The following discussion should be read together with the accompanying Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

Overview

We are a pioneer in electronic trading solutions. The NYFIX Marketplace 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 with enhanced methods of accessing liquidity. We also provide value-added informational and analytic services and 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 low touch, low impact market access and 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 and the Sell-Side, and through exchanges (e.g., NYSE, NYSE Alternext, Nasdaq and other exchanges), the OTC market, ATSs and electronic communication networks, or ECNs.

Sources of Revenue

Our revenues consist of subscription and maintenance fees, transaction fees, and product sales and services revenues. As a percentage of our total revenues during the year ended December 31, 2008, subscription and maintenance revenues accounted for 60%, transaction revenue accounted for 38%, and product sales and services revenue accounted for 2%.

Our subscription and maintenance revenues principally consist of revenues from contracts that provide for the use of our systems and our messaging channels, together with managed services. Subscription and maintenance revenue rates are fixed based on a contractual period of time. Additional services, provided under schedules, or addenda to the contracts, 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 amounts we charge for connectivity to the NYFIX Marketplace Platform, including telecommunications, installation and maintenance of routers, network management software, support staff, and other costs related to the management of connectivity. The connectivity charges are recognized as the services are provided.

Our subscriptions and maintenance revenues are not directly 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 maintain revenues with existing clients and to sign agreements with new clients because of reductions in their technology spending, consolidation of brokerages and hedge fund closures 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 disproportionately impact profitability.

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.

Because commission revenues are earned on a per-transaction basis, such revenues fluctuate from period to period depending on (i) the volume of securities traded through our services in the U.S. and the U.K. and (ii) our commission rates. Commission revenues are primarily generated by orders delivered to us from direct computer-to-computer links driven by our clients routing technology, our FIXTrader order management system and other vendors' products, as well as third party order routing networks and phone orders from our customers.

We believe that the factors that most influence our transaction volumes are the following:

• macro trends in the global equities markets that affect overall institutional equity trading activity;

• competitive pressure, including pricing, created by a proliferation of electronic execution competitors;

• potential changes in the U.S. market structure;

• new regulatory requirements or a failure to comply with existing regulatory requirements;

• service quality and availability;

• 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.

Product sales and services are primarily comprised of FIX software licenses and professional services fees. This revenue is recognized when the software is delivered 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.

Cost of Revenue

Cost of revenue includes the following:

• 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;

• Fees paid to third-party technology providers to access and provide services to their client base;

• Amortization expense of acquired intangible assets and capitalized software 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; and

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

Recent Developments
Discontinuance of the Fusion OMS Product

In October 2007, we made a decision to discontinue our Fusion OMS product. In connection with this decision, we offered one-time termination benefits to affected employees. We recorded a restructuring charge of $0.7 million for 2008, which consisted of retention and severance costs. In addition, we incurred a loss during 2008 of $0.8 million to support the Fusion OMS product during its wind-down phase. We completed the migration of clients off the Fusion OMS system as of June 30, 2008 and do not expect to incur any additional costs related to this product going forward.

In addition to generating subscription revenue for the Fusion OMS product, these clients also used our transaction and FIX Marketplace services. As compared to 2007, our overall revenues from Fusion OMS clients were down $9.8 million during 2008, across all businesses.

Euro Millennium

During the second quarter of 2007, our Board of Directors approved a new initiative, Euro Millennium, a multilateral trading facility for non displayed liquidity in pan-European listed equities. This initiative leverages our experience gained with NYFIX Millennium in the U.S. with our goal of global expansion during a time of rapid regulatory change. During 2008 and 2007, we incurred costs of $9.2 million and $4.0 million, respectively, related to this initiative. These costs include compensation and related costs, consulting, marketing and travel related costs. Due to the recent growth in matched volumes and revenues, we have determined that effective January 1, 2009 Euro Millennium is no longer in its introductory phase and we will report the results of this initiative within the Transaction Services Division, with specific costs included in transaction cost of revenue and the various SG&A categories detailed below. Operating losses from Euro Millennium are expected to continue during 2009, although such amounts are expected to decline throughout the year as revenues grow.

