Edgar Filing: NASDAQ STOCK MARKET INC

Amendment no. 1 to Form S-3

As filed with the Securities and Exchange Commission on January 25, 2005.

Registration No. 333-121226

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 1

FORM S-3

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

The Nasdaq Stock Market, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		52-1165937
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

One Liberty Plaza

New York, NY 10006

(212) 401-8700

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

Edward S. Knight

Executive Vice President and General Counsel

The Nasdaq Stock Market, Inc.

One Liberty Plaza

New York, NY 10006

(212) 401-8700

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

Copies To:

Matthew J. Mallow

Eric J. Friedman

Valerie Ford Jacob

Joel S. Klaperman

Robert H. Mundheim

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, NY 10036

(212) 735-3000

Fried, Frank, Harris, Shriver & Jacobson LLP

One New York Plaza

New York, New York 10004

(212) 859-8000

Shearman & Sterling LLP

599 Lexington Avenue

New York, NY 10022

(212) 848-4000

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement.

If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, check the following box. ¨

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ¨

CALCULATION OF REGISTRATION FEE



Title of Shares to be Registered	Amount To Be Registered⁽¹⁾	Proposed Maximum Offering Price Per Share⁽²⁾	Proposed Maximum Aggregate Offering Price⁽¹⁾⁽²⁾	Amount of Registration Fee⁽³⁾
Common stock, par value $.01 per share	16,100,000	$8.55	$137,655,000	$16,201.99

(1)

Includes common stock, if any, that may be sold pursuant to the underwriters’ overallotment option.

(2)

Estimated solely for the purpose of determining the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based on the average of the high and low price of our common stock as of January 21, 2005 as reported on the OTC Bulletin Board.

(3)

$11,770 has been previously paid with initial filing of this registration statement on December 14, 2004. $4,431.99 is being paid herewith.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion

Preliminary Prospectus dated January 25, 2005

LOGO

14,000,000 Shares

The Nasdaq Stock Market, Inc.

Common Stock

This is a public offering of our common stock. The selling stockholders are selling 14,000,000 shares. We will not receive any proceeds from the sale of shares offered by the selling stockholders.

The shares of our common stock are currently traded on the OTC Bulletin Board. On January 21, 2005, the last sale price of our shares as reported on the OTC Bulletin Board was $8.45 per share. Upon commencement of this offering, we expect that our shares of common stock will be quoted on the Nasdaq National Market under the symbol “NDAQ.”

The underwriters may also purchase up to an additional 2,100,000 shares from National Association of Securities Dealers, Inc. at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments.

Investing in our common stock involves risks that are described in the “ Risk Factors” section beginning on page 11 of this prospectus.


	Per Share	Total
Public offering price	$	$
Underwriting discount	$	$
Proceeds, before expenses, to the selling stockholders	$	$

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about , 2005.

Merrill Lynch & Co.

Credit Suisse First Boston

Citigroup

Morgan Stanley

Thomas Weisel Partners LLC

Sandler O’Neill & Partners, L.P.

The date of this prospectus is , 2005.

LOGO

TABLE OF CONTENTS


		Page
Prospectus Summary		1
The Offering		7
Summary Historical Consolidated Financial and Pro Forma Data		8
Risk Factors		11
Use of Proceeds		27
Price and Related Information Concerning Registered Shares		27
Dividend Policy		27
Capitalization		28
Selected Consolidated Financial Information		29
Unaudited Pro Forma Condensed Combined Financial Information		32
Management’s Discussion and Analysis of Financial Condition and Results of Operations		39
The Industry		78
Business		85
Regulation		101
Management		103
Relationship with NASD		110
Principal and Selling Stockholders		115
Description of Capital Stock		118
Shares Eligible for Future Sale		123
Certain U.S. Federal Tax Consequences to Non-U.S. Holders		124
Underwriting		127
Legal Matters		131
Experts		131
Where You Can Find Additional Information		131
Documents Incorporated by Reference		132
Index to Financial Statements		F-1

You should rely only on the information contained or incorporated by reference in this prospectus. We have not, the selling stockholders have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, the selling stockholders are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer and sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

About This Prospectus

This prospectus includes market share and industry data that we obtained from industry publications and surveys, reports of governmental agencies, and internal company surveys. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on the most currently available market data. For market comparison purposes, data in this prospectus for initial public offerings or IPOs of companies in the United States is based on data provided by Thomson Financial, which does not include best efforts underwritings and, therefore, may not be comparable to other publicly-available initial public offering data. Data in this prospectus for secondary offerings is based on data provided by Thomson Financial. Data in this prospectus for new listings of equity securities on The Nasdaq Stock Market is based on data generated internally by Nasdaq, which includes best efforts underwritings. While we are not aware of any misstatements regarding industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this prospectus.

Trademarks

ACES^®, Market Intelligence Desk^®, MarketSite^®, Nasdaq^®, Nasdaq-100^®, Nasdaq-100 Index^®, Nasdaq-100 Index Tracking Stock^®, Nasdaq Biotechnology Index^®, Nasdaq Canada^®, Nasdaq Composite Index^®, Nasdaq MarketSite^®, Nasdaq National Market^®, Nasdaq Workstation II^®, QQQ^®, SuperMontage^®, The Nasdaq Stock Market^®, Nasdaq Deutschland^®, Nasdaq Europe Planning^®, and OTC Bulletin Board^® are registered service/trademarks of The Nasdaq Stock Market, Inc. Nasdaq International^SM, Nasdaq Europe^SM, Nasdaq Japan^SM, Nasdaq Global^SM, Nasdaq International Market Initiatives^SM, NIMI^SM, Automated Confirmation Transaction Service^SM, ACT^SM, CAES^SM, Level 1 Service^SM, Mutual Fund Quotation Service^SM (MFQS^SM), Nasdaq Corporate Services Network^SM, Nasdaq Market Center^SM, Nasdaq Quotation Dissemination Service^SM (NQDS^SM), The Nasdaq SmallCap Market^SM, and the logos identifying Nasdaq indexes and products are service/trademarks of The Nasdaq Stock Market, Inc.

Forward Looking Statements

Certain statements included or incorporated in this prospectus contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, our ability to implement our strategic initiatives, competition, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this prospectus. Readers should carefully review this prospectus in its entirety, including but not limited to our financial statements and the notes thereto and the risks described in “Risk Factors.” Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. Since it is a summary, this section may not contain all the information that you should consider before investing in our common stock. You should carefully read the entire prospectus and the documents incorporated by reference in this prospectus, including the “Risk Factors” section and the financial statements and the accompanying notes to those statements, before making an investment decision.

Overview

We are a leading provider of securities listing, trading, and information products and services. Our revenue sources are diverse and include revenues from transaction services, market data products and services, listing fees, and financial products. We operate The Nasdaq Stock Market, the largest stock-based equity securities market in the United States, both in terms of number of listed companies and traded share volume. As of December 31, 2004, we were home to 3,271 listed companies with a combined market capitalization of over $3.7 trillion. We also operate the Nasdaq Market Center, which provides our market participants with the ability to access, process, display and integrate orders and quotes in The Nasdaq Stock Market and other national stock exchanges. Transactions involving 319.1 billion and 368.6 billion equity securities were executed on or reported to our systems for the years ended December 31, 2004 and December 31, 2003, respectively. We manage, operate and provide our products and services in two business segments, our Issuer Services segment and our Market Services segment.

Issuer Services. Our Issuer Services segment includes our securities listings business and our financial products business. The companies listed on The Nasdaq Stock Market represent a diverse array of industries including information technology, financial services, healthcare, consumer products and industrials. There were 241 initial public offerings on U.S. equity markets during 2004, which reflects a significant increase in IPO activity compared with the IPO activity for both 2003 and 2002, during which periods there were 84 and 92 IPOs, respectively. Of the 241 IPOs on U.S. equity markets in 2004, 148 or 61% chose to list on The Nasdaq Stock Market and they raised approximately $15 billion in equity capital. The percentage of IPOs on primary U.S. markets that have listed on The Nasdaq Stock Market has increased from 50% during 2002 to 61% during 2004.

We also develop and license financial products and associated derivatives, including the QQQ, which is an exchange traded fund (“ETF”) based on the Nasdaq-100 Index. The QQQ is the most actively traded ETF in the world and the most actively traded listed security in the United States. The listing of the QQQ was switched to The Nasdaq Stock Market on December 1, 2004. Our financial products business has also introduced products based on other Nasdaq indices, including the Nasdaq Composite Index and the Nasdaq Biotechnology Index. We believe that these products leverage, extend and enhance the Nasdaq brand. In addition, we generate revenues by licensing and listing third-party structured products and third-party sponsored ETFs.

Market Services. Our Market Services segment includes our transaction-based business and our market information services business. The Nasdaq Market Center is our transaction-based platform that provides our market participants with the ability to access, process, display and integrate orders and quotes, which enabled our customers to execute trades in over 7,800 equity securities as of December 31, 2004. The Nasdaq Market Center allows us to route and execute buy and sell orders as well as report transactions for Nasdaq-listed securities and those listed on national stock exchanges, including the New York Stock Exchange (the “NYSE”) and the American Stock Exchange (“Amex”), which provides fee-based revenues. Trading activity of Nasdaq-listed securities increased for the year ended December 31, 2004 compared to the year ended December 31, 2003. Average daily share volume in Nasdaq-listed securities was 1.81 billion shares in the year ended December 31, 2004 compared to 1.69 billion shares in the year ended December 31, 2003, an increase of 7.2%.

We also generate revenues by providing varying levels of quote and trade information to market participants and to data vendors, who in turn sell subscriptions for this information to the public. Our systems enable vendors to gain direct access to our detailed order data, index information, mutual fund pricing information, and corporate action information on Nasdaq-listed securities.

To further grow our business and improve our product offerings, we acquired Brut, LLC (the “Brut acquisition”), the owner and operator of the Brut ECN, from SunGard Data Systems Inc. in September 2004.

The Brut acquisition benefits our operations for various reasons. As a result of acquiring Brut:

we provide our Nasdaq Market Center customers with deeper pools of liquidity in Nasdaq-listed and exchange-listed securities by adding Brut’s liquidity to ours;

we expect to be able to apply Brut’s sophisticated order routing technology to all orders entered into the Nasdaq Market Center beginning in the first half of 2005;

we connect directly with a number of customers who did not historically access our system, including new customers such as retail broker-dealers, hedge funds and program trading desks;

in the first half of 2005, we expect that our customers will be able to access the order books of the Nasdaq Market Center and Brut, which effectively will be combined into a consolidated order book allowing our customers to obtain the best price, regardless of whether the trade was entered on the Nasdaq Market Center or Brut; and

we expect the Brut acquisition to generate synergies and to help further strengthen our operating margins and profitability.

Cost Reductions

We have taken significant steps to grow our business and enhance our competitive position, including developing fast, reliable and scalable systems, focusing on maintaining an efficient cost structure and pursuing a competitive pricing strategy for our products and services consistent with our regulatory obligations. Beginning in 2003, we performed a strategic review of our operations to develop a plan to focus our business and improve our profitability, margins and growth. In implementing our strategic plan, we have successfully reduced our technology costs, eliminated non-core products, scaled back our workforce, consolidated our real estate facilities and consolidated our operations. In addition, we are taking steps to exit certain low-margin businesses, primarily relating to providing proprietary network connectivity to the Nasdaq Market Center. In 2003, we reduced total direct expenses by approximately $92.5 million or 15.8%, from $585.2 million to $492.7 million, as compared to 2002. In 2004, we have continued to implement operating efficiencies and have further reduced total direct expenses from continuing operations by approximately $62.8 million or 16.4%, from $383.5 million to $320.7 million for the first nine months in 2003 and 2004, respectively. During the first nine months of 2004, in connection with taking certain actions to improve our operational efficiency, we incurred expenses of approximately $37.1 million. Our results for the first nine months of 2003 include $10.2 million of similar expenses.

Some of the key steps we have taken to reduce our costs and expenses since 2002 include:

Reducing our computer operations and communications expenses from $136.7 million in 2002 to $125.6 in 2003, primarily through the renegotiation of contracts with significant suppliers and a reduction in the number of technology operating platforms that we support. For the first nine months of 2004, our computer operations and communications expenses were $81.3 million compared with $93.4 million for the same period in 2003;

Reducing our headcount from 1,275 at December 31, 2002 to 786 at December 31, 2004 (which includes 41 employees obtained as a result of the Brut acquisition);

Reducing the number of technology consultants we used from approximately 200 in 2001 to less than 40 through December 31, 2004;

Consolidating our real estate facilities from approximately 744,000 square feet as of December 2002 to approximately 525,000 square feet as of December 2004; and

Disposing of our interest in Nasdaq Deutschland (August 2003), IndigoMarkets (September 2003) and Nasdaq Europe (December 2003).

We believe that our actions have positioned us to compete aggressively in all aspects of our business, to continue improvement in profitability and to grow in future periods. If our revenue levels remain consistent with our historical revenue levels, we expect that our cost reduction efforts, if realized, could result in increases in margins and increases in net income as our expenses decrease. We plan to continue to rationalize our business activities and generate additional cost savings by managing our expense base and pursuing operating efficiencies.

Our Competitive Strengths

We believe our principal competitive strengths include:

Diverse Sources of Revenues. Our revenue sources are diverse and include revenues from transaction services, market data product and services, listing fees, and financial products. This distinguishes us from most of our competitors, including ECNs and the Archipelago Exchange (“ArcaEx”), the exclusive equities trading facility of a wholly owned subsidiary of Pacific Exchange, Inc., which rely primarily on trading-volume-driven revenue. We believe that our diversity in revenue sources provides us with a competitive advantage. For the first nine months of 2004, we derived 58.6% of our revenues from our Market Services segment and 41.3% of our revenues from our Issuer Services segment. Our Issuer Services segment provides us with recurring revenue streams in the form of listing fees from issuers and licensing fees for products such as those based on the Nasdaq-100 Index, including QQQ. As part of our Market Services segment, we deliver real-time quote and trade data to investors through our extensive network of vendors.

Highly Liquid and Efficient Market. We offer our customers a highly liquid and efficient market to execute transactions. Trade executions by the Nasdaq Market Center are extremely fast, typically within 0.7 seconds. We believe that our trade execution speeds are comparable to or faster than that of many of our competitors. Since our recent acquisition of Brut, the depth of liquidity available to our customers has significantly increased. The sophisticated order routing technology of Brut increases liquidity on the Nasdaq Market Center by routing additional orders to our systems. In addition, as a broker-dealer, Brut provides its customers with the ability to access liquidity from multiple third-party destinations. Market participants are more likely to get the best price for their orders when their orders are exposed to a larger number of buyers and sellers. We believe that the depth and liquidity that we offer benefits our existing customers as it attracts additional customers, who, in turn, provide further liquidity for our customers. We believe that increased liquidity also enhances the level of transparency that we are able to offer to professional and individual investors.

Strong Brand and Reputation. We believe that we have built a trusted brand name among market participants, institutions and public companies. The Nasdaq Stock Market is recognized as a premier listing venue for stock-based equity securities. Some of the companies that list on our market include Apple, Amgen, Comcast, Dell, Google, Intel, Microsoft, Staples, Starbucks and Yahoo!. Our marketing, promotional and public relations activities are designed to further strengthen our brand and differentiate us from our competitors by presenting us as the market for growth companies and industry leaders and by promoting the unique services available to our listed companies.

Effective Use of Technology. Our technology platforms are fast, reliable and scalable systems and we believe that their transaction speed throughput and reliability provides a competitive advantage. During 2003, we achieved 99.99% uptime for the Nasdaq Market Center, which resulted in our execution platform being fully operational during regular trading hours for 2003 at all times except for an aggregate of approximately 10.5

minutes, and we achieved 100% uptime for our data feeds in 2003. During 2004, we achieved 99.99% uptime for the Nasdaq Market Center, which resulted in our execution platform being fully operational for regular trading hours for 2004 at all times except for an aggregate of approximately 11.6 minutes. We also leverage our technology to provide innovative services that address the needs of the marketplace. For example, we recently implemented the Opening Cross and Closing Cross, which are centralized order facilities that determine a single price for the open and close of each security listed on The Nasdaq Stock Market. The Opening Cross and Closing Cross further establish us as the reference point for trading in Nasdaq-listed securities, which has drawn liquidity to our market at the opening and closing times and has the potential to draw additional liquidity to our market during the trading day. We continue to upgrade our technology while at the same time reducing costs by retiring our proprietary-based platforms and using considerably less expensive technology platforms that do not require significant customization.

Strong and Effective Regulation. As the operator of a stock market and pursuant to delegated authority, we are charged by the U.S. Securities and Exchange Commission (“SEC”) and U.S. securities laws with maintaining a fair and orderly market for the benefit of investors. We work to fulfill this obligation in several ways. First, we have arranged with National Association of Securities Dealers, Inc. (“NASD”), a self-regulatory organization with over 60 years of experience, to provide regulatory oversight that is separated from our market operations. In addition, we operate a real-time market surveillance program to identify problems quickly for referral to NASD. We also maintain a compliance-monitoring and enforcement program with respect to our requirements for initial and continued listing, including all our corporate governance listing standards. We believe that our reputation for corporate governance and regulatory integrity benefits investors and strengthens the Nasdaq brand as well as attracting companies seeking to list their stock as part of their initial public offerings.

Strong and Innovative Management Team. Our strong and dedicated management team, led by President and Chief Executive Officer Robert Greifeld, has extensive experience in equity markets and technology. Through their leadership, we have successfully focused our business and rapidly enhanced our competitive position. Our nine executive officers have an aggregate of approximately 140 years of experience in the financial services industry. We believe that our management team has demonstrated an ability to innovate and respond effectively to market opportunities.

Our Growth Strategy

We intend to grow our business by employing the following strategies:

Continue to Enhance our Competitive Position. We believe that our average trade execution fee per share is the most competitive in the industry. We are committed to continue to streamline and enhance our systems to be able to develop new proprietary data products with fast time-to-market and flexible formats. We also pursue a competitive pricing strategy, which includes:

providing volume discounts for high-volume users of our trade execution services to encourage large market participants to use the Nasdaq Market Center; and

sharing profits from market services to create incentives for market participants to execute orders in the Nasdaq Market Center.

Our strategic plan to reduce costs has been successfully implemented and we are continuously reviewing our operations to identify additional opportunities for cost reduction consistent with our regulatory obligations. Many of our major technology and networking contracts have been favorably renegotiated to reduce our costs and we expect to negotiate additional cost reductions under these contracts in the future. Continuing to reduce our costs will allow us to maintain our pricing strategy and continue to strengthen our competitive position.

Continue Our Leadership in the Listings Business. We intend to aggressively compete for new listings by continuing to capture a substantial portion of initial public offerings. Of the 241 IPOs on U.S. equity markets during 2004, 148 or 61% chose to list on The Nasdaq Stock Market and raised approximately $15 billion in equity capital. We also intend to generate additional listings by persuading companies to switch to The Nasdaq Stock Market from other listing venues because listing fees and liquidity on our market compare favorably with those of other listing venues. As part of this strategy, in January 2004, we began a dual-listing program, which enables NYSE-listed companies to dually list their stocks on The Nasdaq Stock Market as well as the NYSE and waives Nasdaq’s listing fees for the initial year. Since January 2004, several high-profile companies have dual-listed and we continue to target additional companies about joining the program. We have also attracted listings from a number of foreign companies seeking to access U.S. capital markets, and we believe that significant opportunities exist to gain new listings from foreign companies. The addition of new listings (whether from initial public offerings or as a result of switches from another listing venue) will result in increases in our listings revenues and increases in the number of companies listed on The Nasdaq Stock Market and also has the potential to increase our quoting, reporting and trading revenues.

Pursue Strategic Acquisitions and Alliances of Potential Material Impact. In recent years, the securities trading industry has witnessed significant consolidation among market participants. We believe this trend will continue, and a number of possible significant transactions have been announced or discussed in the marketplace. See “The Industry—Market Models—ECNs.” We intend to pursue strategic acquisitions and alliances to strengthen our current business, enter new markets and advance our technology. In addition to acquisitions, we may also pursue partnerships and commercial agreements to take advantage of potential changes in our industry. Our acquisition of Brut was part of pursuing our acquisition strategy. We believe that the successful integration of Brut’s facilities and technology into our operations will demonstrate our ability to successfully execute this strategy.

We are currently exploring certain strategic transaction opportunities, some of which would be material to our business. We have submitted a non-binding proposal, subject to customary conditions, with respect to one potential strategic transaction, which would involve our acquisition of a major ECN. We believe that our proposal is one of several proposals that have been submitted in connection with this potential transaction. There can be no assurances as to whether we will decide to pursue or be successful in completing this transaction or any other strategic transaction and we cannot predict the timing of any transaction. There are risks associated with this and any other future acquisition or strategic transaction, including risks associated with the level of required financing, the impact on our stock price and demands on management. See “Risk Factors—Future acquisitions, partnerships and joint ventures may require significant resources and/or result in significant unanticipated losses, costs or liabilities.”

Continue to Enhance Our Products and Services and Increase Our Penetration. We will continue to enhance our existing products and services and to develop new products and services to meet the evolving demands of our customers in a dynamic marketplace while at the same time reducing our operating expenses. We will also aggressively seek to increase our share of trading in Nasdaq- and exchange-listed securities and broaden our customer base by enhancing the Nasdaq Market Center through price leadership, new product offerings (like the Opening Cross and Closing Cross) and through our acquisition of Brut. We have upgraded and expect to continue to upgrade our technology and our product offering while concurrently reducing our costs by retiring our older proprietary-based platforms and using considerably less expensive technology platforms that do not require significant customization.

Exchange Registration

In 2000, we applied with the SEC for registration as a national securities exchange. Exchange registration is a change in legal status for us as opposed to a change in the way we operate. We believe that we will benefit from exchange registration for the following reasons:

we will be able to separate Nasdaq from NASD thereby eliminating potential conflicts of interest that could result with being controlled by our regulator;

we will be able to clearly establish our separate identity from NASD, a non-profit organization; and

we will no longer have to share revenue from certain proprietary products with certain other exchanges.

