WIXLIB

CBOE . COM152 MILLIONPAGE VIEWSTHE OPTIONSINSTITUTEOne of the most comprehensive and widely-accessed resourcesprovided by CBOE is a completely redesigned website, www.cboe.com,which debuted in June, 2001. At the heart of the new cboe.com is aunique personalized engine called MyCBOE. Investors can use thiscustomization tool to ensure that only relevant options and marketinformation are delivered to them—all on one convenient page.CBOE’s website was named “Best of the Web” in the options field byForbes.com, and was cited for its excellent educational features byTheStreet.com. CBOE’s website logged 152 million page views inFY 2001, a 17% increase over the previous fiscal year.Functioning as the educational arm of CBOE, The Options Instituteis an invaluable resource industry-wide for training a broad rangeof investors and professionals associated with the investing field. InFY 2001, the Options Institute held 364 classes, educating 18,754individuals including individual investors, institutional investors,brokers, trading floor and firm employees, financial advisors andregulatory personnel.RESOURCESAs the first, oldest and largest options exchange in the world,CBOE drew on its extensive experience to develop sophisticatedresources that facilitate speed, deep liquidity and efficiency inthe trading process.ACCOUNTABILITYDPM ASSOCIATIONEXPANDEDTECHNOLOGIESTo offer immediate access to a floor contact and to provide a singlepoint of accountability for customers, CBOE members voted in 1999to expand the “DPM system” to all equity options. CBOE firstintroduced the DPM (Designated Primary Market Maker) programin 1987. Since then, CBOE market makers and DPMs have enabledthe Exchange to grow amidst heightened competition. The DPMAssociation of Chicago was formed in April of 2000. It is an independent association composed of many of CBOE’s DPMs. The DPMAssociation streamlines communication by providing a single pointof contact for the investing community with the majority of Chicago’sDPMs. Offering a vast depth of options trading expertise, the DPMAssociation is committed to market liquidity, best execution andmarket quality.CBOE has one of the most technologically-advanced trading floorsin the world. During FY 2001, CBOE increased flexibility and furtherexpanded access to many of the existing automated systems. CBOEcontinued its technology leadership with a number of innovations.Advances like automated book priority, options quotes with size and10 CBOE ‘01

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improvements to RAES (Retail Automatic Execution System) providedCBOE’s customers with the full service they expect from a trading floorcombined with the speed and efficiency of an electronic marketplace.CBOE provides efficient mechanisms to facilitate seamlesstrading. Eighty-eight percent of all executions are routed andconducted electronically.CBOE combines the advantages of cutting-edge technology with thebenefits of open outcry to produce an efficient, reliable and rapidtrading process resulting in maximized customer service.HYBRID TRADINGFLOORAs part of its ongoing commitment to enhancing execution quality,on August 1, 2000, CBOE introduced the Best Execution AssuranceProgram. The program utilizes technological applications to providemember firms and other customers with best execution documentation. By providing direct price protection and the means with whichto evaluate the quality of order executions at CBOE, the programprovides member firms with the tools necessary to satisfy their bestexecution obligations when deciding to route order flow to CBOE.BEST EXECUTIONSMVXNSMCBOE developed the first Nasdaq Volatility Index, VXN, as itbecame apparent that there was a dramatic divergence betweenvolatility in the Nasdaq market and the broader market early in1999. This significant resource, introduced on January 23, 2001,was constructed in response to customer demand for a quantifiedSMCBOE Nasdaq Volatility Index (VXN) and CBOE Volatility Index (VIX )SMSMJanuary 1995 to January 801.05.9901.05.0001.05.01VIXVXN is based on the implied volatilities of Nasdaq-100 Index options (NDX), while VIX is based on theimplied volatilities of S&P 100 Index options (OEX ).12 CBOE ‘01

measure of volatility in today’s tech-heavy marketplace. VXN tracksthe volatility of Nasdaq-100 Index options (NDX), which tradeexclusively at CBOE. A COMMITMENTTO STAYINGNUMBER ONEIn the years ahead, CBOE will continue to face many challenges,many anticipated and some surprises. At CBOE we view being theindustry leader as a business decision. As the marketplace evolves,we remain committed to preserving our position as the number oneoptions exchange in the world through our ongoing dedication toservice a rapidly-changing marketplace.We pledge to continue to develop the resources and products to helpboth our members and their customers prosper. From the numberone options marketplace in existence, you can expect no less.William J. BrodskyChairman and CEO13 CBOE ‘01Mark F. DuffyVice ChairmanEdward J. JoycePresident and COO

THE 2001 CBOE ANNUAL REPORT IS DEDICATED TO THE VICTIMS OF THE SEPTEMBER 11, 2001 TRAGEDY“Today we honor the victims of last week's tragic terrorist events,including former CBOE Vice Chairman Robert Cruikshank, withtwo minutes of silence prior to the ringing of the opening bell.The whole world is watching to see how the exchanges andfinancial industry respond to the events of last week. CBOEstands ready to do its part in restoring the U.S. financial market.”Statement from CBOE Chairman and CEO William J. Brodsky8:28 a.m., September 17, 200116 CBOE ‘01

