INSTINET GROUP INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-32717
---------

Instinet Group Incorporated
(Exact Name of Registrant as Specified in Its Charter)

Delaware 13-4134098

(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)

3 Times Square, New York, NY 10036

(Address of Principal Executive Offices) (Zip Code)

(212) 310-9500
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X] No [ ]

Number of shares outstanding of each of the registrant's classes of Common Stock
at November 8, 2002.

Common Stock, $0.01 par value 329,495,961 shares

INSTINET GROUP INCORPORATED

FORM 10-Q QUARTERLY REPORT
For the Quarter Ended September 30, 2002

Table of Contents Page

Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the three months and nine
months ended September 30, 2002 and 2001 .............................. 3
Consolidated Statements of Financial Condition as of September 30, 2002
and December 31, 2001 ................................................. 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 ........................................... 5
Notes To Consolidated Financial Statements .............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........ 39
Item 4. Controls and Procedures..... ...................................... 41

Part II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 42
Item 2. Changes in Securities and Use of Proceeds ......................... 42
Item 3. Defaults Upon Senior Securities ................................... 42
Item 4. Submission of Matters to a Vote of Security Holders ............... 42
Item 5. Other Information ................................................. 43
Item 6. Exhibits and Reports on Form 8-K .................................. 43

Signatures ................................................................... 45
Certifications ............................................................... 46

Unless otherwise indicated or the context otherwise requires, references to the
"company," "we," "us," and "our" mean Instinet Group Incorporated and its
subsidiaries.

Forward-Looking Statements:

We have made forward-looking statements in this report on Form 10-Q that are
based on our management's beliefs and assumptions and on information currently
available to our management. From time to time, we may also include oral or
written forward-looking statements in other materials released to the public.
Forward-looking statements include information concerning our possible or
assumed future results of operations, business strategies, financing plans,
competitive position, potential growth opportunities and the effects of
competition and regulation. Forward-looking statements include all statements
that are not historical facts. You can identify these statements by the use of
forward-looking terminology, such as the words "believes," "expects,"
"anticipates," "intends," "plans," "estimates," "may" or "might" or other
similar expressions. The forward-looking statements contained in this report
speak only as of the date hereof, and we do not undertake any obligation to
update any of them publicly in light of new information or future events.

Forward-looking statements involve significant risks, uncertainties and
assumptions. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, actual results may differ materially
from those expressed in these forward-looking statements. You should not put
undue reliance on any forward-looking statements. You should understand that
many important factors could cause our results to differ materially from those
expressed or suggested in forward-looking statements, including those discussed
below under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Quantitative and Qualitative Disclosures About
Market Risk," and in the "Risk Factors" filed as Exhibit 99.1 to our Report on
Form 8-K dated October 22, 2002.

-2-

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements

INSTINET GROUP INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------- -------- -------- --------

REVENUES

Transaction fees.................................. $ 263,917 $ 311,737 $ 799,731 $ 1,105,124
Interest.......................................... 10,699 14,254 31,591 37,734
Investments....................................... (20,336) (6,330) (39,231) (429)
-------- -------- -------- -----------
Total revenues ......................... 254,280 319,661 792,091 1,142,429
EXPENSES
Compensation and benefits......................... 63,809 84,820 221,016 322,352
Communications and equipment...................... 26,620 36,939 89,116 123,130
Soft dollar and commission recapture.............. 51,824 51,595 167,153 161,876
Brokerage, clearing and exchange fees............. 42,079 33,284 112,527 105,859
Depreciation and amortization..................... 16,712 21,206 53,765 59,485
Professional fees................................. 5,110 8,085 16,774 32,110
Occupancy......................................... 12,223 14,424 39,370 38,331
Marketing and business development................ 2,451 843 13,338 19,404
Broker-dealer rebates... ......................... 39,004 - 67,798 -
Other............................................. 9,899 14,312 42,425 40,792
Goodwill impairment............................... 551,991 - 551,991 -
Restructuring..................................... 955 22,821 58,395 22,821
Loss of fixed assets at World Trade Center........ - 19,528 - 19,528
Insurance recovery of fixed assets lost........... - (19,528) - (19,528)
-------- -------- --------- --------
Total expenses.......................... 822,677 288,329 1,433,668 926,160

