PART I.—FINANCIAL INFORMATION

Item 1. Financial Statements

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(In thousands, except share amounts)

	June 30, 2005			December 31, 2004
	(unaudited)
Assets
Cash and cash equivalents	$	198,960		$	206,465
Cash, restricted or segregated	8,999			7,287
Securities owned, at fair value	9,090			32,530
Receivables from brokers, dealers and other, net	569,003			198,642
Investments in limited partnerships	10,427			20,311
Premises and equipment, net	19,931			24,023
Capitalized software, net	10,947			8,926
Goodwill	175,946			86,550
Other intangibles	12,650			2,657
Deferred taxes	8,769			10,226
Other assets	12,228			14,841
Total assets	$	1,036,950		$	612,458
Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable and accrued expenses	$	100,625		$	82,821
Payables to brokers, dealers and other	525,174			142,446
Software royalties payable	—			3,350
Securities sold, not yet purchased, at fair value	299			30
Income taxes payable	8,248			13,310
Total liabilities	634,346			241,957
Commitments and contingencies
Stockholders’ Equity:
Preferred stock, par value $0.01; shares authorized: 1,000,000; shares issued: none	—			—
Common stock, par value $0.01; shares authorized: 100,000,000; shares issued: 51,363,873 and 51,327,388 at June 30, 2005 and December 31, 2004, respectively and 42,040,874 and 41,950,670 shares outstanding at June 30, 2005 and December 31, 2004, respectively	514			513
Additional paid-in capital	164,945			161,169
Retained earnings	405,637			374,961
Common stock held in treasury, at cost; shares: 9,322,999 and 9,376,718 at June 30, 2005 and December 31, 2004, respectively	(176,081		)	(177,095		)
Accumulated other comprehensive income:
Currency translation adjustment	7,589			10,953
Total stockholders’ equity	402,604			370,501
Total liabilities and stockholders’ equity	$	1,036,950		$	612,458

See accompanying notes to unaudited condensed consolidated financial statements.

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (unaudited)
(In thousands, except per share amounts)

	Three Months Ended				Six Months Ended
	June 30, 2005		June 25, 2004		June 30, 2005		June 25, 2004
Revenues:
Commissions	$	95,688	$	75,673	$	183,221	$	150,182
Other	6,494		5,314		10,623		8,377
Total revenues	102,182		80,987		193,844		158,559
Expenses:
Compensation and employee benefits	38,106		29,370		71,971		58,542
Transaction processing	14,013		12,171		27,209		23,751
Software royalties	—		3,288		1,088		7,104
Occupancy and equipment	7,220		7,449		14,473		14,790
Telecommunications and data processing services	4,935		4,338		9,800		8,975
Other general and administrative	10,398		7,697		19,582		14,876
Total expenses	74,672		64,313		144,123		128,038
Income before income tax expense	27,510		16,674		49,721		30,521
Income tax expense	10,070		7,190		19,045		12,783
Net income	$	17,440	$	9,484	$	30,676	$	17,738
Earnings per share:
Basic	$	0.41	$	0.22	$	0.73	$	0.41
Diluted	$	0.41	$	0.22	$	0.73	$	0.41
Basic weighted average number of common shares outstanding	42,040		43,138		42,025		43,726
Diluted weighted average number of common shares outstanding	42,204		43,144		42,183		43,734

See accompanying notes to unaudited condensed consolidated financial statements.

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited)
Six Months Ended June 30, 2005
(In thousands, except share amounts)

	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings		Common Stock Held in Treasury			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
Balance at January 1, 2005	$	—	$	513	$	161,169	$	374,961	$	(177,095	)	$	10,953		$	370,501
Issuance of common stock for the employee stock unit award plan (53,719 shares)	—		—		2,162		—		1,014			—			3,176
Issuance of common stock for the employee stock purchase plan (36,485 shares)	—		1		403		—		—			—			404
Stock-based compensation	—		—		1,211		—		—			—			1,211
Comprehensive income:
Net income	—		—		—		30,676		—			—			30,676
Other comprehensive income:
Currency translation adjustment	—		—		—		—		—			(3,364		)	(3,364		)
Comprehensive income															27,312
Balance at June 30, 2005	$	—	$	514	$	164,945	$	405,637	$	(176,081	)	$	7,589		$	402,604

See accompanying notes to unaudited condensed consolidated financial statements.

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)

	Six Months Ended
	June 30, 2005			June 25, 2004
Cash flows from Operating Activities:
Net income	$	30,676		$	17,738
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	10,288			9,758
Deferred income tax expense (benefit)	1,439			(1,389		)
Provision for doubtful accounts	36			456
Gain on sale of investments	(428		)	(1,481		)
Stock-based compensation	1,211			796
Changes in operating assets and liabilities:
Cash, restricted or segregated	(1,765		)	(214		)
Securities owned, at fair value	(2,208		)	(20,887		)
Receivables from brokers, dealers and other, net	(401,274		)	(671,788		)
Accounts payable and accrued expenses	17,594			13,811
Payables to brokers, dealers and other	411,845			654,036
Securities sold, not yet purchased, at fair value	275			1,532
Income taxes payable	(5,017		)	(1,988		)
Other, net	637			(2,557		)
Net cash provided by (used in) operating activities	63,309			(2,177		)
Cash flows from Investing Activities:
Acquisition of subsidiaries, net of cash acquired	(99,561		)	(12,002		)
Proceeds from sale of investments	34,731			—
Proceeds from sale of 50% interest in KTG	—			4,187
Capital purchases	(2,533		)	(4,405		)
Capitalization of software development costs	(5,325		)	(3,520		)
Net cash used in investing activities	(72,688		)	(15,740		)
Cash flows from Financing Activities:
Tax benefit from employee stock options	—			4
Common stock issued	3,580			2,459
Common stock repurchased	—			(41,333		)
Net cash provided by (used in) financing activities	3,580			(38,870		)
Effect of exchange rate changes on cash and cash equivalents	(1,706		)	121
Net decrease in cash and cash equivalents	(7,505		)	(56,666		)
Cash and cash equivalents—beginning of year	206,465			239,013
Cash and cash equivalents—end of period	$	198,960		$	182,347
Supplemental cash flow information:
Interest paid	$	1,595		$	826
Income taxes paid	$	19,959		$	15,528

See accompanying notes to unaudited condensed consolidated financial statements.