The FSA, along with other European regulators, is currently conducting an extensive review of the impact that MiFID has had on European markets. In connection with this review, the FSA has interpreted a particular provision of MiFID in a way that will require modifications to Euro Millennium's current functionality. Such modifications will result in additional development costs for us. Despite the fact that we believe that we are currently operating Euro Millennium in a manner that is fully compliant with MiFID, a position supported by external legal counsel opinions obtained at the request of the FSA, we are engaged in ongoing conversations with the FSA regarding this interpretation and expect to find a mutually acceptable solution. This solution, however, could have an impact on Euro Millennium's service. In addition, there can be

no assurance that we will be able to make any required modifications within a timeframe acceptable to the FSA. To the extent that we cannot meet the FSA's timeframe, the FSA could react in a variety of ways ranging from an extension of our deadline for compliance to enforcement action or potential revocation of our MTF operating license. We would vigorously appeal any such action.

FIXCITY Acquisition

In April 2008, we acquired 100% of the outstanding stock of FIXCITY, a U.K.-based specialist in web-based electronic trading and liquidity discovery solutions. We have included the operating results of FIXCITY in our consolidated financial statements since the date of acquisition, including revenues of $2.0 million during 2008.

During 2008, we incurred integration charges related to the FIXCITY acquisition of $0.8 million, comprised of a $0.5 million write-off of capitalized software costs, as the technology acquired from FIXCITY replaced certain of our capitalized initiatives, as well as $0.3 million of third-party costs related to the integration of the technology platforms. These integration efforts were complete as of December 31, 2008 and as a result, we do not expect any additional integration costs in 2009.

Pursuant to the terms of the share purchase agreement, we paid £3.3 million (or approximately $6.6 million) in cash and also agreed to pay an additional $1.0 million in cash contingent on the successful completion of the integration of the existing FIXCITY and NYFIX technology platforms within six months of the closing date. In October 2008, we determined that the integration contingency was satisfied and made the $1.0 million payment. This payment was recorded on our consolidated balance sheet as part of goodwill. We incurred $0.7 million in legal and consulting fees related to this acquisition.

In addition, the share purchase agreement provides the potential for cash earn-out payments in years 1, 2 and 3 following the acquisition totaling up to £3.7 million (or approximately $5.4 million) if certain revenue targets are achieved, with potential additional payments based on varying percentages of all such revenue if higher revenue thresholds are achieved.

Settlement of Litigation

On February 25, 2009, we entered into a global settlement agreement relating to the derivative litigation matters for historical stock option granting practices, which is pending court approval, The agreement provides that we adopt certain corporate governance practices and provides for a payment of $1.3 million in legal fees to plaintiffs' counsel that will be paid directly by our insurance carrier. As a result of this settlement, which was substantially agreed to by year-end 2008, we recognized into earnings $10.1 million of insurance advances in the fourth quarter of 2008 on the basis of our belief that it is highly probable that we will retain these amounts. This benefit is reflected as a reduction to SEC investigation, restatement and other related expenses as the amounts recovered were previously expensed in this line item.

Results of Operations

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.