Income/(loss) from continuing operations before
income taxes and cumulative effect of change in
accounting principle........................... (568,397) 31,332 (641,577) 216,269
Provision for /(benefit from) income taxes....... (39,958) 15,685 (59,778) 95,548
--------- -------- -------- --------
Income/(loss) from continuing operations before
cumulative effect of change in accounting
principle...................................... (528,439) 15,647 (581,799) 120,721
Discontinued operations:
Loss from operations of fixed income
business, net of tax......................... - (7,437) (22,586) (21,673)
--------- --------- --------- --------
Income/(loss) before cumulative effect of
change in accounting principle, net of tax..... (528,439) 8,210 (604,385) 99,048
Cumulative effect of change in accounting principle - - (18,642) -
--------- --------- -------- -------
Net income/(loss)....................... $(528,439) $ 8,210 $(623,027) $99,048
========= ========= ========= =======

Basic and diluted earnings/(loss) per share:
Income/(loss) from continuing operations before
cumulative effect of change in accounting
principle........................................ $ (2.05) $ 0.06 $ (2.31) $ 0.54
Discontinued operations:
Loss from operations of fixed income
business, net of tax............................ - (0.03) (0.09) (0.10)
--------- --------- --------- --------
Income/(loss) before cumulative effect of
change in accounting principle, net of tax....... (2.05) 0.03 (2.40) $ 0.44
Cumulative effect of change in accounting principle. - - (0.07) -
--------- --------- --------- --------
Net income/(loss)......................... $ (2.05) $ 0.03 $ (2.47) $ 0.44
========= ========= ========= ========
Basic........................................... 258,206 243,719 251,865 224,566
Diluted......................................... 258,206 243,722 251,865 224,567

The accompanying notes are an integral part of these consolidated
financial statements.

-3-

INSTINET GROUP INCORPORATED

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, Except Per Share Amounts)
(Unaudited)

September 30, December 31,
2002 2001

ASSETS

Cash and cash equivalents..................................... $ 600,781 $ 703,678
Securities segregated under federal regulations............... 303,150 310,692
Securities owned, at market value............................. 290,729 236,007
Securities borrowed........................................... 481,910 455,922
Receivable from broker-dealers................................ 168,698 421,196
Receivable from customers..................................... 59,654 68,280
Commissions and other receivables, net........................ 149,071 116,027
Taxes receivable.............................................. 50,526 -
Investments................................................... 65,866 91,899
Fixed assets and leasehold improvements, net.................. 195,617 205,136
Deferred tax assets, net...................................... 18,239 52,165
Goodwill, net................................................. - 145,066
Other intangible assets, net................................... 134,286 63,664
Other assets.................................................. 99,922 125,109
---------- ----------
Total assets.................................................. $2,618,449 $2,994,841
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES

Short-term borrowings......................................... $ 43,817 $ 69,299
Securities loaned............................................. 438,881 257,000
Payable to broker-dealers..................................... 97,841 369,817
Payable to customers.......................................... 317,961 389,803
Taxes payable... ............................................. - 30,229
Payable to Parent............................................. 211,268 2,254
Payable to affiliates, net.................................... 36 12,707
Accrued compensation........................................... 66,310 128,175
Dividend payable............................................. 41,839 -
Accounts payable, accrued expenses and other liabilities...... 277,237 273,048
---------- ----------
Total liabilities............................................. 1,495,190 1,532,332
---------- ----------
Commitments and contingencies (Note 13)

STOCKHOLDERS' EQUITY
Common stock, $0.01 par value (950,000 shares authorized,
329,398 and 248,351 issued and 329,237 and 248,351 shares
outstanding as of September 30, 2002 and December 31, 2001,
respectively) ................................................ 3,294 2,483
Additional paid-in capital.................................... 1,661,025 1,396,551
Retained earnings/(accumulated deficit)....................... (548,911) 74,116
Treasury stock, at cost (161 shares) ......................... (1,151)
Accumulated other comprehensive income/(loss)................. 12,656 (726)
Unearned compensation......................................... (3,654) (9,915)
---------- ----------
Total stockholders' equity.................................... 1,123,259 1,462,509
---------- ----------
Total liabilities and stockholders' equity.................... $2,618,449 $2,994,841
========== ==========

The accompanying notes are an integral part of these consolidated
financial statements.