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)

(1) Organization and Basis of Presentation

Investment Technology Group, Inc. (“ITG”, the “Company”, “we” or “us”) was formed as a Delaware corporation on July 22, 1983. Its principal subsidiaries include: (1) ITG Inc. and AlterNet Securities, Inc. (“AlterNet”), United States (“U.S.”) broker-dealers in equity securities, (2) ITG Execution Services, Inc., a New York Stock Exchange floor broker (“ITG Execution Services”), (3) Investment Technology Group Limited (“ITG Europe”), an institutional broker-dealer in Europe, (4) ITG Australia Limited (“ITG Australia”), an institutional broker-dealer in Australia, (5) ITG Canada Corp. (“ITG Canada”), an institutional broker-dealer in Canada, (6) ITG Hoenig Limited (“ITG Hong Kong”), an institutional broker dealer in Hong Kong, (7) ITG Software Solutions, Inc., our intangible property, software development and maintenance subsidiary in the U.S. and (8) ITG Japan Ltd., our start-up business in Japan.

We are a full service trade execution firm that uses technology to increase the effectiveness and lower the cost of trading. We have two reportable segments: U.S. Operations and International Operations. The U.S. Operations segment provides equity trading and research services to institutional investors, brokers and alternative investment funds and money managers in the U.S. The International Operations segment includes our brokerage businesses in Europe, Australia, Canada and Hong Kong, as well as our start-up business in Japan and a research and development facility in Israel.

The condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). All material intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements reflect all adjustments, which are in the opinion of management, necessary for the fair presentation of results. Certain reclassifications and format changes have been made to prior period amounts to conform to the current period presentation.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets, liabilities, revenues and expenses. Actual results could differ from those estimates.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with our consolidated financial statements and accompanying notes included in our annual report on Form 10-K for the year ended December 31, 2004.

(2) Cash Restricted or Segregated

Cash restricted or segregated represents (i) funds on deposit with a bank in Asia for the purpose of securing working capital facilities arising from our Asian clearing and settlement activities, (ii) funds from the consideration paid for Hoenig Group Inc. held in escrow for the benefit of the former Hoenig stockholders, and (iii) a segregated account maintained by ITG Inc.’s clearing broker on behalf of its Hoenig division for the benefit of customers under certain directed brokerage arrangements.

(3) Stock-Based Compensation

At June 30, 2005, we had a stock option plan and employee and non-employee director benefit plans, which are described more fully in Note 17, Employee and Non Employee Director Stock and Benefit Plans, in our annual report on Form 10-K for the year ended December 31, 2004.

Effective January 1, 2003, we adopted the fair-value method prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. We used the prospective adoption method, applying the fair-value accounting method and recognizing compensation expense based on the fair value of stock options and/or restricted stock units granted for fiscal 2003 and future years over the related service period. In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, Share-Based Payment, which was a revision to SFAS No. 123. As a result, the fair value based method of accounting for stock-based payments will be required on a modified prospective basis, meaning any previously granted but unvested awards will be recorded as an expense on a prorated basis over the remaining vesting period. As we voluntarily adopted the fair value method approach as of January 1, 2003 on a prospective basis, the impact the revised Statement will have on our results of operations, financial position and cash flows will be minimal. SFAS No. 123R was effective for interim and annual periods beginning after June 15, 2005, with earlier adoption encouraged. However, based on the April 2005 announcement by the Securities and Exchange Commission, we are required to adopt SFAS No. 123R by January 1, 2006.

Employee stock options granted prior to 2003 continue to be accounted for under Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, as permitted by SFAS No. 123. In accordance with APB No. 25, compensation expense is not recognized for stock options that have no intrinsic value on the date of grant.

The following table displays pro forma information as if the provisions of SFAS No. 123 had been applied to all stock options granted (dollars in thousands, except per share data):

	Three Months Ended								Six Months Ended
	June 30, 2005				June 25, 2004				June 30, 2005				June 25, 2004
Net income, as reported	$	17,440			$	9,484			$	30,676			$		17,738
Add:
Stock-based compensation expense included in reported net income, net of taxes ($344 and $239 for the three months ended June 30, 2005 and June 25, 2004, respectively; and $464 and $334 for the six months ended June 30, 2005 and June 25, 2004, respectively)	597				315				747				462
Deduct:
Total stock-based compensation expense determined under fair value based method(a)	(943			)	(860			)	(1,423			)	(1,464			)
Net income, pro forma	$		17,094		$		8,939		$	30,000			$	16,736
Earnings per share:
Basic—as reported	$		0.41		$		0.22		$		0.73		$	0.41
Basic—pro forma	$		0.41		$		0.21		$		0.71		$	0.38
Diluted—as reported	$		0.41		$		0.22		$		0.73		$	0.41
Diluted—pro forma	$		0.41		$		0.21		$		0.71		$	0.38

Note:

(a) determined under fair value based method for all awards, net of tax ($545 and $651 for the three months ended June 30, 2005 and June 25, 2004, respectively, and $883 and $1,055 for the six months ended June 30, 2005 and June 25, 2004, respectively)

(4) Acquisitions

On February 1, 2005 we acquired Morgan Stanley Capital International Inc. (“MSCI”) and BARRA Inc.’s (“Barra”) 50% ownership interest in the POSIT Joint Venture (the “POSIT transaction”) for $90.0 million plus a contingent component payable over 10 years (equal to 1.25% of the revenues from the business of the POSIT Joint Venture). As a result of the POSIT transaction we became the owner of all right, title and interest, including all proprietary software of the POSIT Joint Venture. The initial $90.0 million purchase price was allocated among goodwill ($79.5 million), and intangible assets ($10.5 million) consisting of the POSIT trade name and proprietary software. Through June 30, 2005, the contingent component approximated $661,000, which was recorded as additional goodwill.

Prior to the closing of the POSIT transaction, pursuant to license agreements with the POSIT Joint Venture, we paid quarterly royalties to the POSIT Joint Venture equal to specified percentages of the transaction fees we charge on each share crossed through POSIT. Through January 31, 2005, we incurred royalties to the POSIT Joint Venture of $1.1 million, compared with royalties of $6.9 million incurred during the six months ended June 25, 2004.

On February 28, 2005, we acquired E-Crossnet to offer professional investors in Europe an integrated European equities crossing system with access to an expanded liquidity pool.

(5) Goodwill and Other Intangibles

The following is a summary of goodwill and other intangibles (dollars in thousands):

	Goodwill				Other Intangibles, Net
	June 30, 2005		December 31, 2004		June 30, 2005		December 31, 2004
U.S. Operations	$	149,596	$	66,206	$	12,264	$	2,556
International Operations	26,350		20,344		386		101
Total	$	175,946	$	86,550	$	12,650	$	2,657

We recorded additional goodwill in 2005 related to the POSIT transaction, the acquisition of E-Crossnet and the additional contingent purchase price consideration related to the March 29, 2004 acquisition of Radical.

