Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations for the Six Months Ended June 30, 2005 Compared With the Six Months Ended June 30, 2004

Overview

Our operations for the six months ended June 30, 2005 resulted in net income of $153.1 million compared with net income of $103.3 million for the six months ended June 30, 2004. The increase in net income resulted primarily from a $99.9 million increase in net revenues, partially offset by a $19.3 million increase in operating expenses. The increase in net revenues arose primarily because of a $77.6 million increase in clearing and transaction fees. In addition, we earned an incremental $8.9 million of revenue from clearing and transaction processing services. Contributing to the $19.3 million overall increase in operating expenses was $7.7 million related to compensation and benefits, $5.0 million in depreciation and amortization, and smaller increases in most of our remaining expense categories.

Trading volume for the six months ended June 30, 2005 totaled 521.0 million contracts, or an average daily trading volume of 4.2 million contracts, representing an increase of 36.1% over the same period in 2004 when total trading volume was 382.9 million, or an average daily volume of 3.1 million contracts. Increased trading volume levels resulted principally from: CME ^® Globex ^® system enhancements improving speed and reliability, increased customer demand for the liquidity provided by our markets; the ongoing incentive programs designed to enhance liquidity on CME Globex and to attract new customers, particularly in Europe and Asia; and increased demand for our foreign exchange products. The additional clearing and transaction fees resulting from greater trading volume and the increased percentage of trades executed electronically were augmented by fees for clearing and transaction processing services, additional investment income, and incremental revenue from quotation data fees.

Revenues

Clearing and Transaction Fees. Clearing and transaction fees, which include clearing fees, CME Globex electronic trading fees and other volume-related charges, increased $77.6 million, or 29.2%, to $343.4 million for the six months ended June 30, 2005 from $265.8 million for the six months ended June 30, 2004. The increase is attributed primarily to a 36.1% increase in total trading volume. During the first six months of 2005, average daily trading volume on CME Globex increased by 87.5% to 2.9 million contracts when compared to the same period in 2004. This increase was driven by volume growth in electronic trading in all major product areas. On June 1, 2005, CME Globex set a new single-day record of 5.1 million contracts traded.

The following table summarizes trading volume and revenue (volume in thousands):

In the first six months of 2005, 55.9% of our interest rate volume traded on CME Globex compared with 20.6% during the same period in 2004. Despite declining interest rate volatilities during the first six months of 2005, average daily volume of interest rate products traded electronically increased from 341,000 contracts to 1.3 million contracts. At the same time, average daily volume for interest rate options trading, which occurs primarily through open outcry, increased 42.1%, to 741,000 contracts for the first six months of 2005 compared to 522,000 contracts for the same period in 2004. Also contributing to this volume growth were: expansion in the use of our electronic trading platform; competitive fee programs designed to encourage the participation of market makers and global proprietary trading firms; continued introduction of new products; and tiered pricing provided to high volume traders.

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The volatility in U.S. equity markets, as measured by the CBOE Volatility Index (VIX), in the first six months of 2005 was lower compared with the first six months of 2004. Despite lower volatility, trading volume for our equity products increased primarily as a result of the continued growth in our E-mini ^™ products, which is reflective of a larger market growth trend in U.S. equities. During the first six months of 2005, average daily volume of E-mini products increased by 18.5%, to 1.3 million contracts, compared with the same period in 2004, with the strongest volume growth occurring in our E-mini Russell ^® and S&P ^® products.

During the first six months of 2005, average daily volume of foreign exchange products increased by 72.0%, to 313,000 contracts. The volume growth occurred primarily on CME Globex and was a result of increased demand from automated trading systems, driven primarily by technology enhancements, which allow faster execution, as well as by fee incentive programs initiated during the second quarter of 2004. In the first six months of 2005, 78.4% of our foreign exchange volume traded on CME Globex compared with 61.9% during the same period in 2004. On June 8, 2005, CME set a new single-day foreign exchange volume record of 748,000 contracts, with a record volume of 455,000 contracts traded electronically.