CBOE FY 2001:THE NUMBER ONE OPTIONSEXCHANGE FOR 28 YEARSFINANCIAL SUMMARYFor the fiscal year ended June 30, 2001, the Chicago Board Options Exchange earned net income of 7.1 million comparedto 10.9 million in fiscal year 2000.A new record was set for the total amount of contract volume during the year. Approximately 1,271,000 contracts per day weretraded, a 3.4% increase over the previous record established in fiscal year 2000. However, total Exchange revenues declined by 17.5 million or 9.9% due to the elimination of equity options customer fees.Excluding a 16.0 million consolidated class action settlement expense recorded in fiscal year 2000, operating expensesincreased by 3.8% in fiscal year 2001. This increase was attributed to higher data processing expenses mainly related tocapacity expansion ( 3.1 million), non-cash depreciation and amortization expense related to investments in systemshardware and software ( 2.6 million), and royalty fees due to the highly successful launch of options on the Nasdaq-100Index Trust ( 1.0 million).The Exchange invested 37.7 million in capital spending during fiscal year 2001. Most of these expenditures were for systemshardware and software related to capacity increases, new trading technology, website redesign, complex orders on ORS, and anew trading floor printer system.During the year, 10.7 million was paid into an escrow account, representing the first two installment payments of aconsolidated class action settlement. The third payment of 5.3 million is due on July 1, 2002. Note 7 to the consolidatedfinancial statements summarizes the status of the settlement.Retained earnings increased to 109.3 million and total members’ equity at June 30, 2001 was 130.2 million. At year’s end,the Exchange was debt-free with working capital of 17.6 million.17 CBOE ‘01

CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGSChicago Board Options Exchange, Incorporated and SubsidiaryFor the Years Ended June 30, 2001 and 2000Revenues:Transaction feesOther member feesCommunications feesRegulatory feesInterestEquity in income of CSEOther2001 Total RevenuesExpenses:Employee costsOutside servicesFacilities costsCommunicationsData processingTravel and promotional expensesDepreciation and amortizationSettlement expenseRoyalty feesOtherTotal ExpensesIncome Before Income TaxesProvision (Benefit) for Income 010,835,5001,347,800716,7002,670,8002000 11,100(2,943,000)7,717,7008,401,600(446,900)Total Provision (Benefit) for Income Taxes4,774,7007,954,700Net Income7,135,90010,856,400Retained Earnings at Beginning of YearRetained Earnings at End of Year102,154,50091,298,100 109,290,400 102,154,50020012000CONSOLIDATED BALANCE SHEETSChicago Board Options Exchange, Incorporated and SubsidiaryJune 30, 2001 and 2000AssetsCurrent Assets:Cash and cash equivalentsInvestments available-for-saleAccounts receivableIncome taxes receivablePrepaid medical benefitsOther prepaid expensesOther current assets 00 600515,500Total Current Assets40,932,40048,558,900Investments in operty and Equipment:BuildingFurniture and equipmentSoftware development work in progressLess accumulated depreciation and Total Property and ,500LandOther Assets:Goodwill (less accumulated amortization—2001, 3,130,200; 2000, 2,373,000)Data processing software and other assets(less accumulated amortization—2001, 21,762,600; 2000, 15,881,200)14,783,00012,489,100Total Other Assets—Net16,928,30015,391,600 177,029,500 170,910,900TotalSee notes to consolidated financial statements.18 CBOE ‘01

CONSOLIDATED BALANCE SHEETS (CONTINUED)June 30, 2001 and 20002001Liabilities and Members’ EquityCurrent Liabilities:Accounts payable and accrued expensesSettlement payableMarketing fee payableMembership transfer depositsOther deposits 13,746,80009,173,4000416,0002000 19,560,2005,333,30001,465,500378,800Total Current Liabilities23,336,20026,737,800Long-term Liabilities:Long-term settlement obligationsDeferred income taxes5,333,30018,136,00010,666,70010,418,300Total Long-term Liabilities23,469,30021,085,000Total 0020,933,600102,154,500Members’ EquityMembershipsRetained earningsTotal Members’ EquityTotal130,224,000123,088,100 177,029,500 170,910,90020012000CONSOLIDATED STATEMENTS OF CASH FLOWSChicago Board Options Exchange, Incorporated and SubsidiaryFor the Years Ended June 30, 2001 and 2000Cash Flows from Operating Activities:Net incomeAdjustments to reconcile net income tonet cash flows from operating activities:Depreciation and amortizationLong-term settlement obligationsDeferred income taxesEquity in income of CSEChanges in current assets and liabilities:Accounts receivableIncome taxesPrepaid medical benefitsOther prepaid expensesOther current assetsAccounts payable and accrued expensesSettlement payableMarketing fee payableMembership transfer depositsOther deposits Net Cash Flows from Operating Activities7,135,900 (34,900)25,069,20040,913,500Cash Flows from Investing Activities:Capital and other assets expendituresInvestments available-for-sale:Proceeds from ,800(95,619,000)187,285,300(196,807,700)Net Cash Flows from Investing Activities(17,529,800)(49,326,100)Net Increase (Decrease) in Cash and Cash Equivalents7,539,400(8,412,600)Cash and Cash Equivalents at Beginning of Year2,200,80010,613,400Cash and Cash Equivalents at End of Year 9,740,200 2,200,800Supplemental Disclosure of Cash Flow InformationCash paid for income taxes 3,400 11,870,500See notes to consolidated financial statements.19 CBOE ‘01