We recorded intangible assets of $10.5 million consisting of proprietary software and the POSIT trade name as part of the POSIT transaction.

During the quarter ended June 30, 2005, no goodwill was deemed impaired and accordingly, no write-off was required.

We amortize other intangibles over their respective estimated useful lives, which range from two to five years.

(6) Securities Owned and Sold, Not Yet Purchased

The following is a summary of securities owned and sold, not yet purchased (dollars in thousands):

	Securities Owned					Securities Sold, Not Yet Purchased
	June 30, 2005		December 31, 2004			June 30, 2005		December 31, 2004
Auction rate preferred stock	$	—	$		4,000	$	—	$	—
State and municipal government obligations	—		19,700			—		—
Corporate stocks	3,719		3,461			299		30
Other	5,371		5,369			—		—
Total	$	9,090	$	32,530		$	299	$	30

(7) Receivables From and Payables To Brokers, Dealers and Other

The following is a summary of receivables from and payables to brokers, dealers and other (dollars in thousands):

	Receivables From						Payables To
	June 30, 2005			December 31, 2004			June 30, 2005		December 31, 2004
Customers	$	493,968		$	142,380		$	480,562	$	110,874
Clearing brokers and other	77,241			58,462			44,612		31,572
Allowance for doubtful receivables	(2,206		)	(2,200		)	—		—
Total	$	569,003		$	198,642		$	525,174	$	142,446

(8) Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following (dollars in thousands):

	June 30, 2005		December 31, 2004
Accrued compensation and benefits	$	26,021	$	8,240
Accrued soft dollar research payables	23,149		17,603
Trade payables	6,462		10,615
Deferred compensation	20,084		22,602
Accrued transaction processing	5,043		5,369
Accrued rent	2,316		2,824
Accrued telecom	1,645		1,946
Other accrued expenses	15,905		13,622
Total	$	100,625	$	82,821

(9) Earnings Per Share

The following is a reconciliation of the basic and diluted earnings per share computations (amounts in thousands, except per share amounts):

	June 30, 2005			June 25, 2004
Three Months Ended
Net income for basic and diluted earnings per share	$		17,440	$	9,484
Shares of common stock and common stock equivalents:
Average common shares used in basic computation	42,040			43,138
Effect of dilutive securities	164			6
Average common shares used in diluted computation	42,204			43,144
Earnings per share:
Basic	$		0.41	$	0.22
Diluted	$		0.41	$	0.22
Six Months Ended
Net income for basic and diluted earnings per share	$	30,676		$		17,738
Shares of common stock and common stock equivalents:
Average common shares used in basic computation	42,025			43,726
Effect of dilutive securities	158			8
Average common shares used in diluted computation	42,183			43,734
Earnings per share:
Basic	$	0.73		$		0.41
Diluted	$	0.73		$		0.41

The following is a summary of anti-dilutive options not included in the detailed earnings per share computation (amounts in thousands):

	June 30, 2005	June 25, 2004
Three months ended	2,385	3,498
Six months ended	2,481	3,644

(10) Net Capital Requirement

ITG Inc., AlterNet and ITG Execution Services are subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934, which requires the maintenance of minimum net capital. ITG Inc. has elected to use the alternative method permitted by Rule 15c3-1, which requires that ITG Inc. maintain minimum net capital equal to the greater of $250,000 or 2% of aggregate debit balances arising from customer transactions. AlterNet and ITG Execution Services have elected to use the basic method permitted by Rule 15c3-1, which requires that they maintain minimum net capital equal to the greater of $100,000 for AlterNet and $5,000 for ITG Execution Services, or 6 2/3 % of aggregate indebtedness.

At June 30, 2005, ITG Inc., AlterNet and ITG Execution Services had net capital of $35.2 million, $3.3 million and $1.0 million, respectively, of which $35.0 million, $3.1 million and $1.0 million, respectively, was in excess of required net capital.

In addition, our Canadian, Australian, Asian and European operations had regulatory capital in excess of the minimum requirements applicable to each business as of June 30, 2005 of approximately $10.8 million, $4.1 million, $6.5 million, and $1.7 million, respectively.

As of June 30, 2005, ITG Inc. on behalf of its Hoenig division, held a $4.6 million cash balance in a segregated bank account for the benefit of customers under certain directed brokerage arrangements.

(11) Segment Reporting

We have two reportable segments: U.S. Operations and International Operations. The U.S. Operations segment provides research and equity trading services in U.S. securities to institutional investors, brokers and alternative investment funds and money managers. The International Operations segment includes our brokerage businesses in Australia, Canada, Europe, and Hong Kong, a start-up business in Japan and a research and development facility in Israel.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies described in Note 2, Summary of Significant Accounting Policies, in our annual report on Form 10-K for the year ended December 31, 2004. Intersegment transactions that occur are based on specific criteria or approximate market prices. We allocate resources to and evaluate performance of our reportable segments based on income before income tax expense.

A summary of the segment financial information is as follows (dollars in thousands):

	U.S. Operations			International Operations			Consolidated
Three Months Ended June 30, 2005
Total revenues	$	79,240		$	22,942		$	102,182
Income before income tax expense	25,526			1,984			27,510
Capital purchases	856			845			1,701
Three Months Ended June 25, 2004
Total revenues	$		61,111	$	19,876		$	80,987
Income before income tax expense	13,950			2,724			16,674
Capital purchases	2,054			157			2,211
Six Months Ended June 30, 2005
Total revenues	$	148,762		$		45,082	$	193,844
Income before income tax expense	45,808			3,913			49,721
Capital purchases	1,436			1,098			2,534
Six Months Ended June 25, 2004
Total revenues	$	121,772		$		36,787	$	158,559
Income before income tax expense	27,909			2,612			30,521
Capital purchases	4,058			347			4,405

(12) Subsequent Events

On July 12, 2005 we entered into an agreement to acquire The MacGregor Group, Inc. (“MacGregor”), a leading provider of trade order management technology, for approximately $230 million. The combined technologies of ITG and MacGregor will enable us to provide clients with a best-execution order management system that will closely integrate real-time data, analytics, order management and execution tools into a complete solution for institutional trading desks. The transaction is expected to close within 60 to 90 days, subject to receipt of regulatory approvals.

We are in the process of establishing credit facilities, which are likely to consist of a $180 million term loan and a $25 million revolving credit facility to partially finance our pending acquisition of MacGregor as well as supplement our existing regulatory capital and other working capital requirements, as needed.