Partially offsetting the impact of the increase in trading volume was a decrease in the average rate, or revenue, per contract. Clearing and transaction fees increased $77.6 million while the average rate per contract decreased to $0.659 for the six months ended June 30, 2005 from $0.693 for the same period in 2004. If the average rate per contract remained unchanged from the six months ended June 2004, the increase in total trading volume would have contributed $98.7 million of additional transaction revenues for the six months ended June 30, 2005. Additionally, the rate per contract was favorably impacted by a higher percentage of trades on CME Globex for all product lines, for which additional fees are assessed, but offset by a change in the trading mix from non-member to incentive program activity as well as an increase in the proportion of interest rate volumes, which have a lower rate per contract. Growth in interest rate, equity and foreign currency products, as a result of our competitive fee programs, increased participation of market makers and global proprietary trading firms, resulted in higher incentives and discounts which offset the impact of volume growth by $16.5 million and reduced the average rate per contract by $0.043. In addition, the impact of our mutual offset agreement with Singapore Exchange Derivatives Trading Ltd. (SGX), whereby there is a net settlement for trades executed by the originating exchange but transferred to the other exchange, further reduced revenue by $2.9 million and the average rate per contract by $0.008.

In June 2005, we announced a series of trading fee changes, which were primarily increases, in each of our products groups. The revised fee structure will become effective in the third quarter of 2005. In addition, we also extended the European and Asian incentive programs and the Electronic Corporate Membership program through December 31, 2006. Beginning in August 2005, we will implement a new one-year incentive program designed to attract large hedge funds and commodity trading advisors to our foreign exchange markets.

A substantial portion of our clearing and transaction fees, as well as telecommunications fees and various service charges included in other revenues, are billed to our clearing firms. The majority of clearing and transaction fees received from clearing firms represent charges for trades executed on behalf of their customers. We currently have approximately 80 clearing firms. Should a clearing firm discontinue operations, we believe the customer portion of that firm’s trading activity would likely transfer to another clearing firm. Therefore, we do not believe we are exposed to significant risk from the loss of revenues received from any particular clearing firm.

Clearing and Transaction Processing Services. Clearing and transaction processing services increased $8.9 million, or 33.5%, to $35.6 million for the six months ended June 30, 2005 from $26.7 million for the six months ended June 30, 2004. Clearing and transaction processing services primarily represents fees derived from providing clearing and settlement services to the Chicago Board of Trade (CBOT). In addition, fees are also included for listing futures products on CME Globex for the New York Mercantile Exchange (NYMEX) and processing single stock futures trades for certain of our clearing firms that execute trades at OneChicago, LLC (OneChicago), our joint venture in single stock futures and futures on narrow-based stock indexes. The revenue increase in the first six months of 2005 from the same period in 2004 was primarily the result of increased volume at the CBOT as well as the expiration of lower initial pricing that was in effect during most of the first six months of 2004. We cleared 358.0 million contracts for the CBOT during the six months ended June 30, 2005 compared with 295.1 million contracts during the six months ended June 30, 2004. During the first six months of 2005, revenue from NYMEX also increased by $1.1 million because of increased trading volume. CME expects to discontinue listing NYMEX products on CME Globex in August 2005.

Quotation Data Fees. Quotation data fees increased $5.3 million, or 17.4%, to $35.6 million for the six months ended June 30, 2005 from $30.3 million for the six months ended June 30, 2004. The increase resulted primarily from the change to our fee structure implemented on January 1, 2005. Users of our basic service pay $35 per month for each market data screen, or device, an increase from the $30 per month charge that was in effect during 2004. We distribute our market data to resellers, who offer value-added technology to end-users, as well as directly to our electronic trading customers as part of their access to our markets through our electronic platforms. Access to our market data has remained relatively constant at approximately 181,000 devices. We also continue to enhance our current market data and information product offerings by packaging the basic data we have traditionally offered with advanced analytical data and information.

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For the six months ended June 30, 2005, the two largest resellers of our market data represented approximately 53% of our quotation data fees revenue. Should one of these vendors no longer subscribe to our market data, we believe the majority of that firm’s customers would likely subscribe to our market data through another reseller. Therefore, we do not believe we are exposed to significant risk from the loss of revenue received from any particular market data reseller.

