Weighted					Weighted
				average					average					average
				exercise					exercise					exercise
Options	Shares			price		Shares			price		Shares			price
Outstanding at beginning of
the year		5,157,247		$	10.31		6,758,406		$	10.74		6,741,543		$	11.13
Grants with exercise prices:
Below fair market value on
Grant Date		-		$	-		2,000		$	4.75		83,000		$	5.51
At fair market value on Grant
Date		-		$	-		91,000		$	5.32		539,700		$	6.62
Above fair market value on
Grant Date		-		$	-		4,000		$	5.77		84,000		$	6.18
Exercised		-		$	-		(31,433	)	$	3.98		(125,711	)(1)	$	3.71
Cancelled		(1,486,467	)	$	13.39		(1,666,726	)	$	11.92		(564,126	)	$	11.53
Outstanding at end of the
year		3,670,780	(3)(4)	$	9.56		5,157,247	(2)	$	10.31		6,758,406		$	10.74
Exercisable at end of the year		3,522,217	(3)(4)	$	9.71		4,491,280	(2)	$	10.76		5,431,268		$	11.70

			Weighted				Weighted				Weighted
Weighted average fair			average				average				average
value of options granted:	Shares		fair value		Shares		fair value		Shares		fair value
Below fair market value
on Grant Date		-	$	-		2,000	$	3.01		83,000	$	4.34
At fair market value on
Grant Date		-	$	-		91,000	$	3.75		539,700	$	1.55
Above fair market value
on Grant Date		-	$	-		4,000	$	2.77		84,000	$	3.95

(1) Includes 22,500 shares from options deemed exercised through conversion of a non-recourse note to a recourse note.

(2) Includes 69,492 shares related to Pending Exercises not settled due to the Company not being current with its periodic reporting to the SEC. The weighted average exercise price for such shares approximates $3.12 per share.

(3) Includes 1,089,906 shares related to Pending Exercises not settled due to the Company not being current with its periodic reporting to the SEC. The weighted average exercise price for such shares approximates $3.95 per share.

(4) Includes 884,500 shares related to option grants to certain named directors and officers which the Company repriced during 2006 by increasing the exercise prices of such options then outstanding. The weighted average exercise prices for these 884,500 shares were increased by approximately $2.10 per share.

F-42

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Since the Company has not been current with its SEC reporting obligations, it generally did not issue shares to employees and directors in connection with the exercise of stock options from July 2005 to July 2007. In February 2006, the Compensation Committee of the Board of Directors approved a policy whereby the Company will honor awards to former employees who have validly notified the Company in writing of their intent to exercise. As a result, the Company modified vested in-the-money awards to terminating employees, prior to their termination of employment, extending the normal 90 day post-termination exercise period until such time as the Company expected to be current with its SEC reporting obligations and the underlying shares are once again covered by an effective registration statement.

The Company has cash exposure to these option holders equal to the difference between the fair market value of the Company’s common stock on the original exercise notification date and the fair market value of the Company’s common stock on the actual date of exercise if the price declines. Due to this exposure, these option holders no longer retain the risks of equity ownership. Accordingly, the fair market values of these awards were reclassified as liabilities in accordance with SFAS 123(R). These liabilities are subsequently re-marked for as long as the awards are outstanding and classified as liabilities. The recorded liabilities are offset against a charge to additional paid in capital to the extent of the original grant date fair values of such awards (calculated under SFAS 123). Any amounts by which the current fair values for these modified awards exceed their related original grant date fair values are recorded through compensation expense. At December 31, 2006, shares related to Pending Exercises totaled 1,089,906 with an aggregate fair value of $2.1 million. Of this amount, $2.0 million of grant date fair values were reclassified from additional paid in capital to liabilities and $0.1 million was charged to compensation expense.

F-43

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Once it is considered probable that an award will reach its maximum contractual term of 10 years prior to the time the Company will be able to honor the award through the issuance of stock, the award is considered modified to a cash settled award and a resulting reclassification to liability is recorded. The recorded liability for a cash settled expired award is offset against a charge to additional paid in capital to the extent of the original grant date fair value of such award (calculated under SFAS 123). Any additional liability amounts are recorded through compensation expense.

At December 31, 2006, 130,000 shares underlying awards, to six optionees had either expired or were considered probable of expiring with an aggregate fair value of $0.5 million. Of this amount, $0.2 million of grant date fair values were reclassified from additional paid in capital to liabilities with $0.3 million charged to compensation expense. During the first six months of 2007, the Company paid $0.4 million to cash settle 114,250 of expired options and additional awards covering 5,625 shares were modified to cash settlement as their expiration was deemed probable to occur before the Company has the ability to issue stock. At June 30, 2007, liabilities for modified awards to be cash settled, related to expired options covering 21,375 shares, aggregated $0.1 million.

During 2006 the Company increased the exercise prices of certain grants still outstanding totaling 884,500 shares. In June 2006, the Board of Directors, with the approval of and on the recommendation of the Compensation Committee, increased the exercise prices of certain grants still outstanding to certain current (and former) directors and officers where a higher exercise price was deemed more appropriate. In December 2006, an additional 4,000 shares were repriced accordingly to remedy the IRS Code 409A exposure with respect to a former executive officer. The weighted average exercise prices for these 884,500 shares were increased by approximately $2.10 per share. Because the modifications increased the exercise prices of the related options the Company recorded no accounting charge related to these modifications under SFAS 123(R). The following table summarizes information about stock options outstanding and exercisable at December 31, 2006:

					Options Outstanding				Options Exercisable
	Range of Exercise Prices				Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
	Low		High
	$	1.96	$	3.00		533,699	$	2.25		533,699	$	2.25
	$	3.01	$	4.50		824,933	$	3.91		824,933	$	3.91
	$	4.51	$	6.00		561,667	$	5.26		488,334	$	5.25
	$	6.01	$	7.50		572,029	$	6.71		496,799	$	6.69
	$	7.51	$	12.50		313,250	$	10.56		313,250	$	10.56
	$	12.51	$	39.75		865,202	$	23.76		865,202	$	23.76
						3,670,780	$	9.56		3,522,217	$	9.71
Aggregate Intrinsic Value					$	4,744,212			$	4,668,902
Weighted Average Remaining Life (years)								4.6				4.5

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

	2006			2005			2004
Average risk-free interest rate		NA			3.6	%		3.1	%
Average expected life in years		NA			5.5			4.7
Expected volatility		NA			80	%		82	%
Expected dividend yield		NA			0	%		0	%
Expected forfeiture rate (1)		6.0	%		NA			NA

(1) In 2004 and 2005, under APB 25 and SFAS 123 (for pro forma purposes), actual forfeitures are reflected.

F-44

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company did not award any grants during 2006. As disclosed in Note 1, pro forma compensation expense associated with options granted under the Plans during 2005 and 2004 was approximately $2.3 million, and $4.2 million, respectively.

Stock-based compensation expense for 2006, 2005 and 2004, as presented in the Company’s consolidated statements of operations by line item, is shown below:

(in thousands)	2006		2005			2004
Cost of subscription and maintenance	$	81	$	48		$	46
Cost of product sales and services		4		2			2
Cost of transaction		9		5			10
Selling, general and administrative		747		159			507
Restatement, SEC Investigation and related expenses		396		-			-
Subtotal related to continuing operations		1,237		214			565
Income (loss) from discontinued operations		18		(9	)		24
Total (1)	$	1,255	$	205		$	589

(1) 2006 includes $0.3 million of expense related to expired options to be cash settled and $0.1 million of expense related to extending the normal 90 day post-termination exercise period.