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

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements, including the notes thereto.

Executive Overview

We have two reportable segments: U.S. Operations and International Operations. The U.S. Operations segment provides equity trading and research services to institutional investors, brokers and alternative investment funds and money managers in the U.S., while our International Operations segment includes our brokerage businesses in Europe, Australia, Canada and Hong Kong, a start-up business in Japan, and a research and development facility in Israel.

Revenues primarily consist of commissions generated by customers’ use of our trade execution and analytical and research services (“commission revenues”). Because these commissions are paid on a per-transaction basis, commission revenues fluctuate from period to period depending on (i) the volume of securities traded through our services in the U.S. and Canada, and (ii) the contract value of securities traded in Europe, Australia and Hong Kong.

Expenses consist of compensation and employee benefits, transaction processing, software royalties, occupancy and equipment, telecommunications and data processing services, and other general and administrative expenses.

During the three months ended June 30, 2005 (“Second Quarter 2005”), the market environment for our U.S. Operations improved over the three months ended June 25, 2004 (“Second Quarter 2004”), but deteriorated from the three months ended March 31, 2005 (“First Quarter 2005”). On a year-over-year basis, ITG’s U.S. daily trading volumes for Second Quarter 2005 increased by 24.1% compared with Second Quarter 2004, outperforming increases in daily volumes at the NYSE and Nasdaq of 7.1% and 3.9%, respectively, over the same period. Sequentially, daily trading volumes decreased 3.7% at NYSE and declined 11.5% at Nasdaq in Second Quarter 2005 versus First Quarter 2005. In this environment, ITG’s U.S. daily trading volumes increased in Second Quarter 2005 by 5.0% versus First Quarter 2005.

There continues to be pricing pressure in the U.S. equity markets resulting from continued competition from electronic execution providers and from traditional broker-dealers. With market volatility continuing at historically low levels, large broker-dealers continue to use capital to compete for the portfolio trades that have been traditionally a core component of both POSIT and our Electronic Trading Desk. In this competitive environment, commission revenue per share traded has declined 5% in the six months ending June 30, 2005 (“First Half 2005”), while ITG’s U.S. commission revenues per day increased 15% compared to the six months ending June 25, 2004 (“First Half 2004”) as a result of strengthened daily trading volumes.

Total revenues for First Half 2005 from our International Operations grew 23%, versus First Half 2004, to $45.1 million and include a $2.1 million benefit from exchange rate fluctuations as a result of a weakened U.S. Dollar relative to the currencies in our International Operations. Total revenues for Second Quarter 2005 were up 15% versus Second Quarter 2004 including the benefit of exchange rate fluctuation of $1.2 million.

The International Operations as a whole posted a pre-tax profit of $2.0 million, which included a foreign currency benefit of $0.1 million versus Second Quarter 2004. Canada posted pre-tax profitability of $1.5 million in Second Quarter 2005 and the combined Australia/Asia region had a pre-tax loss of $0.2 million, which includes $0.4 million in costs pertaining to our expansion into Japan. Growth in Europe improved this quarter due to higher levels of portfolio trading business within ITG’s customer base, together with the benefits derived from the acquisition of E-Crossnet, a former competitor.

Results of Operations—Three Months Ended June 30, 2005 Compared to Three Months Ended June 25, 2004

Highlights

The table below sets forth certain items in the condensed consolidated statements of income expressed as a percentage of total revenues for the periods indicated:

	Three Months Ended
	June 30, 2005		June 25, 2004
Revenues:
Commissions	93.6		93.5
Other	6.4		6.5
Total revenues	100.0	%	100.0	%
Expenses:
Compensation and employee benefits	37.3		36.3
Transaction processing	13.7		15.0
Software royalties	—		4.0
Occupancy and equipment	7.1		9.2
Telecommunications and data processing services	4.8		5.4
Other general and administrative	10.2		9.5
Total expenses	73.1	%	79.4	%
Income before income tax expense	26.9		20.6
Income tax expense	9.9		8.9
Net income	17.0	%	11.7	%

Earnings Per Share:

Both basic and diluted earnings per share for Second Quarter 2005 increased $0.19, or 86%, to $0.41 from $0.22 for Second Quarter 2004.

Revenues:

Consolidated Revenue

Consolidated revenues increased $21.2 million, or 26%, to $102.2 million in Second Quarter 2005. There were 64 trading days in Second Quarter 2005 compared with 62 trading days in Second Quarter 2004.

Our commission revenues benefited from strong share volume/contract value growth within our U.S. and International Operations. Share volumes grew 28% in our U.S. Operations. In Europe the market value of executions grew in excess of 40%.

Other revenues increased $1.2 million to $6.5 million in Second Quarter 2005 and included a gain of $2.7 million on our investment in Archipelago Holdings common stock that we received as part of an equity entitlement program and increases in analytical product revenues. In Second Quarter 2004, we had a $2.4 million gain resulting from our sale of 50% of our interest in KTG Technologies Corp.

The following table sets forth the components of revenues, by segment, included in the condensed consolidated statements of income (dollars in thousands):

	Three Months Ended
	June 30, 2005			June 25, 2004		Change		% Change
U.S. Operations	$		79,240	$	61,111	$	18,129	30
International Operations	22,942			19,876		3,066		15
Consolidated	$	102,182		$	80,987	$	21,195	26

Revenues by segment—U.S. Operations

Revenues from U.S. Operations of $79.2 million increased 30% compared to Second Quarter 2004.

Commissions

Commission revenues in Second Quarter 2005 included a strong performance across our entire product spectrum, particularly from POSIT/TriAct, Triton and Radical. Our commission revenue increase was primarily driven by strong growth in average daily share volumes and also included the benefit from two additional trading days in Second Quarter 2005. The following table includes key operating performance metrics:

	Three Months Ended
U.S. Operations	June 30, 2005		June 25, 2004		Change			% Change
Total trading volume (in billions of shares)	6.4		5.0		1.4			28
Trading volume per day (in millions of shares)	100.3		80.8		19.5			24
Commission revenues per trading day ($ millions)	$	1.18	$	0.98	$	0.20		20
Average revenue per share ($)	$	0.0118	$	0.0122	$	(0.0004	)	(3	)
U.S. market trading days	64		62		2			3

Other

Other revenues increased $3.5 million in Second Quarter 2005 primarily due to a $2.7 million gain on our investment in Archipelago Holdings common stock.