Access Fees. Access fees increased $1.5 million, or 19.0%, to $9.5 million for the six months ended June 30, 2005 from $8.0 million for the six months ended June 30, 2004. This increase resulted primarily from CME Globex users switching to a higher bandwidth connection at a higher fee during the third quarter of 2004.

Communication Fees. Communication fees decreased $0.5 million, or 9.2%, to $4.6 million for the six months ended June 30, 2005 from $5.1 million for the six months ended June 30, 2004. The decrease is primarily a result of reduced demand for communication devices and services on the trading floor and by building tenants.

Investment Income. Investment income increased $6.5 million to $12.4 million for the six months ended June 30, 2005 from $5.9 million for the six months ended June 30, 2004. Primarily as a result of market interest rate increases, the annualized average rate earned on all investments increased to 2.6% in the first six months of 2005 compared with 1.5% during the same period in 2004, representing an increase in investment income of $4.8 million. Also, $2.0 million of the increase resulted from an increase in average funds available for investment. Partially offsetting these increases was a $0.2 million decrease in the investment results of our non-qualified deferred compensation plan that is included in investment income but does not affect our net income, as there is an equal decrease in our compensation and benefits expense.

Securities Lending Interest Income and Expense. Securities lending interest income increased $16.4 million, to $23.8 million for the six months ended June 30, 2005 from $7.4 million for the six months ended June 30, 2004. The average daily balance of proceeds from securities lending activity was $1.7 billion and $1.3 billion, respectively, for the six months ended June 30, 2005 and 2004. Securities lending interest expense increased $16.1 million, to $22.8 million for the six months ended June 30, 2005 from $6.7 million for the same period in 2004. The net revenues from securities lending represented an annualized return of 0.12% on the average daily balances in the first six months of 2005 compared with 0.10% for the same period in 2004. The increase in the annualized rate of return was due to increases in interest rates.

Other Revenue. Other revenue increased $0.3 million, or 2.3%, to $11.3 million for the six months ended June 30, 2005 from $11.0 million for the six months ended June 30, 2004. This resulted from a $0.4 million increase in fees associated with managing our Interest Earnings Facility (IEF) programs and a $0.2 million increase from sales of our CME SPAN ^® software. This increase was partially offset by $0.2 million of incremental losses incurred on technology equipment that was traded-in or written off.

Expenses

Compensation and Benefits Expense. Compensation and benefits expense increased $7.7 million, or 9.5%, to $88.9 million for the six months ended June 30, 2005 from $81.2 million for the six months ended June 30, 2004. There were three significant components to this increase. First, compensation and benefits expense increased by $5.8 million during the first six months of 2005 compared with the same period in 2004 primarily because of annual salary increases and increases in employer taxes and health benefits. Second, the average number of employees increased 4%, or by 46 employees, during the first six months of 2005 from the same period in 2004. We had 1,292 employees at June 30, 2005. This increased headcount resulted in additional compensation and benefits expense of $1.4 million. Third, stock-based compensation expense increased $2.4 million to $5.1 million for the six months ended June 30, 2005. This increase resulted primarily from the expense recognized during the first six months of 2005 for the options granted in June 2004 and June 2005. These increases were partially offset by a $1.0 million decrease in the bonus expense, which is accrued under the provisions of our annual incentive plan. The threshold for payment of the bonus increased significantly from 2004 to 2005, resulting in a lower expense in the first six months of 2005 when compared with the same period in 2004. In addition, during the first six months of 2005, there was a $0.6 million increase in the capitalization of compensation and benefits relating to internally developed software. Finally, we experienced a decrease of $0.2 million in the investment results of our non-qualified deferred compensation plan for the six month period ended June 30, 2005 that is included in compensation and benefits expense but does not affect income, as there is an equal and offsetting impact to our investment income.

