Overview

Optionable, Inc. ("the "Company") was formed in Delaware in February 2000. Between April 2001 and July 2007, a substantial portion of our revenues were generated from providing energy derivative brokerage services to brokerage firms, financial institutions, energy traders, and hedge funds worldwide. A substantial portion of all energy derivatives we brokered in the past were natural gas derivatives.

We launched our electronic trading system, OPEX, in 2006 and we enhanced its features and functionalities during 2007 and 2008. Users of OPEX can execute on the platform mostly energy-related derivative trades. A significant portion of the contracts executable on OPEX are those offered by NYMEX, a US exchange. However, we believe that OPEX features and functionalities can be ported to other derivatives as well, such as credit default swaps, interest-related derivatives, metals and other commodities. Additionally, we believe that OPEX, with appropriate enhancements, may be able to execute transactions offered by other exchanges as well. Effective November 4, 2008, the Company has suspended the development of OPEX. However, we intend to maintain OPEX and explore its possible sale or licensing.

A significant portion of our revenues through the third quarter of 2007 was derived from our business relationship with BMO Financial Group ("BMO"). We have not generated any revenues since the third quarter of 2007 as a result of the suspension of the business relationship with us by BMO together with the combined succession of events since then. In addition, the matters discussed in Item 1 of Part II of this Report "Legal Proceedings" have had a significant adverse impact on our business, including current and, likely, future results of operations and financial condition. Our management continues to seek out possible business transactions and new business relationships. Accordingly, we have refined our business strategy by seeking the following options:

(1) to get advice from investment bankers as to whether we could or should sell our technology;

(2) to license our technology to joint ventures with other brokerage or software development firms; and

(3) to merge with another company in a business outside the financial services industry.

We are also considering whether we should satisfy our existing obligations with current creditors and distribute our remaining assets to our stockholders.

While we have been in discussions for strategic transactions with certain companies from time to time, none of these discussions have materialized into a definitive agreement with any of these parties. We cannot guarantee that we will be able to enter into a strategic transaction with a third party in the foreseeable future.

While we believe that it is likely that we will sell our technology, we are currently unable to determine whether we will continue to have any significant continuing involvement in the development or operations of OPEX .

The Company believes it has sufficient funds to meet its obligations, based on its internal projections, for at least the next twelve months. However, the Company cannot guarantee that it will do so. If there are unforeseen expenses or financial obligations which occur during that period such as those related to matters disclosed in Part II, Item 1- Legal Proceedings, the Company may not be able to meet such obligations. Additionally, if the Company acquires a brokerage or trading firm or a technology company which could be instrumental in the Company's long-term growth, this could hamper the Company's ability to continue as a going concern, both from a short-term and a long-term perspective, and the Company would have to resort to financing, through either debt or equity placements, for the funding of either such acquisitions or unforeseen expenses or financial obligations. There can be no assurance that any such financing would be available on acceptable terms, or at all, especially in light of the pending litigation against the Company and recent economic conditions.

Three month period ended March 31, 2009 and March 31, 2008

                             Results of Operations
                                  (Unaudited)



                                                                          Increase/          Increase/
                                           For the period ended           (Decrease)        (Decrease)
                                                 March 31,                in $ 2009          in % 2009
                                           2009             2008           vs 2008            vs 2008


Operating expenses:
 Selling, general and administrative      1,062,815        1,021,735           41,080               4.0%
 Research and development                         -          245,045         (245,045 )          -100.0%
   Total operating expenses               1,062,815        1,266,780         (203,965 )           (16.0% )

   Operating loss                        (1,062,815 )     (1,266,780 )       (203,965 )           (16.0% )

 Other income (expense):
 Interest income                             27,685           88,593          (60,908 )           -68.8%
 Interest expense-related parties          (116,058 )        (91,719 )         24,339              26.5%
                                            (88,373 )         (3,126 )         85,247           NM

Net loss before income tax               (1,151,188 )     (1,269,906 )       (118,718 )             9.3%

Income tax (provision) benefit             (478,622 )        495,771         (974,393 )           NM

Net loss                               $ (1,629,810 )   $   (774,135 )   $    855,675           NM

NM: Not meaningful

Selling, general, and administrative expenses

Selling, general, and administrative expenses consists primarily of legal fees, incurred in connection with the Company's attention to matters described in Part II, Item 1- Legal Proceedings or to handle certain matters which occur during the course of our operations, and compensation of personnel supporting our operations.