-4-

INSTINET GROUP INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)

Nine Months Ended
September 30,
2002 2001
-------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income/(loss)............................................. $ (623,027) $ 99,048
Adjustments to reconcile net income to cash used in
operating activities:
Write-off of fixed assets.................................. 4,513 -
Depreciation and amortization.............................. 53,765 62,021
Goodwill impairment, pre-tax............................... 571,037 -
Deferred tax assets, net................................... 2,781 (9,820)
Amortization of unearned compensation...................... 3,455 6,718
(Increases)/decreases in operating assets:
Securities segregated under federal regulations............ 7,542 (59,009)
Securities borrowed........................................ (25,988) (353,815)
Receivable from broker-dealers............................. 252,498 (50,345)
Receivable from customers.................................. 8,626 71,792
Commissions and other receivables, net..................... (6,469) 2,423
Receivable from Parent..................................... - (4,212)
Receivable from affiliate, net............................. - 14,267
Taxes receivable........................................... (50,526)
Other assets............................................... 32,992 (48,534)
Increases/(decreases) in operating liabilities:
Short-term borrowings...................................... (25,482) 85,609
Securities loaned.......................................... 181,881 123,680
Payable to broker-dealers.................................. (271,976) (27,202)
Payable to customers....................................... (71,842) 41,257
Taxes payable.............................................. (30,941) 21,986
Payable to Parent.......................................... 2,114 (22,488)
Payable to affiliates, net................................. (12,671) 13,003
Accrued compensation....................................... (61,865) (82,409)
Accounts payable, accrued expenses and other liabilities... (28,385) 100,035
-------- --------
Cash used in operating activities.... .................. (87,968) (15,725)

CASH FLOWS FROM INVESTING ACTIVITIES:
Securities owned, at market value.......................... (54,722) 97,737
Investments......................................... 28,589 7,287
Purchase of fixed assets and leasehold improvements........ (26,716) (73,376)
Acquisitions of businesses, net ........................... 25,951 -
-------- --------
Cash (used in)/provided by investing activities......... (26,898) 31,648

CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock................................. (1,413) -
Repayment of subordinated debt from affiliate.............. - (50,417)
Loan from Parent........................................... - 150,000
Capital distribution to Parent............................. - (150,000)
Net proceeds from initial public offering.................. - 486,916
Repayment of loan from Parent.............................. - (150,000)
Proceeds from issuance of common shares.................... - 279
-------- --------
Cash (used in)/provided by financing activities......... (1,413) 286,778

Effect of exchange rate changes.......................... 13,382 (2,572)
-------- --------
Decrease in cash and cash equivalents........................ (102,897) 300,129
Cash and cash equivalents, beginning of year................. 703,678 415,199
-------- --------
Cash and cash equivalents, end of period..................... $ 600,781 $715,328
======== ========

The accompanying notes are an integral part of these consolidated
financial statements.

-5-

INSTINET GROUP INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

Instinet Group Incorporated (the "Company" or "Instinet") is a Delaware
holding company which, through its operating subsidiaries, provides global
agency and other brokerage services to broker-dealers, institutional customers,
hedge funds and professional traders. The Company is approximately 63% owned by
subsidiaries of Reuters Group PLC ("Reuters" or "Parent").

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant transactions
and balances between and among the Company and its subsidiaries have been
eliminated in consolidation. Island's results of operations, subsequent to
September 20, 2002, are consolidated with our results (Note 3). These financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of management,
reflect all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the financial position, results of operations
and cash flows for the periods presented in conformity with generally accepted
accounting principles. These unaudited financial statements should be read in
conjunction with the Company's audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K, as filed with the SEC on
March 27,2002.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Our
accounting policy related to our strategic alliances and long term investments
is the most critical accounting policy that requires us to make estimates and
use judgments that could affect our results (See "INVESTMENTS" and "GOODWILL"
accounting policies below).

