2006 ANNUAL REPORT
CHAIR’S LETTER
TO SHAREHOLDERS
CEO’S LETTER
TO SHAREHOLDERS
STATEMENT OF CORPORATE
GOVERNANCE PRACTICES
2006 MANAGEMENT’S
DISCUSSION AND ANALYSIS
Non-GAAP Financial Measures
Vision
Overview of the Business
Review of Operations – 2006
Liquidity, Capital Resources and Deferred Revenue
Selected Annual Information
Quarterly Information
Critical Accounting Estimates
Disclosure Controls and Procedures
Strategy and Outlook
Forward-Looking Statements, Risks and Uncertainties

FINANCIALS
CORPORATE INFORMATION
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FORWARD-LOOKING STATEMENTS, RISKS AND UNCERTAINTIES (continued)

New Business Activities May Adversely Affect Income
We may enter new business activities that could have an adverse effect on our existing profitability. While we would expect to realize new revenue from these new activities, there is a risk that this new revenue would not be greater than the associated costs or any related decline in existing revenue sources.

Our Trading Operation Depends Primarily on a Small Number of Clients and Vendors
During 2006, approximately 58% of our trading revenue on Toronto Stock Exchange and approximately 59% of our trading revenue on TSX Venture Exchange were accounted for by the top ten POs on each exchange. Our business, financial condition or operating results could suffer a material adverse effect if any one of these POs significantly reduced or stopped trading on our exchanges, or if two or more POs consolidated.

During 2006, approximately 19% of our trading revenue on Toronto Stock Exchange and approximately 11% of our trading revenue on TSX Venture Exchange was derived from trading in the securities of the ten most actively traded listed issuers on each exchange. If we lost one or more of these issuers, we would not only suffer a decrease in revenue from our listing operations, but we would also suffer an even more significant decrease in revenue from our trading operations.

We Could Suffer Losses as a Result of NGX’s Clearing Activities
We could suffer a loss if one or more of NGX’s participants defaults on their contractual obligations since NGX assumes this counterparty risk. As part of its clearing services, NGX guarantees that its cleared contracts will be honoured. NGX faces other risks associated with the clearing business including market risks, settlement risks, concentration risks and operational risks.

By providing a clearing facility, NGX is subject to the risk of a counterparty defaulting simultaneously with an extreme market price movement. NGX manages this risk by applying standard rules and regulations, and using a conservative margining regime based on globally accepted margin concepts. This margining regime involves valuing the market stress of client portfolios in real-time and requiring participants to deposit liquid collateral in excess of those valuations. NGX conducts market stress scenarios regularly to test the ongoing integrity of its clearing operation. NGX also relies on established policies, instructions, rules and regulations as well as procedures specifically designed to actively manage and mitigate risks.

To backstop its clearing operations, NGX has a credit agreement in place with a Canadian chartered bank. We are NGX’s guarantor for this credit agreement up to a maximum of $30.0 million. We have pledged $30.0 million of marketable securities related to our obligations as guarantor. In addition, NGX has covenanted under the agreement to maintain a minimum of $9.0 million of tangible net worth. If NGX suffers a loss on its clearing operations, it could lose its entire tangible net worth. The bank could also realize up to a maximum of $30.0 million on our guarantee, to the extent required to cover the loss.

Our Cost Structure is Largely Fixed
Most of our expenses are fixed and cannot be easily lowered if our revenue decreases, which could have an adverse effect on our results of operations and financial condition.

We Depend on Market Activity that is Outside of our Control
Our revenue is highly dependent upon the level of activity on our exchanges, including the volume of securities traded; the number and market capitalization of listed issuers; the number of new listings; the number of active traders and brokerage firms in the market; and the number of subscribers to market data.

We do not have direct control over these variables. Among other things, these variables depend upon the relative attractiveness of securities traded on our exchanges and the relative attractiveness of our exchanges as a place to trade those securities as compared with other exchanges and other trading vehicles. Those variables are in turn influenced by:

  • the overall economic conditions in Canada and the United States in particular, and in the world in general (especially growth levels and political stability);
  • the condition of the resource sector;
  • interest rate environment and resulting attractiveness of alternative asset classes;
  • the regulatory environment for investment in securities;
  • the relative activity and performance of global capital markets;
  • investor confidence in the prospects and integrity of our listed issuers, and the prospects of Canadian-based listed issuers in general;
  • pricing volatility of global energy markets; and
  • changes in tax legislation that would impact the relative attractiveness of certain types of securities, including income trusts.

We may be able to indirectly influence the volume of trading by providing efficient, reliable and low-cost trading; maximizing the availability of timely, reliable information upon which research, advice and investment decisions can be based; and maximizing the ease of access to trading facilities. However, those activities may not have a positive effect on, or effectively counteract the factors that are outside of our control.

January 31, 2007

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