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                                                                            Year Ended December 31,
(in thousands,                                     % of                                          % of                                          % of
except                      2008                 Revenue                  2007                 Revenue                  2006                 Revenue
percentages)
Revenue:
Subscription and    $        70,525                   60 %        $        67,116                   55 %        $        65,801                   67 %
maintenance
Transaction                  44,904                   38 %                 52,339                   43 %                 29,609                   30 %
Product sales and             2,118                    2 %                  2,247                    2 %                  2,943                    3 %
services
Total revenue               117,547                  100 %                121,702                  100 %                 98,353                  100 %
Cost of revenue:
Subscription and             30,997                   26 %                 34,381                   28 %                 32,638                   33 %
maintenance(1)
Transaction(1)               23,314                   20 %                 29,916                   25 %                 15,901                   16 %
Product sales and               340                    0 %                    813                    1 %                  1,824                    2 %
services(1)
Total cost of                54,651                   46 %                 65,110                   53 %                 50,363                   51 %
revenue
Gross profit                 62,896                   54 %                 56,592                   47 %                 47,990                   49 %
Operating
expense:
Selling, general
and                          74,675                   64 %                 86,848                   71 %                 49,237                   50 %
administrative(1)
Depreciation and              1,907                    2 %                  1,554                    1 %                  1,185                    1 %
amortization
Integration                     838                    1 %                      -                    0 %                      -                    0 %
charges
SEC
investigation,
restatement and              (9,550 )                 -8 %                  5,846                    5 %                 12,758                   13 %
other related
expenses(1)
Restructuring                   216                    0 %                    331                    0 %                  2,056                    2 %
charge
Asset impairment             11,651                   10 %                  7,596                    0 %                      -                    0 %
charge
Loss from                   (16,841 )                -14 %                (45,583 )                -37 %                (17,246 )                -18 %
operations
Interest expense               (763 )                 -1 %                   (565 )                  0 %                 (1,029 )                 -1 %
Investment income             1,357                    1 %                  4,114                    3 %                  1,894                    2 %
Other (expense)                 (25 )                  0 %                     (3 )                  0 %                     20                    0 %
income, net
Loss from
continuing
operations before           (16,272 )                -14 %                (42,037 )                -35 %                (16,361 )                -17 %
income tax
provision
(benefit)
Income tax
provision                       143                    0 %                   (275 )                  0 %                    189                    0 %
(benefit)
Loss from
continuing                  (16,415 )                -14 %                (41,762 )                -34 %                (16,550 )                -17 %
operations
Income from
discontinued
operations,
including gain on                 -                   NM                      676                   NM                    3,646                   NM
sale of $1,905
and $4,035 in
2007 and 2006,
respectively(1)
Net loss                    (16,415 )                 NM                  (41,086 )                 NM                  (12,904 )                 NM
Accumulated
preferred                    (2,247 )                 NM                   (5,868 )                 NM                   (1,354 )                 NM
dividends
Beneficial
conversion                        -                   NM                        -                   NM                  (18,139 )                 NM
feature on
preferred stock
Loss applicable
to common           $       (18,662 )                 NM          $       (46,954 )                 NM          $       (32,397 )                 NM
stockholders


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NM - not meaningful

Percentage sub-totals may not add due to rounding

(1) Stock-based compensation included in the respective line items above follows:

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Cost of revenue:
Subscription and          $             333     $           272         $              81
maintenance
Transaction                             152                 108                         9
Product sales and                         7                   6                         4
services
Selling, general and                  7,324               5,579                       747
administrative
SEC investigation,
restatement and other                     -                (118 )                     396
related expenses(a)
Income from                               -                   -                        18
discontinued operations
                          $           7,816     $         5,847         $           1,255

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

Revenues

The following table presents our components of revenue:

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                                   Year Ended                               Increase (Decrease)                              Year Ended                               Increase (Decrease)
                                  December 31,                                                                              December 31,
(in thousands,
except                     2008                  2007                    $                      %                    2007                  2006                    $                      %
percentages)
Subscription and    $          70,525     $          67,116     $         3,409                    5 %        $          67,116     $          65,801     $         1,315                    2 %
maintenance
Transaction                    44,904                52,339              (7,435 )                -14 %                   52,339                29,609              22,730                   77 %
Product sales and               2,118                 2,247                (129 )                 -6 %                    2,247                 2,943                (696 )                -24 %
services
Total revenue       $         117,547     $         121,702     $        (4,155 )                 -3 %        $         121,702     $          98,353     $        23,349                   24 %