TRANSACTION FEES

Transaction fees and related expenses arising from securities brokerage
transactions are recorded on a trade date basis.

SOFT DOLLAR AND COMMISSION RECAPTURE

Soft dollar and commission recapture expenses primarily relate to the
purchase of third party research products as well as payments made as part of
the Company's commission recapture services. The Company reports its transaction
fee revenue from these businesses separately from its soft dollar and commission
recapture expenses.

INVESTMENTS

Investments are stated at estimated fair value as determined in good
faith by management. Generally, management will initially value investments at
cost and require that changes in value be established by meaningful third-party
transactions or a significant impairment in the financial condition or operating
performance of the issuer, unless meaningful developments occur that otherwise
warrant a change in the valuation of an investment. Factors considered in
valuing individual investments include, without limitation, available market
prices, type of security, purchase

-6-

price, purchases of the same or similar securities by other investors,
marketability, restrictions on disposition, current financial position and
operating results, and other pertinent information.

Management uses its best judgment in estimating the fair value of these
investments. There are inherent limitations in any estimation technique. The
fair value estimates, presented herein, are not necessarily indicative of an
amount which the Company could realize in a current transaction. Because of the
inherent uncertainty of valuation, these estimated fair values do not
necessarily represent amounts that might be ultimately realized, since such
amounts depend on future circumstances, and the differences could be material.

Investments are accounted for under the equity method if the Company
has the ability to exercise significant influence over the investee, but not
control. Significant influence is deemed to exist if the Company has ownership
of between 20% and 50%.

Unrealized gains and losses from investments are included in investment
income on the Consolidated Statements of Operations.

DEPRECIATION AND AMORTIZATION OF FIXED ASSETS ($ IN THOUSANDS)

Depreciation of capitalized furniture and equipment is provided on a
straight-line basis using estimated useful lives of three to ten years.
Leasehold improvements are amortized on a straight-line basis over the lesser of
the lease term or the estimated useful life. Fixed assets are stated at cost,
net of accumulated amortization of $285,422 and $373,689 as of September 30,
2002 and December 31, 2001, respectively.

ACQUISITIONS AND GOODWILL

All business acquisitions have been accounted for under the purchase
method and, accordingly, the excess of the purchase price over the fair value of
the net assets acquired has been recorded as goodwill on the Consolidated
Statements of Financial Condition.

The carrying value of goodwill is reviewed on a periodic basis for
impairment based upon estimated fair value of the Company's reporting units. The
Company estimates fair value by using a discounted cash flow model or by using
the services of an external valuation specialist. Should the review indicate
that goodwill is impaired, the Company's carrying value of goodwill would be
reduced by the estimated shortfall of the discounted cash flows.

In accordance with SFAS 142 "Goodwill and other Intangible Assets,"
goodwill existing as of June 30, 2001 was amortized until December 31, 2001. For
goodwill arising from acquisitions after June 30, 2001, the Company did not
amortize goodwill but reviewed it for impairment in accordance with the
Company's impairment policy noted above.

Pursuant to the purchase method, the results of operations, changes in
stockholders' equity and cash flows of acquired companies and businesses are
included in consolidated operations only for those periods following the date of
their acquisition.

The Company's subsidiary, ProTrader Group, L.P. ("ProTrader"), has
entered into agreements whereby additional consideration would be paid to former
owners of trading offices it had purchased. The additional consideration is
generally based on actual trading volumes of the respective trading office and
is generally effective for a period of two years from the date of acquisition.
In accordance with EITF 95-8: "Accounting for Contingent Consideration Paid to
Shareholders of an Acquired Enterprise in a Purchase Business Combination", the
Company records these contingent payments as additional goodwill.

-7-

MARKETING AND BUSINESS DEVELOPMENT

Advertising costs are expensed when incurred.

SOFTWARE COSTS

Costs for internal use software, whether developed or obtained, are
assessed to determine whether they should be capitalized or expensed in
accordance with American Institute of Certified Public Accountants' Statement
("SOP") 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use."

INCOME TAXES

The Company files a consolidated income tax return in the U.S. and in
other countries and combined U.S. state and local income tax returns with an
affiliate.