Revenues by segment—International Operations

Commissions

Commission revenues from International Operations increased $5.4 million, or 37%, and include a $1.0 million benefit from exchange rate fluctuations resulting from a weakened U.S. Dollar relative to the currencies in our International Operations. Excluding the foreign currency impact, we grew commission revenues $4.4 million or 30%.

In Europe we increased our market share of “customer business” on the London Stock Exchange (“LSE”) to 1.69% versus 1.19% in Second Quarter 2004. This increase in LSE market share, together with growth in continental European equity

executions, resulted in a 38% increase in commission revenues.

	Three Months Ended
International Commission Revenues	June 30, 2005				June 25, 2004			Change				% Change
	($ millions, except per trading day amounts)
Europe	$		10.2		$	7.4		$	2.8			38
Canada	6.2				3.7			2.5				68
Australia	2.4				1.7			0.7				41
Hong Kong	1.3				1.9			(0.6			)	(32	)
Total Commission Revenues	20.1				14.7			5.4				37
Less: Currency Exchange Impact	(1.0			)	—			(1.0			)
Total Commission Revenues Excluding Currency Exchange Impact	$		19.1		$	14.7		$	4.4			30
Commission revenues per trading day	$	315,000			$		238,000	$		77,000		32

Other

Other revenues decreased 45%, or $2.3 million, largely due to the $2.4 million gain on our sale of 50% of our interest in KTG Technologies Corp. in the Second Quarter 2004.

Expenses:

The following table sets forth the components of expenses and income taxes, by segment (dollars in thousands):

	Three Months Ended
	June 30, 2005		June 25, 2004		Change			% Change
Consolidated
Compensation and employee benefits	$	38,106	$	29,370	$	8,736		30
Transaction processing	14,013		12,171		1,842			15
Software royalties	—		3,288		(3,288		)	(100	)
Occupancy and equipment	7,220		7,449		(229		)	(3	)
Telecommunications and data processing services	4,935		4,338		597			14
Other general and administrative	10,398		7,697		2,701			35
Income taxes	10,070		7,190		2,880			40
U.S. Operations
Compensation and employee benefits	28,401		21,903		6,498			30
Transaction processing	7,839		6,781		1,058			16
Software royalties	—		2,892		(2,892		)	(100	)
Occupancy and equipment	5,727		5,880		(153		)	(3	)
Telecommunications and data processing services	3,339		3,041		298			10
Other general and administrative	8,407		6,664		1,743			26
Income taxes	9,131		5,779		3,352			58
International Operations
Compensation and employee benefits	9,705		7,467		2,238			30
Transaction processing	6,174		5,390		784			15
Software royalties	—		396		(396		)	(100	)
Occupancy and equipment	1,493		1,569		(76		)	(5	)
Telecommunications and data processing services	1,596		1,297		299			23
Other general and administrative	1,991		1,033		958			93
Income taxes	939		1,411		(472		)	(33	)

In Second Quarter 2005, foreign exchange rate fluctuations contributed approximately $1.1 million to the overall increase in expenses for our International Operations as the weaker U.S. Dollar increased costs, in U.S. Dollar terms, relative to the underlying costs in local foreign currency terms.

Compensation and employee benefits: Our consolidated compensation and employee benefits expense increased $8.7 million driven by an increase in average headcount, higher performance based compensation (due to revenue and profit growth) and benefits costs, as well as the impact of foreign currency translation as a result of a weakened U.S. Dollar ($0.5 million).

U.S. compensation and employee benefits expense increased by $6.5 million, or 30% primarily reflecting higher performance based compensation and employee benefits including bonuses, profit sharing and stock based compensation, as well as salary and headcount increases. Average U.S. headcount during Second Quarter 2005 was 475 compared to 455 in Second Quarter 2004. The headcount increase is principally related to (i) the POSIT transaction on February 1, 2005, (ii) the full effect of our headcount increases from Sarbanes-Oxley compliance and (iii) sales and support for our new products.

Total international compensation and employee benefits expense increased $2.2 million due to higher performance based bonuses, increased headcount and employee benefit costs. Average international headcount increased from 166 in Second Quarter 2004 to 182 in Second Quarter 2005. The impact of exchange rate fluctuations contributed $0.5 million to the increase in compensation and employee benefits expense.

Transaction processing: Consolidated transaction processing expenses increased by $1.8 million to $14.0 million in Second Quarter 2005 primarily reflecting higher commission revenue levels, which grew 24% in our U.S. operations and 37% in our International Operations.

U.S. transaction processing costs increased $1.1 million in Second Quarter 2005 reflecting higher daily share volume as well as two additional trading days in Second Quarter 2005. This increase was partially offset by lower execution and clearing costs due to rate reductions.

International transaction processing costs increased $0.8 million in Second Quarter 2005 reflecting increased business activity in Second Quarter 2005, and foreign currency impact of $0.3 million, partially offset by European clearing unit cost reductions.

Software royalties: Software royalties principally relate to POSIT royalties, which were contractually fixed as a percentage of POSIT revenues. Following our February 1, 2005 acquisition of the 50% interest in the POSIT Joint Venture that we did not already own, we no longer incur POSIT royalty costs.

Occupancy and equipment: Consolidated occupancy and equipment costs decreased by $0.2 million in Second Quarter 2005 driven by slightly lower facility and equipment costs.

Telecommunications and data processing services: Consolidated telecommunications and data processing services costs increased $0.6 million, or 14% primarily reflecting increased business activity and currency exchange rate impact of $0.1 million.

Other general and administrative: Consolidated other general and administrative costs increased $2.7 million, or 35% reflecting (i) higher marketing costs related to our marketing/branding efforts, (ii) additional amortization of intangible assets resulting from the POSIT transaction, (iii) higher consulting fees, primarily related to systems and new business development activities, and (iv) higher legal costs, which are described further in the “Legal Proceedings” section.

Income tax expense

The effective tax rate was 36.6% in Second Quarter 2005, compared to 43.1% in Second Quarter 2004 as Second Quarter 2005 included a $1.0 million reduction of a valuation allowance relating to the utilization of capital loss carry-forwards to offset capital gains. Our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings.

Results of Operations—Six Months Ended June 30, 2005 Compared to Six Months Ended June 25, 2004

Highlights

The table below sets forth certain items in the condensed consolidated statements of income expressed as a percentage of revenues for the periods indicated:

	Six Months Ended
	June 30, 2005		June 25, 2004
Revenues:
Commissions	94.5		94.7
Other	5.5		5.3
Total revenues	100.0	%	100.0	%
Expenses:
Compensation and employee benefits	37.1		36.9
Transaction processing	14.0		15.0
Software royalties	0.6		4.5
Occupancy and equipment	7.5		9.3
Telecommunications and data processing services	5.1		5.6
Other general and administrative	10.1		9.4
Total expenses	74.4	%	80.7	%
Income before income tax expense	25.6		19.3
Income tax expense	9.8		8.1
Net income	15.8	%	11.2	%

Earnings Per Share:

Basic and diluted earnings per share for First Half 2005 increased $0.32, or 78%, to $0.73 from $0.41 for First Half 2004.