F-45

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. Loss Per Share Applicable to Common Stockholders

The following table sets forth the computations of loss per share applicable to common stockholders for the years ended December 31, 2006, 2005 and 2004:

(in thousands, except per share amounts)	2006			2005			2004
Loss from continuing operations	$	(16,550	)	$	(6,243	)	$	(15,400	)
Less: Accumulated preferred dividends (Note 10)		(1,354	)		-			-
Less: Beneficial conversion feature on preferred stock (Note 10)		(18,139	)		-			-
Loss from continuing operations applicable to common stockholders, basic and diluted		(36,043	)		(6,243	)		(15,400	)
Income (loss) from discontinued operations, basic and diluted		3,646			(174	)		1,041
Loss applicable to common stockholders, basic and diluted	$	(32,397	)	$	(6,417	)	$	(14,359	)
Basic and diluted loss from continuing operations per common share	$	(1.06	)	$	(0.19	)	$	(0.48	)
Basic and diluted income (loss) from discontinued operations per common share		0.11			(0.01	)		0.03
Basic and diluted loss per common share	$	(0.95	)	$	(0.20	)	$	(0.45	)
Weighted average common shares outstanding:
Basic and diluted shares		34,035			32,509			32,201
Antidilutive securities:
Stock options, treasury stock method (1)		582			600			1,167
Convertible note (1)		1,325			1,304			-
Convertible preferred stock (1)		15,000			-			-

 

(1) The impact of stock options, the convertible note and the convertible preferred stock on earnings per share is anti-dilutive in a period of loss.

16. Segment Information

In accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"), the Company is reporting certain information relating to its operating segments. The Company’s segments are organized into three operating divisions through which the Company’s chief operating decision makers manage the Company’s business. These divisions, as described in more detail below, are organized around the products and services provided to customers and represent the Company’s reportable segments under SFAS 131.

FIX Division. The FIX Division provides software and consultative services to enable global financial institutions to utilize the industry established Financial Information eXchange (FIX) Protocol for messaging, monitoring and processing transaction information. The FIX Division also provides messaging channels for institutions who are members of its trading community for order routing and other value-added services.

Order Management Systems (“OMS”) Division. The OMS Division provides software applications for desktop and wireless handheld management of New York Stock Exchange and Nasdaq listed trading activities. These products enable customers to take advantage of the broad range of products and services offered by other divisions.

Transaction Services Division. The Transaction Services Division is comprised of the three U.S. registered broker-dealer subsidiaries, NYFIX Millennium, NYFIX Transaction and NYFIX Clearing together with the execution business of NYFIX International in the U.K. NYFIX Millennium, an alternative trading system registered under SEC Regulation ATS, provides anonymous matching and routing of U.S. equity securities. NYFIX Transaction provides direct electronic market access and algorithmic trading products. NYFIX Millennium and NYFIX Transaction also resell certain products and services offered by the FIX Division and the OMS Division. NYFIX Clearing clears trades on behalf of NYFIX Millennium and NYFIX Transaction and operates a matched-book stock borrow/stock loan business.

F-46

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies contained in Note 1.

For the years ended December 31, 2006, 2005 and 2004, no single customer accounted for more than 10% of consolidated revenue.

The Company does not currently break-out total assets by reportable segment as there is a high level of shared utilization between certain reportable segments.

The following table presents information by reportable segment for the years ended December 31, 2006, 2005 and 2004:

(in thousands)	FIX Division			OMS Division			Transaction Services Division			Corporate & Other (1)			Total
2006
Revenue - external customers	$	46,245		$	17,853		$	34,255		$	-		$	98,353
Revenue (cost of revenues), net -
intersegment		2,347			1,091			(3,438	)		-			-
Net revenue		48,592			18,944			30,817			-			98,353
Operating income (loss) (2)		6,958			(9,983	)		2,120			(16,341	)		(17,246	)
Depreciation and amortization		4,294			4,664			2,198			-			11,156
Goodwill		48,383			-			9,810			-			58,193
2005
Revenue - external customers	$	37,521		$	21,786		$	29,792		$	-		$	89,099
Revenue (cost of revenues), net -
intersegment		2,293			1,179			(3,472	)		-			-
Net revenue		39,814			22,965			26,320			-			89,099
Operating income (loss) (2)		5,073			(4,211	)		822			(7,086	)		(5,402	)
Depreciation and amortization		4,403			5,793			2,488			-			12,684
Goodwill		48,404			-			9,830			-			58,234
2004
Revenue - external customers	$	26,902		$	21,305		$	17,423		$	-		$	65,630
Revenue (cost of revenues), net -
intersegment		1,450			1,110			(2,560	)		-			-
Net revenue		28,352			22,415			14,863			-			65,630
Operating (loss) (2)		(3,416	)		(120	)		(4,967	)		(5,979	)		(14,482	)
Depreciation and amortization		4,270			5,625			2,797			-			12,692
Goodwill		48,424			-			9,851			-			58,275

(1) Corporate & Other includes restatement, SEC investigation and related expenses, corporate restructuring costs, certain corporate items which are not allocated to reportable segments and certain shared costs which were previously allocated to disposed operations.

(2) Operating income (loss) by segment reflects a significant amount of costs which are allocated by headcount, usage and other methods, depending on the nature of the cost.

F-47

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table presents information by geographic area for the years ended December 31, 2006, 2005 and 2004:

(in thousands)	United States		Foreign		Total
2006
Revenue	$	94,045	$	4,308	$	98,353
Long-lived assets		84,401		660		85,061
2005
Revenue	$	85,368	$	3,731	$	89,099
Long-lived assets		84,401		660		85,061
2004
Revenue	$	64,406	$	1,224	$	65,630
Long-lived assets		88,242		1,309		89,551

17. Valuation and Qualifying Accounts

(in thousands)	Balance at Beginning of Year		Additions Charged to Costs and Expenses		Deductions and Write-offs		Balance at End of Year
Allowance for doubtful accounts:
Year ended December 31, 2006	$	580	$	2	$	266	$	316
Year ended December 31, 2005	$	1,478	$	97	$	995	$	580
Year ended December 31, 2004	$	1,399	$	555	$	476	$	1,478
Allowance for inventory obsolescence
Year ended December 31, 2006	$	309	$	220	$	273	$	256
Year ended December 31, 2005	$	210	$	235	$	136	$	309
Year ended December 31, 2004	$	175	$	35	$	-	$	210

18. Supplemental Cash Flow Information

Supplemental cash flow information related to acquisitions during the year ended December 31, 2004 follows:

(in thousands)	2004
Fair value of net assets acquired, net of cash acquired	$	(474	)
Fair value of notes issued		450
Javelin working capital adjustment settlement		1,250
Cash acquired from acquisitions, net of payments	$	1,226

Information about other cash flow activities during the years ended December 31, 2006, 2005 and 2004 follows:

(in thousands)	2006			2005			2004
Supplemental disclosures of cash flow information:
Cash paid for interest	$	837		$	704		$	238
Cash paid (refunded) for income taxes, net	$	(1	)	$	(286	)	$	128
Supplemental schedule of noncash investing and financing information:
Capital lease obligations incurred for the purchase of property and equipment	$	727		$	891		$	1,472
Common stock and treasury stock issued for promissory note payments	$	258		$	708		$	2,342

F-48

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. Quarterly Financial Data (Unaudited)