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSChicago Board Options Exchange, Incorporated and SubsidiaryFor the Years Ended June 30, 2001 and 20001. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESNature of Business – The Chicago Board Options Exchange, Incorporated (“the Exchange”) is a registered securities exchange, subjectto oversight by the Securities and Exchange Commission. The Exchange’s principal business is providing a marketplace for tradingequity and index options.Basis of Presentation – The consolidated financial statements include the accounts and results of operations of the Exchange, and itswholly owned subsidiary, Chicago Options Exchange Building Corporation. Inter-company balances and transactions are eliminated.Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities,disclosure of contingent assets and liabilities, and reported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates.Cash and Cash Equivalents – Cash and cash equivalents include highly liquid investments with maturities of three months or lessfrom the date of purchase.Investments – All investments are classified as available-for-sale and are reported at cost which approximates their fair value inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt andEquity Securities.”Accounts Receivable – Accounts receivable consist primarily of transaction, marketing and other fees receivable from The OptionsClearing Corporation (“OCC”), and the Exchange’s share of distributable revenue receivable from The Options Price ReportingAuthority (“OPRA”).Investments in Affiliates – Investments in affiliates represent investments in OCC and The Cincinnati Stock Exchange (“CSE”). Theinvestment in OCC (20% of its outstanding stock) is carried at cost because of the limited percentage owned. The Exchange accountsfor the investment in CSE (68% of its total certificates of proprietary membership) under the equity method due to the lack of effective control over the operating and financing activities of CSE.Property and Equipment – Property and equipment are carried at cost. Depreciation on building, furniture and equipment is providedon the straight-line method. Estimated useful lives are 40 years for the building and five to ten years for furniture and equipment.Leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining term of the applicable leases.Data Processing Software – Data processing software is carried at cost and amortized over five to seven years using the straight-linemethod commencing with the date the software is put in service.Goodwill – Goodwill is amortized over seven years to 40 years for financial statement presentation and over fifteen years for incometax purposes.Impairment of Long-Lived Assets – Management reviews long-lived assets and the related intangible assets for impairment of valuewhenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. If the Exchangedetermines it is unable to recover the carrying value of the assets, the assets will be written down using an appropriate method.Management does not believe current events or circumstances provide evidence that suggest asset values have been impaired.Income Taxes – Income taxes are determined using the liability method, under which deferred tax assets and liabilities are recordedbased on differences between the financial accounting and tax bases of assets and liabilities.Other Deposits – Other deposits include amounts received from members for telephones in the Exchange facility and amounts forExchange sponsored conferences.Fair Value of Financial Instruments – SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” requires disclosure ofthe fair value of certain financial instruments. The carrying values of financial instruments included in assets and liabilities arereasonable estimates of their fair value.Adoption of New Accounting Policies – Effective for the fiscal year ended June 30, 2000, the Exchange adopted the American Instituteof Certified Public Accountants’ Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed orObtained for Internal Use.” The statement requires capitalization of certain costs incurred in the development of internal-use software,including external direct material and service costs, employee payroll and payroll-related costs. Prior to adoption of SOP 98-1, theExchange expensed these costs as incurred. The effect of this change in accounting principle was an increase to earnings, net of tax,of 7,531,700 and 9,483,000 for the fiscal years ended June 30, 2001 and 2000, respectively.In June 1998, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities,” which requires recognition of all derivative instruments in the balance sheet as either assets or liabilities and themeasurement of those instruments at fair value. SFAS No. 133 also requires changes in the fair value of the derivative instrumentsto be recorded each period in current year earnings or comprehensive income depending on the intended use of the derivatives. InJune 2000, the FASB issued SFAS No. 138, which amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and certain hedging activities. SFAS No. 133 and SFAS No. 138 are required to be adopted by the Exchange effectiveJuly 1, 2001. In July 2001, the Exchange adopted the provisions of SFAS No. 13

Exchange Traded Funds (ETF)in the world. CBOEdirect, CBOE's new screen-based trading system, is scheduled to be launched on October 26, 2001. Not just an order matching system, CBOEdirectactually replicates CBOE's trading floor on a screen, with liquidity providers making two-sided, continuous markets.