Revenues:

Consolidated Revenue

Consolidated revenues increased $35.3 million, or 22%, to $193.8 million in First Half 2005. There were 125 trading days in First Half 2005 compared with 121 trading days in First Half 2004.

Our commission revenues benefited from strong share volume/contract value growth within our U.S. and International Operations and include a $1.6 million benefit from exchange rate fluctuations resulting from a weakened U.S. dollar relative to currencies in our International Operations. Share volumes grew 25% in our U.S. Operations and 34% in our Canadian Operations. In Europe and Australia, the market value of executions grew in excess of 50%.

Other revenues increased $2.2 million to $10.6 million in First Half 2005 and included gains of $2.4 million related to our common stock equity investment in Archipelago Holdings that we received as part of an equity entitlement program, recovery against previous investment write-downs of $0.5 million, increases in our analytical product revenues, and an increase in our Canadian customer facilitation and inter-listed arbitrage trading. In First Half 2004, we had a $2.4 million gain from our sale of 50% of our interest in KTG Technologies Corp.

The following table sets forth the components of revenues, by segment, included in the condensed consolidated statements of income (dollars in thousands):

	Six Months Ended
	June 30, 2005		June 25, 2004		Change		% Change
U.S. Operations	$	148,762	$	121,772	$	26,990	22
International Operations	45,082		36,787		8,295		23
Consolidated	$	193,844	$	158,559	$	35,285	22

Revenues by segment—U.S. Operations

Revenues from U.S. Operations of $148.8 million increased 22% compared to First Half 2004.

Commissions

Commission revenues in First Half 2005 reflect a strong performance across our entire product spectrum, particularly from POSIT/TriAct, Triton and Radical. We benefited from four additional trading days in the First Half 2005 and strong growth in average daily share volumes. The following table includes key operating performance metrics:

	Six Months Ended
	June 30, 2005		June 25, 2004		Change				% Change
U.S. Operations
Total trading volume (in billions of shares)	12.2		9.8		2.4				24
Trading volume per day (in millions of shares)	98.0		80.8		17.2				21
Commission revenues per trading day ($ millions)	$	1.15	$	1.00	$		0.15		15
Average revenue per share ($)	$	0.0118	$	0.0124	$	(0.0006		)	(5	)
U.S. market trading days	125		121		4				3

Other

Other revenues increased $4.4 million in First Half 2005 principally from a $2.4 million gain on our investment in Archipelago Holdings common stock and increased subscriptions for our analytical products.

Revenues by segment—International Operations

Commissions

Commission revenues from International Operations increased $10.5 million, or 36%, and include a $1.6 million benefit from exchange rate fluctuations resulting from a weakened U.S. Dollar relative to the currencies in our International Operations. Excluding the foreign currency impact, we grew commission revenues $8.9 million or 31%.

In Europe we increased our market share of “customer business” on the LSE to 1.62% versus 1.02% in First Half 2004. This increase in LSE market share together with the growth in continental European equity executions drove a 45% increase in commission revenues in First Half 2005.

	Six Months Ended
International Commission Revenues	June 30, 2005			June 25, 2004		Change				% Change
	($ millions, except per trading day amounts)
Europe	$	19.9		$	13.7	$	6.2			45
Canada	11.5			8.0		3.5				44
Australia	5.0			3.7		1.3				35
Hong Kong	2.9			3.4		(0.5			)	(15	)
Total Commission Revenues	39.3			28.8		10.5				36
Less: Currency Exchange Impact	(1.6		)	—		(1.6			)
Total Commission Revenues Excluding Currency Exchange Impact	$	37.7		$	28.8	$	8.9			31
Commission revenues per trading day	$	314,000		$	238,000	$		76,000		32

Other

Other revenues decreased 27%, or $2.2 million, principally due to a Second Quarter 2004 gain of $2.4 million on our sale of 50% of our interest in KTG Technologies Corp.

Expenses:

The following table sets forth the components of expenses and income taxes, by segment (dollars in thousands):

	Six Months Ended
	June 30, 2005		June 25, 2004		Change			% Change
Consolidated
Compensation and employee benefits	$	71,971	$	58,542	$	13,429		23
Transaction processing	27,209		23,751		3,458			15
Software royalties	1,088		7,104		(6,016		)	(85	)
Occupancy and equipment	14,473		14,790		(317		)	(2	)
Telecommunications and data processing services	9,800		8,975		825			9
Other general and administrative	19,582		14,876		4,706			32
Income taxes	19,045		12,783		6,262			49
U.S. Operations
Compensation and employee benefits	52,902		43,636		9,266			21
Transaction processing	15,280		13,816		1,464			11
Software royalties	952		6,187		(5,235		)	(85	)
Occupancy and equipment	11,496		11,594		(98		)	(1	)
Telecommunications and data processing services	6,652		6,129		523			9
Other general and administrative	15,671		12,500		3,171			25
Income taxes	17,203		10,743		6,460			60
International Operations
Compensation and employee benefits	19,069		14,906		4,163			28
Transaction processing	11,929		9,935		1,994			20
Software royalties	136		917		(781		)	(85	)
Occupancy and equipment	2,977		3,196		(219		)	(7	)
Telecommunications and data processing services	3,148		2,846		302			11
Other general and administrative	3,911		2,376		1,535			65
Income taxes	1,842		2,040		(198		)	(10	)

In First Half 2005, foreign exchange rate fluctuations contributed approximately $1.9 million to the overall increase in expenses for our International Operations as the weaker U.S. Dollar increased costs, in U.S. Dollar terms, relative to the underlying costs in local foreign currency terms.

Compensation and employee benefits: Our consolidated compensation and employee benefits expense increased $13.4 million as a result of an increase in average headcount, higher performance based compensation (due to revenue and profit growth) and benefits costs, as well as the impact of foreign currency translation ($0.8 million).

U.S. compensation and employee benefits expense increased by $9.3 million, or 21% primarily reflecting higher performance based compensation and employee benefits including bonuses, profit sharing and stock based compensation, as well as increased salary and headcount. Average U.S. headcount during First Half 2005 was 479 compared to 445 in First Half 2004. The headcount increase is principally related to (i) the POSIT transaction on February 1, 2005, (ii) the full effect of our 2004 headcount increases relating to Sarbanes-Oxley compliance and the March 2004 Radical acquisition, and (iii) sales and support for our new products.