The following table presents selected unaudited consolidated quarterly financial information for each of the quarters in 2006 and 2005:

(in thousands, except per share amounts)	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
2006
Revenue	$	23,722		$	22,952		$	25,240		$	26,439
Gross profit		11,233			10,507			12,876			13,374
Restatement, SEC investigation and related expenses		4,054			3,688			1,928			3,088
Restructuring charge		-			-			2,056			-
Loss from continuing operations	$	(4,062	)	$	(4,804	)	$	(3,783	)	$	(3,901	)
Income (loss) from discontinued operations, including gain on sale of $4,035 in the third quarter		(192	)		(200	)		4,038			-
Net income (loss)		(4,254	)		(5,004	)		255			(3,901	)
Accumulated preferred dividends (Note 10)		-			-			-			(1,354	)
Beneficial conversion feature on preferred stock (Note 10)		-			-			-			(18,139	)
Income (loss) applicable to common stockholders	$	(4,254	)	$	(5,004	)	$	255		$	(23,394	)
Basic and diluted loss from continuing operations per common share	$	(0.12	)	$	(0.15	)	$	(0.11	)	$	(0.66	)
Basic and diluted income (loss) from discontinued operations per common share		(0.01	)		(0.00	)		0.12			-
Basic and diluted income (loss) per common share	$	(0.13	)	$	(0.15	)	$	0.01		$	(0.66	)
Basic and diluted weighted average common shares outstanding		32,596			32,596			35,380			35,521

F-49

NYFIX, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(in thousands, except per share amounts)	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
2005
Revenue	$	21,032		$	21,814		$	22,955		$	23,298
Gross Profit		10,090			9,693			10,900			9,877
Restatement, SEC investigation and related expenses		658			737			578			1,096
Loss from continuing operations	$	(405	)	$	(1,747	)	$	(286	)	$	(3,805	)
Income (loss) from discontinued operations		511			115			(703	)		(97	)
Net income (loss)		106			(1,632	)		(989	)		(3,902	)
Income (loss) applicable to common stockholders	$	106		$	(1,632	)	$	(989	)	$	(3,902	)
Basic and diluted loss from continuing operations per common share	$	(0.01	)	$	(0.05	)	$	(0.01	)	$	(0.12	)
Basic and diluted income (loss) from discontinued operations per common share		0.01			0.00			(0.02	)		(0.00	)
Basic and diluted income (loss) per common share	$	0.00		$	(0.05	)	$	(0.03	)	$	(0.12	)
Basic and diluted weighted average common shares outstanding		32,426			32,439			32,575			32,596

F-50

EX-10.54

EXHIBIT 10.54

EMPLOYMENT AGREEMENT

AGREEMENT made and effective as of the 25th day of May, 2006 (the "Effective Date") by and between NYFIX, INC. a Delaware corporation with its principal office at 100 Wall Street, New York, NY 10005, and Donald Henderson, residing at ____________________ (hereinafter "Executive").

In consideration of employment by NYFIX, Inc., a Delaware corporation, or any subsidiary or affiliate of NYFIX, Inc. (collectively, "NYFIX," "Employer" or the "Company") and services therein rendered, the undersigned Executive and NYFIX hereby agree as follows:

1.Employment.

The Company agrees to employ Executive, and Executive agrees to enter the employ of the Company for the period stated in Section 3 hereof and upon the other terms and conditions set forth herein.

2.Position and Responsibilities.

During the period of employment hereunder (the "Employment Period"), Executive agrees to serve as Chief Technology Officer of the Company. The Executive shall have the full responsibilities and authority consistent with such position and report to the Chief Executive Officer ("CEO") of the Company.

3.Term of Employment.

The Employment Period shall be deemed to have commenced as of May 25, 2006 and shall continue until December 31, 2007 unless further extended as provided in this Section 3 or sooner terminated as provided in Section 19. Provided no earlier termination pursuant to Section 19 has occurred, commencing on January 1, 2008, and on each successive anniversary thereafter, the Employment Period shall be automatically extended for one additional calendar year, subject to termination during such additional calendar year as provided in Section 19, unless written notice, given at least 60 days prior to the beginning of such additional calendar year, is provided by either party to the other that the term of the Executive's employment hereunder (the "Contract Term") will not be so extended.

4.Duties.

Except as otherwise provided herein and except for illness, permitted vacation periods and permitted leaves of absence as otherwise approved by the Chief Executive Officer of the Company (the "CEO"), the Executive agrees that during the term of his employment hereunder he shall devote substantially his full business time, efforts, skill and abilities to the business of the Company in accordance with the reasonable directions and orders of the CEO and will use his best efforts to promote the interests of the Company.

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5.Vacation.

In addition to paid holidays, as defined by the Company's holiday schedule, Executive shall be eligible for four weeks paid vacation during each year of the Employment Period, with vacation accruing on a prorata basis during each pay period. All vacation periods shall be scheduled at the convenience of the Employer.

6.Compensation.

(a) Base Salary and Annual Bonus. Employer shall pay Executive as compensation for Executive's services hereunder a total annual Base Salary of $350,000.00, pro-rated to the extent Executive has not worked for all of _________ 2006, plus an Annual Bonus calculated under the NYFIX Partnership Incentive Plan with a target amount of 50%. The Annual Bonus, if any, is payable in cash upon the earlier of (i) the filing of NYFIX's Annual Report for the year ended December 31, 2006; or (ii) the 15^th day of the third month following the end of the calendar year in which it is earned.

(b) Other Compensation. The Company may extend special bonuses or incentives which could include equity or equity related compensation awards (stock options, restricted stock, restricted stock units, phantom stock, stock appreciation rights, etc.). The granting of equity and equity related compensation awards to the Executive under an equity incentive plan adopted by the NYFIX Board of Directors and approved by the NYFIX stockholders (the "Plan"), shall (i) be made at the same time the Board of Directors makes its first grant under the Plan after the Effective Date of this Agreement to seven or more most highly compensated senior executives other than the CEO and (ii) be in an amount and form of equal or greater value at the time of the grant than that granted under the Plan to the senior executive, other than the CEO, with the sixth highest grant under the Plan (in terms of value at the time of grant). Any equity and equity related compensation awards shall be subject to the terms of the Plan and award agreements under which they are granted.

(c) Benefits. Executive shall be entitled to participate in all such benefit plans and payroll practices, in accordance with the terms thereof, as may from time to time be generally made available to the Company's senior executives (including without limitation - health/medical insurance plans, dental insurance plan, life insurance plan, disability insurance plan, 401(k) and other pension and retirement plan arrangements).

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7.Payment Terms.

The salary payment shall be made in accordance with the usual payroll system of the Company, presently bi-weekly.

8.Reimbursement of Expenses.

Employer shall pay or reimburse Executive for all reasonable travel and other expenses incurred by Executive in performance of Executive's obligations under this Agreement, provided that such expenses are incurred in accordance with the policies and procedures established by the Company. Such payments or reimbursements will be made in accordance with the Company's reimbursement policy for senior executives.

9.Non-Competition.