Because of the nature of the regulatory process and the variety of market structure issues that have to be resolved across all markets, the registration process has been lengthy. There can be no assurance that exchange registration will occur or that the registration process will occur in a timely manner. For additional information regarding exchange registration, see “Relationship with NASD—Changes Upon Exchange Registration.”

Recent Developments

On January 25, 2005, we issued a press release providing preliminary results for our fourth fiscal quarter and full fiscal year ended December 31, 2004. These preliminary results are subject to an annual audit. Following the completion of the audit we will announce final audited results.

Based upon preliminary, unaudited information, we expect net income for the fourth quarter 2004 to be in the range of $5 million to $9 million. Net income for the full year 2004 is expected to be in the range of $9 million to $13 million. Net (loss) income available to common stockholders for the fourth quarter 2004 is expected to be in the range of $(1) million to a profit of $3 million. Full year net (loss) income available to common stockholders is expected to be in the range of $(4) million to breakeven. The net (loss) income per share on a basic and diluted basis is expected to be in the range of $(0.01) to a profit of $0.04 for the fourth quarter and in the range of $(0.05) to $0.00 for the full year. Gross margin (revenues less cost of revenues) for the fourth quarter is expected to be in the range of $120 million to $123 million. Gross margin for the full year 2004 is expected to be in the range of $483 million to $486 million.

Total expenses are expected to be in the range of $120 million to $123 million for the fourth quarter and $475 million to $478 million for the full year 2004. Included in both the 2004 fourth quarter and full year results are the following:

a one-time non-cash charge to retained earnings of approximately $4 million associated with the exchange of all of our outstanding shares of Series A Cumulative Preferred Stock for newly issued shares of Series C Cumulative Preferred Stock;

pre-tax charges in total expenses of approximately $26 million in the fourth quarter and approximately $63 million for the full year associated with our continuing efforts to improve efficiencies and reduce operating expenses; and

a pre-tax gain in discounted operations of approximately $15 million related to the release of a reserve for potential claims established in December 2003 in conjunction with the transfer of our ownership of Nasdaq Europe.

The items listed above in total are estimated to reduce earnings per share by $0.13 for the fourth quarter and $0.41 for the full year 2004.

Corporate Information

We are incorporated in Delaware. Our executive offices are located at One Liberty Plaza, New York, New York, 10006 and our telephone number is (212) 401-8700. Our web site is http://www.nasdaq.com. Information contained on our web site is not incorporated by reference into this prospectus.

THE OFFERING

Common stock offered by the selling

stockholders

14,000,000

Shares outstanding before and after the offering

78,973,085

Use of proceeds

All the shares offered in this offering will be sold by the selling stockholders. We will not receive any proceeds from the sale of shares by the selling stockholders.

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

Listing

Our common stock currently trades on the OTC Bulletin Board under the ticker symbol “NDAQ.” If our rule proposal that would allow us to list our common stock on the Nasdaq National Market is approved by the SEC, we anticipate that trading on the Nasdaq National Market will begin immediately upon commencement of this offering under the ticker symbol “NDAQ.”

Unless we indicate otherwise, all information in this prospectus:

assumes shares outstanding as of December 31, 2004;

assumes no exercise of the underwriters’ overallotment option; and

excludes:

up to 306,662 shares of restricted stock issued to our employees and directors pursuant to equity compensation awards;

up to 17,056,763 shares of common stock issuable upon the exercise of options granted to our employees and directors, of which 8,368,901 were exercisable at a weighted average exercise price of $11.92;

up to 239,824 shares of common stock issuable upon the exercise of warrants granted to Softbank Corp. at exercise prices of $15.00 and $16.00 per share; and

up to 12.0 million shares of common stock issuable upon the conversion of our 4.0% convertible subordinated notes due May 2006 currently owned by Hellman & Friedman Capital Partners IV, L.P. at a conversion price of $20.00 per share.

We, together with NASD, have provided our stockholders, who purchased shares of our common stock in our 2000 and 2001 private placements, with the opportunity to sell those shares in this public offering. Participation will be subject to meeting certain eligibility requirements and the completion of satisfactory documentation. Any shares of our common stock that were not purchased in our 2000 or 2001 private placements will not be sold in this offering. To the extent that our stockholders elect to sell shares in this offering based on this opportunity, we will amend the prospectus to incorporate such selling stockholder’s name, amount and nature of beneficial ownership, number of shares being offered, percentage of beneficial ownership and any other applicable material information. Several of the underwriters and/or their affiliates are eligible to participate in this opportunity and one or more of such persons may elect to do so. To the extent that additional stockholders elect to sell shares in this offering, such stockholders may sell shares in lieu of shares to be sold by NASD.

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND PRO FORMA DATA

The table below sets forth certain summary historical and pro forma financial and operating data of our company. The summary historical financial data as of and for the years ended December 31, 2001, 2002 and 2003 set forth below was derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The summary historical financial data as of and for the nine months ended September 30, 2003 and 2004 set forth below was derived from our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus. The historical financial and operating information may not be indicative of our future performance. In management’s opinion, the unaudited information has been prepared on substantially the same basis as the consolidated financial statements appearing elsewhere in this prospectus and includes all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the unaudited consolidated quarterly data.

The summary unaudited pro forma financial data set forth below has been prepared to give effect to our acquisition on September 7, 2004 of Toll Associates LLC, and its subsidiaries, including Brut, LLC, owner and operator of the Brut ECN, from SunGard Data Systems Inc. The summary unaudited pro forma financial data as of and for the year ended December 31, 2003 and the nine months ended September 30, 2004 set forth below is derived from our unaudited pro forma condensed combined financial information and the notes thereto included under the caption “Unaudited Pro Forma Condensed Combined Financial Information” included elsewhere in this prospectus. The unaudited pro forma statement of operations data for the year ended December 31, 2003 and the nine months ended September 30, 2004 reflects adjustments to our consolidated historical financial information to give effect to the Brut acquisition as if this transaction had occurred on January 1, 2003. The summary unaudited pro forma financial and operating information is based on certain assumptions and adjustments and does not purport to present what our actual results of operations would have been had the Brut acquisition in fact occurred on the dates specified, nor is it necessarily indicative of the results of operations that may be achieved in the future. Toll results presented in our unaudited pro forma information for the nine months ended September 30, 2004 and year ended December 31, 2003 reflect audited results of Toll for the periods ended September 6, 2004 and December 31, 2003, respectively. Actual Toll results are included in our results of operations beginning on September 7, 2004, the date we acquired Toll. Since balance sheet data for Toll is included in our balance sheet data as of September 30, 2004, we have not presented pro forma balance sheet data for Toll.

The summary financial data should be read together with our consolidated financial statements and the related notes included elsewhere in this prospectus, “Selected Consolidated Financial Information,” “Unaudited Pro Forma Condensed Combined Financial Information” and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


	Year Ended December 31,												Nine Months Ended September 30,
	2001			2002			2003			2003 (Pro Forma)			2003			2004			2004 (Pro Forma)
										(unaudited)						(unaudited)
	(in thousands, except per share amounts)
Statements of Income Data⁽¹⁾
Revenues
Market Services	$	654,979		$	581,774		$	383,715		$	500,082		$	297,374		$	218,361		$	341,586
Issuer Services		189,749			203,969			204,186			204,186			152,571			153,935			153,935
Other		3,342			1,411			1,944			1,944			1,890			91			91

Total revenues		848,070			787,154			589,845			706,212			451,835			372,387			495,612
Cost of revenues⁽²⁾		—			—			—			(99,337	)		—			(9,177	)		(120,043	)

Gross margin		848,070			787,154			589,845			606,875			451,835			363,210			375,569
Total direct expenses		662,734			585,131			492,745			512,049			383,529			320,716			332,791
Elimination of non-core product lines, initiatives and severance⁽³⁾		—			—			97,910			97,910			69,551			—			—
Nasdaq Japan impairment loss		—			15,208			(5,000	)		(5,000	)		(5,000	)		—			—
Support costs from related parties, net		101,799			74,968			61,504			62,164			48,418			34,293			34,896

Total expenses		764,533			675,307			647,159			667,123			496,498			355,009			367,687

Operating income (loss)		83,537			111,847			(57,314	)		(60,248	)		(44,663	)		8,201			7,882
Net income (loss) from continuing operations		60,055			65,021			(45,112	)		(48,099	)		(34,305	)		3,931			3,007
Loss from discontinued operations (net of tax)⁽⁴⁾		(19,592	)		(21,893	)		(60,335	)		(60,335	)		(50,145	)		—			—

Net income (loss)	$	40,463		$	43,128		$	(105,447	)	$	(108,434	)	$	(84,450	)	$	3,931		$	3,007
Preferred stock⁽⁵⁾:
Dividends declared		—			—			(8,279	)		(8,279	)		(5,736	)		(7,350	)		(7,350	)
Accretion of preferred stock		—			(9,765	)		—			—			—			—			—

Net income (loss) applicable to common stockholders	$	40,463		$	33,363		$	(113,726	)	$	(116,713	)	$	(90,186	)	$	(3,419	)	$	(4,343	)

Basic and diluted net earnings (loss) per share:
Continuing operations	$	0.52		$	0.66		$	(0.68	)	$	(0.72	)	$	(0.51	)	$	(0.04	)	$	(0.06	)
Discontinued operations		(0.17	)		(0.26	)		(0.77	)		(0.77	)		(0.64	)		—			—

Total basic and diluted net earnings (loss) per share	$	0.35		$	0.40		$	(1.45	)	$	(1.49	)	$	(1.15	)	$	(0.04	)	$	(0.06	)

(footnotes on following page)


	As of December 31,						As of September 30, 2004
	2001		2002		2003		As of September 30, 2004
							(unaudited)
	(in thousands)
Balance Sheet Data⁽¹⁾
Cash and cash equivalents and investments available-for-sale⁽⁶⁾	$	521,760	$	423,588	$	334,633	$	236,968
Total assets⁽⁷⁾		1,326,251		1,175,914		851,254		850,535
Total long-term liabilities⁽⁷⁾		529,029		636,210		452,927		453,115
Total stockholders’ equity⁽⁷⁾⁽⁸⁾		518,388		270,872		160,696		157,082


	Year Ended December 31,
	2001		2002		2003		2004
Other Data
Average daily share volume in Nasdaq-listed stocks (in billions)	1.90		1.75		1.69		1.81
Percentage of share volume reported to Nasdaq systems⁽⁹⁾	98.0	%	89.3	%	67.0	%	51.3	%
Initial public offerings	58		46		54		148
Secondary offerings	169		149		190		233
New listings⁽¹⁰⁾	136		121		134		260
Number of listed companies⁽¹¹⁾	4,109		3,659		3,333		3,271

(1)

Certain prior period amounts have been reclassified to conform with the 2004 presentation.

(2)

Pursuant to Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” execution revenues from transactions executed through Brut are recorded on a gross basis in revenues and expenses such as liquidity rebate payments are recorded in cost of revenues as Brut acts as principal. Our other execution revenues will continue to be reported net of the liquidity rebate as we do not act as principal.

(3)

Reflects expenses in connection with our strategic review.

(4)

Reflects losses related to our disposal of Nasdaq Europe and IndigoMarkets.

(5)

The Series A Cumulative Preferred Stock carried a 7.6% dividend rate for the year commencing March 2003 and carried a 10.6% dividend rate in all subsequent years. On September 30, 2004, NASD waived a portion of the dividend for the third quarter of 2004 of $2.5 million and accepted an aggregate amount of $1.0 million (calculated based on an annual rate of 3.0%) as payment in full of the dividend for this period. On November 29, 2004, we entered into an exchange agreement with NASD pursuant to which NASD exchanged 1,338,402 shares of our Series A Cumulative Preferred Stock, representing all the outstanding shares of Series A Cumulative Preferred Stock, for 1,338,402 shares of newly issued Series C Cumulative Preferred Stock. The Series C Cumulative Preferred Stock accrues quarterly dividends at an annual rate of 3.0% for all periods until July 1, 2006 and at an annual rate of 10.6% for periods thereafter. The principal amount of the Series C Cumulative Preferred Stock will accrete through retained earnings from its estimated current fair market value of $129.2 million to its redemption value of $133.8 million over the five consecutive quarters beginning with the fourth quarter of 2004.

(6)

Decrease in cash and cash equivalents and investments available-for-sale as of September 30, 2004 as compared with December 31, 2003 was primarily due to our acquisition of Brut on September 7, 2004 for total cash consideration of $190.0 million, subject to certain post-closing adjustments.

(7)

Includes continuing and discontinued operations. For a further discussion of the impact of these items from discontinued operations, see Note 2, “Significant Transactions—Discontinued Operations,” to our consolidated financial statements and condensed consolidated financial statements.

(8)

Decrease from 2001 to 2002 is primarily the result of our purchase of certain shares of our common stock from NASD for $305 million in cash, and as part of the purchase price also issued 1,338,402 shares of our Series A Cumulative Preferred Stock and 1 share of our Series B Preferred Stock to NASD in 2002.

(9)

Consists of all trades in Nasdaq-listed securities reported to the Nasdaq Market Center.

(10)

Includes initial public offerings, including those completed on a best efforts basis, and listings that switched from other listing venues.

(11)

Number of listed companies as of period end.

RISK FACTORS

An investment in our common stock is subject to a number risks and uncertainties. You should carefully consider the following risk factors and all the other information contained in this prospectus before deciding whether to purchase our common stock. If any of the following events occur, our business, financial condition and results of operations could be materially adversely affected. In such case, the market price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business

Our operating results could fluctuate significantly in the future.

The financial services industry is risky and unpredictable and is directly affected by many national and international factors that are beyond our control. Any one of these factors could have a material adverse effect on our business, financial condition and operating results by causing a substantial decline in the financial services markets and reduced trading volume.

Our operating results may fluctuate significantly in the future as a result of a variety of factors, including:

a decrease in the trading volume in The Nasdaq Stock Market;

increased competition from regional exchanges, ECNs, the Alternative Display Facility operated by NASD or other alternative trading systems that might reduce market share and create pricing pressure;

competition from the NYSE or new or existing exchanges competing for new listings;

reduction in the rate at which The Nasdaq Stock Market obtains new listings and maintains its current listings;

a reduction in industry use of market data;

regulatory changes and increases in compliance costs;

our ability to utilize capital effectively;

our ability to integrate acquisitions;

our ability to manage personnel, overhead and other expenses, particularly technology expenses; and

general market and economic conditions.

Our operating results are affected by the seasonality in our business. We experienced relatively higher trading volume during the first and second quarters of 2004. We experienced a decline in trading volume for the third quarter of 2004. We generally expect to have our lowest trading volume of any year during the third quarter. As seasonal trends affect our operating results, they may have a negative impact on the market price of our common stock.

As a result of all the foregoing factors, you will not be able to rely on our operating results in any particular period as an indication of our future performance.

Our business and operating results could be harmed by market fluctuations and other risks associated with the securities industry generally.

Trading volume is directly affected by economic and political conditions, broad trends in business and finance, and changes in price levels of securities and by the overall level of investor confidence. Weak economic

conditions or a reduction in prices of securities trading on the securities markets could result in a decline in trading volume. A decline in trading volume would lower revenues from our Market Services segment and our profitability may be adversely affected if we are unable to reduce costs at the same rate. We are particularly affected by declines in trading volume in technology-related securities because a significant portion of our customers trade in these types of securities and a large number of technology-related companies are listed on The Nasdaq Stock Market. In addition, investor confidence and trader interest can be affected by factors outside our control, such as the publicity surrounding several recent investigations and prosecutions for corporate governance or accounting irregularities at public companies. Any stagnation or decline in the IPO market will have an adverse effect on our revenues, including, in particular, revenues from listing fees. Poor economic conditions could also lead to an increase in the number of companies delisted from The Nasdaq Stock Market also causing a decline in our revenues. During the year ended December 31, 2004, 63 companies were delisted from The Nasdaq Stock Market for regulatory non-compliance and 259 companies voluntarily delisted primarily due to mergers or to switch listing venues.

If our revenues decline and we are unable to reduce our costs, our profitability could be adversely affected.

We base our cost structure on historical and expected levels of demand for our products and services. Any decline in demand for our products and services and our resulting revenues may not cause a corresponding decline in our expenses and, therefore, we may not be able to adjust our cost structure on a timely basis. Over the last several years, the securities industry and securities markets have faced generally adverse conditions and increased competition. As a result, we have not been able, and in the future may not be able, to maintain revenues and income levels from prior periods when there was substantial growth in the securities industry. In addition, we may have difficulty managing our business as we are forced to reduce our expenses to deal with contraction in our business.

Any failure to achieve our goals on cost savings will have an adverse impact on our business, financial condition and results of operations. We may fail in our initiatives to try to increase our business. We also may not have made adequate allowances for the changes and risks associated with the increasingly competitive securities market landscape or a weakened equities market. Our systems and procedures may not be adequate to support our operations. Our management may not be able to offer or expand our services successfully, particularly in adverse market conditions. If we are unable to manage our operations effectively, our business, financial condition and operating results could be adversely affected.

We face significant competition in our business.

The securities trading business is highly competitive. We face competition from numerous entities in the securities trading industry, including competition for listings and trading services from other exchanges and market centers. Such competition also includes pricing competition. In addition, competition could increase as a result of the registration of new exchanges. The following factors are some of the risks associated with competition that may affect our business and results of operations:

Competition by national and regional exchanges, ECNs and the Alternative Display Facility may reduce our transactions, trade reporting and market information revenues and impact our ability to increase our market share of transactions in Nasdaq-listed and exchange-listed securities.

We have invested considerable capital in the trading services we offer through the Nasdaq Market Center. These services have been launched into a competitive environment. Any decision by market participants to quote, execute or report trades through regional exchanges or the Alternative Display Facility maintained by NASD, as discussed below, could have a negative impact on our share of quotes and trades in securities listed on The Nasdaq Stock Market and may adversely affect our business, financial condition and operating results.

We currently face increased competition from regional exchanges for quotation, execution and trade reporting business for securities listed on The Nasdaq Stock Market, which affects revenues from the Market Services segment. ECNs such as Instinet Group, which operates INET, quote and report trades to regional exchanges and ArcaEx quotes and reports to the Pacific Exchange.

Additionally, the NYSE has formally requested entry into the joint industry-plan that governs the sharing of market information revenue for Nasdaq-listed securities (the “UTP Plan”), with the stated purpose of being able to trade QQQ now that it has listed on The Nasdaq Stock Market. If the NYSE chooses to trade QQQ and other Nasdaq-listed stocks once they are a participant, then we could face competition in our Market Services segment, in addition to listing competition from the NYSE.

It is possible that a competing securities exchange, ECN, market maker, network provider, or technology company could develop ways to replicate the network offered through the Nasdaq Market Center in a more efficient manner than we do and persuade a critical mass of market participants to switch to such a new network. If there is an increase in the number of market makers or ECNs that determine they do enough order routing traffic to justify setting up a proprietary network for their traffic, we may be forced to alter our pricing structure or risk losing share in the order routing or execution business.

As a condition for the SEC’s approval of our current trading platform, the SEC required NASD to provide NASD members with the ability to opt-out of reporting trades to the Nasdaq Market Center by providing the Alternative Display Facility as an alternative quotation and trade reporting facility for NASD members. If additional market participants quote through the Alternative Display Facility, we face the risk of reduced market share in revenues from the Market Services segment, which could adversely affect our business, financial condition and operating results.

Through the Nasdaq Market Center, we also compete for trading in exchange-listed securities, including securities listed on the NYSE and Amex. Historically, we have had a comparatively small percentage of this market due in part to the centralized nature of NYSE and Amex. As a result, the national exchanges offer greater liquidity in these stocks than we do. In addition, regulatory limitations currently hinder us from increasing our market share in trading NYSE-listed securities. See “The Industry—The Trade Execution Function.” Accordingly, we face major obstacles in trying to increase our market share of trading in exchange-listed securities.

The NYSE has stated that it intends to increase its focus on its electronic trading capabilities. In August 2004, the NYSE sought the SEC’s approval of an NYSE rule proposal to expand its electronic trading system and to make it a permanent facility of the NYSE. We believe our electronic trading model has significant advantages over the NYSE’s current floor-based model. Accordingly, a move to enhance market participants’ ability to engage in automated electronic trading on the NYSE could undermine one of our competitive advantages and could negatively impact our business.

Our responses to competition may not be sufficient to regain lost business or prevent other market participants from shifting some of their quoting and/or trade reporting to regional exchanges. We may be required to take further action to remain competitive such as reducing prices. If we are unable to compete for transactions, trade reporting and market information revenues, it could have an adverse effect on our business, financial condition and operating results.

Over the past few years, competition from ECNs and other electronic trading platforms has significantly reduced our market share of trade executions in Nasdaq-listed securities. If this trend of declining market share of trade executions in Nasdaq-listed securities continues, it could have an adverse effect on our business, financial condition, or operating results.

Substantial listing competition could reduce our revenues.

The Nasdaq Stock Market faces competition for listings from other primary exchanges and especially from the NYSE. In addition to competition for initial listings, The Nasdaq Stock Market also competes with the NYSE to maintain listings. Every year, a net number of issuers listed on The Nasdaq Stock Market switch to the NYSE. The 50 largest Nasdaq-listed issuers (based on U.S. market value) accounted for approximately 51.2% and 42.8% of total dollar volume traded on The Nasdaq Stock Market for the year ended December 31, 2003 and

the nine months ended September 30, 2004, respectively. While the loss of one or more of these issuers would result in a decrease in listings revenues for our Issuer Services segment, such a loss would cause an even more significant reduction in revenues from the Market Services segment because of a decline in quoting, reporting and trading revenue. In addition new entrants to the listing services business could provide additional competition for us. For example ArcaEx, the exclusive equities trading facility of the Pacific Exchange, has begun competing for listings and the associated listing fees. The reduction in initial listings or the loss of one or more large issuers could have an adverse effect on our business, financial condition, or operating results.