Subscription and Maintenance

Subscription and maintenance revenue increased during 2008, as compared to 2007, primarily due to an increase in subscriptions (and related managed services) for order routing messaging channels offered by our FIX Division and to the impact of our FIXCITY acquisition, offset in part by a decrease in subscriptions (and related managed services) for our OMS Division products. FIXCITY, which was acquired in April 2008, contributed $2.0 million in subscription revenues during 2008. As of December 31, 2008, we had 9,588 billable direct order routing messaging channels in service, an increase of 16% over the 8,270 messaging channels in service at December 31, 2007. The growth in our messaging channel subscription revenue during 2008 was slowed by a decrease in revenues of $1.1 million attributable to former Fusion OMS clients, as compared to 2007. The decline in subscriptions (and related managed services) for our OMS Division products to $4.7 million in 2008 from $10.5 million in 2007, was due primarily to the discontinuation of our Fusion OMS product, as well as related cancellations from other desktop clients. OMS subscription revenue from former Fusion OMS clients decreased by $3.1 million during 2008 as compared to 2007. As a result of recent consolidations in the brokerage industry, we expect the growth in subscription and maintenance revenues from messaging channels to be offset in 2009 by $1.5 million due to ongoing and expected cancellations for duplicate services from these clients. We also expect increased cancellations in order routing channels in 2009 due to hedge fund closures. Revenue from recurring maintenance on licensed software was $3.8 million in both 2008 and 2007.

The increase in subscription and maintenance revenue during 2007 was primarily attributable to an increase in subscriptions (and related managed services) for 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. As of December 31, 2007, we had 8,270 billable order routing messaging channels in service, an increase of 22% over the 6,796 billable order routing channels in service at December 31, 2006. This increase was partially offset by a decrease in subscriptions (and related managed services) for our OMS Division desktop and floor products to $10.5 million in 2007 from $18.9 million in 2006. This revenue decrease in the OMS Division is due primarily to the discontinuation (during the second quarter of 2007) of certain floor application products as well as cancellations from certain desktop clients. In October 2007, we decided to discontinue the Fusion OMS product and entered into a strategic arrangement with Lava to offer NYFIX Fusion OMS customers a transition arrangement to Lava's ColorPalette® OMS. Recurring maintenance on licensed software decreased $0.3 million to $3.8 million in 2007 as compared to $4.1 million in 2006.

Transaction

The decrease in transaction revenue during 2008 was primarily attributable to a decrease in commissions on trade executions. Commissions decreased to $43.8 million during 2008 from $51.0 million during 2007, primarily due to decreases in commissions of $6.4 million and $0.8 million from Sell-Side and Buy-Side clients, respectively. The decrease from Sell-Side clients was primarily due to a decrease in the use of our NIX algorithmic trading products and in commissions from direct market access services, offset in part by an increase in commissions from NYFIX Millennium and Euro Millennium. The decline in revenue from our NIX algorithmic trading products and from OTC direct market access was primarily attributable to lower volumes from former Fusion OMS clients. Transaction revenue from former Fusion OMS clients decreased by $5.6 million during 2008 compared to 2007. The additional decline in revenue from NYSE DOT direct market access services (including associated pass-through charges) of $6.2 million was primarily attributable to our

decision to improve our margins by eliminating discounts for these services below cost for clients who do not generate valuable pass-through matches in NYFIX Millennium. The average daily matched volume in NYFIX Millennium during 2008 was 48.6 million shares, a 5% increase over the average of 46.4 million shares during 2007.

The decrease from Buy-Side clients was due in part to the disintermediation of our direct Buy-Side client base by third-party algorithmic trading solution providers who offer enhanced technology solutions for certain clients. Our securities lending business generated net interest spread on its matched book stock borrow/stock loan portfolio of $1.1 million during 2008, compared to $1.3 million during 2007.

The increase in transaction revenue during 2007 was attributable to an increase in commissions (including related billed pass-through amounts) on trade executions. Commissions increased $22.8 million to $51.0 million during 2007 compared to $28.2 million during 2006 due primarily to a $21.6 million increase in commissions from Sell-Side clients and a $1.2 million increase in commissions from Buy-Side clients. The increase from Sell-Side clients was due to increased . . .