Occupancy Expense. Occupancy expense increased $0.5 million, or 3.9%, to $14.0 million for the six months ended June 30, 2005 from $13.5 million for the six months ended June 30, 2004. Occupancy expense increased primarily as a result of rent that began in April 2004 for an additional remote data center. This increase was partially offset by a decrease in trading volume rent due to lower open outcry volume in the first six months of 2005.

Professional Fees, Outside Services and Licenses Expense. Professional fees, outside services and licenses expense increased $3.4 million, or 20.1%, to $20.3 million for the six months ended June 30, 2005 from $16.9 million for the six months ended June 30, 2004. The increase resulted primarily from $1.3 million in additional professional fees related to consulting services for our

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technology initiatives. In addition, fees related to our revenue sharing agreement with SGX increased by $1.0 million in the first six months of 2005 from same period in 2004 due to increased electronic trading of CME Eurodollars. This revenue sharing cannot exceed $0.3 million per month. In addition, license fees increased by $0.9 million in the first six months of 2005 from the same period in 2004 because of increased trading volume and increased license rates related to our equity index products. We also incurred $0.8 million of expense related to two market maker programs in the first six months of 2005. Increases were offset by decreases of $0.4 million in other professional fees and outside services and $0.2 million in legal fees for the first six months of 2005 compared to the same period in 2004.

Communications and Computer and Software Maintenance Expense. Communications and computer and software maintenance expense increased $2.5 million, or 10.0%, to $27.4 million for the six months ended June 30, 2005 from $24.9 million for the six months ended June 30, 2004. This expense is affected primarily by growth in electronic trading. Computer and software maintenance costs are determined by the volume of transactions processed and bid/offer prices received electronically, not the number of contracts traded. During the six months ended June 30, 2005, the number of transactions we processed increased approximately 46%. In addition, we processed approximately 92% of transactions electronically in the first six months of 2005 compared with approximately 84% for the same period in 2004, which represented 69.0% and 50.1%, respectively, of contracts traded. As a result, our expenses for software, software maintenance and hardware maintenance increased $2.7 million during the first six months of 2005 when compared with the same period in 2004.

Depreciation and Amortization Expense. Depreciation and amortization expense increased $5.0 million, or 19.1%, to $30.9 million for the six months ended June 30, 2005 from $25.9 million for the six months ended June 30, 2004. The increase was the result of depreciation and amortization of 2005 and 2004 asset acquisitions exceeding the depreciation and amortization of assets that have become fully depreciated or retired since July 1, 2004. Capital expenditures totaled $43.1 million for the six months ended June 30, 2005 and $31.8 million for the same period in 2004. For these periods, technology-related purchases, defined as purchases of computers and related equipment, software, internally-developed software and costs associated with the build-out of our data centers, represented approximately 93% and 86%, respectively, of total capital expenditures.

Marketing, Advertising and Public Relations Expense. Marketing, advertising and public relations expense increased $0.6 million, or 11.4%, to $5.6 million for the six months ended June 30, 2005 from $5.0 million for the six months ended June 30, 2004. This increase is primarily attributed to an increase in marketing costs due to public relations and product-related marketing.

Other Expense. Other expense decreased $0.3 million, or 2.8%, to $11.9 million for the six months ended June 30, 2005 from $12.2 million for the six months ended June 30, 2004. This change was attributable primarily to a $0.8 million decrease in currency delivery fees resulting from migration to a more efficient delivery system and was partially offset by an increase in general administrative expense.

Income Tax Provision . We recorded a tax provision of $101.2 million for the six months ended June 30, 2005 compared with $70.3 million for the six months ended June 30, 2004. The effective tax rate was 39.8% for the first six months of 2005, compared with 40.5% for the same period in 2004. The effective tax rate declined in 2005 because of a reduction in non-deductible expenses and the favorable resolution of certain tax audit issues.

Outlook. For 2005, we expect operating expenses to increase by the upper end of our previously disclosed range of 11% to 13%. The increase is primarily due to spending for technology and expanded communications bandwidth to accommodate additional volume growth.