In 2002, the U.S. Congress enacted the Public Company Accounting Reform and Investor Protection Act, commonly known as the Sarbanes-Oxley Act, in response to a perceived need for reform in the oversight of listed companies. The Sarbanes-Oxley Act may discourage some U.S. companies from making public offerings and listing with us or any U.S. exchange. In addition, although Congress exempted non-U.S. companies from certain provisions of the Sarbanes-Oxley Act in 2003, the increased regulatory requirements imposed by the Sarbanes-Oxley Act may deter non-U.S. companies from listing in the United States. Accordingly, these companies may choose not to list with Nasdaq or any U.S. exchange.

Our market center data revenues are adversely affected by competition from ECNs and regional exchanges.

Exchanges that are participants in the UTP Plan, which collects and disseminates price and transaction information for securities listed on The Nasdaq Stock Market, are entitled to a share of fees collected by the exchanges and The Nasdaq Stock Market from data vendors for price and transaction information. These fees are referred to as “tape fees.” Over the last several years other participants in the UTP Plan have received increasing percentages of the UTP Plan fees as a result of ECNs reporting to regional exchanges instead of to us. As a result, our share of UTP Plan fees has declined accordingly. In addition, as a facility of the Pacific Exchange, ArcaEx is able to earn UTP Plan fees, which has reduced our share of UTP Plan fees. If this trend continues and our share of the UTP Plan fees continues to experience reductions, then our business, financial condition and results of operations could be adversely affected.

Price competition has impacted and could continue to impact our business.

The securities trading industry is characterized by intense price competition and we have determined that it is in our best interest to gain price leadership in transaction and market data fees. We have recently implemented changes to our pricing designed to make us more attractive to high-volume customers. However, to date, our trading volume has not increased to compensate for the reduction in revenues caused by these price decreases. Should our trading volume not increase in the future, we will continue to suffer from a decline in revenues as a result of our new reduced prices, and our business, financial condition and results of operations could be adversely affected. Additionally, if any competitor sought to increase its market share by further reducing its transaction fees, offering higher liquidity payments or other incentives, our business, financial condition and results of operations could be adversely affected.

Our revenues derived from market data fees are also subject to price competition. We currently rebate to our customers 50% of the market data fees that we receive for trading in exchange-listed securities, and also have a program to share a portion of revenues associated with the trading of Nasdaq-listed securities, including a portion of Nasdaq Market Services Subscriptions revenues. Many of our competitors offer their customers similar rebates. Price competition with respect to market data rebates or our program relating to sharing revenues associated with trading Nasdaq-listed securities could attract trading volume away from us, leading to loss of market share and decreased revenues.

Finally, pursuant to our aggressive pricing strategy, although we price many of our products and services at prices that are competitive with the prices charged by our competitors for similar products and services, our overall operating costs are currently significantly higher than those of our competitors which puts us

at a disadvantage. If we are unable to reduce our cost structure to a point where it is comparable to that of our competitors, then we may be unable to continue to offer our products and services at competitive prices and consequently our business, financial condition and operating results could be adversely affected.

Our revenues may be impacted by competition in the business for financial products.

We have grown our financial products business, which creates and licenses Nasdaq-branded financial products. Nasdaq-sponsored financial products are subject to intense competition from other ETFs, derivatives and structured products as investment alternatives. Our revenues may be adversely affected by increasing competition from competitors’ financial products designed to replicate or correlate with the performance of Nasdaq financial products.

In addition, the legal and regulatory climate, which supports the licensing of these financial products, may change. For certain license agreements there could be an increased risk of counterparty default. In this intensely competitive environment, new entrants may seek to avoid the cost of licensing by trading QQQ or other Nasdaq financial products without a license. We have filed one lawsuit against a party trading QQQ without a license. While the trial court dismissed certain of our claims in September 2004, in November 2004 we petitioned the court to allow us to file an amended complaint. We intend to defend our intellectual property rights and take appropriate legal action against any other entity that seeks to trade Nasdaq financial products without obtaining a license from us. If we are unsuccessful in our lawsuit, it may negatively impact our ability to receive license fees from U.S. markets that trade the QQQ on a UTP basis.

System limitations, failures or security breaches could harm our business.

Our business depends on the integrity and performance of the computer and communications systems supporting it. If our systems cannot be expanded to cope with increased demand or otherwise fail to perform, we could experience unanticipated disruptions in service, slower response times and delays in the introduction of new products and services. These consequences could result in lower trading volumes, financial losses, decreased customer service and satisfaction, and regulatory sanctions. We have experienced occasional systems failures and delays in the past and could experience future systems failures and delays especially as we implement new systems. In particular, in connection with the Brut acquisition, we are in the process of integrating Brut’s systems with our systems while concurrently trying to update our systems. The integration of the Brut systems and the implementation of new systems could increase the likelihood of system failures or delays.

We use internally developed systems to operate our business, including transaction processing systems to accommodate increased capacity. However, if our trading volume increases unexpectedly, we will need to expand and upgrade our technology, transaction processing systems and network infrastructure. We do not know whether we will be able to accurately project the rate, timing, or cost of any increases; or expand and upgrade our systems and infrastructure to accommodate any increases in a timely manner.

Our systems and operations also are vulnerable to damage or interruption from human error, natural disasters, power loss, sabotage or terrorism, computer viruses, intentional acts of vandalism and similar events. We have active and aggressive programs in place to identify and minimize our exposure to these vulnerabilities and work in collaboration with the technology industry to share corrective measures with our business partners. Although we currently maintain multiple computer facilities that are designed to provide redundancy and back-up to reduce the risk of system disruptions and have facilities in place that are expected to maintain service during a system disruption, such systems and facilities may prove inadequate. Any system failure that causes an interruption in service or decreases the responsiveness of our service could impair our reputation, damage our brand name and negatively impact our business, financial condition and operating results.

We could encounter difficulties in integrating Brut, our recent ECN acquisition, with the Nasdaq Market Center.

On September 7, 2004, we acquired the Brut ECN. Brut’s integration with our existing business operations presents many challenges and has demanded significant attention of several key managers. The demands placed on the time of our management team in the Brut integration may adversely affect the operation of our existing businesses. The integration could take longer than planned and be subject to unanticipated difficulties and expenses.

Key risks involve:

failure to execute as well or as quickly as anticipated on our integration plans, including the integration of the acquired employees, operations, technologies and products with our existing business and products;

retention of business relationships with suppliers and customers of Brut;

loss of key Brut personnel;

the diversion of our management during the integration process; and

resistance to cultural changes in the acquired organization.

Future acquisitions, partnerships and joint ventures may require significant resources and/or result in significant unanticipated losses, costs or liabilities.

In the future we may seek to grow our company and businesses by making acquisitions or entering into partnerships and joint ventures. We have submitted a non-binding proposal, subject to customary conditions, with respect to one potential strategic transaction, which would involve our acquisition of a major ECN. In view of the substantial amount of consideration reflected in our non-binding proposal compared to our market capitalization, completion of the acquisition would require significant financing, as set forth below.

We may finance future acquisitions by issuing additional equity securities and/or with additional indebtedness. The issuance of equity may be dilutive to existing stockholders. In addition, announcement or completion of future transactions could have a material effect on the price of our stock. We could face financial risks associated with incurring additional indebtedness such as reducing our liquidity and curtailing our access to financing markets and increasing the amount of cash flow required to service such indebtedness.

In addition, acquisitions, partnerships or investments may require significant managerial attention, which may be diverted from our other operations. These capital, equity and managerial commitments may impair the operation of our businesses. Furthermore, any future acquisitions of businesses or facilities could entail a number of additional risks, including:

problems with effective integration of operations;

the inability to maintain key pre-acquisition business relationships;

increased operating costs;

exposure to unanticipated liabilities; and

difficulties in realizing projected efficiencies, synergies and cost savings.

We may not be able to keep up with rapid technological and other competitive changes affecting the structure of the securities markets.

The markets in which we compete are characterized by rapidly changing technology, evolving industry standards, frequent enhancements to existing services and products, the introduction of new services and

products and changing customer demands. Our future success will depend on our ability to respond to changing technologies on a timely and cost-effective basis and continuing to implement lower cost technologies, which require significantly less customization. If we fail to implement these lower cost technologies or if these technologies fail to work as expected, our business would be negatively impacted. Our business, financial condition and operating results may be adversely affected if we cannot successfully develop, introduce, or market new services and products or if we need to adopt costly and customized technology for these services and products. In addition, any failure by us to anticipate or respond adequately to changes in technology and customer preferences, or any significant delays in other product development efforts, could have a material adverse effect on our business, financial condition and operating results.

We may need additional funds to support our business.

We depend on the availability of adequate capital to maintain and develop our business. We believe that our current capital requirements will be met from internally generated funds and from the funds previously raised. However, based upon a variety of factors, including our market share, reductions in fee levels caused by increased competition, the cost of service and technology upgrades and regulatory costs, our ability to fund our capital requirements may vary from those currently planned. In addition, in 2006, $240 million aggregate principal amount of our convertible notes will become due and payable. Should we raise additional capital through debt issuances, any restrictive covenants contained in such debt instruments may likely impose significant limitations on our ability to take certain business actions. Furthermore, if we issue additional equity, our equity holders, including you, may suffer dilution. There can be no assurance that additional capital will be available on a timely basis, or on favorable terms or at all. We will not receive any of the proceeds from this offering of our common stock by some of our stockholders.

Our financial condition and results of operations may suffer if we incur more charges than currently anticipated.

In June 2003, we announced the results of a strategic review designed to eliminate non-core products and initiatives in order to position us for improved profitability and growth. Through the end of 2003, we had incurred $145.5 million in pre-tax charges related to the elimination of these products and services. See Note 2, “Significant Transactions—Strategic Review,” to the consolidated financial statements. We continue to evaluate our cost structure relative to our revenue levels and may take additional charges in the future. If our estimates about future charges prove to be inadequate, our financial condition and results of operations could be adversely affected.

Regulatory changes and changes in market structure could have a material adverse effect on our business.

We operate in a highly regulated industry. In recent years, the securities trading industry and, in particular, the securities markets, have been subject to significant regulatory changes. Regulatory changes are generally made in response to innovations in markets and technology or to address regulators’ specific concerns, such as ensuring best execution for investors. Moreover, the securities markets have been the subject of increasing political and public scrutiny over the past year in response to a number of developments and inquiries. Any of these factors or events may result in future regulatory or other changes, although we cannot predict the nature of these changes or their impact on our business at this time. Our customers also operate in a highly regulated industry. The SEC and other regulatory authorities could impose regulatory changes that could impact the ability of our customers to use The Nasdaq Market Center or could adversely affect The Nasdaq Stock Market. The loss of a significant number of customers or a reduction in trading activity on The Nasdaq Stock Market as a result of such changes could have a material adverse effect on our business, financial condition and operating results.

The SEC published a concept release in November 2004 requesting public comment on the structure of the self-regulatory system, including alternative approaches to securities industry self-regulation. Certain of the approaches discussed by the SEC in the release call for a single self-regulatory organization, or SRO (the

“Universal Regulator”), that would be responsible for all rules, markets and members. Under these models, all markets, both the Nasdaq and exchange markets, would be registered with the Universal Regulator and would not have any self-regulatory authority. Other models discussed by the SEC would significantly reduce or even eliminate securities industry self-regulation altogether. The adoption of any of these models could adversely affect our control of our market and may adversely impact our business, financial condition and operating results.

We are subject to extensive regulation that may harm our ability to compete with less regulated entities.

Under current federal securities laws, changes in our rules and operations, including our pricing structure, must be approved by the SEC. The SEC may approve, disapprove, or recommend changes to proposals that we submit. In addition, the SEC may delay the initiation of the public comment process or the approval process. This delay in approving changes, or the altering of any proposed change, could have an adverse effect on our business, financial condition and operating results. We must compete not only with ECNs that are not subject to the SEC approval process, but also with other exchanges that have lower regulation and surveillance costs than us. This self-regulation cost that we are required to undertake contributes to the high quality regulation of our market. However, with the fragmentation of trading that has occurred through SEC encouragement, fragmentation of regulation has followed. There is a risk that trading will shift to exchanges that spend significantly less on regulation services. In April 2003, we raised both concerns—regulatory fragmentation and regulatory arbitrage—to the SEC in an attempt to ensure that the SEC does not permit competition to harm regulation. The SEC has sought and received public comment with regard to our concerns and recently published a concept release that, among other things, seeks additional comment on these issues. There can be no assurance that the SEC will act favorably regarding our arguments in the foreseeable future.

In addition, Brut, LLC is a broker-dealer. Broker-dealers are subject to certain regulations that did not apply to us prior to the Brut acquisition. All broker-dealers have an SRO that is assigned by the SEC as the broker-dealer’s designated examining authority, or DEA. The DEA is responsible for examining a broker-dealer for compliance with the SEC’s financial responsibility rules. NASD is Brut’s current DEA, and the SEC has requested that Brut become a member of the NYSE so that the NYSE can become Brut’s DEA. A failure to comply with the SEC’s request in a satisfactory manner may have adverse consequences and changing Brut’s DEA may entail additional regulatory costs. See “Regulation” for further discussion of broker-dealer regulations. Any failure to comply with these broker-dealer regulations could have a material effect on the operation of our business, financial condition and operating results.

We have self-regulatory organization obligations and also operate a for-profit business, and these two roles may create conflicts of interest.

Pursuant to the Securities Exchange Act of 1934, as amended, we have obligations pursuant to delegated authority from our SRO, NASD, to regulate and monitor activities on The Nasdaq Stock Market and ensure compliance with applicable law and the rules of our market by market participants and Nasdaq-listed companies. The SEC staff has expressed concern about potential conflicts of interest of “for-profit” markets performing the regulatory functions of a self-regulatory organization. While we outsource the majority of our market regulation functions to NASD, we do perform certain regulatory functions related to our listed companies and our market. In addition to the risk of overly aggressive regulation, potential conflicts of interest could also result in overly lenient regulation, motivated by a misplaced attempt to increase trading volume and revenue. In either case, any failure by us to diligently and fairly regulate our market or to otherwise fulfill our regulatory obligations could significantly harm our reputation, prompt SEC scrutiny and adversely affect our business. The SEC recently issued a concept release relating to the efficacy of the self-regulation system, including the inherent tensions in the SRO model. The SEC has also recently proposed new rules with respect to SROs. The proposed new rules would, among other things:

require a majority independent board for SROs and nominating, governance, audit, compensation and regulatory oversight committees of the board composed solely of independent directors;

require separation of an SRO’s regulatory functions from its market operations and other business interests;

restrict ownership and voting levels of members of the SRO that are broker-dealers to no more than 20%;

require SROs to comply with additional reporting and other requirements in the event that the SRO lists or trades its own or an affiliate’s securities; and

require that all regulatory fees, fines and penalties received be used to fund regulatory programs and not be made available for distribution to shareholders.

Any rule making that may result from this release could have a material effect on the operation of our business, financial condition and operating results.

The adoption of Regulation NMS by the SEC could have a material adverse effect on our business.

In February 2004, the SEC proposed Regulation NMS, a series of proposals designed to modernize the regulatory structure of the U.S. equity markets. In December 2004, the SEC proposed a revised Regulation NMS for public comment. Regulation NMS addresses the trade-through rule, intermarket access, market data and sub-penny pricing. See “The Industry—Recent Industry Developments.”

We cannot predict whether the changes proposed by Regulation NMS will be adopted by the SEC in their proposed form, a different form, or at all. Accordingly, we cannot predict the impact these proposed rule changes will have on our business. If the SEC adopts a proposal that (i) reduces the market data fees or revenues we receive for trade executions, (ii) imposes significant regulatory compliance costs upon us, (iii) reduces the number of orders routed to our systems for execution, and/or (iv) reduces the number of internalized trades reported to The Nasdaq Stock Market, our business, financial condition and results of operations may be adversely affected. Internalization occurs when a broker-dealer receives a customer buy or sell order and, instead of routing the order to another broker-dealer or market for execution, chooses to fill the order from shares in the firm’s own trading account or by executing it against other customer orders that the firm holds. In addition, Regulation NMS may lead to structural change in how securities trade and report, which are unknown and could have an adverse impact on our financial results or which could adversely affect our competitive position.

Failure to protect our intellectual property rights could harm our brand-building efforts and ability to compete effectively.

To protect our rights to our intellectual property, we rely on a combination of trademark laws, copyright laws, patent laws, trade secret protection, confidentiality agreements and other contractual arrangements with our affiliates, clients, strategic partners and others. The protective steps that we have taken may be inadequate to deter misappropriation of our proprietary information. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. We have registered, or applied to register, our trademarks in the United States and in over 40 foreign jurisdictions and have pending U.S. and foreign applications for other trademarks. Effective trademark, copyright, patent and trade secret protection may not be available in every country in which we offer or intend to offer our services. Failure to protect our intellectual property adequately could harm our brand and affect our ability to compete effectively. Further, defending our intellectual property rights could result in the expenditure of significant financial and managerial resources, which could adversely affect our business, financial condition and operating results.

Failure to attract and retain key personnel may adversely affect our ability to conduct our business.

Our future success depends, in large part, upon our key employees who execute our business strategy and identify and pursue strategic opportunities and initiatives. In particular, we are highly dependent on the continued services of Robert Greifeld, our President and Chief Executive Officer, and other executive officers,

key employees and technical personnel who possess extensive financial markets knowledge and technology skills. The diminution or loss of the services of these persons for any reason, as well as any negative market or industry perception arising from that diminution or loss, could have a material adverse effect on our business. We do not maintain “key person” life insurance policies on any of our executive officers, managers, key employees or technical personnel. We may have to incur costs to replace key employees that leave, and our ability to execute our business model could be impaired if we cannot replace departing employees in a timely manner.

We are subject to risks relating to litigation and potential securities laws liability.

Many aspects of our business potentially involve substantial risks of liability. While we enjoy immunity from private suits for self-regulatory organization activities, we could be exposed to liability under federal and state securities laws, other federal and state laws and court decisions, as well as rules and regulations promulgated by the SEC and other federal and state agencies. These risks include, among others, potential liability from disputes over the terms of a trade, or claims that a system failure or delay cost a customer money, that we entered into an unauthorized transaction or that we provided materially false or misleading statements in connection with a securities transaction. As we intend to defend any such litigation actively, significant legal expenses could be incurred. An adverse resolution of any future lawsuit or claim against us could have an adverse effect on our business, financial condition and operating results.

In addition, we are subject to oversight by the SEC. The SEC regularly examines us for compliance with our obligations under the securities laws. In the case of non-compliance with our obligations under those laws, we could be subject to investigation and judicial or administrative proceedings that may result in substantial penalties.

We have a lack of operating history as for-profit entity.

While we have an established operating history, we have only operated as a for-profit company with private ownership interests since June 28, 2000. Therefore, we are subject to the risks and uncertainties associated with any recently independent company.

Our agreements with NASD and its other affiliates may not be on terms as favorable to us as could have been obtained from unaffiliated third parties and we have potential conflicts of interest with NASD and related parties.

For purposes of governing our ongoing relationship, we and NASD, or their affiliates, have entered into various agreements and arrangements involving the provision of services, such as market surveillance and other regulatory and facilities sharing functions. We have negotiated an agreement with NASD, pursuant to which NASD will regulate our membership and market surveillance activity commencing upon the SEC granting our application for exchange registration. At the time the parties negotiated this agreement, the parties envisioned that NASD would continue regulating trading activity on The Nasdaq Stock Market under a long-term contract that establishes the various functions NASD will perform for us and the pricing methodology for the services that we receive from NASD. The functions covered under this agreement, as negotiated, are substantially of the same type and scope as those NASD currently performs under the Delegation Plan.

Until exchange registration is granted, the regulatory services agreement between Nasdaq and NASD is not effective. Thus, Nasdaq and NASD currently operate pursuant to the Delegation Plan. We have approached NASD about formalizing the services provided pursuant to the Delegation Plan in a written contract to be effective until exchange registration. However, the parties have not agreed to the terms of such an agreement to date. Since we have no formal regulatory services contract with NASD, we negotiate pricing on services annually and we can offer no assurances that we will be able to obtain services from NASD at comparable or reduced price levels in future periods. In addition, we may determine that it is necessary to negotiate other new contracts with NASD or its affiliates, or to renegotiate existing contracts between the parties. Although it is the intention of

the parties to negotiate agreements that provide for arm’s length, fair market value pricing, there can be no assurance that these contemplated agreements, or the transactions provided in them, will be effected on terms as favorable to us as could have been obtained from unaffiliated third parties. The cost to us for such services could increase at a faster rate than our revenues and could adversely affect our business, financial condition and operating results.

Conflicts of interest may arise between us and NASD, or its affiliates, in a number of areas including the nature, quality and pricing of services rendered; tax and employee benefit matters; indemnity agreements; sales or distributions by NASD of all or any portion of its ownership interest in us; or NASD’s ability to influence certain affairs of ours prior to exchange registration. There can be no assurance that NASD and Nasdaq will be able to resolve any potential conflict or that, if resolved, we would not receive a more favorable resolution if we were dealing with an unaffiliated party.

On November 29, 2004, we entered into an exchange agreement with NASD pursuant to which NASD exchanged 1,338,402 shares of our Series A Cumulative Preferred Stock, representing all the outstanding shares of Series A Cumulative Preferred Stock, for 1,338,402 shares of newly issued Series C Cumulative Preferred Stock. Under the exchange agreement, we must obtain NASD’s prior written consent before incurring or assuming long-term debt or engaging in extraordinary asset sales that in aggregate equal or exceed $200.0 million in outstanding long-term debt and sales of our assets for cash outside of the ordinary course of business. NASD’s consent may not be unreasonably withheld; however, if we elect to proceed with such a transaction, NASD is permitted to condition its consent on the proceeds being used to redeem the Series C Cumulative Preferred Stock. Debt outstanding as of February 21, 2002 and debt incurred to refinance such outstanding debt are excluded from this calculation. Also, sales of capital stock and sales or transfers of assets in connection with a joint venture, strategic alliance or similar arrangement (if not primarily for cash and to raise capital) are excluded from the definition of sales of our assets for cash outside of the ordinary course of business.

NASD will continue to maintain voting control over us until exchange registration is granted and may have interests that are different from yours and, therefore, may make decisions that are adverse to your interests.