Except as required in the performance of his duties under this Agreement, Executive will not: during any period he is performing services hereunder; and (x) for the first six (6) months following the termination of employment by the Executive for Good Reason due to a Change in Control; or (y) for the lesser of one year following termination or the length of time the Executive is entitled to payment under Section 20, either directly or indirectly in any capacity or manner, without NYFIX prior written approval:

(a) engage in any activity or employment where it could be reasonably anticipated that Executive would or would be required or expected to use or disclose any Confidential Information (as defined in Section 10(d) below) of NYFIX;

(b) engage in activity or employment with any of the following companies: Thomson Financial Services' Trade Route or autex, Transaction Network Services (TNS), Radianz, or Liquidnet, or any successor-in-interest of any of them;

(c) solicit business or accept orders for products and services competitive with NYFIX products and services from any NYFIX client or prospective client with whom Executive dealt, directly or indirectly, during the Employment Period;

(d) develop, test or provide customer support for products or services competitive with NYFIX products and services; or

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(e) (i) hire any person who was employed by NYFIX at any time during the last six months of the Employment Period; (ii) directly or indirectly induce or attempt to induce, solicit or encourage any person to leave then current employment with NYFIX; or (iii) advise or counsel any person, other than NYFIX, with respect to the identity or skill set of anyone who was employed by NYFIX at any time during the last six months of the Employment Period.

10.Non-Disclosure of Information.

(a) Executive acknowledges that NYFIX's trade secrets, NYFIX's specific combination of use of third-party parts, proprietary technology and software, information of NYFIX's partners, customers, and suppliers, and other Confidential Information as may be shared with Executive are valuable and unique assets of NYFIX or such providing party. NYFIX and Executive recognize that access to and knowledge of NYFIX's Confidential Information are essential to Executive's duties as a NYFIX Executive.

(b) Executive agrees that he will not, during the Employment Period or at any time thereafter, except as required in the performance of Executive's duties hereunder, or as agreed to in a prior writing signed by an authorized representative of NYFIX, Inc. or as may be required by law or legal process: (i) disclose any such Confidential Information to any person, firm, corporation, or other entity for any reason or purpose whatsoever; (ii) copy any NYFIX Confidential Information; or (iii) make use of any such Confidential Information for Executive's own purposes or for the benefit of any person, firm, corporation, or other entity, other than NYFIX, under any circumstances during or after the Employment Period.

(c) On written request made by NYFIX, Executive agrees to promptly return or destroy (at NYFIX's option) all originals and copies of any NYFIX Confidential Information and shall confirm in writing that this has been done and that no other Confidential Information or copies thereof exist under Executive's control.

(d) The term "Confidential Information" shall mean trade secrets, confidential knowledge, proprietary information and any other nonpublic data of the Company, its partners, customers, or suppliers. By way of illustration but not limitation, "Confidential Information" includes (i) inventions, trade secrets, ideas, processes, formulas, data, programs, other works of authorship, know-how, improvements, discoveries, developments, designs and techniques, in each case, to the extent such items relate to communications and/or business transactions with one or more users over a computer network or the Internet; and (ii) information regarding plans for research, development, new products and services, marketing and selling, business plans, budgets and unpublished financial statements, licenses, prices and costs, suppliers and customers; and information regarding the skills and compensation of any other employee of the Company.

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11.The Company's Right to Inventions.

(a) Executive shall promptly disclose, grant and assign to the Company for its sole use and benefit any and all inventions, improvements, technical information, methods and suggestions related to financial instruments or financial markets, or technology related to either of them, made, conceived, reduced to practice or learned by Executive, either alone or jointly with others, which Executive may acquire or develop (whether or not during usual working hours) during the Employment Period ("Company Inventions"), and all patent rights, copyrights, trade secret rights and all other rights throughout the world (collectively, "Proprietary Rights") related to Company Inventions, whether or not such Company Inventions are patentable or registrable under copyright or similar statutes, together with all patent applications, patents, copyrights and reissues thereof that may at any time be granted for or upon any such Company Inventions. Executive acknowledges that all original works of authorship which are made by Executive (solely or jointly with others) within the scope of his employment and which are protectable by copyright are "works made for hire," as that term is defined in the United States Copyright Act (17 U.S.C., Section 101).

(b) In connection with the Company Inventions:

(i) Executive shall without charge, but at the expense of the Company, promptly execute and deliver such applications, assignments and other instruments as may be reasonably necessary or proper to vest title to any Company Inventions and related Proprietary Rights in the Company and to enable it to obtain and maintain the entire right and title thereto throughout the world; and

(ii) Executive shall provide to the Company at its expense (including a reasonable payment for the time involved if Executive is not then an Executive) all reasonable assistance to prosecute its Proprietary Rights, or to prosecute or defend any litigation or other matter relating to such Proprietary Rights or Company Inventions.

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(c) Executive will assist the Company in obtaining and enforcing United States and foreign Proprietary Rights relating to Company Inventions in any and all countries. To that end Executive will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company may reasonably request for applying for, obtaining, sustaining and enforcing such Proprietary Rights and the assignment thereof. In addition, Executive will execute, verify and deliver assignments of such Proprietary Rights to the Company or its designee. Executive will assist the Company with respect to Proprietary Rights relating to such Company Inventions in any and all countries during and after the Employment Period, and the Company shall compensate Executive at a reasonable rate for time actually spent by Executive after the Employment Period providing such assistance.

(d) If the Company is unable to obtain Executive's signature on any document related to Company Inventions or Proprietary Rights, Executive hereby designates the Company and its duly authorized agents as Executive's attorney in fact, to execute, verify and file for Executive any such documents and to do all other acts related to Company Inventions or Proprietary Rights with the same legal effect as if executed or done by Executive. This power of attorney shall be deemed coupled with an interest and shall be irrevocable. Executive hereby waives and quitclaims to the Company any and all claims, of any nature whatsoever, which Executive now has or may hereafter have for infringement of any Proprietary Rights assigned hereunder to the Company.

12.Obligation to Keep Company Informed.

During the Employment Period and for a period of one (1) year thereafter, Executive will promptly disclose to the Company fully and in writing and will hold in trust for the sole benefit of the Company any and all Company Inventions. In addition, Executive will promptly disclose to the Company all patent applications filed by him within one (1) year after the Employment Period that relate to Executive's employment with the Company.

13.Prior Inventions.

Any Inventions that Executive made before the Employment Period are excluded from this Agreement. To avoid uncertainty, Executive lists in Exhibit "A" all Inventions that Executive has, alone or with others, made before the Employment Period, that Executive considers to be his property or the property of third parties and that Executive wishes to have excluded from this Agreement. If disclosure of an invention on Exhibit A would cause Executive to violate any prior confidentiality agreement, Executive understands that he is not to list that invention in Exhibit A but is to inform the Company that Executive has not listed all inventions for that reason.

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14.No Improper Use Of Materials.

During the Employment Period, Executive will not improperly use or disclose any confidential information or trade secrets, if any, of any former employer or other person to whom Executive has an obligation of confidentiality, and Executive will not bring onto the premises of the Company any unpublished documents or any property belonging to any former employer or other person to whom Executive has an obligation of confidentiality unless consented to in writing by that former employer or person.

15.No Conflicting Obligation.

Executive represents that his or her performance under this Agreement and as a Company Executive does not and will not breach any non-compete agreement, any non-solicitation agreement or any confidentiality agreement covering information that Executive acquired before the Employment Period. Executive has not entered into and will not enter into any oral or written agreement in conflict herewith.

16.Return of Company Documents.

When Executive leaves the employ of the Company, Executive will deliver to the Company all materials, including copies, acquired during the Employment Period pertaining to the Company or its business, whether or not such materials contain or disclose Confidential Information.

17.Legal and Equitable Remedies.

Because Executive's services are personal and unique and because Executive may have access to and become acquainted with Company Confidential Information, the Company shall have the right to enforce the provisions of this Agreement by injunction or other equitable relief, without bond and without prejudice to any other rights and remedies that the Company may have for a breach of this Agreement, which Executive acknowledges will result in irreparable harm to the Company.