Total international compensation and employee benefits expense increased $4.2 million due to higher performance based compensation, increased headcount and employee benefits costs, as well as the $0.8 million impact of exchange rate fluctuations.

Transaction processing: Consolidated transaction processing expenses increased by $3.5 million to $27.2 million in First Half 2005 as commission revenues from our U.S. operations grew 19% and our International Operations grew 36%.

U.S. transaction processing costs increased $1.5 million primarily resulting from our 21% increase in daily share volume, partially offset by lower execution and clearing costs due to rate reductions.

International transaction processing costs increased $2.0 million primarily resulting from an increase in share volume in Canada and market value of transactions in Europe and Australia in First Half 2005, as well as the $0.5 million impact of exchange rate fluctuations, offset by European clearing unit cost reductions.

Occupancy and equipment: Consolidated occupancy and equipment costs decreased $0.3 million to $14.5 million in First Half 2005, as a result of lower facility and equipment costs.

Telecommunications and data processing services: Consolidated telecommunications and data processing services costs increased $0.8 million, or 9% primarily reflecting increased business activity and currency exchange rate impact of $0.1 million.

Other general and administrative: Consolidated other general and administrative costs increased $4.7 million, or 32% reflecting (i) higher marketing costs related to our marketing/branding efforts, (ii) additional amortization of intangible assets resulting from the POSIT transaction and the March 2004 Radical acquisition, and (iii) higher legal and consulting costs related to the National Association of Securities Dealers Inc.’s (“NASD”) investigation into our industry relating to gifts and gratuities and as higher legal costs, which are described further in the “Legal Proceedings” section, and (iv) other consulting costs, primarily related to systems development.

Income tax expense

The effective tax rate was 38.3% in First Half 2005 and 41.9% in First Half 2004. The First Half 2005 included a $1.0 million reduction of a valuation allowance pertaining to capital loss carry-forwards that will be utilized primarily as a result of the sale of long-term investment securities. The First Half 2004 included a $0.6 million reduction of a valuation allowance pertaining to capital loss carry-forwards that were utilized as a result of the sale of 50% of our interest in KTG Technologies Corp. to IRESS Market Technology Limited. Our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings.

Liquidity and Capital Resources

Our liquidity and capital resource requirements result from our working capital needs, primarily consisting of compensation and employee benefits and transaction processing fees. Historically, cash from operations has met all working capital requirements. We believe that our cash flow from operations and existing cash balances will be sufficient to meet our ordinary course of business cash requirements.

In Asia, we maintain working capital facilities with a bank relating to our clearing and settlement activities. These facilities are in the form of overdraft protection totaling approximately $18.9 million and are supported by $3.6 million in restricted cash deposits.

A substantial portion of our assets is liquid, consisting of cash and cash equivalents or assets readily convertible into cash. We generally invest our excess cash in money market funds and other short-term investments that mature within 90 days or less. Additionally, securities owned at fair value may include highly liquid, variable state and municipal obligations, auction rate preferred stock, mutual fund investments, common stock and warrants. At June 30, 2005, cash and cash equivalents and securities owned, at fair value amounted to $208.1 million. Our net receivables from brokers, dealers and other due within 30 days totaled $556.8 million, while payables to brokers, dealers and other totaled $525.2 million. In addition, we held $9.0 million of total cash in restricted or segregated bank accounts at June 30, 2005.

We also invest a portion of our excess cash balances in cash enhanced strategies, which we believe should yield higher returns without significant effect on risk and are typically less than 90 days in duration. As of June 30, 2005, we had investments in limited partnerships totaling $10.4 million, all of which were invested in marketable securities. The limited partnerships employ a hedged convertible strategy.

Cash flows provided by operating activities were $63.3 million in First Half 2005 as compared to $2.1 million used in operations in First Half 2004. The increase in operating cash flow was primarily attributable to changes in working capital as well as higher net income.

Net cash used in investing activities reflects (i) our acquisitions of E-Crossnet and the 50% of the POSIT Joint Venture that we did not already own, (ii) additional contingent purchase price consideration related to the acquisition of Radical on March 29, 2004, and (iii) investments in premises and equipment and capitalizable software development projects, partially offset by (iv) proceeds from the sale of some of our investments in limited partnerships, and (v) the sale of state and municipal government securities, as well as Archipelago Holdings common stock (which were classified in the condensed consolidated statements of financial condition as securities owned, at fair value).

Net cash provided by financing activities reflects $3.6 million in cash provided by common stock issued in connection with our employee stock purchase plan, employee stock option plan, and other equity based compensation.

Historically, all regulatory capital needs of ITG Inc., AlterNet and ITG Execution Services have been provided by cash from operations. We believe that cash flows from operations will continue to provide ITG Inc., AlterNet and ITG Execution Services with sufficient regulatory capital. At June 30, 2005, ITG Inc., AlterNet and ITG Execution Services had net capital of $35.2 million, $3.3 million and $1.0 million, respectively, of which $35.0 million, $3.1 million and $1.0 million, respectively, was in excess of required net capital.

We are in the process of establishing credit facilities, which are likely to consist of a $180 million term loan and a $25 million revolving credit facility to partially finance our pending acquisition of MacGregor (as described in Subsequent Events). The revolving credit facility will also be available to supplement our existing regulatory capital and other working capital requirements, as needed, as a shortfall in net regulatory capital would have a material adverse effect on us.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

In the normal course of business, we are involved in the execution of various customer securities transactions. Securities transactions are subject to the credit risk of counterparty or customer nonperformance. In connection with the settlement of non-U.S. securities transactions, Investment Technology Group, Inc. has provided third party financial institutions with guarantees in amounts up to a maximum of $136.4 million. In the event that a customer of ITG’s subsidiaries fails to settle a securities transaction, or if the related subsidiaries were unable to honor trades with a customer, Investment Technology Group, Inc. would be required to perform for the amount of such securities up to the $136.4 million cap. However, transactions are collateralized by the underlying security, thereby reducing the associated risk to changes in the market value of the security through settlement date. Therefore, the settlement of these transactions is not expected to have a material effect upon our financial statements. It is also our policy to review, as necessary, the credit worthiness of each customer.

As of June 30, 2005, our other contractual obligations and commercial commitments consisted principally of minimum future rentals under non-cancelable operating leases and minimum compensation under employment agreements at our Hoenig division. There has been no significant change to such arrangements and obligations since December 31, 2004. For additional information, see Off-Balance Sheet Arrangements and Aggregate Contractual Obligations in our annual report on Form 10-K for the year ended December 31, 2004.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates during First Half 2005, as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2004.