The SEC requires that NASD retain greater than 50% of the voting control over us. Pursuant to our authority to operate The Nasdaq Stock Market as delegated to us by NASD and as approved by the SEC, NASD must continue to have voting control over us until the SEC approves our application to become a registered exchange. If exchange registration is granted to us by the SEC, NASD would own approximately 27.1 million shares of our common stock (assuming exercise of the underwriters’ overallotment option) following this offering. Following exchange registration, the voting rights of the shares underlying unexercised and unexpired warrants will revert to the holders of the warrants. However, NASD will still be entitled to approximately 6.9% of the vote of holders of our common stock. Upon expiration of the warrants that are not exercised, the voting rights of our common stock underlying such warrants will revert to NASD and, therefore, will increase NASD’s voting percentage. Until exchange registration is granted, as a result of NASD’s voting control, its share ownership and our operating pursuant to NASD’s SRO registration pursuant to delegated authority, NASD will be in a position to continue to control substantially all matters affecting us, including any determination with respect to our direction and policies, acquisition or disposition of assets, future issuances of our securities, our incurrence of debt and any dividend payable on our common stock. NASD may have interests that conflict with your interests as a holder of our common stock. NASD’s control may delay or prevent a change in control, impede a merger, consolidation, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us or result in actions that may be opposed by other stockholders, including those who purchase common stock in this offering.

The SEC may challenge or not approve our plan to become a national securities exchange or it may require changes in the manner we conduct our business before granting this approval, which may adversely impact our business or our shareholders.

The SEC may not approve our application for exchange registration or may require changes in our corporate governance structure and the way we conduct our business before granting this approval. Failure to be

so registered could adversely affect our competitive position and could have a material adverse effect on our business conditions and business prospects. For example, we would remain subject to NASD’s control if we do not obtain our own license to operate as a self-regulatory organization. This may limit our ability to raise additional capital to expand and improve our products and services or to pay off our obligations. In addition, until exchange registration is granted, we likely will be required to continue sharing UTP Plan fees with other UTP Plan participants for Nasdaq Quotation Dissemination Service (“NQDS”) data, which provides subscribers with the best bid and offer information from each individual Nasdaq market maker and ECN. The obligation to share revenues with other UTP Plan participants for this NQDS data will cease upon exchange registration. Accordingly, any delay or failure to obtain exchange registration will impede our ability to retain fees for NQDS data.

Further, in connection with exchange registration, certain changes must be made to the national market system plans so that we can become a participant. Certain participants in the plans may object to, or request modifications to, amendments that we propose. In addition, in order to become a participant in these plans, we will need to pay amounts, which have not yet been determined, but which may be significant and could impact our business, financial condition and operating results. We may need to adjust our business practices to join these plans in a manner that will impose costs on us and could adversely impact our business, financial condition or operating results. Failure to resolve these issues could result in a denial or delay of exchange registration.

We have previously sought and obtained approval from the UTP Plan operating committee for changes to that plan to enable us to become a member once our exchange application has been approved. We have also sought the approval of the operating committees for the other three national market system plans. The operating committee of one national market system plan voted not to accept our proposed changes to that plan that would allow us to become a plan member and to operate our execution system in accordance with our chosen business strategy upon exchange registration. We plan to continue negotiating with the members of the plan; however, we cannot predict the outcome of those negotiations at this time. A failure to achieve a successful outcome could require us to alter our business strategy in an unfavorable manner or could otherwise limit our ability to participate as an exchange under such plan.

In addition, the SEC has advised us that as a condition to exchange registration, we will need to comply with the provision of Section 6 of the Exchange Act requiring that national exchanges provide for representation of their “members” (as defined in the Exchange Act) on their boards of directors. The SEC recently proposed rule changes that could affect the governance of SROs. The proposed rules would require that at least 20% of the total number of directors of an exchange must be selected by its broker-dealer members. While the outcome is not yet clear, we may have to revise our board structure as a condition to exchange registration so that only our members would elect a certain percentage of our board and our stockholders would elect the remainder of the board. In addition, the proposed rules would, among other things, require SROs to implement certain minimum governance standards, including a majority independent board, fully independent nominating, governance, audit, compensation and regulatory oversight committees, and the separation of an SRO’s regulatory functions from its market operations and other business interests. We cannot predict whether these proposed requirements will be adopted by the SEC in their proposed form, a different form, or at all, and cannot now predict the impact of the proposed requirements on our business.

We have recently proposed listing standards to the SEC with respect to listing our common stock on The Nasdaq Stock Market. These proposed listing standards would require periodic reporting of compliance to the SEC and an annual compliance audit by an independent accounting firm. In addition, the SEC has recently proposed Regulation AL, a new regulation that would institute a set of rules for demutualized exchanges and securities associations that intend to list their own securities or those of an affiliate. If Regulation AL is adopted by the SEC after our proposed listing standards go into effect, we may have to alter our operations and business to comply with Regulation AL to the extent that Regulation AL supersedes our proposed listing standards. We cannot predict whether our proposed listing standards or this new rule proposal will be adopted by the SEC in their proposed form, a different form, or at all, and cannot now predict the impact of the proposed requirements on our business.

The SEC also has raised a concern about our desire to remain a venue to which our market participants can report internalized trades, since internalization may result in orders being executed ahead of similarly priced orders for the same security already entered in the Nasdaq Market Center. In December 2004, we filed a proposed rule change with the SEC designed to address the SEC’s concern about us not always according strict time priority to similarly priced orders for the same security entered in the Nasdaq Market Center. The SEC has published our proposed rule change for public comment. The proposed rule change seeks to eliminate any deviations from strict time priority in the execution algorithm of the Nasdaq Market Center’s execution system, including the current internalization exception. The only remaining exception in the new algorithm would be for instances when a deviation is necessary for a member to avoid internalizing an order if that member has a regulatory or fiduciary obligation to do so. We are continuing to work with the SEC on how to address the time priority issue with respect to trades that are reported to us but executed outside the Nasdaq Market Center execution system. We are continuing discussions with the SEC to resolve this issue, but we can make no assurances as to the result of such discussions.

Also, in order for broker-dealers to continue as our market participants after the SEC grants our application for exchange registration, broker-dealers will need to become members of Nasdaq. After we become an exchange, these broker dealers will no longer be able to rely on their NASD membership to utilize our products and services. There is no assurance that broker-dealers will choose to become members of Nasdaq. If broker-dealers determine not to become Nasdaq members upon the SEC granting our application to become an exchange, our business, financial condition and operating results could be adversely affected.

Accordingly, there can be no assurance that exchange registration will occur or that the registration process will occur in a timely manner. Because of the nature of the regulatory process and the variety of market structure issues that would have to be resolved across all markets, the registration process has been lengthy. In the long-term, the failure to be approved as an exchange by the SEC may have negative implications on our ability to fund our planned initiatives.

We depend on third party suppliers and service providers for a number of services that are important to our business. An interruption or cessation of an important supply or service by any third party could have a material adverse effect on our business.

We depend on a number of suppliers, such as MCI, Microsoft, Cisco, Hewlett Packard and Dell for elements of our trading, market data and other systems, as well as communications and networking equipment, computer hardware and software and related support and maintenance. We cannot assure you that any of these providers will be able to continue to provide these services in an efficient, cost-effective manner or that they will be able to adequately expand their services to meet our needs. An interruption in or the cessation of an important supply or service by any third party and our inability to make alternative arrangements in a timely manner, or at all, could result in lost revenue and higher costs and adversely affect our business, financial condition and operating results.

Risks Associated With Purchasing Our Common Stock in This Offering

There currently is a limited trading market for our common stock.

To date there has been a limited public market for our common stock on the OTC Bulletin Board. Daily trading volume in shares of our common stock has averaged approximately 26,000 shares during 2004. We have applied to list our common stock on the Nasdaq National Market under the ticker symbol “NDAQ.” In addition, we also require SEC approval of our rule proposal, which would allow us to list our common stock on the Nasdaq National Market, before our stock can be listed on the Nasdaq National Market. If our rule proposal is approved, we anticipate that trading of our common stock on the Nasdaq National Market will begin immediately upon commencement of this offering.

We cannot predict the extent to which a trading market will develop or how liquid that market might become. If you purchase shares of common stock in this offering, you will pay a price that was not set in the

public trading market. Instead, the offering price will be determined by negotiations between the underwriters, the selling stockholders and us. You may not be able to resell your shares above the offering price and may suffer a loss on your investment.

Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance. Factors that could cause fluctuations in our stock price may include, among other things:

actual or anticipated variations in quarterly operating results;

changes in financial estimates by us or by any securities analysts who might cover our stock;

conditions or trends in our industry, including trading volumes, regulatory changes or changes in the securities marketplace;

announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures;

announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;

additions or departures of key personnel; and

sales of our common stock, including sales of our common stock by our directors and officers or our strategic investors.

Fluctuations in our operating results may negatively impact our stock price.

Our revenue, margins, and operating results have varied in the past and are likely to fluctuate significantly in the future, making them difficult to predict. We believe our business has relatively large fixed costs and low variable costs, which magnifies the impact of revenue fluctuations on our operating results. As a result, a decline in our revenue may lead to a relatively larger impact on operating results. A substantial portion of our operating expenses is related to personnel costs, regulation and corporate overhead, none of which can be adjusted quickly. Our operating expense levels are based on our expectations for future revenue. If actual revenue is below management’s expectations, or if our expenses increase before revenues do, both gross margins and operating results would be materially and adversely affected. Because of these fluctuations, it is possible that our operating results or other operating metrics may fail to meet the expectations of stock market analysts and investors. If this happens, the market price of our common stock is likely to decline.

The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.

Sales by our stockholders of a substantial number of shares of our common stock in the public markets following this offering, or the perception that these sales might occur, could cause the market price of our common stock to decline or could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities. As of December 31, 2004, there were 78,973,085 shares of our common stock outstanding, which include the shares of our common stock sold in two private placements in 2000 and 2001. All of our outstanding shares, including the shares of our common stock sold in this offering, will be freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as amended. Additionally, 21,612,988 of the 78,973,085 shares of our common stock are not immediately available for sale because they are shares underlying unexercised and unexpired warrants issued by NASD. See “Relationship with NASD—Agreements and Arrangements with NASD—Warrants and the Voting Trust Agreement.” If any of such warrants expire without being exercised, then NASD will be able to sell any such underlying shares pursuant to a registration statement or an exemption from registration, including pursuant to the limitations of Rule 144. Prior to this offering, our shares of common stock traded on the OTC Bulletin Board and there was low liquidity and trading volume. Following this offering, the listing of our common stock on The Nasdaq Stock Market and the resulting additional liquidity for our common stock could encourage existing holders of our common stock to sell their shares.

The number of freely transferable shares of our common stock will increase upon any exercise of outstanding warrants sold by NASD in the 2000 and 2001 private placements that entitle holders thereby to purchase shares of our common stock that are currently owned by NASD. In addition, the number of freely transferable shares of our common stock will increase upon any exercise of outstanding options pursuant to our stock compensation and stock award plan for our employees. Also, the number of freely transferable shares of our common stock will increase if the holders of our Series C Cumulative Preferred Stock become entitled to receive an additional payment and we elect to pay such additional payment in shares of our common stock. See “Description of Capital Stock—Preferred Stock.” Finally, the number of freely transferable shares of our common stock will increase upon any conversion of our convertible subordinated notes, which are convertible into 12,000,000 shares of our common stock.

We, our directors, executive officers and select existing stockholders will agree pursuant to a lockup agreement, with limited exceptions, for a period of 90 days after the date of this prospectus, that we and they will not, without the prior written consent of the representatives on behalf of the underwriters, directly or indirectly, offer to sell, sell or otherwise dispose of any shares of our common stock.

We have previously granted NASD certain registration rights with respect to the 1,338,402 outstanding shares of Series C Cumulative Preferred Stock and the shares of common stock underlying the warrants issued by NASD in two private placements in 2000 and 2001. For a description of these rights, see “Description of Capital Stock—Preferred Stock.” We have granted the holder of our convertible subordinated notes certain registration rights with respect to the shares of our common stock underlying those notes. Upon the effectiveness of such a registration, all shares covered by a registration statement will be freely transferable. In addition, pursuant to an investor rights agreement, NASD may direct, subject to the terms and conditions set forth in the investor rights agreement, that we allow NASD members, subject to regulatory requirements, to subscribe to purchase up to 10,295,403 shares of common stock in the event that we conduct an initial public offering of our common stock for cash. See “Relationship with NASD—Agreements and Arrangements with NASD.”

Provisions of our certificate of incorporation, including provisions included to address SEC concerns, and Delaware law could delay or prevent a change in control of our company and entrench current management.

Our organizational documents contain provisions that may be deemed to have an anti-takeover effect and may delay, deter or prevent a change of control of us, such as a tender offer or takeover proposal that might result in a premium over the market price for our common stock. In addition, certain of these provisions make it more difficult to bring about a change in the composition of our board of directors, which could result in entrenchment of current management.

Our organizational documents place restrictions on the voting rights of certain stockholders. Our certificate of incorporation limits the voting rights of persons (either alone or with related parties) owning more than 5% of the then outstanding votes entitled to be cast on any matter, other than NASD or any other person as may be approved by our board of directors prior to the time such person owns more than 5% of the then outstanding votes entitled to be cast on any matter. The SEC has proposed rules that will raise ownership limitations of broker-dealers to 20%. We have not determined at this time if we will seek to raise our 5% ownership limitation if the SEC adopts the proposed rule.

In addition, in response to the SEC’s concern about a concentration of our ownership, our exchange registration application includes a rule that prohibits any Nasdaq member or any person associated with a Nasdaq member from beneficially owning more than 5% of our outstanding voting interests.

In addition, our certificate of incorporation and by-laws:

provide for a staggered board of directors;

do not permit the removal of directors other than for cause and require supermajority stockholder approval to remove directors;

do not permit stockholders to act by written consent or to call special meetings;

require certain advance notice for director nominations and actions to be taken at annual meetings;

require supermajority stockholder approval with respect to certain amendments to our certificate of incorporation and constitution (including in respect of the provisions set forth above); and

authorize the issuance of undesignated preferred stock, or “blank check” preferred stock, that could be issued by our board of directors without stockholder approval.

Section 203 of the Delaware General Corporation Law, or DGCL, imposes restrictions on mergers and other business combinations between us and any holder of 15% or more (or, in some cases, a holder who previously held 15% or more) of our common stock. In general, Delaware law prohibits a publicly held corporation from engaging in a “business combination” with an “interested stockholder” for three years after the stockholder becomes an interested stockholder, unless the corporation’s board of directors and stockholders approve the business combination in a prescribed manner. See “Description of Capital Stock—Delaware Business Combination Statute.”

We do not currently intend to pay dividends on our common stock.

You should not anticipate receiving dividends with respect to shares of common stock you purchase in this offering. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors that our board or directors deems relevant. Accordingly, if you purchase shares in this offering to realize a gain on your investment, the price of our common stock must appreciate, which may not occur. Investors seeking cash dividends should not purchase our common stock.

USE OF PROCEEDS

We will not receive any proceeds from the sale of common stock, which may be sold pursuant to this prospectus by the selling stockholders. All proceeds from this offering, net of underwriters’ discounts, will be received by the selling stockholders.

PRICE AND RELATED INFORMATION CONCERNING REGISTERED SHARES

Our common stock began trading on the OTC Bulletin Board on July 1, 2002 under the symbol “NDAQ.” No established public trading market existed for the common stock prior to July 2002.

There currently is a limited trading market for our common stock. Daily trading volume in shares of our common stock has averaged approximately 26,000 shares during 2004. The following chart lists the quarterly high and low bid prices for shares of our common stock for the first quarter of 2005 through January 21, 2005, fiscal years 2004 and 2003 and the third and fourth quarters of 2002. These prices are between dealers and do not include retail markups, markdowns or other fees and commissions and may not represent actual transactions.


	High		Low
Fiscal 2005
First quarter (through January 21, 2005)	$	10.60	$	8.10
Fiscal 2004
Fourth quarter	$	10.50	$	6.40
Third quarter		7.00		5.53
Second quarter		8.80		6.30
First quarter		12.60		8.55
Fiscal 2003
Fourth quarter	$	9.35	$	8.05
Third quarter		10.05		6.75
Second quarter		8.55		5.15
First quarter		10.40		6.75
Fiscal 2002
Fourth quarter	$	11.20	$	6.25
Third quarter		13.75		9.05

As of December 31, 2004, we had approximately 1,600 holders of record of our common stock.

DIVIDEND POLICY

In the past, we have not declared or paid cash dividends on our common stock and we currently do not intend to pay any cash dividends on our common stock. Rather, we intend to retain any future earnings for funding our growth and meeting our obligations. Future dividends, if any, will be determined by our board of directors.

CAPITALIZATION

The following table sets forth cash and cash equivalents, senior notes, subordinated notes and our capitalization as of September 30, 2004, on an actual basis. This table should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and our consolidated financial statements and related notes included elsewhere in this prospectus.


	September 30, 2004
	(unaudited) (in thousands, except share and par value amounts)
Cash and cash equivalents	$	47,986
Investments available-for-sale		188,982

Total Cash and investments available-for-sale		236,968

Long-Term Debt:
Senior notes		25,000
Subordinated notes		240,000

Total Long-Term Debt		265,000
Stockholders’ equity:
Common stock, $0.01 par value, 300,000,000 authorized, shares issued: 130,653,191; shares outstanding: 78,618,593		1,306
Preferred stock, 30,000,000 authorized, Series A: 1,338,402 shares issued and outstanding; Series B: 1 share issued and outstanding⁽¹⁾		133,840
Additional paid-in capital		358,535
Common stock in treasury, at cost: 52,034,598 shares		(666,543	)
Accumulated other comprehensive loss		(593	)
Deferred stock compensation		(1,292	)
Common stock issuable		2,721
Retained earnings		329,108

Total stockholders’ equity		157,082

Total Capitalization	$	422,082

(1)

SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following summary consolidated financial and operating data should be read together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The financial information as of and for the years ended December 31, 2001, 2002 and 2003 set forth below was derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The financial information as of and for the years ended December 31, 1999 and 2000 set forth below was derived from our audited consolidated financial statements that are not included in this prospectus. The financial information as of and for the nine months ended September 30, 2003 and 2004 set forth below was derived from our unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus. In management’s opinion, the unaudited information has been prepared on substantially the same basis as the consolidated financial statements appearing elsewhere in this prospectus and includes all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the unaudited consolidated quarterly data. The historical financial and operating information may not be indicative of our future performance.


	Year Ended December 31,															Nine Months Ended September 30,
	1999			2000			2001			2002			2003			2003			2004
																(unaudited)
Statements of Income⁽¹⁾		(in thousands, except per share amounts)
Revenues
Market Services	$	468,592		$	664,679		$	654,979		$	581,774		$	383,715		$	297,374		$	218,361
Issuer Services		165,377			166,163			189,749			203,969			204,186			152,571			153,935
Other		230			1,617			3,342			1,411			1,944			1,890			91

Total revenues		634,199			832,459			848,070			787,154			589,845			451,835			372,387
Cost of revenues⁽²⁾		—			—			—			—			—			—			(9,177	)

Gross margin		634,199			832,459			848,070			787,154			589,845			451,835			363,210
Expenses
Compensation and benefits		98,129			137,284			179,352			183,130			159,097			129,039			112,424
Marketing and advertising		62,790			45,908			25,418			26,931			19,515			13,820			8,996
Depreciation and amortization		43,696			65,546			83,684			88,502			89,983			69,045			54,997
Professional and contract services		35,282			59,669			70,669			60,499			37,544			28,679			16,589
Computer operations and data communications		100,493			138,228			166,853			136,642			125,618			93,422			81,243
Provision for bad debts		2,978			5,554			15,459			8,426			1,365			1,584			1,321
Occupancy		6,591			14,766			25,986			32,367			31,212			23,143			21,326
General and administrative		34,588			38,653			95,313			48,634			28,411			24,797			23,820

Total direct expenses		384,547			505,608			662,734			585,131			492,745			383,529			320,716
Elimination of non-core product lines, initiatives and severance⁽³⁾		—			—			—			—			97,910			69,551			—
Nasdaq Japan impairment loss		—			—			—			15,208			(5,000	)		(5,000	)		—
Support costs from related parties, net		115,189			128,522			101,799			74,968			61,504			48,418			34,293

Total expenses		499,736			634,130			764,533			675,307			647,159			496,498			355,009

Operating income (loss)		134,463			198,329			83,537			111,847			(57,314	)		(44,663	)		8,201
Interest income		12,249			20,363			23,782			12,583			9,517			7,860			4,578
Interest expense		(2,142	)		(2,778	)		(9,777	)		(18,488	)		(18,555	)		(15,634	)		(8,613	)

Operating income (loss) from continuing operations before minority interests and income taxes		144,570			215,914			97,542			105,942			(66,352	)		(52,437	)		4,166
Minority interests		—			740			845			—			—			—			—
(Provision) benefit for income taxes		(58,421	)		(90,477	)		(38,332	)		(40,921	)		21,240			18,132			(235	)

(footnotes on following page)


	Year Ended December 31,														Nine Months Ended September 30,
	1999		2000			2001			2002			2003			2003			2004
															(unaudited)
	(in thousands, except per share amounts)
Income (loss) from continuing operations	$	86,149	$	126,177		$	60,055		$	65,021		$	(45,112	)	$	(34,305	)	$	3,931
Discontinued operations:
Loss from discontinued operations (net of tax)⁽⁴⁾⁽⁵⁾		—		(1,781	)		(19,592	)		(21,893	)		(60,906	)		(50,716	)		—
Gain on disposition of discontinued operations		—		—			—			—			571			571			—

Loss from discontinued operations		—		(1,781	)		(19,592	)		(21,893	)		(60,335	)		(50,145	)		—

Income (loss) before cumulative effect of change in accounting principle		86,149		124,396			40,463			43,128			(105,447	)		(84,450	)		3,931
Cumulative effect of change in accounting principle, net of taxes of $(67,956)⁽⁶⁾		—		(101,090	)		—			—			—			—			—

Net income (loss)	$	86,149	$	23,306		$	40,463		$	43,128		$	(105,447	)	$	(84,450	)	$	3,931

Net income (loss) applicable to common stockholders:
Net income (loss)	$	86,149	$	23,306		$	40,463		$	43,128		$	(105,447	)	$	(84,450	)	$	3,931
Preferred stock⁽⁷⁾:
Dividends declared		—		—			—			—			(8,279	)		(5,736	)		(7,350	)
Accretion of preferred stock		—		—			—			(9,765	)		—			—			—

Net (loss) income applicable to common stockholders	$	86,149	$	23,306		$	40,463		$	33,363		$	(113,726	)	$	(90,186	)	$	(3,419	)

Basic and diluted net earnings (loss) per share:
Cumulative effect of change in accounting principle	$	—	$	(0.90	)	$	—		$	—		$	—		$	—		$	—
Continuing operations		0.86		1.13			0.52			0.66			(0.68	)		(0.51	)		(0.04	)
Discontinued operations		—		(0.02	)		(0.17	)		(0.26	)		(0.77	)		(0.64	)		—

Total basic and diluted net earnings (loss) per share	$	0.86	$	0.21		$	0.35		$	0.40		$	(1.45	)	$	(1.15	)	$	(0.04	)


	Year Ended December 31,										September 30, 2004
	1999		2000		2001		2002		2003		September 30, 2004
											(unaudited)
	(in thousands)
Balance Sheet Data⁽¹⁾⁽⁸⁾
Cash and cash equivalents and investments available-for-sale⁽⁹⁾	$	164,164	$	494,347	$	521,760	$	423,588	$	334,633	$	236,968
Total assets⁽¹⁰⁾		578,254		1,164,399		1,326,251		1,175,914		851,254		850,535
Total long-term liabilities⁽¹⁰⁾		78,965		221,464		529,029		636,210		452,927		453,115
Total stockholders’ equity^(10)(11)		352,012		645,159		518,388		270,872		160,696		157,082

(1)

Certain prior period amounts have been reclassified to conform with the 2004 presentation.