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18.Indemnification.

EXECUTIVE SHALL INDEMNIFY THE COMPANY FULLY AGAINST ALL LOSSES, LIABILITIES, COSTS (INCLUDING LEGAL COSTS) AND EXPENSES THAT THE COMPANY MAY INCUR AS A RESULT OF ANY BREACH (INCLUDING A BREACH ARISING AS A RESULT OF NEGLIGENCE) OF EXECUTIVE'S OBLIGATIONS SET FORTH UNDER SECTIONS 9, 10, 11, 14 AND 15 OF THIS AGREEMENT. The Company shall (i) indemnify the Executive to the full extent permitted by law for all expenses, costs, liabilities and legal fees which the Executive may incur in the discharge of his duties hereunder; (ii) reimburse the Executive for any reasonable legal fees and expenses incurred by the Executive in contesting or disputing any termination of the Executive's employment hereunder or in seeking to obtain or enforce any right or benefit provided by this Agreement, but only if the Executive shall prevail with respect to the preponderance of the matters at issue; and (iii) provide the Executive with the same coverage afforded directors and other officers under a director's and officer's liability insurance policy. The payments under (ii) above shall be made within thirty (30) days after the Executive's request for payment is received by the Company accompanied with such evidence of his having prevailed (as described above) and such evidence of the fees and expenses incurred as the Company may reasonably require.

19.Termination.

(a) (a) This Agreement may be terminated by either party at any time upon thirty (30) days written notice, except that the Company may terminate this Agreement immediately for Cause.

(b) (b) Notwithstanding Section 19(a), Executive acknowledges that he or she is responsible for any disclosure or use of Confidential Information that results from Executive's failure to comply with the provisions of Section 10 and that such failure to comply is grounds for disciplining Executive up to and including immediate termination of Executive's employment with the Company without prior notice.

20.Compensation Upon Termination

(a) If during the Employment Period the Executive's employment is terminated (A) by the Company other than for Cause or (B) by the Executive for Good Reason: the Company shall continue to pay to the Executive (or his legal representatives or estate) his Base Salary then in effect for the remainder of the Contract Term, or if greater, a period of one year.

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(b) Notwithstanding the provisions of subsection 20(a), if during the Employment Period the Executive's employment is terminated by the Company other than for Cause or by the Executive for Good Reason within twelve months after a Change in Control, the Company shall pay the Executive in three equal successive monthly payments, commencing on the first day of the month following termination of employment that in the aggregate are equal to either (1) three times the sum of (x) the Executive's annualized Base Salary then in effect and (y) annualized target Annual Bonus (or the actual Annual Bonus earned by the Executive during the immediately preceding year, determined on an annualized basis, if greater than the target Annual Bonus) (the sum of (x) and (y) hereinafter being referred to as the "Change in Control Amount") should such termination occur at a time when the Company has not made equity grants to the Executive or the Executive is not at least 50% vested in all of such grants that have been made to him prior to the Change in Control; or (2) two times the Change in Control Amount should such termination occur at a time when the Company has made equity grants to the Executive and the Executive is at least 50% vested in all such grants that have been made to him prior to the Change in Control. The timing for any payment provided for in this paragraph shall be subject to the provisions of Section 27 of this Agreement. For purposes of Section 20(b)(i)(1) or (2), a grant made prior to a Change in Control, including one for which Executive receives the stock of an acquirer in a Change of Control, shall be deemed to be vested as of termination of Executive's employment after the Change in Control where vesting of such grant continues to occur after such termination.

(c) For twelve (12) months following termination of employment, Executive shall be entitled to coverage at Company's sole expense under all medical, dental and life insurance benefit programs that the Company generally makes available to its employees and senior executives during such twelve-month period, provided that the Executive's participation is possible under the general terms and provisions of such plans and programs.

(d) The Executive's right to exercise and/or the Executive's vesting in equity or equity related compensation awards shall continue during the period of the Consultancy Agreement referred to in Section 28, to the extent permitted under the applicable Plan, and management will make all reasonable efforts to see that any such Plan so provides. The amount of any payment or benefit provided for the Executive hereunder shall not be reduced by retirement benefits or by offset against any amount claimed to be owed by the Executive to the Company. Furthermore, the Executive shall not be required to mitigate the amount of any payment provided for the Executive by seeking other employment or otherwise, nor, shall the amount of any payment or benefit provided for the Executive hereunder be reduced by any compensation earned by the Executive as a result of employment by another employer (provided such employment does not violate the provisions of Section 9 of this Agreement).

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(e) For purposes of this Agreement, the occurrence of a Change in Control event shall be certified objectively by the CEO of the Company solely on a ministerial basis based on the definitions provided in subsection (h) of this Section 20 and such certification shall not involve any discretionary authority.

(f) For purposes of this Agreement, "Cause" means any of the following: (i) a material breach by the Executive of any of the material obligations to which he is subject under this Agreement; (ii) Executive engaging in willful misconduct which is materially injurious to the Company, its customers or suppliers; or (iii) Executive engaging in any act of fraud or other conduct which would constitute a felony under federal or state law.

(g) The Executive shall have "Good Reason" for terminating his employment with the Company under this Agreement if either or both of the following occur:

(i) a material reduction by the Company in the Executive's Base Salary or the minimum target amount of the Annual Bonus without the Executive's prior written consent, unless the material reduction in the minimum target amount of the Annual Bonus is proportionate with the reduction in such minimum target amount for other senior executives; or

(ii) there is a change in the Executive's status or reporting responsibilities that does not reflect a promotion, and a material reduction by the Company in the Executive's total cash compensation (Base Salary and the minimum target amount of the Annual Bonus), without the Executive's prior written consent as long as notification of intent to terminate employment for Good Reason by the Executive to NYFIX or the successor Employer, in the event of a Change in Control, occurs within no more than 1 year after the change in such status or reporting responsibilities.

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(h) For purposes of this Agreement, "Change in Control" means any of the following events:

(i) A change in the ownership of the Company. A change in ownership of the Company occurs on the date that any one person, or more than one person acting as a group (as defined in regulations under Section 409A of the Internal Revenue Code of 1986, as amended (the "Code")) acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of the Company. However, if any one person, or more than one person acting as a group is considered to own more than 50% of the total fair market value or total voting power of the stock of the Company, the acquisition of additional stock by the same person or persons shall not be considered to cause a change in ownership of the Company (or to cause a change in effective control of the Company within the meaning of subparagraph (ii) below). An increase in the percentage of stock owned by any one person, or persons acting as a group, as result of a transaction in which the Company acquires its stock in exchange for property will be treated as an acquisition of stock. For purposes of this subsection (i), a change in ownership of the Company only occurs when there is a transfer of stock of the Company (or issuance of stock of the Company) and stock in the Company remains outstanding after the transaction; or

(ii) A change in effective control of the Company. A change in the effective control of the Company occurs only on the date that either:

(A) Any one person or more than one person acting as a group (as defined in regulations under Section 409A of the Code) acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the Company possessing 35% or more of the total voting power of the stock of the Company, or

(B) A majority of members of the Company's board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Company's board of directors prior to the date of the appointment or election; or

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(iii) A change in the ownership of a substantial portion of the Company's assets. A change in ownership of a substantial portion of the Company's assets occurs on the date that any one person or more than one person acting as a group (as defined in regulations under Section 409A of the Code) acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all the assets of the Company immediately prior to such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the Company or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

(A) A transfer of assets by the Company is not treated as a change in the ownership of such assets if the assets are transferred to― (1) a shareholder of the Company (immediately before the asset transfer) in exchange for or with respect to its stock; (2) an entity, 50 percent or more of the total value or voting power of which is owned, directly or indirectly, by the Company; (3) a person, or more than one person acting as a group, that owns, directly or indirectly, 50 percent or more of the total value or voting power of all the outstanding stock of the Company; or (4) an entity, at least 50 percent of the total value or voting power of which is owned, directly or indirectly, by a person described in (3). For purposes of this paragraph and except as otherwise provided, a person's status is determined immediately after the transfer of the assets.