Results of Operations for the Three Months Ended June 30, 2005 Compared to the Three Months Ended June 30, 2004

Overview

Our operations for the three months ended June 30, 2005 resulted in net income of $82.2 million compared with net income of $57.3 million for the three months ended June 30, 2004. The increase in net income resulted primarily from a $52.1 million increase in net revenues that was partially offset by a $12.2 million increase in operating expenses. The increase in net revenues was primarily driven by a $39.7 million increase in clearing and transaction fees. In addition, we earned an incremental $4.6 million of revenue from clearing and transaction processing services. Contributing to the overall increase in operating expenses was $4.4 million related to compensation and benefits, $3.0 million in depreciation and amortization expense and smaller increases in our remaining expense categories.

Trading volume for the three months ended June 30, 2005 totaled 280.3 million contracts, representing a 35.1% increase in total trading volume over the 207.4 million contracts traded during the same period in 2004. Average daily trading volume of 4.4 million contracts for the three months ended June 30, 2005 represented an increase of 33.0% over average daily volume of 3.3 million contracts during the same period in 2004.

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Revenues

Clearing and Transaction Fees. Clearing and transaction fees increased $39.7 million, or 27.8%, to $182.6 million for the three months ended June 30, 2005 from $142.9 million for the three months ended June 30, 2004. The increase was primarily attributable to a 35.1% increase in total trading volume. During the second quarter of 2005, average daily trading volume on CME Globex increased to 3.1 million contracts, an 81.5% increase compared to the same period in 2004. The increase resulted primarily from volume growth in interest rate, foreign exchange, and equity products.

The following table summarizes trading volume and revenue (volume in thousands):

In the second quarter of 2005, 59.9% of our interest rate volume traded on CME Globex compared with 27.7% during the same period in 2004. Despite the decline in interest rate volatility, average daily volume of interest rate products traded electronically increased to 1.5 million contracts from 523,000 contracts during the same period in 2004. Increased trading volume on CME Globex was primarily a result of continuing competitive fee programs designed to encourage the participation of market makers and global proprietary trading firms, continued introduction of new products and pricing incentives for high volume CME Eurodollar traders.

The volatility in U.S. equity markets, as measured by VIX, declined by 17% during the second quarter of 2005 when compared with the same period in 2004. Despite this decline in volatility, trading volume for our equity products increased, primarily because of the continued growth in our E-mini and E-mini options products. Average daily volume of E-mini products increased by 21.0% to 1.3 million contracts during the second quarter of 2005 compared to the same period in 2004 driven primarily by the continued success of our S&P 500 ^® and Russell 1000 ^® futures. E-mini options products also experienced an increase in average daily volume of 12,000 contracts from the same period in 2004, a majority of which is attributable to the liquidity created by the market maker program for E-mini S&P options launched in November 2004.

During the second quarter of 2005, average daily volume of foreign exchange products increased by 88.6%, to 332,000 contracts. Growth in foreign exchange is primarily a result of technological innovations which have facilitated faster execution of trades by automated trading systems and increased accessibility by international customers. The success of our tiered pricing structure, which provides incentives to high volume traders, has also contributed to the growth in volume. In the second quarter of 2005, 80.2% of our foreign exchange volume traded through CME Globex compared with 63.6% during the same period in 2004.

The impact of the increase in trading volume was partially offset by a decrease in the average rate, or revenue, per contract. Clearing and transaction fees increased $39.7 million while average rate per contract decreased to $0.651 for the three months ended June 30, 2005 from $0.688 for the same period in 2004. If the average rate per contract remained unchanged from the three months ended June 30, 2004, the increase in trading volume would have contributed $51.9 million of clearing and transaction revenue for the three months ended June 30, 2005. Growth in interest rate, equity and foreign currency products, as a result of our competitive fee programs, increased participation of market makers and global proprietary trading firms, resulted in higher incentives and discounts which offset the impact of volume growth by $9.4 million, and the average rate per contract by $0.045. In addition, our mutual offset agreement with SGX further reduced revenue by $1.5 million and the average rate per contract by $0.007. The rate per contract was favorably impacted by a higher percentage of trades on CME Globex for all product lines, for which additional fees are assessed, but offset by a change in the trading mix from non-member to incentive program activity as well as an increase in the proportion of interest rate volumes, which have a lower rate per contract.