(2)

Pursuant to EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” Brut execution revenues are recorded on a gross basis in revenues and expenses such as liquidity rebate payments are recorded in cost of revenues as Brut acts as principal. Our other execution revenues will continue to be reported net of the liquidity rebate as we do not act as principal.

(3)

Reflects expenses in connection with our strategic review.

(4)

Reflects losses related to our disposal of Nasdaq Europe and IndigoMarkets.

(5)

Net of tax provision for income taxes of $0 in 2000, $0 in 2001, and $128 in 2002, and net of tax benefit for income taxes of $3,663 in 2003 and $1,186 for the nine months ended September 30, 2003.

(6)

As a result of the adoption of Staff Accounting Bulletin 101, “Revenue Recognition in Financial Statements” (“SAB 101”), Nasdaq recognized a one-time cumulative effect of a change in accounting principle in the first quarter of 2000. See Note 4, “Summary of Significant Accounting Policies—Revenue Recognition,” to the consolidated financial statements for further discussion.

(7)

(8)

Balance sheet data for 1999 has not been restated for the Change in Accounting Principle, which was adopted as of January 1, 2000. See “Revenue Recognition,” of Note 4, “Summary of Significant Accounting Policies,” to the consolidated financial statements for further discussion.

(9)

(10)

(11)

Decreases from 2000 to 2001 and 2001 to 2002 are primarily the result of our purchase of certain shares of our common stock from NASD for $240 million in cash in 2001, and $305 million in cash, and as part of the purchase price also issued 1,338,402 share of our Series A Cumulative Preferred Stock and 1 share of our Series B Preferred Stock to NASD in 2002.

UNAUDITED PRO FORMA CONDENSED COMBINED

FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information has been prepared to give effect to our acquisition on September 7, 2004 of Toll Associates LLC, and its subsidiaries, including Brut, LLC, owner and operator of the Brut ECN from SunGard Data Systems Inc. The unaudited pro forma condensed combined financial information for the year ended December 31, 2003 and nine months ended September 30, 2004 reflects adjustments to our consolidated historical financial information to give effect to the Brut acquisition as if this transaction had occurred on January 1, 2003. Toll results presented in our unaudited pro forma information for the nine months ended September 30, 2004 and year ended December 31, 2003 reflect audited results of Toll for the periods ended September 6, 2004 and December 31, 2003, respectively. Actual Toll results are included in our results of operations beginning on September 7, 2004, the date we acquired Toll. Since balance sheet data for Toll is included in our balance sheet data as of September 30, 2004, we have not presented pro forma balance sheet data for Toll.

The unaudited pro forma condensed combined financial information is based on certain assumptions and adjustments and does not purport to present what our actual results of operations would have been had the Brut acquisition in fact occurred on the dates specified, nor is it necessarily indicative of the results of operations that may be achieved in the future.

Additional information is provided in the notes to the unaudited pro forma condensed combined financial information.

You should read our pro forma financial information in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Results of Operations and Financial Condition” in this prospectus.

The Nasdaq Stock Market, Inc.

Unaudited Pro Forma Condensed Combined Statement of Income

Nine Months Ended September 30, 2004

(in thousands, except share and per share amounts)


	Nasdaq			Toll			Pro Forma Adjustments			Note 4	Pro Forma Combined
Revenues
Market Services	$	218,361		$	129,494		$	(6,269	)	(a),(b),(c)	$	341,586
Issuer Services		153,935			—			—				153,935
Other		91			—			—				91

Total revenues		372,387			129,494			(6,269	)			495,612
Cost of revenues		(9,177	)		(117,564	)		6,698		(a),(d)		(120,043	)

Gross margin		363,210			11,930			429				375,569

Expenses
Compensation and benefits		112,424			6,080			—				118,504
Marketing and advertising		8,996			40			—				9,036
Depreciation and amortization		54,997			2,222			2,116		(e),(f)		59,335
Professional and contract services		16,589			238			—				16,827
Computer operations and data communications		81,243			184			—				81,427
Provision for bad debts		1,321			114			—				1,435
Occupancy		21,326			317			—				21,643
General and administrative		23,820			764			—				24,584

Total direct expenses		320,716			9,959			2,116				332,791
Support costs from related parties, net		34,293			603			—				34,896

Total expenses		355,009			10,562			2,116				367,687

Operating income		8,201			1,368			(1,687	)			7,882
Interest income		4,578			89			—				4,667
Interest expense		(8,613	)		(1,289	)		—				(9,902	)

Operating income before income taxes		4,166			168			(1,687	)			2,647
(Provision) benefit for income taxes		(235	)		(68	)		663		(f)		360

Net income (loss)	$	3,931		$	100		$	(1,024	)		$	3,007

Net (loss) income applicable to common stockholders:
Net income (loss)	$	3,931		$	100		$	(1,024	)		$	3,007
Preferred stock dividends declared		(7,350	)		—			—				(7,350	)

Net (loss) income applicable to common stockholders	$	(3,419	)	$	100		$	(1,024	)		$	(4,343	)

Total basic and diluted net loss per share	$	(0.04	)								$	(0.06	)

Weighted average shares used to calculate loss per share:
Basic and diluted		78,552										78,552

See Notes to Unaudited Pro Forma Condensed Combined Statements of Income.

The Nasdaq Stock Market, Inc.

Unaudited Pro Forma Condensed Combined Statement of Income

Year Ended December 31, 2003

(in thousands, except share and per share amounts)


	Nasdaq			Toll			Pro Forma Adjustments			Note 4	Pro Forma Combined
Revenues
Market Services	$	383,715		$	127,429		$	(11,062	)	(g),(h),(i)	$	500,082
Issuer Services		204,186			—			—				204,186
Other		1,944			—			—				1,944

Total revenues		589,845			127,429			(11,062	)			706,212
Cost of revenues		—			(110,569	)		11,232		(g),(j)		(99,337	)

Gross margin		589,845			16,860			170				606,875

Expenses
Compensation and benefits		159,097			8,425			—				167,522
Marketing and advertising		19,515			46			—				19,561
Depreciation and amortization		89,983			3,180			3,590		(k),(l)		96,753
Professional and contract services		37,544			1,390			—				38,934
Computer operations and data communications		125,618			223			—				125,841
Provision for bad debts		1,365			664			—				2,029
Occupancy		31,212			412			—				31,624
General and administrative		28,411			1,374			—				29,785

Total direct expenses		492,745			15,714			3,590				512,049
Elimination of non-core product lines, initiatives and severance		97,910			—			—				97,910
Nasdaq Japan impairment loss		(5,000	)		—			—				(5,000	)
Support costs from related parties, net		61,504			660			—				62,164

Total expenses		647,159			16,374			3,590				667,123

Operating (loss) income		(57,314	)		486			(3,420	)			(60,248	)
Interest income		9,517			108			—				9,625
Interest expense		(18,555	)		(2,088	)		—				(20,643	)

Operating loss from continuing operations before income taxes		(66,352	)		(1,494	)		(3,420	)			(71,266	)
Benefit for income taxes		21,240			600			1,327		(l)		23,167

Net loss from continuing operations	$	(45,112	)	$	(894	)	$	(2,093	)		$	(48,099	)

Net loss applicable to common stockholders from continuing operations:
Net loss from continuing operations	$	(45,112	)	$	(894	)	$	(2,093	)		$	(48,099	)
Preferred stock dividends declared		(8,279	)		—			—				(8,279	)

Net loss applicable to common stockholders from continuing operations	$	(53,391	)	$	(894	)	$	(2,093	)		$	(56,378	)

Total basic and diluted loss per share from continuing operations	$	(0.68	)								$	(0.72	)

Weighted average shares used to calculate loss per share:
Basic and diluted		78,378										78,378

See Notes to Unaudited Pro Forma Condensed Combined Statements of Income.

Notes to the Unaudited Pro Forma Condensed Combined Financial Statements of

The Nasdaq Stock Market, Inc. (“Nasdaq”)

Note 1. Basis of Presentation

On September 7, 2004, Nasdaq completed its acquisition of Toll Associates LLC (“Toll”) and affiliated entities from SunGard Data Systems Inc. (“SunGard”) pursuant to the terms of a purchase agreement dated May 25, 2004 and amended as of September 7, 2004 (the “Purchase Agreement”). Toll is a holding company that owns a 99.8% interest in Brut, LLC (“Brut”), the owner and operator of the Brut electronic communication network, a broker-dealer registered pursuant to the Securities Exchange Act of 1934, as amended. Toll also owns a 100.0% interest in Brut Inc. (“Brut Inc.”), which owns the remaining 0.2% interest in Brut and serves as its manager pursuant to an operating agreement. Brut also owns Brut Europe Limited (“Brut Europe”), a wholly-owned subsidiary set up to generate a European subscriber base, which is currently inactive. Pursuant to the terms of the Purchase Agreement, Nasdaq paid total cash consideration of $190.0 million, which is subject to certain post-closing adjustments.

The unaudited pro forma condensed combined financial statements are presented to illustrate the effects of the acquisition on the historical financial position and operating results of Nasdaq and Toll. The unaudited pro forma condensed combined statement of income combines the historical consolidated statements of income of Nasdaq and Toll, giving effect to the acquisition as if it had occurred on January 1, 2003.

Nasdaq prepared the unaudited pro forma condensed combined financial information using the purchase method of accounting with Nasdaq treated as the acquirer. Accordingly, Nasdaq’s cost to acquire Toll of $190.0 million (which is subject to certain post-closing adjustments) has been allocated to the assets acquired and liabilities assumed of $6.3 million, goodwill of $141.7 million and intangible assets of $42.0 million. Independent valuation specialists assisted Nasdaq management in determining the fair values of the net assets acquired and the intangible assets. The work performed by the independent valuation specialists has been considered by management in determining the fair values reflected in these unaudited pro forma condensed combined financial statements. The valuation is based on the actual assets acquired and liabilities assumed at the acquisition date and management’s consideration of the independent valuation work.

The unaudited pro forma condensed combined financial information is presented for informational purposes only. The pro forma data is not necessarily indicative of what Nasdaq’s financial position or results of operations actually would have been had Nasdaq completed the acquisition at the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future financial position or operating results of the combined company. The pro forma net income for the nine months ended September 30, 2004 has been updated to reflect the results of the September 6, 2004 audit of Toll.

Note 2. Reclassifications

Certain reclassifications have been made to the Toll historical balances in the unaudited pro forma condensed combined statements of income and balance sheets in order to conform to the Nasdaq presentation.

Note 3. Purchase Price

Nasdaq purchased Toll for a total consideration of $190.0 million in cash, subject to post-closing adjustments. In addition, Nasdaq incurred direct costs of $3.3 million associated with the acquisition.

For the purpose of this pro forma analysis, the above estimated purchase price has been preliminarily allocated based on an estimate of the fair value of assets acquired and liabilities assumed. The final valuation of net assets will be completed as soon as possible but no later than one year from the acquisition date. To the extent that Nasdaq’s estimates need to be adjusted, Nasdaq will do so.

Notes to the Unaudited Pro Forma Condensed Combined Financial Statements of

The Nasdaq Stock Market, Inc. (“Nasdaq”)—(Continued)


Estimated Purchase Price		(in millions)
Net assets acquired:
Accounts receivable, net		$ 19.2
Deferred tax assets		0.5
Other current assets		0.2
Property, plant and equipment, net		3.4
Current liabilities		(16.4)
Other liabilities		(0.5)
Foreign currency translation		(0.1)

Total net assets		6.3

Identifiable intangible assets⁽¹⁾		42.0
Goodwill		141.7

Estimated Purchase Price		$190.0

(1)

Adjustment to record identifiable intangible assets at fair value.

The following table presents details of the identifiable intangible assets acquired:


	Amount		Estimated Average Useful Life
	(in millions)		(in years)
Identifiable intangible asset
Technology	$	15.7	10.0
Customer relationships		26.3	10.0

Total	$	42.0

Note 4. Pro Forma Adjustments

For the Nine Months Ended September 30, 2004

Adjustments included in the column under the heading “Pro Forma Adjustments” primarily relate to the following:

(a)

To eliminate transactions between Nasdaq and Toll, which upon completion of the acquisition would be considered intercompany transactions.


Increase/(decrease)	(in millions)
Nasdaq Market Center revenues	$	(2.5	)
Cost of revenues		(5.4	)

The entries include:

the elimination of Nasdaq’s revenues of $4.6 million from Brut for accessing liquidity on the Nasdaq Market Center;

the elimination of Nasdaq’s revenues of $0.8 million from Brut for the use of Nasdaq’s systems to access the Nasdaq Market Center;

Notes to the Unaudited Pro Forma Condensed Combined Financial Statements of

The Nasdaq Stock Market, Inc. (“Nasdaq”)—(Continued)

the elimination of Brut’s cost of revenues for the above intercompany transactions of $5.4 million as Nasdaq no longer charges Brut for accessing liquidity and accessing the Nasdaq Market Center; and

the decrease in UTP Plan revenue sharing of $2.9 million assuming that Brut reported trades to the Nasdaq Market Center for the entire nine months ended September 30, 2004 rather than reporting to the Boston Stock Exchange. Brut began reporting trades to the Nasdaq Market Center on September 1, 2004.

(b)

To eliminate Nasdaq Market Center order delivery revenues of $2.2 million as Nasdaq no longer charges market participants for delivery of orders to Brut.

(c)

To record the reduction of Brut routing revenues of $1.6 million due to unified pricing for the Nasdaq Market Center and the Brut electronic communication network.

(d)

To recognize decrease in cost of revenues ($1.3 million) relating to the renegotiation of a clearing contract with a SunGard affiliate.

(e)

To eliminate amortization expense of $0.9 million related to the intangible assets recorded by Toll.

(f)

To record:

amortization expense of $3.0 million related to the estimated fair value of identifiable intangible assets, which are being amortized over their estimated average useful lives of 10 years and

tax benefit of $0.7 million based on the condensed combined statement of income pro forma adjustments noted above utilizing a 39.225% effective tax rate.

Adjustments included in the column under the heading “Nasdaq Pro Forma Adjustments” relate to the following:

For the Year Ended December 31, 2003

Adjustments included in the column under the heading “Pro Forma Adjustments” primarily relate to the following:

(g)

To eliminate transactions between Nasdaq and Toll, which upon completion of the acquisition would be considered intercompany transactions.


Increase/(decrease)	(in millions)
Nasdaq Market Center revenues	$	(7.8	)
Cost of revenues		(9.2	)

The entries include:

the elimination of Nasdaq’s revenues of $7.1 million from Brut for accessing liquidity on the Nasdaq Market Center;

Notes to the Unaudited Pro Forma Condensed Combined Financial Statements of

The Nasdaq Stock Market, Inc. (“Nasdaq”)—(Continued)

the elimination of Nasdaq’s revenues of $2.1 million from Brut for the use of Nasdaq’s systems to access the Nasdaq Market Center;

the elimination of Brut’s cost of revenues for the above intercompany transactions of $9.2 million as Nasdaq no longer charges Brut for accessing liquidity and accessing the Nasdaq Market Center; and

the decrease in UTP Plan revenue sharing of $1.4 million. Assumes Brut reported trades to the Nasdaq Market Center for year ended December 31, 2003 rather than reporting to the National and Boston Stock Exchanges.

(h)

To eliminate Nasdaq Market Center order delivery revenues of $1.9 million as Nasdaq no longer charges market participants for delivery of orders to Brut.

(i)

To record the reduction of Brut routing revenues of $1.4 million due to unified pricing for the Nasdaq Market Center and the Brut electronic communication network.

(j)

To recognize decrease in cost of revenues ($2.0 million) relating to the renegotiation of a clearing contract with a SunGard affiliate.

(k)

To eliminate amortization expense of $1.2 million related to the intangible assets recorded by Toll.

(l)

To record:

amortization expense of $4.8 million related to the estimated fair value of identifiable intangible assets, which are being amortized over their estimated average useful lives of 10 years; and

increase in tax benefit of $1.3 million based on the condensed combined statement of income pro forma adjustments noted above utilizing a 39.225% effective tax rate.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this prospectus. The discussion contains forward-looking statements. Actual results could differ materially from the results discussed in the forward-looking statements. See “Risk Factors” and “Forward Looking Statements.”

Overview

We are a leading provider of securities listing, trading, and information products and services. We operate The Nasdaq Stock Market, the largest stock-based equity securities market in the United States, both in terms of number of listed companies and traded share volume. As of December 31, 2004, we were home to 3,271 listed companies with a combined market capitalization of over $3.7 trillion. We also operate the Nasdaq Market Center, which as of December 31, 2004 enabled our customers to trade over 7,800 equity securities. Our revenue sources are diverse and include transaction services revenues, market data product and services revenues, listing fees, and financial product revenues.

We offer our products and services for fees that are among the lowest in the industry. We believe that our average trade execution fee per share is the most competitive in the industry, which we believe will help us maintain and extend our market share. In order to sustain this competitive price strategy, we have significantly reduced operating expenses consistent with our regulatory obligations. We intend to implement further changes to our cost structure to further reduce expenses so that we can maintain our competitive pricing advantage, continue to attract additional business, and achieve our profitability goals. See “—Cost Reduction and Operating Efficiencies” for further discussion. Our listing fees are competitive for companies of all sizes and are significantly lower for larger capitalization companies than those of the NYSE.

We manage, operate and provide our products and services in two business segments, our Market Services segment and our Issuer Services segment. Our Market Services segment includes our transaction-based business and our market information services business, which are interrelated because the transaction-based business generates the quote and trade information that we sell to market participants and data vendors. Our Issuer Services segment includes our securities listings business and our financial products business. The companies listed on The Nasdaq Stock Market represent a diverse array of industries. This diversity of Nasdaq-listed companies allows us to develop industry-specific and other Nasdaq indices that we use to develop and license financial products and associated derivatives. Because of the foregoing interrelationships, our management allocates resources, assesses performance and manages these businesses as two separate segments, our Market Services segment and our Issuer Services segment.

Business Environment

In recent years, the business environment in which we operate has been characterized by challenging business and economic conditions. In addition, the business environment has been marked by intense competition, both in the trade execution and trade reporting businesses and for new and existing listings, aggressive price cutting in an attempt to increase trading volume market share, and an increased emphasis on electronic trading due to technological advancements and regulatory changes. Our business has been and will continue to be impacted by the following key external factors:

the number of companies seeking equity financing, which is affected by factors such as investor demand, the economy, alternative sources of financing and tax policy;

trading volumes in U.S. equity securities, which are driven primarily by overall macroeconomic conditions;

competition (in terms of listings, market share, pricing, and product and service offerings); and

technological advancements and regulatory developments.

These factors will affect our future revenue, gross margin and profitability. Each major driver is discussed in this Management’s Discussion and Analysis and elsewhere in this prospectus.

The following table includes data showing average daily share volume in Nasdaq-listed securities and the percentage of share volume in Nasdaq-listed securities reported on the Nasdaq Market Center. In addition, the table shows drivers for our Issuer Services segment, including IPOs and numbers of listed companies. In evaluating the performance of our business, our senior management closely watches these key drivers.


	Year Ended December 31,
	2001		2002		2003		2004
Average daily share volume in Nasdaq-listed securities (in billions)	1.90		1.75		1.69		1.81
Percentage of share volume of Nasdaq-listed stocks reported to the Nasdaq Market Center	98.0	%	89.3	%	67.0	%	51.3	%
Initial public offerings	58		46		54		148
Secondary offerings	169		149		190		233
New listings⁽¹⁾	136		121		134		260
Number of listed companies⁽²⁾	4,109		3,659		3,333		3,271

(1)

Includes initial public offerings, including those completed on a best efforts basis, and listings that switched from other listing venues.

(2)

Number of listed companies as of period end.

Improving economic conditions at the end of 2003 contributed to an increase in equity prices from the relative lows in 2002, which stimulated an increase in the issuance of equity capital and the number of initial public offerings during the first nine months of 2004. Trading volume in U.S. equity markets increased by 7.2% during 2004 as compared to 2003. During 2000 through early 2003, the weak and uncertain economic climate, together with corporate governance and accounting concerns and concerns arising from the war in Iraq, contributed to a decline in new equity financing, an inability of certain listed companies to meet listing standards, lower equity prices, higher market volatility and more challenging business conditions for companies in the financial services industry, including us.