(i) For purposes of subsection (h) of this Section 20, the term "Company" includes only (i) the corporation for whom the Executive is performing services at the time of the Change in Control event; (ii) the corporation that is liable for the payment under this Section 20 (or all corporations liable for the payment if more than one corporation is liable); or (iii) a corporation that is a majority shareholder of a corporation identified in (i) or (ii), or any corporation in a chain of corporations in which each corporation is a majority shareholder of another corporation in the chain, ending in a corporation identified in (i) or (ii). For purposes of this paragraph, a majority shareholder is a shareholder owning more than 50% of the total fair market value and total voting power of such corporation.

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(j) For purposes of subsections (h) and (i) of this Section 20, Section 318 of the Code shall apply to determine stock ownership. Stock underlying a vested option is considered owned by the individual who holds the vested option (and the stock underlying an unvested option is not considered owned by the individual who holds the unvested options). For purposes of the preceding sentence, however, if a vested option is exercisable for stock that is not substantially vested (as defined by Treas. Reg. §1.83-3(b) and (j)), the stock underlying the option is not treated as owned by the individual who holds the option.

21.Limitation on Payment Obligation.

(a) Notwithstanding any other provision of this Agreement, any "parachute payment" to be made to or for the benefit of the Executive, whether pursuant to this Agreement or otherwise, shall be modified to the extent necessary so that the requirements of either subparagraph (i) or (ii) below are satisfied:

(i) The aggregate "present value" of all "parachute payments" payable to or for the benefit of the Executive, whether pursuant to this Agreement or otherwise, shall be less than three times the Executive's "base amount"; or

(ii) Each "parachute payment" to or for the benefit of the Executive, whether pursuant to this Agreement or otherwise, shall be in an amount which does not exceed the portion of the "base amount" allocable to such "parachute payment".

(iii) For the purposes of this limitation, no "parachute payment," the receipt of which the Executive shall have effectively waived prior to the date which is fifteen (15) days following termination of employment and prior to the earlier of the date of constructive receipt and the date of payment thereof, shall be taken into account.

(b) Notwithstanding any other provision of this Agreement, no "illegal parachute payments" shall be made to or for the benefit of the Executive.

(c) For purposes of this Section:

(i) The term "base amount" shall have the meaning set forth in section 280G (b) (3) of the Code;

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(ii) The term "parachute payment" shall mean a payment described in section 280G (b) (2) (A) and not excluded under Section 280G (b) (6) of the Code;

(iii) The term "illegal parachute payment" shall mean a payment described in section 280G (b) (2) (B) of the Code;

(iv) "Present value" shall be determined in accordance with section 280G (d) (4) of the Code; and

(v) The portion of the "base amount" allocable to any "parachute payment" shall be determined in accordance with section 280G (b) (3) of the Code.

(d) This Section shall be interpreted and applied to limit the amounts otherwise payable to the Executive under this Agreement or otherwise only to the extent required to avoid the imposition of excise taxes on the Executive under section 4999 of the Code or the disallowance of a deduction to the Company under section 280G(a) of the Code, except that the Executive shall be presumed to be a disqualified individual for purposes of applying the limitations set forth in subsection (a) above without regard to whether or not the Executive meets the definition of disqualified individual set forth in section 280G(c) of the Code. In the event that the Company and the Executive are unable to agree as to the application of this Section, the Company's independent auditors shall select independent tax counsel to determine the amount of such limits. Such selection of tax counsel shall be subject to the Executive's consent, provided that the Executive shall not unreasonably withhold his consent. The determination of such tax counsel under this Section shall be final and binding upon the Company and the Executive.

22.Claims Procedures for Termination Pay.

The CEO of NYFIX, Inc. (the "CEO") may, and upon reasonable written request from the Executive shall, provide to the Executive information as to the amount, if any, to which the Executive is entitled under the terms of subsections 20(a) and (b) of this Agreement following termination of his employment ("Termination Pay"). If the Executive disagrees with such determination, he shall provide written notice to that effect to the CEO. If no such notice is received by the CEO within the later of sixty (60) days after the termination of the Executive's employment with the Company or ninety (90) days after the Executive receives written notification of the amount of Termination Pay from the CEO, the CEO's determination shall be final, and no claim for a different Termination Pay shall be permitted. In the event any such claim is duly filed for a different Termination Pay, the CEO shall exercise his best efforts to act upon such claim within sixty (60) days after its receipt. If such claim is denied, in whole or in part, the CEO shall give notice in writing of such denial to the Executive within sixty (60) days after receipt of the claim, setting forth (i) one or more specific reasons for such denial; (ii) specific reference to pertinent provisions of this Agreement on which the denial is based; (iii) a description of any additional material or information necessary for the Executive to perfect the claim and an explanation of why such material or information is necessary; and (iv) information to the effect that the Executive may request a full review of such claim by filing with the CEO, within sixty (60) days after the Executive has received such notice, a request for such review, including, a statement of the CEO's opinion as to whether, in the Company's opinion, the Executive has a right to bring a civil action under Section 502 of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended following an adverse benefit determination on review, and, if so, a statement of that right. In the event any such request for review is duly submitted, the CEO shall review the claim within sixty (60) days and the Executive shall be given written notice of the result of such review, which shall be final within the Company, but shall be subject to review under the Agreement to Arbitrate Claims and otherwise pursuant to Section 25.2 . If such claim is denied in whole or in part, such notice shall include (i) one or more specific reasons for such denial; (ii) specific reference to pertinent provisions of this Agreement on which the denial is based; (iii) a statement that the Executive is entitled to receive upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claim; and (iv) a statement of the CEO's opinion as to whether, in the Company's opinion, the Executive has a right to bring a civil action under Section 502 of ERISA, and, if so, a statement of that right. The Executive may designate any other person to act on his behalf in pursuing a benefit claim or appealing the denial of a benefit claim under the terms of these procedures. The Company in its discretion may amend, modify or eliminate these procedures or substitute different procedures, at any time and from time to time, provided that any such change does not materially affect Executive's review rights in an adverse manner under this Section 22 without Executive's prior written consent.

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23.Notices.

Any notices under this Agreement shall be given at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery or, if sent by certified or registered mail, three days after the date of mailing.

24.Representations.

Executive hereby represents and warrants that there is no action, proceeding or investigation pending or, to Executive's knowledge, threatened against him and Executive has not been convicted of, pleaded nolocontendere to, or had an order issued or consent decree entered into in respect of, a charge of violating securities laws or any felony.

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25.General Provisions.

25.1Governing Law.

THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE INTERNAL SUBSTANTIVE LAWS, AND NOT THE LAWS OF CONFLICTS, OF THE STATE OF NEW YORK.

25.2Venue.