Clearing and Transaction Processing Services. Clearing and transaction processing services increased $4.6 million, or 32.4%, to $18.8 million for the three months ended June 30, 2005 from $14.2 million for the three months ended June 30, 2004. The revenue increase in the second quarter of 2005 from the same period in 2004 was a result of increased trading volume at the CBOT as well as the expiration of lower initial pricing that was in effect during the second quarter of 2004. We cleared 184.9 million contracts

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for the CBOT during the quarter ended June 30, 2005 compared with 158.5 million contracts during the same period in 2004. During the second quarter of 2005, revenue from NYMEX also increased by $1.1 million compared to the same period in 2004. The increase was a result of increased trading volume in futures products listed for NYMEX.

Quotation Data Fees. Quotation data fees increased $3.0 million, or 20.2%, to $17.8 million for the three months ended June 30, 2005 from $14.8 million for the three months ended June 30, 2004. The increase resulted primarily from the change to our fee structure implemented on January 1, 2005. Users of our basic service currently pay $35 per month for each market data screen, or device, an increase from the $30 per month charge that was in effect during the second quarter of 2004.

Access Fees. Access fees increased $0.8 million, or 19.5%, to $4.8 million for the three months ended June 30, 2005 from $4.0 million for the three months ended June 30, 2004. This increase resulted primarily from CME Globex users switching to a higher bandwidth connection at a higher cost.

Communication Fees. Communication fees decreased $0.4 million, or 13.0%, to $2.2 million for the three months ended June 30, 2005 from $2.6 million for the three months ended June 30, 2004 primarily because of decreased demand for communication devices and services on the trading floor.

Investment Income. Investment income increased $4.1 million to $6.9 million for the three months ended June 30, 2005 from $2.8 million for the three months ended June 30, 2004. The annualized average rate earned on all investments increased to 2.7% in the second quarter of 2005 compared with 1.5% during the same period in 2004, representing an increase in investment income of $2.7 million. This increase resulted primarily from increases in market interest rates since June 2004. In addition, $1.2 million of the increase in interest income resulted from increased funds available for investment including cash performance bonds and security deposits.

Securities Lending Interest Income and Expense. Securities lending interest income increased $9.7 million, to $13.6 million for the three months ended June 30, 2005 from $3.9 million for the three months ended June 30, 2004. The average daily balance of proceeds from securities lending activity was $1.8 billion for the second quarter of 2005 and $1.4 billion for the same period in 2004. Securities lending interest expense increased $9.6 million, to $13.1 million for the second quarter of 2005 from $3.5 million for the same period in 2004. The net revenues from securities lending represented an annualized return of 0.12% on the average daily balances in both the second quarter of 2005 and 2004. The spread between interest rates received and paid remained constant due to similar market conditions during both quarters.

Other Revenue. Other revenue increased $0.2 million, or 3.2%, to $5.6 million for the three months ended June 30, 2005 compared to $5.4 million for the three months ended June 30, 2004. This resulted primarily from a $0.2 million increase in fees associated with managing our IEF programs.

Expenses

Compensation and Benefits Expense. Compensation and benefits expense increased $4.4 million, or 10.7%, to $45.0 million for the three months ended June 30, 2005 from $40.6 million for three months ended June 30, 2004. There were three significant components to this increase. First, compensation and benefits expense increased by $3.0 million primarily because of annual salary increases and increases in employer taxes and health benefits. Second, the average number of employees increased approximately 3%, or by 39 employees, resulting in additional compensation and benefits expense of $0.7 million. Third, stock-based compensation expense increased $1.2 million to $2.7 million for the second quarter of 2005. This increase resulted primarily from a full three months of expense during the second quarter of 2005 for the options granted in June of 2004 as well as the first month’s recognition of expense related to the June 2005 employee options grant. These increases were partially offset by a $0.4 million decrease in the bonus expense, which is accrued under the provisions of our annual incentive plan. Finally, during the second quarter of 2005, there was a $0.3 million increase in the capitalization of compensation and benefits relating to internally-developed software.