We experience competition in our core trading activities such as execution services; quoting and trading capabilities; and reporting services. Many of our competitors have engaged in aggressive price competition by reducing the trade execution transaction fees they charge their customers. As a result of this competition, we have also significantly reduced the trade execution transaction fees we charge our customers, particularly our large-volume customers. In connection with our aggressive pricing strategy, we have initiated significant cost reduction plans consistent with our regulatory obligations and we intend to continue to reduce our cost structure to a point where it is comparable to our competitors. Our revenues from the sale of market information products and services are also under competitive threat from other securities exchanges that trade Nasdaq-listed securities. We have implemented a new program that provides monetary incentives for quoting market participants to send orders and report trades to the Nasdaq Market Center. In addition, we believe that the Brut acquisition will accelerate our growth initiatives and enhance our competitive position.

We aggressively compete for new listings of initial public offerings. Our primary competitor for larger company listings on The Nasdaq Stock Market is the NYSE. We also compete, to a limited extent, with Amex for listing of smaller, less active, companies. In addition, at least one regional exchange, the Pacific Exchange, together with ArcaEx, its exclusive equities trading facility, has indicated that it intends to pursue a listings business.

Nasdaq-sponsored financial products are subject to intense competition from other ETFs, derivatives and structured products as investment alternatives and we are subject to competition for the listing of these products from other exchanges.

The securities industry continues to experience considerable technological and regulatory change. Some of our competitors who have historically supported a floor-based trading model are increasingly moving to more fully automate their processes. While one consequence of these initiatives has been to highlight the advantages of the electronic trading model, another consequence has been to shorten the expected life of legacy hardware and architecture as market centers rapidly innovate in order to offer their customers the best possible platform. In addition, our competitors’ migration to electronic trading could further increase the competitive pressures on us.

Cost Reduction and Operating Efficiencies

In response to increased competition, we performed a strategic review in 2003 of our operations to develop a plan to focus our business and improve our profitability, margins and growth. In implementing our strategic plan, we have successfully reduced our technology costs, eliminated non-core products, scaled back our workforce and consolidated our real estate facilities. In addition, we are also taking steps to exit certain low-margin businesses, primarily relating to providing proprietary network connectivity to the Nasdaq Market Center. In 2003 we reduced total direct expenses by approximately $92.5 million or 15.8%, from $585.2 million to $492.7 million, as compared to 2002. In 2004, we have continued to implement operating efficiencies and have further reduced total direct expenses from continuing operations by approximately $62.8 million or 16.4%, from $383.5 million to $320.7 million for the first nine months in 2003 and 2004, respectively. During the first nine months of 2004, in connection with taking certain actions to improve our operational efficiency, we incurred expenses of approximately $37.1 million. Our results for the first nine months of 2003 include $10.2 million of similar expenses.

As part of our cost reduction program, our management reviews all of our expenses to determine whether additional efficiencies can be pursued consistent with our regulatory obligations. Since 2002, we have successfully reduced expense items reflected in our financial statements. Some of the key steps we have taken to reduce our costs and expenses since 2002 include:

Reducing our headcount from 1,275 at December 31, 2002 to 786 at December 31, 2004 (which includes 41 employees obtained from the Brut acquisition);

Reducing the number of technology consultants we used from approximately 200 in 2001 to less than 40 through December 31, 2004;

Consolidating our real estate facilities from approximately 744,000 square feet as of December 2002 to approximately 525,000 square feet as of December 2004; and

Disposing of our interest in Nasdaq Deutschland (August 2003), IndigoMarkets (September 2003) and Nasdaq Europe (December 2003).

We have also been successful in reducing other costs and expenses as demonstrated in the table below.


	Year Ended December 31,						Nine Months Ended September 30,
	2002		2003		% Decrease (Increase)		2003		2004		% Decrease
	(in millions)						(unaudited) (in millions)
Compensation and benefits	$	183.1	$	159.1	13.1	%	$	129.0	$	112.4	12.9	%
Marketing and advertising		26.9		19.5	27.5			13.8		9.0	34.8
Depreciation and amortization		88.5		90.0	(1.7	)		69.1		55.0	20.4
Professional and contract services		60.5		37.5	38.0			28.7		16.6	42.2
Computer operations and data communications		136.7		125.6	8.1			93.4		81.3	13.0
Provision for bad debts		8.4		1.4	83.3			1.6		1.3	18.8
Occupancy		32.4		31.2	3.7			23.1		21.3	7.8
General and administrative		48.7		28.4	41.7			24.8		23.8	4.0
Support costs from related parties, net		75.0		61.5	18.0			48.4		34.3	29.1

We plan to continue to rationalize our business activities and generate additional cost savings by managing our expense base and pursuing additional operational efficiencies and have identified additional expense reduction opportunities in computer operations and real estate that we intend to pursue. If our revenue levels remain consistent with our historical revenue levels, we expect that our cost reduction efforts, if realized, could result in increases in margins and increases in net income as our expenses decrease. We believe that our cost reduction and increased operational efficiency have positioned us to compete aggressively in all aspects of our business and provide us with the ability to continuously grow and improve our profitability in future periods consistent with our regulatory obligations. In addition, we also expect to increase operational efficiency as a result of our integration of Brut.

Sources of Revenues

Market Services

Nasdaq Market Center

The Nasdaq Market Center provides market participants with access to The Nasdaq Stock Market execution services, such as quoting and trading capabilities, and reporting services such as trade reporting and risk management. We provide these quoting, trading, and trade reporting services for securities listed on the Nasdaq National Market and the Nasdaq SmallCap Market as well as for securities authorized for trading on the OTC Bulletin Board and for exchange-listed securities that are traded in the over-the-counter market by NASD members.

We provide our customers with the ability to electronically execute trades in equity securities. The primary fee for these execution services is a transaction execution charge, assessed on a per share basis to the party that accesses the liquidity provided by another market participant. In most circumstances, we credit a portion of the per share execution charge as a rebate to the market participant that provides the liquidity. We also earn revenue based on our share of trading of securities listed on the NYSE and Amex. Many of our competitors engage in aggressive price competition by reducing the transaction fees they charge customers for trade execution. As a result of this competition, we have also significantly reduced the transaction fees we charge our customers for trade execution, particularly for large-volume customers. We believe that our average trade execution fee per share is the most competitive in the industry.

The Nasdaq Market Center also provides three primary revenue-generating reporting services: trade reporting, trade comparison and risk management. Although we do not currently charge market participants to report trades to us, we earn revenues for trades reported to us in the form of shared market information revenues under the UTP Plan.

Trade comparison revenues are generated by matching two market participants to a trade that they have submitted to us for comparison for a fee. We also provide clearing firms with risk management services for a fee to assist them in monitoring their exposure to their correspondent brokers.

Finally, the Nasdaq Market Center provides market participants with the ability to access, process, display and integrate orders and quotes. We provide our market participants with several alternatives for accessing the Nasdaq Market Center for a fee. We are taking steps to exit certain low-margin business such as providing proprietary network connectivity for access to the Nasdaq Market Center. As we phase out these low margin access services, we expect our revenues to decrease but we expect the corresponding expenses to decrease at a greater rate.

Nasdaq Market Services Subscriptions

The primary source of revenues for Nasdaq Market Services Subscriptions is the collection and dissemination of price quotations and information regarding price and volume of executed trades. We collect information, distribute it and earn revenues in two capacities as a member of the UTP Plan and as a distributor of our proprietary market data. We also operate as the exclusive Securities Information Processor as part of the UTP Plan for the collection and dissemination of the best bid and offer information and last transaction information from the exchanges and markets that quote and trade in Nasdaq-listed securities. We do not generate any profits from our role as the Securities Information Processor.

In our role as the Securities Information Processor, we disseminate information to data vendors, which the data vendors then sell to the public. After deducting our expenses incurred as the Securities Information Processor, we distribute the tape fees to the respective UTP Plan participants, including ourselves, based on a combination of the participants’ respective annual trade volume and share volume. Since our sharing in the UTP Plan is based on our market share, our revenues from the sale of market information products and services are under competitive pressure from other securities exchanges that trade Nasdaq-listed securities. As a result, we have implemented a new tiered pricing structure and a new program that provide an incentive for quoting market participants to send orders and report trades to the Nasdaq Market Center to stabilize and increase our market share.

We also sell proprietary data products to market participants that choose to display trading interest on Nasdaq. We offer a range of proprietary data products including TotalView, our flagship market depth quote product. We operate several other proprietary services and data feed products, including the Mutual Fund Quotation Service; the Mutual Fund Dissemination Service; our financial websites, Nasdaq.com and NasdaqTrader.com; and Nasdaq Index Dissemination service. See “Business—Products and Services” for a discussion of our proprietary data products.

Issuer Services

Corporate Client Group

The Corporate Client Group provides customer support services and products to Nasdaq-listed companies and is responsible for obtaining new listings on The Nasdaq Stock Market. We charge issuers an initial listing fee, a fee for listing of additional shares and an annual fee. The initial listing fee for securities listed on The Nasdaq Stock Market includes a listing application fee and a total shares outstanding fee. The fee for listing of additional shares is based on the total shares outstanding, which we review quarterly. Annual fees for securities listed on The Nasdaq Stock Market are based on total shares outstanding. Initial listing and listing of additional shares fees are recognized on a straight-line basis over estimated service periods, which are six and four years, respectively, based on our historical listing experience, pursuant to the requirements of SEC Staff Accounting Bulletin Topic 13: Revenue Recognition. The listing fees that are amortized over their respective service periods provide us with recurring revenue. This distinguishes us from most of our competitors, such as ECNs and ArcaEx, the exclusive equities trading facility of the Pacific Exchange, who rely primarily on trading-volume-driven revenue.

Nasdaq Financial Products

Nasdaq Financial Products is responsible for introducing products that leverage, extend and enhance the Nasdaq brand, such as Nasdaq indices and QQQ, an exchange traded fund based on the Nasdaq-100 Index. Nasdaq Financial Products oversees the development and licensing of Nasdaq-branded financial products based on Nasdaq indices. In addition to licensing revenues, these products, particularly exchange traded funds, or ETFs, can lead to increased investments in companies listed on The Nasdaq Stock Market, which, in turn, could benefit our Market Services revenues.

We have licensed to major stock markets in the United States the right to use our trademarks in connection with trading QQQ under the UTP Plan. Every major options market in the United States also licenses the right to use our trademarks to trade the equity options on QQQ from us. We receive license fees for our trademark licenses that vary by product based on assets or number or underlying dollar value of contracts issued. In addition, QQQ has a national advertising campaign, which is separate from ours, that demonstrates the success of the issuers included in the Nasdaq-100 Index. Although the QQQ’s advertising campaign aims to increase interest in the QQQ, we believe that increased awareness and recognition of the QQQ raises awareness and recognition of Nasdaq at no cost to us.

Components of Expenses

Since implementation of our strategic plan, we have been and continue to be committed to reducing our costs to improve our profitability, margins and growth consistent with our regulatory obligations. As described earlier, we have significantly reduced many of our costs. The following discussion describes the components of our expenses and the cost reductions that we have realized through September 30, 2004.

Our direct expenses have decreased $170.0 million or 25.7% from $662.7 million in 2001 to $492.7 million in 2003. This decrease reflects our commitment to bring our expenses to levels that allow us to provide the most competitive prices in our industry. Direct expenses accounted for $320.7 million or 90.3% of total expenses, for the nine months ended September 30, 2004 down 16.4% compared with the same period of 2003.

In addition, our total expenses have decreased $117.3 million or 15.3% from $764.5 million in 2001 to $647.2 million in 2003. Total expenses accounted for $355.0 million for the nine months ended September 30, 2004 down 28.5% compared with the same period of 2003.

Compensation is our most significant expense and includes salaries, incentive compensation, related employee benefits and employer taxes. Changes in this expense are driven by the number of employees, increases in wages as a result of inflation or labor market conditions, rates for employer taxes and price increases affecting benefit plans. Annual bonus payments also vary from year to year and have an impact on total salaries and benefit plans. In addition, we have reduced our headcount from 1,275 at December 31, 2002 to 891 (including 47 employees obtained in the Brut acquisition), or 30.1%, at September 30, 2004. This expense accounted for $159.1 million, or 24.6% of total expenses, for 2003 and $112.4 million, or 31.7% of total expenses, for the nine months ended September 30, 2004, down 12.9% compared to the same period 2003. We expect our compensation expenses to continue to decrease in future periods as we continue to rationalize our headcount.

Marketing and advertising expense consists primarily of media advertising, conferences and event sponsorship as well as customer marketing expenses. We are reimbursed by the QQQ trust for marketing activities designed to promote the trust. This expense accounted for $19.5 million, or 3.0% of total expenses, for 2003 and $9.0 million, or 2.5% of total expenses, for the nine months ended September 30, 2004, down 34.8% compared to the same period 2003.

Depreciation and amortization expense results primarily from the depreciation of property and equipment purchased as well as amortization of internally developed software. This expense accounted for

$90.0 million, or 13.9% of total expenses, for 2003 and $55.0 million, or 15.5% of total expenses, for the nine months ended September 30, 2004, down 20.4% compared to the same period 2003. Included in these results are incremental depreciation and amortization expenses of $11.1 million in 2003 and $3.5 million in the first nine months of 2004 associated with changing the estimated useful life of certain assets and renegotiation of certain operating leases. These changes were made as a result of a review of technology and real estate assets.

Professional and contract service expenses consist primarily of consultant services provided for major technology initiatives and legal and accounting fees. This expense fluctuates primarily as a result of changes in requirements for consultants to complete technology initiatives and other undertakings that require the use of professional services. As we have reduced the number of technology platforms that we support through our cost reduction plan, we have significantly reduced our need to rely on consulting services. This expense accounted for $37.5 million, or 5.8% of total expenses, for 2003 and $16.6 million, or 4.7% of total expenses, for the nine months ended September 30, 2004, down 42.2% compared to the same period 2003.

Computer operations and data communication expense consists primarily of costs for our network connection with our customers and suppliers and maintenance of the hardware and software required to support our technology. As part of our commitment to cost reductions, we have been able to reduce this expense through the renegotiation of supply contracts. This expense is affected primarily by demand for our access services. This expense accounted for $125.6 million, or 19.4% of total expenses, for 2003 and $81.3 million, or 22.9% of total expenses, for the nine months ended September 30, 2004, down 13.0% compared to the same period 2003. As discussed earlier, we are currently exiting certain low margin businesses such as certain access services. We expect these expenses to continue to decline as the relevant access services are phased out as part of our migration away from the low margin business of providing our own proprietary network.

Provision for bad debts consists of charges to absorb estimated losses related to our accounts receivable portfolio.

Occupancy expense consists primarily of rent, maintenance and utilities for our offices and data center. This expense is affected primarily by the amount of office space leased or owned by us. Our cost reduction strategy and reduction in headcount has allowed us to consolidate and reduce the amount of office space that we require to run our business. This expense accounted for $31.2 million, or 4.8% of total expenses, for 2003 and $21.3 million, or 6.0% of total expenses, for the nine months ended September 30, 2004, down 7.8% compared to the same period of 2003. As we continue to consolidate our owned and leased properties, we expect to have additional reductions of our occupancy expense.

General and administrative expense consist primarily of travel, meals and entertainment, telephone, various state and local taxes and general office costs. This expense also included losses on equity investments and certain non-recurring real estate related costs.

Elimination of non-core product lines, initiatives and severance consists of charges associated with our 2003 strategic review. Our strategic review was designed to improve profitability and growth. This strategic review included the elimination of non-core products and initiatives including Primex; Nasdaq Tools; Nasdaq LIFFE Markets, LLC; The Bulletin Board Exchange and Liquidity Tracker and also resulted in a reduction in our workforce. Other charges included the extinguishment of certain debt and severance costs associated with the reduction in our workforce. The charge recorded in 2003 reflects the completion of the costs associated with our strategic review.

Support costs from related parties reflect services received from NASD and services that we previously provided to Amex. NASD provides surveillance and regulatory services as well as certain administrative, corporate and infrastructure services. Additionally, we previously provided Amex with systems and technology support. This expense is affected primarily by less reliance upon support from NASD and lower regulatory costs

as a result of renegotiated technology service contracts and lower depreciation charges. It is also affected by our reduced reliance upon support from NASD. Our systems and technology support of Amex ceased in 2002.

Net interest income reflects interest income earned from investments. Net interest expense reflects interest expenses associated with debt and capital leases.

We use the asset and liability method, which provides income taxes on all transactions recorded in the consolidated financial statements. Deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates that will be in effect when these differences are realized. This tax benefit or tax provision is affected primarily by our operating results during the period.

Results of Operations

The following table sets forth our consolidated statements of operations for the periods presented in percentage of total revenue:


	Year Ended December 31,						Nine Months Ended September 30,
	2001		2002		2003		2003		2004
	(unaudited)
Revenues
Market Services	77.2	%	73.9	%	65.1	%	65.8	%	58.6	%
Issuer Services	22.4		25.9		34.6		33.8		41.3
Other	0.4		0.2		0.3		0.4		0.1

Total revenues	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Cost of revenues	—		—		—		—		(2.5	)

Expenses
Compensation and benefits	21.1		23.3		27.0		28.6		30.2
Marketing and advertising	3.0		3.4		3.3		3.1		2.4
Depreciation and amortization	9.9		11.2		15.2		15.3		14.8
Professional and contract services	8.3		7.7		6.4		6.3		4.4
Computer operations and data communications	19.7		17.4		21.3		20.7		21.8
Provision for bad debts	1.8		1.1		0.2		0.3		0.4
Occupancy	3.1		4.1		5.3		5.1		5.7
General and administrative	11.2		6.2		4.8		5.5		6.4

Total direct expenses	78.1	%	74.4	%	83.5	%	84.9	%	86.1	%
Elimination of non-core product lines, initiatives and severance	—		—		16.6		15.4		—
Nasdaq Japan impairment loss	—		1.9		(0.8	)	(1.1	)	—
Support costs from related parties, net	12.0		9.5		10.4		10.7		9.2

Total expenses	90.1	%	85.8	%	109.7	%	109.9	%	95.3	%

Operating (loss) income	9.9		14.2		(9.7	)	(9.9	)	2.2
Income (loss) from continuing operations	7.1		8.3		(7.6	)	(18.7	)	1.1

Net income (loss)	4.8	%	5.5	%	(17.9	)%	(18.7	)%	1.1	%

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003

Overview

For the nine months ended September 30, 2004, our net income was $3.9 million compared with a net loss of $84.5 million for the nine months ended September 30, 2003, an increase of $88.4 million. Included in the results for the nine months ended September 30, 2003 was a net loss of $50.2 million from discontinued operations related to the transfer of our interest in Nasdaq Europe and the sale of IndigoMarkets. Accordingly, results from these subsidiaries have been reclassified as discontinued operations in our statement of income for the nine months ended September 30, 2003.

The remainder of this discussion and analysis for the nine-month periods ending September 30, 2004 and September 2003 reflects results from continuing operations, unless otherwise noted. On this basis, for the nine months ended September 30, 2004, our net income from continuing operations was $3.9 million compared with a net loss of $34.3 million for the nine months ended September 30, 2003, an increase of $38.2 million.

For the nine months ended September 30, 2004, results were positively impacted by lower operating expenses from corporate-wide cost reduction programs and our 2003 strategic review, which resulted in charges recorded during 2003. Total expenses were $355.0 million for the nine months ended September 30, 2004, compared with $496.5 million for the nine months ended September 30, 2003, a decrease of $141.5 million or 28.5%. However, nine months 2004 total revenues decreased when compared with the same period in 2003. Total revenues were $372.4 million for the nine months ended September 30, 2004, compared with $451.8 million for the nine months ended September 30, 2003, a decrease of $79.4 million or 17.6%. The decline in total revenues was primarily due to continued competitive pressure on Market Services segment revenues due to a decline in the percentage of share volume reported to our systems and higher UTP Plan revenue sharing. Market Services segment revenues decreased $79.0 million or 26.6% for the nine months ended September 30, 2004. These current and prior year items are discussed in more detail below.

Results of Operations

For the Nine Months Ended September 30, 2004 and 2003

MARKET SERVICES

The following table sets forth revenues, cost of revenues and gross margin from Market Services.


	Nine Months Ended September 30,
	2003			2004
	(in millions )
Nasdaq Market Center:
Revenues	$	296.2		$	249.6
Liquidity rebate		(94.8	)		(92.8	)
Tape Fee revenue sharing		(10.4	)		(6.4	)
Nasdaq General Revenue Sharing Program		—			(1.9	)

Total Nasdaq Market Center revenues, net		191.0			148.5

Nasdaq Market Services Subscriptions:
Revenues⁽¹⁾		133.8			137.9
Nasdaq General Revenue Sharing Program		—			(14.1	)
UTP Plan revenue sharing		(33.2	)		(60.7	)

Total Nasdaq Market Services Subscriptions revenues, net		100.6			63.1
Other Market Services revenues		5.8			6.8

Total Market Services revenues	$	297.4		$	218.4
Cost of revenues		—			(9.2	)

Gross margin from Market Services	$	297.4		$	209.2

(1)

Includes eligible and non-eligible UTP Plan revenues. Eligible UTP Plan revenues are associated with the calculation and dissemination of the consolidated national best bid and best offer (“inside quote”) and last sale information. These revenues are shared among UTP Plan participants. Non-eligible UTP Plan revenues are associated with the calculation and dissemination of proprietary Nasdaq information and are not shared among UTP Plan participants.

Nasdaq Market Center

Trading activity of Nasdaq-listed securities increased for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. Average daily share volume was 1.78 billion shares in the nine months ended September 30, 2004 compared to 1.66 billion shares in the nine months ended September 30, 2003, an increase of 7.2%. While average daily share volume increased for the nine months ended September 30, 2004, continued competitive pressures from regional exchanges and ECNs drew activity away from our systems to other venues resulting in decreased share volume reported to our systems. As a result, the percentage of share volume reported to our systems fell from 70.7% in the nine months ended September 30, 2003 to 49.1% in the nine months ended September 30, 2004. This continued competition along with decreases in certain fees and increases in certain rebates resulted in a significant decline in revenues from the Market Services segment.