Except as set forth in the Agreement to Arbitrate Claims dated May 25, 2006, between Executive and NYFIX (the "Arbitration Agreement"), attached hereto as Exhibit B and incorporated herein, Executive and NYFIX agree that the exclusive forum for the resolution of any and all disputes or controversies that may arise between them relating to this Agreement shall be the courts of the State of New York or of the United States of America located in New York County, New York, and by execution and delivery of this Agreement, Executive and NYFIX each hereby accepts, generally and unconditionally, the exclusive jurisdiction of those courts. Executive and NYFIX each hereby irrevocably waives, in connection with any such action or proceeding, any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which it may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions.

25.3Entire Agreement.

This Agreement and the Arbitration Agreement set forth the entire agreement and understanding between the Company and Executive relating to the subject matter hereof and supersede and merge all prior oral and written agreements and discussions between the parties relating to that subject matter. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing signed by the party to be charged. Any subsequent change or changes in Executive's duties, salary or compensation will not affect the validity or scope of this Agreement. If there is a conflict between this Agreement and the Arbitration Agreement, the Arbitration Agreement governs and controls.

25.4Consultancy.

As used in this Agreement, the term "Employment Period" does not include any time during which Executive may be or have been retained by the Company as a consultant.

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25.5Enforcement; Severability.

It is the desire and the intent of the parties hereto that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policy of the jurisdictions in which enforcement is sought. Accordingly, if any particular portion or provision of this Agreement shall be adjudicated to be invalid or unenforceable, the remaining portion or such provision or the remaining provisions of this Agreement, or the application of such provision or portion of such provision as is held invalid or unenforceable to persons or circumstances other than those to which it is held invalid or unenforceable, shall not be effected thereby.

25.6Successors and Assigns.

This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts have accrued to him under this Agreement up until the time of his death, all such amounts unless otherwise provided herein shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there is no such designee, to the Executive's estate. This Agreement will be binding upon Executive's heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors and its assigns; provided, that the Company and any such successor or assign shall provide prompt notice to Executive of any assignment of this Agreement.

25.7Survival.

The provisions of this Agreement shall survive the assignment of this Agreement by the Company to any successor in interest or other assignee. The provisions of Sections 9, 10, 11, 12, 13, 16, 17, 18, 19, 20, 21, 22, 23, 25, 26 and 27 which by their nature and context, are intended to survive any termination of Executive's employment with the Company and shall so survive such termination.

25.8Waiver.

No waiver by either party hereto of any breach of this Agreement shall be a waiver of any preceding or succeeding breach. No waiver by either party hereto shall be construed as a waiver of any other right. Neither party hereto shall be required to give notice to enforce strict adherence to all terms of this Agreement.

25.9No Unannounced Modifications to Signature Documents.

By signing and delivering this Agreement and/or any schedule, exhibit, amendment, or addendum thereto, each party will be deemed to represent to the other that the signing party has not made any changes to such document from the draft(s) originally provided to the other party by the signing party, or vice versa, unless the signing party has expressly called such changes to the other party's attention in writing (e.g., by "redlining" the document or by a comment memo or email).

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26.Non-Disparagement.

Except as required or permitted under law, neither party, nor any director, officer, employee, agent or other representative of either party shall in any way, and at any time during or after the Employment Period, make any derogatory or defamatory remarks about the other party that may disparage him or it in any manner.

27.Section 409A Requirements.

This Agreement is intended to satisfy in form and operation the requirements of the terms of Section 409A of the Code to the extent applicable and any applicable guidance or regulations, including transition rules, thereunder (collectively, "Section 409(A)"). To the extent required by Section 409A, and notwithstanding any other provision of this Agreement, no payment or benefit that constitutes deferred compensation for purposes of Section 409A will be provided to the Executive following his separation from service prior to the first to occur of (i) the date of the Executive's death or (ii) the first day of the seventh month following the month in which his separation from service occurs, if he is a "specified employee" (as defined under Section 409A(a)(2)(B)(i) of the Code). Any payment that is delayed pursuant to the provisions of the immediately preceding sentence shall instead be paid in a lump sum promptly following the first to occur of the two dates specified in the immediately preceding sentence. Furthermore and notwithstanding any other provision of this Agreement to the contrary, this Agreement is deemed to be modified in any way necessary to satisfy the requirements of Section 409A as determined by the Company in its good faith discretion.

EXECUTIVE UNDERSTANDS THAT THIS AGREEMENT AFFECTS HIS RIGHTS TO INVENTIONS EXECUTIVE MAKES DURING EMPLOYMENT WITH THE COMPANY, AND RESTRICTS EXECUTIVE'S RIGHTS TO DISCLOSE OR USE THE COMPANY'S CONFIDENTIAL INFORMATION AND TO COMPETE IN BUSINESS WITH THE COMPANY, DURING AND AFTER SUCH EMPLOYMENT.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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EXECUTIVE HAS CAREFULLY READ THIS EMPLOYMENT AGREEMENT AND UNDERSTANDS ITS TERMS. EXECUTIVE HAS COMPLETELY FILLED OUT EXHIBIT B TO THIS AGREEMENT.

Dated:   May 25, 2006

Signature
 

/s/ Donald Henderson     

Donald Henderson

Dated May 25, 2006

NYFIX, Inc.

By:/s/ Robert C. Gasser

Robert C. Gasser

President and Chief Executive Officer

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EXHIBIT A

To: NYFIX, Inc.:

1. The following is a complete list of all inventions or improvements relevant to the subject matter of my employment by NYFIX, Inc. or any of its subsidiaries or affiliates (collectively, the "Company") that have been made or conceived or first reduced to practice by me alone or jointly with others prior to my employment by the Company that I desire to remove from the operation of the Executive Agreement to which this Exhibit A is attached.

___ No inventions or improvements.

___ See below:

___ Additional sheets attached.

2. I propose to bring to my employment the following materials and documents of a former employer:

___ No materials or documents.

___ See below:

___ Additional sheets attached.

Signature: /s/

Donald Henderson

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EXHIBIT B

AGREEMENT TO ARBITRATE CLAIMS

I recognize that differences may arise between me and NYFIX, Inc. or one of its present or future subsidiaries or affiliates during or after my employment with the Company, and that those differences may or may not be related to my employment. I understand and agree that by entering into this Agreement to Arbitrate Claims ("Agreement"), I anticipate gaining the benefits of a non-judicial, impartial dispute-resolution procedure.

I understand that any reference in this Agreement to "the Company" will include not only NYFIX, Inc., but also all NYFIX, Inc. present and future subsidiaries and affiliates, and all successors and assigns of any of them.

Claims Included by the Agreement

Except as excluded in the following provision, "Claims Not Included by the Agreement," the Company and I mutually consent to the resolution by arbitration of all claims or controversies ("Claims"), whether or not arising out of my employment (or its termination), that the Company may have against me or that I may have against the Company or against any of its officers, directors, employees or agents in their capacity as such or otherwise. This includes, but is not limited to, the following:

1)Any and all claims for wrongful discharge; breach of contract, both express and implied; breach of the covenant of good faith and fair dealing, both express and implied; negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; and defamation;

2)Any and all claims for violation of any federal, state or municipal statute including, but not limited, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, the Fair Labor Standards Act, the New York Human Rights Law, the New York City Administrative Code, as amended from time to time;

3)Any and all claims arising out of any other applicable laws, rules and regulations of any jurisdiction whatsoever.

Claims Not Included by the Agreement

Claims I may have for workers' compensation or unemployment compensation benefits are not covered by this Agreement.

