NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2005 and 2004 (in thousands of dollars, except per share amounts)

TSX Group Inc. (the "Company") owns and operates two national stock exchanges, Toronto Stock Exchange and TSX Venture Inc., serving Canada’s senior equity and public venture equity markets respectively, as well as Natural Gas Exchange Inc. ("NGX"), a leading North American exchange for the trading and clearing of natural gas and electricity contracts. 

All references to earnings per share, common shares issued and outstanding, common shares reserved for issuance, and options reflect the impact of the two-for-one stock split which was effective May 17, 2005.

1. SIGNIFICANT ACCOUNTING POLICIES:

(a) Basis of presentation:
The consolidated financial statements include the accounts of the Company's wholly owned subsidiaries, TSX Inc., Natural Gas Exchange Inc. (“NGX”) and TSX Inc.'s wholly owned subsidiary, TSX Venture Exchange Inc. Intercompany balances and transactions have been eliminated upon consolidation.

(b) Change in accounting policy:
During 2005 the Company retroactively changed its accounting policy for initial listing fees and additional listing fees to comply with the evolving interpretation of The Canadian Institute of Chartered Accountants’ Emerging Issues Committee Abstract 141-Revenue Recognition. Previously, non-refundable initial and additional listing fees were recognized at the time such fees were received. The Company now recognizes such fees on a straight-line basis over an estimated service period of ten years.  

For Toronto Stock Exchange, reported revenue from initial and additional listing fees has been recalculated for the ten years preceding the periods presented in these financial statements. For TSX Venture Exchange, which was acquired on August 1, 2001, reported revenue from initial and additional listing fees has been recalculated from the date of acquisition.

The effect of the change in accounting policy relating to revenue recognition from the prior method is a decrease in revenue for the year ended December 31, 2005 of $58,620 (2004 - $52,123). Income taxes for the year ended December 31, 2005 decreased by $24,246 (2004 - $22,216). Net income for the year ended December 31, 2005 decreased $34,374 (2004 - $29,907). The effect of the change on basic earnings per share for the year ended December 31, 2005 was a decrease of $0.50 (2004 - $0.44). 

The effect on the consolidated balance sheet at December 31, 2005 and at December 31, 2004 is an increase in the future tax asset of $93,110 and $68,864 respectively, and an increase in deferred revenue-initial and additional listing fees of $278,775 and $220,155 respectively, with a corresponding increase in deficit of $185,665 and $151,291 respectively.

(c) Investments:
The investment portfolio includes pooled fund investments.

Pooled funds are managed by an external investment fund manager and are carried at the lower of carrying value or market value.  Market values for securities held by the pooled funds are determined by reference to quoted market prices.  To the extent that the value of the underlying assets in the pooled funds decrease, the value of the units will decrease and such decrease will be recognized during the period in which it occurs.  There is no contractual maturity date for the investment in pooled funds.

Investment income is recognized in the period it is earned.  Realized gains or losses on investments are recorded in the period in which they occur.

The Company's investment in an affiliate, which is subject to significant influence, is accounted for using the equity method of accounting.

(d) Derivative financial instruments:
The Company has restricted and deferred share units that are awarded to directors and senior management. The Company uses derivatives to manage the exposure of the restricted share units and deferred share units to the Company's share price fluctuations. The Company's policy is not to utilize derivative financial instruments for trading or speculative purposes. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific assets or liabilities on the balance sheet. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. 

The Company purchases total return forward contracts to hedge against the market price fluctuations of the Company’s common shares.  Any increase in the Company's share price results in an increase in the liability to directors and senior management and a corresponding increase in the return on the hedged units.  The reverse situation arises in the case of a price decline.  The only impact to the income statement is for the cost of the hedge itself.  In the event a designated hedged item is sold, matures, or becomes ineffective prior to the termination of the relative derivative instrument, any realized or unrealized gain or loss on such derivative instrument is recognized in income.

(e) Amortization:
Amortization is provided over the following useful lives of the assets:

(f) Revenue recognition:
Revenue for goods and services is recognized when the services are provided or the goods are sold.  

Trading and related revenues for capital markets are recorded and recognized as revenue in the month in which the trades are executed or when the related services are provided.

Fees relating to NGX trading are recognized over the period the service is provided. 

Listing revenues are derived primarily from recurring annual sustaining fees and transaction-based fees for initial and additional listings.  Sustaining fees are billed during the first quarter of the year and the amount is recorded as deferred revenue and amortized over the year on a straight-line basis. Initial and additional listing fees are recorded as deferred revenue and are recognized on a straight line basis over an estimated service period of ten years.