Nasdaq Market Center revenues decreased $46.6 million, or 15.7%, for the nine months ended September 30, 2004, compared with the same period of 2003. The decline in Nasdaq Market Center revenues for the nine month period of 2004 was also due to declines in the percentage of share volume reported to our systems and the number of trader log-ons to our systems and the effect of price reductions. Share volume declined as competitive pressures from regional exchanges drew trade reporting activity away from our systems to other venues. These decreases were partially offset by an increase in market share as a result of the acquisition of Brut

on September 7, 2004. In response to this continued competition, we have reduced certain fees. In January 2004, we implemented a new tiered pricing structure geared toward drawing increased liquidity to our trading platform. In April 2004, we further enhanced our pricing structure by increasing the liquidity rebate for certain market participants, which impacted the Nasdaq Market Center liquidity rebate. The new tiered pricing structure lowers execution charges to market participants based on the amount of liquidity a participant provides. These price changes are in addition to price reductions implemented in the second, third and fourth quarters of 2003 for trades reported to the Nasdaq Market Center. The decline in trader log-ons was due to market participant consolidations and firms moving to alternative venues to access the market.

Nasdaq Market Center liquidity rebate, in which we credit a portion of the per share execution charge to the market participant that provides the liquidity, decreased $2.0 million, or 2.1%, for the nine months ended September 30, 2004, compared with the same period of 2003. This decrease was primarily due to the elimination of the liquidity rebate for all NYSE-listed securities in December 2003 and certain Amex-listed securities in May 2004. This decrease was partially offset by an increase in the per share liquidity rebate in April 2004 for Nasdaq-listed securities. Nasdaq Market Center liquidity rebate for the year-to-date period was also impacted by higher overall average daily share volume of market participants on The Nasdaq Stock Market for the nine months ended September 30, 2004 as compared with the same period of 2003.

We record tape fee revenues from NYSE-listed and Amex-listed securities based upon both the percentage of trades reported to the Nasdaq Market Center for securities listed on these exchanges and the size of NYSE and Amex revenue sharing pools. We share tape fee revenues with our market participants from NYSE-listed and Amex-listed securities through Nasdaq Market Center tape fee revenue sharing arrangements. Nasdaq Market Center tape fee revenue sharing decreased $4.0 million, or 38.5%, for the nine months ended September 30, 2004, compared with the same period of 2003. This decrease was primarily due to the INET ECN reporting additional trading activity to The National Stock Exchange beginning in the first quarter of 2004 as opposed to us as it had previously done. This change reduced both Nasdaq Market Center revenues and the amount of tape fee revenues we were obligated to share with INET, resulting in an overall decline in Nasdaq Market Center revenues, net.

In response to increased competition from the regional exchanges for tape fee revenues, in January 2004, we implemented a new tiered pricing structure and the Nasdaq general revenue sharing program, which provides an incentive for quoting market participants to send orders and report trades to the Nasdaq Market Center. For the nine months ended September 30, 2004, we shared $1.9 million of Nasdaq Market Center revenues under this program.

Nasdaq Market Services Subscriptions

We provide subscribers with inside quote and last trade information through Level 1, the best quote information for each market participant through Nasdaq Quotation Dissemination Services and all price levels for each market participant through TotalView. These services are provided for securities listed on The Nasdaq Stock Market to both professional and non-professional users. We also provide Mutual Fund Quotation Service, a service that collects and disseminates daily price and related data for unit investment trusts, mutual funds and money market funds that are subscribers to this service. These subscription revenues include eligible and non-eligible UTP Plan revenues. Nasdaq Market Services Subscriptions revenues increased $4.1 million, or 3.1%, before sharing under UTP and general revenue sharing plans, for the nine months ended September 30, 2004, compared with the same periods of 2003. This increase was primarily due to an increase in professional and non-professional Level 1 subscriptions resulting from increased interest in the equity markets during 2004.

In January 2004, we began sharing Market Services Subscriptions revenues under the Nasdaq general revenue sharing program, which shares operating revenue with market participants from multiple business lines in addition to tape fee revenue. For the nine months ended September 30, 2004, we shared $14.1 million of Nasdaq Market Services Subscriptions revenues under this program.

We also share tape fee revenues (i.e., revenues from the sale of tape data) for Nasdaq-listed securities through the UTP Plan. After deducting costs associated with acting as the exclusive Securities Information Processor, we distribute to the respective UTP Plan participants, including Nasdaq, their share of tape fees based on a combination of their respective trade volume and share volume. Tape fee revenue shared with UTP Plan participants other than us increased $27.5 million, or 82.8%, for the nine months ended September 30, 2004, compared with the same period of 2003. This increase was primarily due to a decline in the percentage of share volume reported to our systems as certain ECNs shifted reporting their trades in Nasdaq-listed securities from us to regional exchanges, the full effect of which was reflected in our 2004 results and as other UTP Plan participants increased their percentage of reported share volume. These increases were partially offset by a decline in trade reporting activity from The Boston Stock Exchange after Brut began to report its trades to the Nasdaq Market Center on September 1, 2004. This change resulted in a decrease to UTP Plan revenue sharing of approximately $1.5 million for September 2004 that would have otherwise been shared with The Boston Stock Exchange.

Cost of Revenues

Cost of revenues was $9.2 million for the nine months ended September 30, 2004 and relates to the acquisition of Brut. Pursuant to EITF 99-19, we have recorded execution revenues from transactions executed through Brut on a gross basis in revenues and have recorded expenses such as liquidity rebate payments as cost of revenues as Brut acts as principal. Our other trade execution revenues will continue to be reported net of the liquidity rebate as we do not act as principal.

ISSUER SERVICES

The following table sets forth revenues from Issuer Services:


	Nine Months Ended September 30,
	2003		2004
	(in millions)
Issuer Services:
Corporate Client Group	$	125.0	$	122.9
Nasdaq Financial Products		27.5		31.0

Total Issuer Services revenues	$	152.5	$	153.9

For the nine months ended September 30, 2004, Issuer Services revenues increased $1.4 million, or 0.9%, compared with the nine months ended September 30, 2003 due to an increase in licensing revenues. Improved market conditions and consumer outlook continued to have a positive impact on the ability of companies to raise money in the equity markets in 2004. For the nine months ended September 30, 2004, there were 105 IPOs on The Nasdaq Stock Market compared to 19 for the nine months ended September 30, 2003. Secondary offerings increased from 109 in the nine months ended September 30, 2003 to 181 in the same period of 2004. The increase in IPOs and secondary listings during 2004 will primarily affect our revenues in future years as revenues from initial listing fees (including IPOs) and listing of additional services fees (including secondary offerings) are amortized over six and four years, respectively. Annual renewal fee revenues, which are amortized on a pro-rata basis over the calendar year, decreased in 2004 due to the decline in the number of companies listed on The Nasdaq Stock Market from 3,659 on January 1, 2003 to 3,333 on January 1, 2004, the date on which companies are billed their annual fees. During 2003, 460 companies delisted from The Nasdaq Stock Market for failure to meet The Nasdaq Stock Market’s listing standards and other reasons, including mergers and acquisitions. Partially offsetting this decline were 134 new listings in 2003.

Corporate Client Group

The initial listing fee for securities listed on The Nasdaq Stock Market includes a listing application fee and a total shares outstanding fee. The fee for listing of additional shares is based on the total shares outstanding, which we review quarterly. Annual fees for securities listed on The Nasdaq Stock Market are based on total shares outstanding. Initial listing and listing of additional shares fees are recognized on a straight-line basis over estimated service periods, which are six and four years, respectively. The following table sets forth the revenues from the Corporate Client Group as reported in accordance with GAAP (“as reported”) and as would be reported on a non-GAAP basis (“billed basis”). We believe that the presentation of billed basis revenues, as they relate to listing of additional shares and initial listing fees, is a good indicator of current Corporate Client Group activity as billed basis information excludes the effects of recognizing revenues related to initial listing fees and listing of additional shares fees over the six and four year periods, respectively.


	Nine Months Ended September 30,
	2003				2004
	As Reported		Billed Basis		As Reported		Billed Basis
	(in millions)
Annual renewal fees	$	70.0	$	70.0	$	67.9	$	67.9
Listing of additional shares fees		27.8		19.9		27.6		38.4
Initial listing fees		24.4		10.6		23.5		19.7
Other Corporate Client Group revenues		2.8		2.8		3.9		3.9

Total Corporate Client Group revenues	$	125.0	$	103.3	$	122.9	$	129.9

Corporate Client Group revenues, on an as reported basis, decreased $2.1 million, or 1.7%, for the nine months ended September 30, 2004, compared with the same period of 2003.

Corporate Client Group revenues are primarily derived from fees for annual renewals, listing of additional shares and initial listings for companies listed on The Nasdaq Stock Market. Fees are generally calculated based upon total shares outstanding for the issuing company. These fees are initially deferred and amortized over the estimated periods for which the services are provided. Revenues from annual renewal fees are amortized on a pro-rata basis over the calendar year and initial listing fees and listing of additional shares fees are amortized over six and four years, respectively. The difference between the as reported revenues and the billed basis revenues is due to the amortization of fees in accordance with GAAP.

Annual renewal fees on both an as reported and billed basis decreased $2.1 million, or 3.0%, for the nine months ended September 30, 2004, compared with the same period of 2003. This decrease was primarily due to a reduction in the number of companies listed on The Nasdaq Stock Market from 3,659 on January 1, 2003 to 3,333 on January 1, 2004, the date on which companies are billed their annual fees. The decrease in the number of listed companies was due to 460 issuers delisted by us during 2003 for failure to meet The Nasdaq Stock Market’s listing standards and other reasons, including mergers and acquisitions. Partially offsetting this decline were 134 new listings in 2003.

Listing of additional shares fees, on an as reported basis, decreased $0.2 million, or 0.7%, for the nine months ended September 30, 2004, compared with the same period of 2003. On a billed basis, listing of additional shares fees increased $18.5 million, or 93.0%, for the nine months ended September 30, 2004, compared with the same period of 2003. The increase in listing of additional shares fees on a billed basis was primarily due to the adoption of a new fee structure. This new fee structure increased the minimum fee and eliminated a quarterly cap. The annual cap was not impacted. An improved economic environment, which resulted in higher activity for secondary offerings as well as other additional share activity during the nine months ended September 30, 2004 as compared to the same period in 2003, contributed to the year-to-date increase. During the nine months ended September 30, 2004, there were 181 secondary offerings compared to 109 secondary offerings during the nine months ended September 30, 2003.

Initial listing fees, on an as reported basis, decreased $0.9 million, or 3.7%, for the nine months ended September 30, 2004, compared with the same period of 2003. On a billed basis, initial listing fees increased $9.1 million, or 85.8%, for the nine months ended September 30, 2004, compared with the same period of 2003. The increase in initial listing fees on a billed basis was primarily due to an increase in the number of new listings and IPOs. During the nine months ended September 30, 2004, there were 188 new listings, including 105 IPOs, compared to 72 new listings, including 19 IPOs, during the nine months ended September 30, 2003.

Nasdaq Financial Products

The following table sets forth the revenues from Nasdaq Financial Products:


	Nine Months Ended September 30,
	2003		2004
	(in millions)
Licensing revenues	$	25.3	$	28.2
Other Nasdaq Financial Products revenues		2.2		2.8

Total Nasdaq Financial Products revenues	$	27.5	$	31.0

Nasdaq Financial Products revenues increased $3.5 million, or 12.7%, for the nine months ended September 30, 2004, compared with the same period of 2003.

Licensing revenues increased $2.9 million, or 11.5% for the nine months ended September 30, 2004, compared with the same period of 2003. This increase was primarily due to an increase in options trading volume on the QQQ and an increase in options and futures trading volume on our indices. Licensing revenues primarily include trademark and licensing revenues related to the QQQ and other financial products linked to our indices issued in the United States and abroad. QQQ represents units of beneficial interest in a unit investment trust, the Nasdaq-100 Trust, that holds shares of the top 100 U.S. and international non-financial stocks listed on The Nasdaq Stock Market that comprise the Nasdaq-100 Index.

Other Revenues

Other revenues decreased $1.8 million, or 94.7%, for the nine months ended September 30, 2004, compared with the same periods of 2003. In September 2003, we recorded the receipt of a business interruption insurance claim related to the events of September 11, 2001 of $1.9 million.

Direct Expenses


	Nine Months Ended September 30,
	2003		2004		% Decrease
	(in millions)
Compensation and benefits	$	129.0	$	112.4	12.9	%
Marketing and advertising		13.8		9.0	34.8
Depreciation and amortization		69.1		55.0	20.4
Professional and contract services		28.7		16.6	42.2
Computer operations and data communications		93.4		81.3	13.0
Provision for bad debts		1.6		1.3	18.8
Occupancy		23.1		21.3	7.8
General and administrative		24.8		23.8	4.0

Total direct expenses	$	383.5	$	320.7	16.4	%

Direct expenses decreased $62.8 million, or 16.4%, for the nine months ended September 30, 2004, compared with the same period of 2003.

Compensation and benefits expense decreased $16.6 million, or 12.9%, for the nine months ended September 30, 2004, compared with the same period of 2003. The decline in compensation and benefits expense for the year-to-date period was due to lower costs associated with the decreased headcount due to reductions in force as a result of our 2003 strategic review, which eliminated a total of 329 positions (206 positions as of September 30, 2003, 123 positions in the fourth quarter of 2003) and additional headcount reductions of 45 positions during the first and second quarters of 2004. Total headcount was 1,004 on September 30, 2003 compared with 891 on September 30, 2004, which includes 47 employees from the Brut acquisition.

Marketing and advertising expense decreased $4.8 million, or 34.8%, for the nine months ended September 30, 2004, compared with the same period of 2003. This decrease was primarily due to a decline in overall marketing and advertising expenditures, including media advertising, as part of our cost reduction plan.

Depreciation and amortization expense decreased $14.1 million, or 20.4%, for the nine months ended September 30, 2004, compared with the same period of 2003. This decrease was primarily due to incremental depreciation and amortization expense on certain assets which was higher for the nine months ended September 30, 2003 than in the same period of 2004. Incremental depreciation and amortization expense was associated with Nasdaq’s quoting platform and its trading and quoting network as we migrate to lower cost operating environments as part of our cost reduction plan. The elimination of certain products as part of our 2003 strategic review also contributed to the decline in depreciation and amortization expense for year-to-date period.

Professional and contract services expense decreased $12.1 million, or 42.2%, for the nine months ended September 30, 2004, compared with the same period of 2003. This decrease was primarily due to less reliance on outside contractors as part of our cost reduction plan.

Computer operations and data communications expense decreased $12.1 million, or 13.0%, for the nine months ended September 30, 2004, compared with the same period of 2003. This decrease was primarily due to lower costs associated with (1) providing computer links to customers due to lower demand for such services, (2) the renegotiated MCI contract effective June 1, 2004 and (3) maintenance contracts due to the favorable renegotiation of certain maintenance contracts in 2004. These decreases were partially offset by a change in the terms of certain operating leases associated with our quoting platform and its trading and quoting network as it migrates to lower cost operating environments. The elimination of certain products as part of our 2003 strategic review further contributed to the declines.

Provisions for bad debts decreased $0.3 million, or 18.8%, for the nine months ended September 30, 2004, compared with the same period of 2003.

Occupancy expense decreased $1.8 million, or 7.8%, for the nine months ended September 30, 2004, compared with the same period of 2003. This decrease was primarily due to our consolidation of leased office space as part of our cost reduction plan.

General and administrative expense decreased $1.0 million, or 4.0%, for the nine months ended September 30, 2004, compared with the same periods of 2003 due to a decline in overall spending in 2004 as a result of our cost reduction plan, the reversal of the sublease loss reserve of $1.9 million, net of rental payments on leased property in Rockville, Maryland during September 2004, and losses from our equity investment in Nasdaq LIFFE Markets, LLC recorded in the first and second quarters of 2003. On July 24, 2003, we redeemed our interest in the Nasdaq LIFFE Markets joint venture and transferred its ownership interest to LIFFE. Partially offsetting these declines was a $12.8 million sublease loss reserve recorded for expansion space at One Liberty Plaza that we will not occupy.

Elimination of Non-Core Product Lines, Initiatives and Severance

Strategic Review

As discussed earlier in this Management’s Discussion and Analysis, in 2003, we announced the results of a strategic review of our operations designed to position us for improved profitability and growth. The strategic review included the elimination of non-core products and initiatives and resulted in a reduction in our workforce. For the nine months ended September 30, 2003, a pre-tax charge to earnings of $109.1 million was recorded. The net impact to us was a pre-tax charge for the nine months ended September 30, 2003 of $107.1 million. The difference represented costs absorbed by minority shareholders of Nasdaq Europe. The charge of $109.1 million for the nine months ended September 30, 2003 included $69.5 million from continuing operations and $39.6 million from discontinued operations related to Nasdaq Europe and IndigoMarkets. The charge was primarily recorded to Property and equipment, Goodwill, Other intangible assets, Other accrued liabilities and Accrued personnel costs.

The following table summarizes the strategic review charges in our financial statements:


	Nine Months Ended September 30, 2003
	(in millions)
Continuing Operations
Non-Core Product Lines and Initiatives:
Impairment of capitalized software and fixed assets	$	7.8
Impairment of goodwill and intangible assets		7.1
Contract cancellations		2.0
Other exit costs		10.0

Total non-core product lines and initiatives		26.9
Severance and benefit costs		29.4
Loss on early extinguishment of debt		13.2

Total continuing operations strategic review charge	$	69.5

Discontinued Operations
Nasdaq Europe:
Impairment of technology platform	$	25.4
Severance and benefit costs		1.8
Impairment of goodwill		8.1
Other exit costs including contract cancellations		4.9

Total Nasdaq Europe		40.2
Gain on disposition of IndigoMarkets		(0.6	)

Total discontinued operations strategic review charge	$	39.6

Total strategic review charge	$	109.1

Nasdaq Japan Impairment Loss

During the second quarter of 2002, we recognized an other-than-temporary impairment charge on its equity investment in Nasdaq Japan of $15.2 million. Nasdaq Japan entered into liquidation status in late November 2002 and was completely dissolved in May 2003.

During the second quarter of 2003, we reversed $5.0 million of the reserves related to Nasdaq Japan due to favorable contract negotiations and lower legal costs resulting from the complete liquidation of Nasdaq Japan.

Support Costs From Related Parties, net

Support costs from related parties, net were $34.3 million and $48.4 million for the nine months ended September 30, 2004 and 2003, respectively, a decrease of $14.1 million, or 29.1%. This decrease primarily reflects a reduction in surveillance and other regulatory charges from NASD primarily due to the renegotiation of a technology service contract including a reduction in technology consultants and lower depreciation charges as certain technology assets were fully depreciated during the year ended December 31, 2003. The allocation of this charge among the markets and members NASD regulates also contributed to the decline.

Net interest expense

Net interest expense was $4.0 million and $7.7 million, for the nine months ended September 30, 2004 and 2003, respectively, a decrease of $3.7 million, or 48.1%. This decrease was primarily due to a decrease in interest expense as a result of the redemption of outstanding debt in the third quarter of 2003. On September 30, 2003, we redeemed the $150.0 million outstanding principal amount of our 5.83% senior notes due 2007. In addition, interest income also decreased due to the acquisition of Brut. As previously noted, we used funds from available cash and investments to finance both the redemption and the acquisition of Brut.

Income Taxes

Our income tax provision from continuing operations was $0.2 million for the nine months ended September 30, 2004, compared to an income tax benefit of $18.1 million for the nine months ended September 30, 2003. The change was primarily due to a write-off of deferred tax assets, offset by a favorable adjustment for permanent tax deductions and a reduction of a valuation allowance related to a foreign net operating loss carryforward. The overall effective tax rate was 5.6% for the nine months ended September 30, 2004, compared with 34.6% for the same period of 2003.

At this time, we feel that it is more likely than not, that the deferred tax asset for a portion of the foreign net operating loss carryforwards will be realized based on a recent history of pre-tax income, forecasted pre-tax income and the unlimited life of the asset.

The effective tax rate may vary from period to period depending on, among other factors, the geographic and business mix of earnings and losses. These same and other factors, including history of pre-tax earnings and losses, are taken into account in assessing the ability to realize deferred tax assets.

Year Ended December 31, 2003, Compared to Year Ended December 31, 2002 and 2001

Overview

Our operations for the year ended December 31, 2003, resulted in a net loss of $105.4 million compared with net income of $43.1 million in 2002 and $40.5 million in 2001. Included in the 2003 results are pre-tax expenses totaling $97.9 million associated with our strategic review. Our strategic review, initiated in the second quarter 2003, included the elimination of non-core product lines, initiatives and severance. Also included in 2003 results was a net loss from discontinued operations related to the transfer of our interest in Nasdaq Europe S.A./N.V. and the sale of IndigoMarkets Ltd. of $60.3 million compared with $21.9 million in 2002 and $19.6 million in 2001. We completed the sale of IndigoMarkets on September 30, 2003 and completed the transfer of our interests in Nasdaq Europe on December 18, 2003. Following the sale of IndigoMarkets and the transfer of our interest in Nasdaq Europe, results from these subsidiaries have been reclassified as discontinued operations in our Statements of Operations. See Note 3, “Discontinued Operations,” to the consolidated financial statements for further discussion.

The remainder of this discussion and analysis of the year ended December 31, 2003 reflects results from continuing operations, unless otherwise noted. On this basis, our net loss from continuing operations was $45.1 million in 2003 compared with net income of $65.0 million in 2002 and $60.1 million in 2001. Overall lower earnings in 2003 were driven by pre-tax expenses totaling $97.9 million relating to our strategic review noted above. In 2003, results were positively impacted by lower operating expenses from corporate-wide cost reduction programs. Direct expenses were $492.7 million in 2003 compared with $585.2 million in 2002 and $662.7 million in 2001.