The increase in selling, general, and administrative expenses during the three-month period ended March 31, 2009, when compared to the prior year period is primarily due to the following:

· Higher legal fees incurred in connection with an increased number of litigations as well as legal fees incurred in connection with our annual meeting of stockholders in March 2009 and the satisfaction of our obligations to Mark Nordlicht, a stockholder and our former Chairman of the Board, which occurred in February 2009.

As a result of the matters discussed above and in Item 1 of Part II of this Report, we believe that our legal fees for 2009 will continue to constitute of a large share of our selling, general, and administrative expenses.

Research and development

Research and development expenses consist primarily of compensation of personnel and consultants associated with the development and testing of our automated electronic trading system. The decrease in research and development expenses during the three month period ended March 31, 2009 when compared to the prior year periods is primarily due to the following:

· We suspended our OPEX development efforts in November 2008.

Interest income

Interest income consists primarily of interest earned on interest-bearing cash and cash equivalents. The decrease in interest income during the three month period ended March 31, 2009 when compared to the prior year period is primarily due to a decrease in interest rate we earned as well as a lower weighted average interest-bearing cash balance.

Interest expense to related parties

Interest expense to related parties consists of interest charges associated with amounts due to related parties, including Mark Nordlicht, our former Chairman of the Board and Edward O'Connor, our former President and current Director. The increase in interest expense to related parties during the three month period ended March 31, 2009 is primarily due to a loss on extinguishment of debt to Mark Nordlicht of approximately $45,000 which was recognized as interest expenses during the three-month period ended March 31, 2009. No such loss occurred during the comparable prior year period.

Income tax

Income tax benefit/expense consists of federal and state current and deferred income tax or benefit based on our net income. The increase in income tax provision during the three month period ended March 31, 2009 when compared to the income tax expense we incurred during the comparable prior year period is primarily due to a tax gain we incurred on the satisfaction of the due to Mark Nordlicht. The tax gain amounted to approximately $2.5 million.

LIQUIDITY AND CAPITAL RESOURCES

Our cash balance as of March 31, 2009 amounts to approximately $5.3 million.

· net loss of approximately $1.6 million, adjusted for the amortization of debt discount of approximately $116,000; and

· a decrease in recoverable income taxes resulting from the taxable gain of $2.5 million resulting from the satisfaction of our obligations to Mark Nordlicht, offset by the current pre-tax quarter losses of $1.2 million.

During the three-month period ended March 31, 2009, we used cash in investing activities, resulting from purchases of three notes receivable aggregating $60,000;

During the three-month period ended March 31, 2009, we satisfied our obligations of approximately $5.0 million to a stockholder and our former Chairman of the Board, Mark Nordlicht and repurchased 4,095,075 shares of our common stock hold for a consideration aggregating $2,575,000.

During the three-month period ended March 31, 2008, we generated cash from operating activities of approximately $466,000, primarily resulting from:

· net loss of approximately $770,000, adjusted for the amortization of debt discount of approximately $92,000; and

· a decrease in prepaid income taxes assets resulting from the reimbursement during the three-month period ended March 31, 2008 of the 2007 federal estimated tax payments /income tax payable of 3.6 million resulting from the payment of estimated income taxes.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A summary of significant accounting policies is included in Note 2 of unaudited financial statements included in this Quarterly Report. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition. Our financial statements and accompanying notes are prepared in accordance with U.S. GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. Critical accounting policies for us include the following:

Share-based payment

We account for share-based payments in accordance with SFAS No. 123(R), Share-Based Payment. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating expected volatility. In addition, judgment is also required in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

Contingencies

The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. SFAS No. 5, Accounting for Contingencies, requires that an estimated loss from a loss contingency such as a legal proceeding or claim should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred.

In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial position or our results of operations.