Occupancy Expense. Occupancy expense increased $0.4 million, or 5.2%, to $7.2 million for the three months ended June 30, 2005 from $6.8 million for the three months ended June 30, 2004. Occupancy expense increased primarily because of increased real estate taxes and operating expenses at our primary location in Chicago as well as increased utilities expense. This increase was partially offset by a decrease in trading volume rent due to lower open outcry volume in the second quarter of 2005.

Professional Fees, Outside Services and Licenses Expense. Professional fees, outside services and licenses expense increased $2.0 million, or 22.4%, to $10.8 million for the three months ended June 30, 2005 from $8.8 million for the three months ended June 30, 2004. The increase resulted primarily from consultant fees related to our technology initiatives as well as market maker agreements and license fees. Technology-related professional fees increased $1.0 million, net of amounts capitalized for internally-developed software, in the second quarter of 2005 when compared to the second quarter of 2004 because of technology initiatives to expand electronic trading functionality and accessibility. In addition, we incurred $0.5 million of expense related to two market maker programs in the second quarter of 2005. Lastly, increased trading volume and licensing rates related to equity index licensing agreements resulted in a $0.4 million increase in the second quarter of 2005 from the same period in 2004.

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Communications and Computer and Software Maintenance Expense. Communications and computer and software maintenance expense increased $1.6 million, or 13.2%, to $14.3 million for the three months ended June 30, 2005 from $12.7 million for three months ended June 30, 2004. This expense is affected primarily by growth in electronic trading. During the second quarter of 2005, the number of transactions we processed increased approximately 46%. In addition, we processed approximately 93% of total transactions electronically in the second quarter of 2005 compared with nearly 86% for the same period in 2004, which represented 71.3% and 52.2%, respectively, of total contracts traded. As a result, our expenses for software, software maintenance and hardware maintenance increased $1.9 million during the second quarter of 2005 when compared with the same period in 2004.

Depreciation and Amortization Expense. Depreciation and amortization expense increased $3.0 million, or 22.5%, to $16.1 million for the three months ended June 30, 2005 from $13.1 million for the three months ended June 30, 2004. The increase was the result of depreciation and amortization of 2004 and 2005 asset acquisitions exceeding the depreciation and amortization of assets that have become fully depreciated or retired since July 1, 2004. Capital expenditures totaled $27.3 million for the second quarter of 2005 and $22.8 million for the same period in 2004. For these periods, technology-related purchases, defined as purchases of computers and related equipment, software, internally-developed software, and costs associated with the build-out of our data centers, represented approximately 92% and 86%, respectively, of total capital expenditures.

Marketing, Advertising and Public Relations Expense. Marketing, advertising and public relations expense increased $0.8 million, or 34.3%, to $3.3 million for the three months ended June 30, 2005 from $2.5 million for the three months ended June 30, 2004. This is primarily a result of increased event sponsorships, trade shows, and direct mail advertising.

Other Expense. Other expense remained constant relative to the prior year for the quarter ended June 30, 2005 as increases in general administrative expenses offset the benefit from improved currency delivery processes.

Income Tax Provision . We recorded a tax provision of $54.0 million for the three months ended June 30, 2005 compared with $39.0 million for the three months ended June 30, 2004. The effective tax rate was 39.6% for the second quarter of 2005, compared with 40.5% for the same period in 2004. A decrease in non-deductible expenses and the resolution of certain tax audit issues were the primary drivers for the decrease in the effective tax rate.

Liquidity and Capital Resources

Liquidity and Cash Management . Cash and cash equivalents totaled $499.0 million at June 30, 2005, compared with $357.6 million at December 31, 2004. The $141.4 million increase from December 31, 2004 to June 30, 2005 resulted primarily from cash generated by operations for the six months ended June 30, 2005, retained primarily in the form of short-term investments that are included as cash equivalents. Also contributing to the increase was $37.5 million of proceeds from maturities of marketable securities and $5.7 million in proceeds from the exercise of stock options. Partially offsetting these increases were $43.1 million in purchases of property, net of trade-in allowances, and quarterly dividend payments that totaled $31.5 million. The balance retained in cash and cash equivalents is a function of anticipated or possible short-term cash needs, prevailing interest rates, our investment policy, alternative investment choices, and any dividends paid.