Claims for provisional relief, such as temporary restraining orders, preliminary injunctions, attachments and the like, and claims for permanent injunctive and other equitable relief are not covered by this Agreement. Specifically, claims related to the enforcement of any confidentiality obligation, whether arising from contract or otherwise, between me and the Company are not covered by this Agreement.

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Representation

Any party may be represented by an attorney of his, her or its choice.

Discovery

Each party shall have the right to take the deposition of a number of individuals to be agreed upon by the parties hereto and any expert witness designated by another party. Each party also shall have the right to make requests for production of documents to any party. The right to compel testimony by subpoena specified below shall be applicable to discovery pursuant to this paragraph. Additional discovery may be had only where the Arbitrator selected pursuant to this Agreement so orders, upon a showing of substantial need.

Designated of Witnesses

At least 30 days before the arbitration, the parties must exchange lists of witnesses, including any expert, and copies of all exhibits to be used at the arbitration.

Subpoenas

Each party shall have the right to subpoena witnesses and documents for the arbitration.

Arbitration Procedures

The Company and I agree that, except as provided in this Agreement, any arbitration shall be in accordance with the then-current Model Employment Arbitration Procedures of the American Arbitration Association ("AAA") before an arbitrator who is licensed to practice law in the State of New York ("the Arbitrator"). The arbitration shall take place in the County of New York, New York.

The Arbitrator shall be selected as follows: The AAA shall give each party a list of 5 arbitrators drawn from its panel of labor and employment arbitrators. Each side may strike all names on the list it deems unacceptable. If only one common name remains on the lists of all parties, said individual shall be designated as the Arbitrator. If more than one common name remains on the lists of all parties, the parties shall strike names alternately until only one remains. If no common name remains on the lists of all parties, the AAA shall furnish an additional list or lists until the arbitrator is selected.

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The Arbitrator shall apply the substantive law of New York. The New York Rules Of Evidence shall apply. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement is void or voidable. The arbitration shall be final and binding upon the parties.

The Arbitrator shall have jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold pre-hearing conferences by telephone or in person as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal rules of Civil Procedure.

Either party, at its expense, may arrange for and pay the cost of a court reporter to provide a stenographic record of proceedings.

Either party, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator.

Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement and to enforce an arbitration award. Except as otherwise provided in this Agreement, both the Company and I agree that neither of us shall initiate or prosecute any lawsuit or administration action (other than an administrative charge of discrimination) in any way related to any claim covered by this Agreement.

The Arbitrator shall render an award and written opinion in the form typically rendered in labor arbitrations.

Arbitration Fees and Costs

The Company and I initially shall equally share the fees and costs of the Arbitrator. Each party will deposit funds or post other appropriate security for its share of the Arbitrator's fee, in an amount and manner determined by the Arbitrator, 10 days before the first day of hearing. Notwithstanding the foregoing, the Arbitrator shall have the authority to reallocate its costs and fees between the parties hereto as he or she deems appropriate. Each party shall pay for its own costs and attorneys' fees, if any. However, if any party prevails on a statutory claim that affords the prevailing party attorneys' fees, or if there is a written agreement providing for fees, the Arbitrator may award reasonable fees to the prevailing party.

Requirements for Modification or Revocation

This Agreement to arbitrate shall survive the termination of my employment. It can only be revoked or modified by a writing signed by the parties that specifically states an intent to revoke or modify this Agreement.

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Sole and Entire Agreement

This is the complete agreement of the parties on the subject of arbitration of disputes. This Agreement supersedes any prior or contemporaneous oral or written understanding on the subject. No party is relying on any representations, oral or written, on the subject of the effect, enforceability or meaning of this Agreement, except as specifically set forth in this Agreement.

Construction

If any provision of this Agreement is adjudged to be void or otherwise unenforceable, in whole or in part, such adjudication shall not affect the validity of the remainder of the Agreement.

Consideration

The promises by the Company and by me to arbitrate differences, rather than litigate them before courts or other bodies, as well as the Company's agreement to employ me and to grant me stock options, provide consideration to enter into this Agreement.

Not an Employment Agreement

This Agreement is not, and shall not be construed to create, any contract of employment, express or implied. Nor does this agreement in any way alter the "at-will" status of my employment, which can only be affected by an express written employment agreement signed by me and an authorized representative of the Company.

No Unannounced Modifications to Signature Documents

By signing and delivering this Agreement and/or any schedule, exhibit, amendment, or addendum thereto, the Company and I will each be deemed to represent to the other that the signing party has not made any changes to such document from the draft(s) originally provided to the other party by the signing party, or vice versa, unless the signing party has expressly called such changes to the other party's attention in writing (e.g., by "redlining" the document or by a comment memo or email).

Voluntary Agreement

I ACKNOWLEDGE THAT I HAVE CAREFULLY READ THIS AGREEMENT, THAT I UNDERSTAND ITS TERMS, THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY AND ME RELATING TO THE SUBJECTS COVERED IN THE AGREEMENT ARE CONTAINED IN IT, AND THAT I HAVE ENTERED INTO THE AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON ANY PROMISES OR REPRESENTATIONS BY THE COMPANY OTHER THAN THOSE CONTAINED IN THIS AGREEMENT ITSELF.

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I FURTHER ACKNOWLEDGE THAT I HAVE HAD THE OPPORTUNITY TO DISCUSS THIS AGREEMENT WITH MY OWN ATTORNEY AND HAVE DONE SO TO THE EXTENT THAT I HAVE WISHED.

EMPLOYEE:	NYFIX, INC.:
Signature of Employee	Signature of Authorized Company Representative
Donald Henderson	Robert C. Gasser, President and Chief Executive Officer
Print Name of Employee	Print Name and Title of Representative
_____________, 2006	___________, 2006
Date	Date

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EX-23

EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-70037, 333-60314, 333-83920, 333-93943, 333-88350 and 333-102493) and on Form S-8 (Nos. 33-85522, 333-95285, 333-81604, 333-62158 and 333-88346) of NYFIX, Inc. of our reports, dated August 1, 2007 relating to the consolidated financial statements, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appear in this Form 10-K.

/s/ Friedman LLP

East Hanover, New Jersey

August  1, 2007

EX-31.1

Exhibit 31.1

Certificate of Principal Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, P. Howard Edelstein, Chief Executive Officer and President of NYFIX, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of NYFIX, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 6, 2007	/s/ P. Howard Edelstein
	P. Howard Edelstein President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of the Principal Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Steven R. Vigliotti, Chief Financial Officer of NYFIX, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of NYFIX, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 6, 2007	/s/ Steven R. Vigliotti
	Steven R. Vigliotti Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350,

As adopted pursuant to

Section 906 of the Sarbanes-Oxley Act Of 2002

In connection with the Annual Report on Form 10-K of NYFIX, Inc.for the annual period ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), P. Howard Edelstein, as Chief Executive Officer of NYFIX, Inc., hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of NYFIX, Inc.

	By:	/s/ P. Howard Edelstein
		P. Howard Edelstein President and Chief Executive Officer
Dated: August 6, 2007

EX-32.2

Exhibit 32.2

Certification of Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350,

As adopted pursuant to

Section 906 of the Sarbanes-Oxley Act Of 2002

In connection with the Annual Report on Form 10-K of NYFIX, Inc. for the annual period ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Steven R. Vigliotti, as Chief Financial Officer of NYFIX, Inc., hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of NYFIX, Inc.

Dated: August 6, 2007	By:	/s/ Steven R. Vigliotti
		Steven R. Vigliotti Chief Financial Officer