Revenues

MARKET SERVICES

The following table sets forth total revenues from Market Services:


	Year Ended December 31,
	2001			2002			2003
	(in millions)
Nasdaq Market Center:
Revenues	$	477.6		$	523.8		$	388.5
Liquidity Rebate		(14.1	)		(88.8	)		(127.4	)
Tape fee revenue sharing		(20.4	)		(17.4	)		(13.8	)

Total Nasdaq Market Center revenues, net		443.1			417.6			247.3

Nasdaq Market Services Subscription:
Revenues⁽¹⁾		206.7			182.0			179.0
Nasdaq Data tape fee revenue sharing		—			(9.0	)		—
UTP Plan revenue sharing sharing		(4.7	)		(18.3	)		(50.8	)

Total Nasdaq Market Services Subscription revenues, net		202.0			154.7			128.2
Other Market Services revenues		9.9			9.5			8.2

Total Market Services revenues	$	655.0		$	581.8		$	383.7

(1)

Nasdaq Market Center

Nasdaq Market Center revenues decreased $135.3 million, or 25.8%, in 2003 compared with 2002. The decrease was primarily due to declines in market share and the percentage of share volume reported to our systems, the elimination of a quote update fee, the effect of price reductions and a decline in the number of trader log-ons to our systems. Market share and share volume both declined as competitive pressures from regional exchanges and ECNs continued to draw activity away from our systems to other venues. In response to this continued competition, we eliminated a quote update fee in February 2003 that we had formerly charged market participants for updating a quotation or non-marketable limit order on The Nasdaq National Market and The Nasdaq SmallCap Market and reduced certain fees. Price reductions were implemented in the second, third and fourth quarters of 2003 for trades reported to the Nasdaq Market Center. The decline in trader log-ons is due to continued market participant consolidations and firms moving to other venues to access the market. These decreases were partially offset by an increase, during the fourth quarter of 2002, in the per share execution charge. However, the increase in the per share execution charge had no effect on Nasdaq Market Center revenues, net since the amount shared through the Nasdaq Market Center liquidity rebate (see discussion below) also increased by the same amount.

Nasdaq Market Center revenues increased $46.2 million, or 9.7%, in 2002 compared with 2001. This increase was primarily due to increases, in the fourth quarter of 2001 and 2002, in the per share execution charge. However, the increase in the per share execution charge had no effect on Nasdaq Market Center revenues, net since the amount shared through the Nasdaq Market Center Liquidity rebate also increased by the same amount. See discussion of Nasdaq Market Center Liquidity rebate below. Also contributing to the increase was a new, incremental fee associated with quote updates in Nasdaq quotation systems implemented in February 2002. We eliminated this quote update fee in February 2003. Partially offsetting these increases were declines in market share and the percentage of share volume reported to our systems and a decline in the number of trader log-ons to our systems.

Nasdaq Market Center Liquidity rebate, in which we credit a portion of the per share execution charge to the market participant that provides the liquidity, increased $38.6 million, or 43.5%, in 2003 compared with 2002, and increased $74.7 million, in 2002 compared with 2001. These increases were due to an increase in the amount rebated beginning in the fourth quarter of 2002. However, as discussed above, this increase did not effect Nasdaq Market Center revenues, net because it was offset by the increase in the per share execution charge. The liquidity rebate was introduced in the fourth quarter of 2001.

We share tape fee revenues from NYSE-listed and Amex-listed securities through Nasdaq Market Center tape fee revenue sharing. We record tape fee revenues from NYSE-listed and Amex-listed securities based upon both the percentage of trades reported to the Nasdaq Market Center for securities listed on these exchanges and the size of NYSE and Amex revenue sharing pools. Nasdaq Market Center tape fee revenue sharing decreased $3.6 million, or 20.7%, in 2003 compared with 2002, and decreased $3.0 million, or 14.7%, in 2002 compared with 2001. These decreases were primarily due to the INET ECN reporting certain trading activity to The National Stock Exchange beginning in the fourth quarter of 2002 as opposed to us as it had previously done. This change reduced both Nasdaq Market Center revenues and the amount of revenues Nasdaq was obligated to share with INET, resulting in an overall decline in Nasdaq Market Center revenues, net. Also contributing to the decreases was a revision of estimated payouts for revenue sharing in 2002.

In addition, in August 2003 we filed with the SEC on an immediately effective basis, a Nasdaq general revenue sharing program, which like The National Exchange’s general revenue sharing program, shares operating revenues from multiple business lines in addition to tape fee revenues. We did not share any revenues during 2003. See Note 2, “Significant Transactions—Nasdaq Member Revenue Sharing,” to the consolidated financial statements for further discussion.

Nasdaq Market Services Subscriptions

We provide subscribers with inside quote and last trade information through Level 1, the best quote information for each market participant through Nasdaq Quotation Dissemination Services and all price levels for each market participant through Total View. These services are provided for securities listed on The Nasdaq Stock Market to both professional and non-professional users. We also provide Mutual Fund Quotation Service, a service that collects and disseminates daily price and related data for unit investment trusts, mutual funds and money market funds that are subscribers to this service. These subscription revenues, which include eligible and non-eligible UTP Plan revenues, decreased $3.0 million, or 1.6%, in 2003 compared with 2002, and decreased $24.7 million, or 11.9%, in 2002 compared with 2001. These decreases were primarily due to cost saving initiatives among our market participants and market participant consolidations causing a decrease in professional Level 1 subscriptions. Also contributing to the decline was a decrease in non-professional Level 1 subscriptions resulting from decreased consumer interest in the equity markets. These decreases were partially offset by revenue received from Total View. We began charging for our Total View data products in the first quarter of 2003.

In 2002, Nasdaq Market Services Subscriptions shared tape fee revenues with its market participants in a pilot program based on their share of trades and volume reported to us. This revenue sharing plan was

introduced in the first quarter of 2002. During 2002, Nasdaq shared $9.0 million in tape fee revenues with its market participants. The data revenue sharing program was part of a larger strategy to compete with UTP exchanges and provide incentive for Nasdaq members to continue to fully utilize our Market Services. Effective June 1, 2002, the SEC abrogated certain market participant tape fee sharing pilot programs, which resulted in an elimination of the Nasdaq member revenue sharing program for data covered under the UTP Plan. See Note 2, “Significant Transactions—Nasdaq Member Revenue Sharing,” to the consolidated financial statements for further discussion.

Under the revenue sharing provision of the UTP Plan, we are permitted to deduct certain costs associated with acting as the exclusive Securities Information Processor from the total amount of tape fees collected. After these costs are deducted from the tape fees, we distribute to the respective UTP Plan participants, including Nasdaq, their share of tape fees based on a combination of their respective trade volume and share volume. Our tape fee revenue sharing allocated to UTP Plan participants other than us increased $32.5 million, in 2003 compared with 2002, and $13.6 million, in 2002 compared with 2001. These increases were primarily due to a decline in the percentage of share volume reported to our systems as continued competitive pressures from ECNs continued to draw activity away from our systems to regional exchanges that are members of the UTP Plan and that trade Nasdaq-listed securities.

ISSUER SERVICES

The following table sets forth revenues from Issuer Services:


	Year Ended December 31,
	2001		2002		2003
	(in millions)
Issuer Services
Corporate Client Group	$	157.3	$	174.2	$	168.3
Nasdaq Financial Products		32.4		29.8		35.9

Total Issuer Services revenues	$	189.7	$	204.0	$	204.2

Corporate Client Group

The following table sets forth the revenues from the Corporate Client Group as reported in accordance with GAAP (“as reported”) and as would be reported on a non-GAAP basis (“billed basis”). We believe that the presentation of billed basis revenues, as they relate to listing of additional shares and initial listing fees, is a good indicator of current Corporate Client Group activity as billed basis information excludes the effects of recognizing revenues related to initial listing fees and listing of additional shares fees over the six and four year periods, respectively.


	Year Ended December 31
	2001				2002				2003
	As reported		Billed Basis		As reported		Billed Basis		As reported		Billed Basis
	(in millions)
Annual renewal fees	$	83.6	$	83.6	$	100.8	$	100.8	$	93.9	$	93.9
Listing of additional shares fees		35.9		41.6		37.5		27.9		37.1		30.2
Initial listing fees		35.6		12.6		33.6		22.8		32.3		16.9
Other Corporate Client Group revenues		2.2		2.2		2.3		2.3		5.0		5.0

Total Corporate Client Group revenues	$	157.3	$	140.0	$	174.2	$	153.8	$	168.3	$	146.0

Corporate Client Group revenues decreased $5.9 million, or 3.4%, in 2003 compared with 2002 and increased $16.9 million, or 10.7%, in 2002 compared with 2001.

Annual renewal fees decreased $6.9 million, or 6.8%, in 2003 compared with 2002 and increased $17.2 million, or 20.6%, in 2002 compared with 2001. The decrease in 2003 was primarily due to a reduction in the number of companies listed on The Nasdaq Stock Market from 4,109 on January 1, 2002 to 3,659 on January 1, 2003, the date on which companies are billed their annual fees. The decrease in the number of listed companies was due to 571 issuers delisted by us during 2002 for failure to meet The Nasdaq Stock Market’s listing standards and other reasons, including mergers and acquisitions. Partially offsetting this decline were 121 new listings in 2002. Annual renewal fees increased in 2002 primarily due to the introduction in January 2002 of a revised fee structure.

Listing of additional shares fees, on an as reported basis, decreased $0.4 million, or 1.1%, in 2003 compared with 2002 and increased $1.6 million, or 4.5%, in 2002 compared with 2001. On a billed basis, listing of additional shares fees increased $2.3 million, or 8.2%, in 2003 compared with 2002 and decreased $13.7 million, or 32.9%, in 2002 compared with 2001. The increase in listing of additional shares fees on a billed basis in 2003 was primarily due to an improved economic environment, which resulted in higher activity for secondary offerings as well as other additional share activity. There were 190 secondary offerings during 2003 compared to 149 secondary offerings during 2002. The decrease in listing of additional shares fees on a billed basis in 2002 was primarily due to a weaker economic environment, which resulted in lower activity for secondary offerings as well as other additional share activity. There were 149 secondary offerings during 2002 compared to 169 secondary offerings during 2001.

Initial listing fees, on an as reported basis, decreased $1.3 million, or 3.9%, in 2003 compared with 2002 and decreased $2.0 million, or 5.6%, in 2002 compared with 2001. On a billed basis, initial listing fees decreased $5.9 million, or 25.9%, in 2003 compared with 2002 and increased $10.2 million, or 81.0%, in 2002 compared with 2001. The decrease in initial listing fees on a billed basis in 2003 was primarily due to a temporary suspension of listing requirements due to the events of September 11, 2001. This temporary suspension was lifted on January 3, 2002. As a result, a higher number of companies transferred down in 2002 from one tier of The Nasdaq Stock Market to the other at the end of their respective time periods for review of non-compliance. These companies were charged an initial fee in 2002 upon entering the new tier. Partially offsetting this decrease in 2003 was an increase in the number of new listings and initial public offerings for the year. In 2003, there were

134 new listings, including 54 new initial public offerings, compared to 121 new listings, including 46 new initial public offerings, in 2002. The increase in initial listing fees on a billed basis in 2002 was primarily due to an increase in initial listing fees implemented in January 2002, which more than offset the decrease in the number of initial public offerings listings on The Nasdaq Stock Market. In 2002, there were 121 new listings, including 46 new initial public offerings, compared to 136 new listings, including 58 new initial public offerings, in 2001.

Nasdaq Financial Products

The following table sets forth the revenues from Nasdaq Financial Products:


	Year Ended December 31,
	2001		2002		2003
	(in millions)
Licensing revenues	$	30.6	$	28.1	$	32.9
Other Nasdaq Financial Products revenues		1.8		1.7		3.0

Total Nasdaq Financial Products revenues	$	32.4	$	29.8	$	35.9

Nasdaq Financial Products revenues increased $6.1 million, or 20.5%, in 2003 compared with 2002 and decreased $2.6 million, or 8.0%, in 2002 compared with 2001.

Licensing revenues increased $4.8 million, or 17.1%, in 2003 compared with 2002 and decreased $2.5 million, or 8.2% in 2002 compared with 2001. The increase in licensing revenues in 2003 was primarily due to an increase in options trading volume on the QQQ and an increase in options and futures trading volume on Nasdaq indices. Licensing revenues primarily include trademark and licensing revenues related to the QQQ and other financial products linked to Nasdaq indices issued in the United States and abroad. The QQQ is the trading symbol for the shares of the Nasdaq-100 Index Tracking Stock. QQQ represents units of beneficial interest in a unit investment trust, the Nasdaq-100 Trust, that holds shares of the top 100 U.S. and international non-financial stocks listed on The Nasdaq Stock Market that comprise the Nasdaq-100 Index. The decrease in licensing revenues in 2002 was primarily due to a decrease in price per unit and a decrease in trade reports occurring outside of the Nasdaq Market Center of the QQQ. Licensing revenues are charged as a percentage of per unit charges for trade reports occurring outside of the Nasdaq Market Center.

Direct Expenses


	Year Ended December 31,
	2001		2002		2003
	(in millions)
Compensation and benefits	$	179.3	$	183.1	$	159.1
Marketing and advertising		25.4		26.9		19.5
Depreciation and amortization		83.7		88.5		90.0
Professional and contract services		70.7		60.5		37.5
Computer operations and data communications		166.8		136.7		125.6
Provision for bad debts		15.5		8.4		1.4
Occupancy		26.0		32.4		31.2
General and administrative		95.3		48.7		28.4

Total direct expenses	$	662.7	$	585.2	$	492.7

Direct expenses decreased $92.5 million, or 15.8%, in 2003 compared with 2002 and decreased $77.5 million, or 11.7%, in 2002 compared with 2001.

Compensation and benefits expense decreased $24.0 million, or 13.1%, in 2003 compared with 2002 and increased $3.8 million, or 2.1%, in 2002 compared with 2001. The decrease in 2003 was primarily due to reduced headcount resulting from a result of our 2003 strategic review, which eliminated a total of 329 positions, partially offset by an increase in employee benefit obligations. Total headcount was 1,227 on December 31, 2002 (excluding 48 employees in discontinued operations) compared with 956 on December 31, 2003. See Note 2, “Significant Transactions—Strategic Review,” to the consolidated financial statements for further discussion. The increase in compensation and benefits expense in 2002 was primarily due to increased headcount related to internal functions being handled by us as a result of the separation from NASD as well as additional benefit obligations, partially offset by staff reductions. Compensation and benefits expense also included charges of $4.5 million in 2002 and $7.4 million in 2001 for severance and outplacement costs associated with staff reductions plans. The staff reductions eliminated 134 and 137 positions in 2002 and 2001, respectively.

Marketing and advertising expense decreased $7.4 million, or 27.5%, in 2003 compared with 2002 and increased $1.5 million, or 5.9%, in 2002 compared with 2001. The decrease in 2003 was primarily due to a decline in direct marketing expenses related to the roll-out of our SuperMontage system in 2002 (we currently refer to our SuperMontage system as being part of the Nasdaq Market Center) and a decline in advertising expenses related to our “Listed on Nasdaq” marketing campaign.

Depreciation and amortization expense increased $1.5 million, or 1.7%, in 2003 compared with 2002 and increased $4.8 million, or 5.7%, in 2002 compared with 2001. These increases were primarily due to capacity and technology infrastructure improvements required to support market activity and new initiatives.

Professional and contract services expense decreased $23.0 million, or 38.0%, in 2003 compared with 2002 and decreased $10.2 million, or 14.4%, in 2002 compared with 2001. The decrease in 2003 was primarily due to less reliance on outside contractors and a decline in expenses associated with our global expansion strategy, which has been abandoned. In 2002, the decrease was also due to less reliance on outside contractors as well as a decrease in development costs associated with SuperMontage, partially offset by increased costs associated with our global expansion strategy.

Computer operations and data communications expense decreased $11.1 million, or 8.1%, in 2003 compared with 2002 and decreased $30.1 million, or 18.0%, in 2002 compared with 2001. These decreases were primarily due to a renegotiation of our contract with MCI that occurred in the second quarter of 2002. Also contributing to the decreases were lower costs associated with providing computer links to customers due to lower demand for such services.

Provision for bad debts decreased $7.0 million, or 83.3%, in 2003 compared with 2002 and decreased $7.1 million, or 45.8%, in 2002 compared with 2001. The decrease in 2003 was primarily due a decrease in past due account balances. In 2002, the decrease in provision for bad debts was primarily due to the provision for a bankruptcy filing by a market data vendor recorded in the first quarter of 2001. This was partially offset by an increase in inactive issuers with outstanding account balances resulting from the temporary suspension of certain listing requirements due to the events of September 11, 2001, the continuing erosion of market conditions and increased payment defaults.

Occupancy expense decreased $1.2 million, or 3.7%, in 2003 compared with 2002 and increased $6.4 million, or 24.6%, in 2002 compared with 2001. The decrease in 2003 was primarily due to consolidation of leased office space. The increase in 2002 was primarily due to the direct payment of occupancy expenses to third party vendors previously reported in Support costs from related parties, net in 2001 in the Consolidated Statements of Operations as a result of the separation from NASD.

General and administrative expense decreased $20.3 million, or 41.7%, in 2003 compared with 2002 and decreased $46.6 million, or 48.9%, in 2002 compared with 2001. The decrease in general and administrative expense in 2003 was partially due to the fulfillment in 2002 of our technology transition commitment to Amex.

In conjunction with the separation from NASD, we had committed to fund $14.5 million of transitional support costs to Amex. In 2001, we accrued $9.2 million for such costs. The remaining $5.3 million was recorded in the fourth quarter of 2002. Further contributing to the decline in 2003 were lower discretionary spending, lower equity investment losses related to Nasdaq LIFFE Markets, LLC and Nasdaq Japan and a $4.9 million write-down of an auxiliary trading technology platform recorded in the second quarter of 2002. See Note 2, “Significant Transactions—Strategic Review,” and “Significant Transactions—Nadaq Japan,” to the consolidated financial statements for further discussion of Nasdaq LIFFE Markets and Nasdaq Japan.

The decrease in general and administrative expense in 2002 was primarily due to non-recurring real estate related costs of $21.5 million recorded during 2001. See Note 6, “Real Estate Developments,” to the consolidated financial statements for further discussion. Also contributing to the decline were lower Nasdaq Japan losses recorded as general and administrative expenses in 2002 compared with 2001 due to the other-than-temporary impairment charge on our equity investment in Nasdaq Japan of $15.2 million, which was recorded in the “Nasdaq Japan impairment loss” line item on the consolidated statements of operations. Further contributing to the decline was a reduction in technology transition costs to $5.3 million in 2002 from $9.2 million in 2001 to Amex. Partially offsetting the decreases were higher Nasdaq LIFFE Markets losses of $9.0 million in 2002 as compared to $6.0 million in 2001.

Elimination of Non-Core Product Lines, Initiatives and Severance

Strategic Review

As discussed earlier in this Management’s Discussion and Analysis, in 2003, we announced the results of a strategic review of our operations designed to position us for improved profitability and growth. The strategic review included the elimination of non-core products and initiatives and resulted in a reduction in our workforce. For the year ended December 31, 2003, a total pre-tax charge to earnings of $145.5 million was recorded. The net impact to us was a total pre-tax charge of $143.5 million. The difference represented charges absorbed by minority shareholders of Nasdaq Europe S.A./N.V. The charge recorded reflects the completion of the charges associated with our strategic review. As shown in the following table, the total charge of $145.5 million included $97.9 million from continuing operations and $47.6 million from discontinued operations related to Nasdaq Europe. See Note 3, “Discontinued Operations,” to the consolidated financial statements for further discussion. The charge was primarily recorded to Property and equipment, Goodwill, Other intangible assets, Other accrued liabilities and Accrued personnel costs on the consolidated balance sheets.

The following table summarizes the strategic review charge included in the consolidated statements of operations for the year ended December 31, 2003:


	Year Ended December 31, 2003
	(in millions)
Continuing Operations
Non-Core Product Lines and Initiatives:
Impairment of capitalized software and fixed assets	$	21.1
Impairment of goodwill and intangible assets		8.2
Contract cancellations		11.4
Other exit costs		11.6

Total non-core product lines and initiatives		52.3

Severance and benefit costs		32.4
Loss on early extinguishment of debt		13.2

Total continuing operations strategic review charge	$	97.9

Discontinued Operations
Nasdaq Europe S.A./N.V.:
Impairment of technology platform	$	29.4
Severance and benefit costs		2.5
Impairment of goodwill		8.1
Other exit costs including contract cancellations		8.2

Total Nasdaq Europe		48.2
Gain on disposition of IndigoMarkets Ltd.		(0.6	)

Total discontinued operations strategic review charge	$	47.6

Total strategic review charge	$	145.5

Continuing Operations

Non-core product lines and initiatives included in the strategic review were:

Primex—Primex was an electronic auction system. Nasdaq ended our exclusive rights agreement with Primex Trading N.A., L.L.C. on December 31, 2003. Nasdaq decided to consolidate our trading services to a common functionality within the SuperMontage system and ceased offering Primex effective January 16, 2004.

Nasdaq Tools—Nasdaq Tools was an order management system that ran on the Nasdaq Application Programming Interface using the Nasdaq Workstation II and was wound down throughout 2003. Nasdaq Tools was previously our wholly-owned subsidiary and was merged with and into us on July 31, 2002.

Nasdaq LIFFE Markets, LLC—Nasdaq LIFFE Markets was a joint venture with the London International Financial Futures Exchange, LIFFE to create a market for single stock futures and other futures products. On July 24, 2003, Nasdaq redeemed our interest in the Nasdaq LIFFE Markets joint venture and transferred our ownership interest to LIFFE. LIFFE assumed financial and management responsibility for Nasdaq LIFFE Markets. This change did not have any impact on the operation of Nasdaq LIFFE Markets, but usage of the Nasdaq brand by the company ceased.

The Bulletin Board Exchange—The Bulletin Board Exchange was a proposed platform for companies not eligible for the Nasdaq SmallCap Market to raise equity capital and increase the visibility of their stock. The Over the Counter Bulletin Board will continue its existing operations.

Liquidity Tracker—Liquidity Tracker was an automated order routing system designed to allow traders to direct orders to specific market makers based on recent trading activity. Liquidity Tracker ceased operations as of June 30, 2003.