Included in current and other assets are net deferred tax assets of $11.3 million and $10.8 million at June 30, 2005 and December 31, 2004, respectively. These net deferred tax assets result primarily from depreciation, stock-based compensation, and deferred compensation. There is no valuation reserve for these assets as we expect to fully realize their value in the future based on our expectation of future taxable income.

Historically, we have met our funding requirements from operations. If operations do not provide sufficient funds to complete capital expenditures, short-term investments or marketable securities can be reduced to provide the needed funds or assets can be acquired through capital leases.

Sources and Uses of Cash . Net cash provided by operating activities was $174.1 million for the six months ended June 30, 2005 and $107.9 million for the same period in 2004. The net cash provided by operations increased in the first six months of 2005 primarily because of improved operating results. The net cash provided by operating activities exceeded our net income in the six months ended June 30, 2005 by $20.9 million primarily because of non-cash expenses, such as depreciation and amortization of $30.9 million, which did not adversely affect our cash flow. In addition, we received tax benefits of $15.6 million related to employee option exercises in excess of our book expense associated with these options. This tax benefit reduced our income tax obligations for the six months ended June 30, 2005. These increases were partially offset by an increase in accounts receivable of $18.0 million. Accounts receivable at the end of any period results primarily from the clearing and transaction fees billed in the last month of the reporting period as well as the receivable for the portion of transaction processing services that are billed on a quarterly basis. Clearing and transaction fees were $18.3 million greater in June 2005 than in December 2004.

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Cash used in investing activities was $6.8 million for the six months ended June 30, 2005 compared with $53.5 million for the six months ended June 30, 2004. The decrease in cash used of $46.7 million was primarily due to the $48.6 million in purchases of marketable securities in the first six months of 2004 that was not repeated during the first six months of 2005. By comparison, in the first six months of 2005, maturities totaled $37.5 million and there were no purchases. Cash used to acquire and develop capital assets increased $11.3 million to $43.1 million for the first six months of 2005 from $31.8 million for the same period in 2004. As part of our efforts to increase trade matching and clearing capacity to accommodate volume growth, we expect capital expenditures for 2005 to be at the upper end of our previously disclosed range of $80 million to $90 million.

Cash used in financing activities was $25.9 million for the six months ended June 30, 2005 compared with $17.2 million for the six months ended June 30, 2004. The increase was primarily due to the $14.1 million increase in dividends paid. Dividends totaled $31.5 million for the six months ended June 30, 2005 compared with $17.4 million for the six months ended June 30, 2004. The increase resulted primarily from a year-over-year improvement in cash earnings, defined as net income excluding depreciation and amortization expense and tax-effected stock-based compensation expense, less capital expenditures. Partially offsetting this increase were the proceeds from stock option exercises, which increased $4.6 million to $5.7 million for the six months ended June 30, 2005 from $1.1 million for the six months ended June 30, 2004.

Debt Instruments. We maintain a secured $750.0 million line of credit with a consortium of banks. The secured credit agreement, which expires on October 14, 2005, is collateralized by clearing firm security deposits held by the exchange in the form of U.S. Treasury and government agency securities, security deposit funds in IEF2 and performance bond deposits of the defaulting firm, if any. The amount held as available security deposit collateral at June 30, 2005 was $1.1 billion. The line of credit is available for use in certain situations, such as a disruption in the domestic payments system that would delay settlement between our exchange and our clearing firms or in the event of a clearing firm default. Effective March 1, 2005, the standby letter of credit for GFX Corporation, our wholly owned subsidiary that engages in futures transactions, increased to $5.0 million from $2.5 million. In addition, as of June 30, 2005, we were contingently liable on irrevocable letters of credit totaling $89.0 million in connection with our mutual offset agreement with SGX.