Real time market data revenue is recognized based on usage as reported by customers and vendors.  The Company conducts periodic audits of the information provided.  Other Market Data and Business Services revenue are recorded and recognized as revenue in the month in which the services are provided. 

(g) Development expenditures:
Development expenditures, including application software, are expensed as they are incurred.

(h) Income taxes:
Future income taxes are provided in recognition of temporary differences between the carrying amount of assets and liabilities and their respective tax bases, operating losses and tax credit carryforwards made for financial reporting and income tax purposes.  Future tax assets and liabilities are measured using substantively enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be removed or settled.  The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period in which the substantive enactment occurs.

(i) Employee future benefits:
TSX Inc., TSX Venture Exchange Inc. and NGX have registered pension plans with a defined benefits tier and a defined contributions tier covering substantially all of their employees, as well as a retirement compensation arrangement ("RCA") for senior management. Benefits are based on years of service and the employee's compensation.  The costs of these programs are being funded currently.  In addition, the Company provides other employee future benefits, such as supplementary medical and dental coverage, to defined eligible employees ("other benefit plans").  The cost of the other benefit plans is not being funded; however, a provision for this has been made in the accounts.

The Company accrues its obligations under employee defined benefit plans as the employees render the services necessary to earn pension and other employee future benefits.

The Company has adopted the following policies for its benefit plans:

1. The cost of defined benefit pensions and other retirement benefits earned by employees is actuarially determined using the projected benefit method prorated on service and management's best estimate of salary escalation, retirement ages and expected health care cost.
   
2. For the purpose of calculating expected return on plan assets, those assets are valued at fair value.
   
3. Past service costs from plan amendments are amortized on a straight-line basis over the expected average remaining service period of employees active at the time of the amendment.
   
4. Actuarial gains (losses) on plan assets arise from the difference between the actual return on plan assets for a period and the expected return on plan assets for that period.  Actuarial gains (losses) on the accrued benefit obligation arise from differences between actual and expected experience and from changes in the actuarial assumptions used to determine the accrued benefit obligation. The excess of the net accumulated actuarial gain (loss) over 10% of the greater of the accrued benefit obligation and the fair value of plan assets is amortized over the expected average remaining service period of active employees.
   
5. When a restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement.
   

(j) Intangible assets:
Intangible assets are reviewed at least annually. When the carrying amount of the reporting unit's intangible asset exceeds the implied fair value of the intangible asset, an impairment loss is recognized as an amount equal to the excess and is identified separately on the statement of income.

(k) Goodwill:
Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the assets acquired, less liabilities assumed, based on their fair values.  Goodwill is allocated as of the date of the business combination to the Company's reporting units that are expected to benefit from the synergies of the business combination.

Goodwill is not amortized and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.  The impairment test is carried out in two steps.  In the first step, the carrying amount of the reporting unit is compared with its fair value.  When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and the second step of the impairment test is unnecessary. 

The second step is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case the implied fair value of the reporting unit's goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any.  The implied fair value of goodwill is determined in the same manner as the value of goodwill is determined in a business combination described in the preceding paragraph, using the fair value of the reporting unit as if it was the purchase price.  When the carrying amount of the reporting unit goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess and is recorded in the statement of income before extraordinary items and discontinued operations.

(l) Use of estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year.  Actual results could differ from those estimates.

(m) Earnings per share:
Earnings per share are calculated using the treasury stock method.

Basic earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the reporting period. 

Diluted earnings per share are computed similar to basic earnings per share except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of share options, if dilutive.  The number of additional shares is calculated by assuming that outstanding share options were exercised and that the proceeds from such exercises were used to acquire common shares at the average market price during the reporting period.

(n) Related party transactions:
Any transactions entered into between the Company and related parties are on terms and conditions that are at least as favourable to the Company as market terms and conditions and are recorded at the agreed upon exchange amount.

(o) Share based compensation:
The Company has a share-based compensation plan, which is described in notes 18 and 19.  The Company accounts for all share-based payments to employees that call for settlement by the issuance of equity instruments, granted on or after January 1, 2003, using the fair value based method.  Under the fair value based method, compensation cost attributable to options to employees is measured at fair value at the grant date and amortized over the vesting period. Compensation cost attributable to awards to employees that call for settlement in cash is measured at intrinsic value and amortized over the vesting period. Changes in intrinsic value between the grant date and the measurement date result in a change in the measure of compensation cost.

For options that vest at the end of the vesting period, compensation cost is recognized on a straight-line basis.  No compensation cost is recognized for options that employees forfeit if they fail to satisfy the service requirement for vesting.