Recent Accounting Pronouncements

In March 2005, the Securities and Exchange Commission (“SEC”) released SEC Staff Accounting Bulletin No. 107, Share-Based Payment (“SAB 107”). SAB 107 provides the SEC staff position regarding the application of SFAS 123R. SAB 107 contains interpretive guidance related to the interaction between SFAS 123R and certain SEC rules and regulations, as well as provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also highlights the importance of disclosures made related to the accounting for share-based payment transactions. We are currently evaluating SAB 107 and we will be incorporating it as part of our adoption of SFAS 123R.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (“SFAS 154”), which supersedes APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 changes the requirements for the accounting for and reporting of changes in accounting principle. The statement requires the retroactive application to prior periods’ financial statements of changes in accounting principles, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. SFAS 154 does not change the guidance for reporting the correction of an error in previously issued financial statements or the change in an accounting estimate. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of SFAS 154 to have a material impact on our consolidated results of operations and financial condition.

Subsequent Events

On July 12, 2005 we entered into an agreement to acquire MacGregor, a leading provider of trade order management technology, for approximately $230 million. The combined technologies of ITG and MacGregor will enable us to provide clients with a best-execution order management system that will closely integrate real-time data, analytics, order management and execution tools into a complete solution for institutional trading desks. The transaction is expected to close within 60 to 90 days, subject to receipt of regulatory approvals.

We are in the process of establishing credit facilities, which are likely to consist of a $180 million term loan and a $25 million revolving credit facility to partially finance our pending acquisition of MacGregor as well as supplement our existing regulatory capital and other working capital requirements, as needed.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Please see our annual report filed on Form 10-K (Item 7A) for the year ended December 31, 2004. There has been no material change in this information.

Item 4. Controls and Procedures

As of the end of the period covered in this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II.— OTHER INFORMATION

Item 1. Legal Proceedings

Except as described below, we are not a party to any pending legal proceedings other than claims and lawsuits arising in the ordinary course of business. We do not believe these proceedings will have a material adverse effect on our financial position or results of operations.

In March 2004, we were served with a complaint by John Wald and Pendelton Trading Systems, Inc. (collectively “Pendelton”) asserting that certain features of ITG ACE and our Limit Order Model infringe Pendelton’s U.S. Patent No. 6,493,682 (the “Pendelton Patent”). In February 2005, Pendelton amended its complaint to add claims that ITG Horizon SmartServer, ITG HorizonPlus, and certain features of QuantEX and Triton infringe the Pendelton Patent. That amendment also contains a federal false advertising claim, state law claims for unfair competition and unjust enrichment and a claim under a New York consumer protection statute. It is our position that we are not infringing the Pendelton Patent and that such claim is without merit. It is also our position that Pendelton’s other claims concerning ITG’s advertising of its products are without merit. We plan to vigorously defend such claims. However, intellectual property disputes are subject to inherent uncertainties and there can be no assurance that such claim will be resolved in our favor or that it would not have a material adverse effect on us.

We have received letters from the NASD as part of what we understand to be an industry investigation relating to gifts and gratuities. In addition, we have received a subpoena from the SEC similarly seeking information concerning gifts and entertainment involving a mutual fund company. We believe that other broker-dealers have received similar subpoenas. These investigations are ongoing and we cannot predict their potential outcomes.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During 2004, our Board of Directors authorized the repurchase of five million shares of our common stock and we have two million shares remaining for repurchase under such authorization. During the First Half 2005, we did not repurchase any shares of our common stock.

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

Date of the Meeting—May 10, 2005

Type of Meeting—Annual Meeting of Stockholders

At the meeting, the following directors were elected by the stockholders to hold office until the next annual meeting of stockholders or until their successors have been duly elected and qualified:

J. William Burdett
William I Jacobs
Timothy L. Jones
Raymond L. Killian, Jr.
Robert L. King
Maureen O’Hara
Brian J. Steck

At the meeting with respect to the election of the directors and ratification of the appointment of KPMG LLP as our independent auditors for the 2005 fiscal year, the votes were cast in the following manner:

Election of Directors:

Name	For	Withheld
J. William Burdett	38,766,293	377,932
William I Jacobs	37,955,121	1,189,104
Timothy L. Jones	38,761,973	382,255
Raymond L. Killian, Jr.	37,955,201	1,189,024
Robert L. King	37,955,351	1,188,874
Maureen O’Hara	38,772,682	371,543
Brian J. Steck	38,761,743	382,482

Ratification of the appointment of KPMG LLP as our independent auditors for the 2005 fiscal year:

		Number of Shares
For		37,791,740
Against		1,347,632
Abstain		4,853

Item 5. Other Information

Our Audit Committee approved all of the non-audit services performed by KPMG LLP, our independent auditors, during the period covered by this report.

(Mark One)
ý		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal period ended June 30, 2005

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to

DELAWARE	95-2848406
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
380 Madison Avenue, New York, New York	(212) 588-4000
(Address of Principal Executive Offices)	(Registrant’s Telephone Number, Including Area Code)
10017
(Zip Code)

3.1		Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K for the year ended December 31, 1999)
3.2		By-Laws of the Company (incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K for the year ended December 31, 1999)
31.1		Rule 13a-14(a) Certification (filed herewith)
31.2		Rule 13a-14(a) Certification (filed herewith)
32.1		Section 1350 Certification (filed herewith)

	INVESTMENT TECHNOLOGY GROUP, INC.
	(Registrant)
Date: August 3, 2005	By:	/s/ Howard C. Naphtali
		Howard C. Naphtali
		Chief Financial Officer and
		Duly Authorized Signatory of Registrant

	PART I.—Financial Information

Item 1.	Financial Statements
	Condensed Consolidated Statements of Financial Condition:
	June 30, 2005 (unaudited) and December 31, 2004	4
	Condensed Consolidated Statements of Income (unaudited):
	Three and Six Months Ended June 30, 2005 and June 25, 2004	5
	Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited):
	Six Months Ended June 30, 2005	6
	Condensed Consolidated Statements of Cash Flows (unaudited):
	Six Months Ended June 30, 2005 and June 25, 2004	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	22
Item 4.	Controls and Procedures	22
	PART II.—Other Information
Item 1.	Legal Proceedings	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 4.	Submission of Matters to a Vote of Security Holders	23
Item 5.	Other Information	23
Item 6.	Exhibits	24
	Signature	24