The Company records deferred tax assets and liabilities for the
difference between the tax basis of assets and liabilities and the amounts
recorded for financial reporting purposes, using current tax rates. Deferred tax
expenses and benefits are recognized in the Consolidated Statements of
Operations for changes in deferred tax assets and liabilities.

STOCK-BASED COMPENSATION

The Company accounts for its stock-based compensation plans in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees
("APB No. 25"), SFAS 123 Accounting for Stock-Based Compensation ("SFAS No.
123"), and related accounting interpretations. The Company has chosen to account
for stock options granted to employees using the intrinsic value method
prescribed in APB No. 25 and accordingly compensation expense is measured as the
excess, if any, of the estimated fair value of the Company at the date of grant
over the option exercise price and is recorded over the vesting period. For
options granted to non-employees, the Company uses the fair value method
prescribed in SFAS No. 123 and accordingly records compensation expense over the
vesting period.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.

SECURITIES OWNED ($ IN THOUSANDS)

Securities owned are recorded on a trade date basis and are carried at
their market value with unrealized gains and losses reported in investment
income on the Consolidated Statements of Operations. Securities owned, with the
exception of shares in stock exchanges, have maturities of less than 3 years and
consisted of the following:

September 30, December 31,
2002 2001
----------- ------------

U.S. government and federal agency obligations $ 38,702 $42,446
Municipal bonds 84,520 73,637
Corporate bonds 92,488 72,408
Foreign sovereign obligations 48,065 18,317
Shares of stock exchanges 26,753 29,199
Other 200 --
--------- -------
Total $290,729 $ 236,007
========= =======

-8-

SECURITIES BORROWED AND LOANED

Securities borrowed and loaned are recorded at the amount of cash
collateral advanced or received. Securities borrowed require the Company to
deposit cash with the lender. For securities loaned, the Company receives
collateral in the form of cash in an amount generally in excess of the market
value of the securities loaned. The Company monitors the market value of the
securities borrowed and loaned on a daily basis, with additional collateral
obtained or refunded, as necessary.

RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS

Receivable from broker-dealers are primarily comprised of fails to
deliver. Fails to deliver arise when the Company does not deliver securities on
settlement date. The Company records the selling price as a receivable due from
the purchasing broker-dealer. The receivable is collected upon delivery of the
securities. Payable to broker-dealers are primarily comprised of fails to
receive. Fails to receive arise when the Company does not receive securities on
settlement date. The Company records the amount of the purchase price as a
payable due to the selling broker-dealer. The liability is paid upon receipt of
the securities.

RECEIVABLE FROM AND PAYABLE TO CUSTOMERS

Receivable from customers primarily represent customer debit balances
and payable to customers represent free credit balances in customer accounts.

COMMISSIONS AND OTHER RECEIVABLES, NET ($ IN THOUSANDS)

Commissions and other receivables are reported net of a provision for
doubtful accounts of $25,936 and $7,472 as of September 30, 2002 and December
31, 2001, respectively.

SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD
UNDER AGREEMENTS TO REPURCHASE

Transactions involving purchases of securities under agreements to
resell and securities sold under agreements to repurchase are treated as
collateralized financing transactions and are recorded at their contracted
resale amounts plus accrued interest. It is the Company's policy to take
possession of securities with a market value in excess of the principal amount
loaned plus the accrued interest thereon, in order to collateralize reverse
repurchase agreements. Similarly, the Company is required to provide securities
to counterparties in order to collateralize repurchase agreements. The Company's
agreements with counterparties generally contain contractual provisions allowing
for additional collateral to be obtained, or excess collateral returned, when
necessary. It is the Company's policy to value collateral daily and to obtain
additional collateral, or to retrieve excess collateral from counter-parties,
when deemed appropriate.

FOREIGN CURRENCY TRANSLATION

Assets and liabilities of subsidiaries whose functional currency is not
the U.S. dollar are translated based on the end of period exchange rates from
local currency to U.S. dollars. Results of operations are translated at the
average exchange rates in effect during the period. The resulting gains or
losses are reported as comprehensive income.

DERIVATIVES

The Company may enter into forward foreign currency contracts to
facilitate customers' settling transactions in various currencies, primarily the
U.S. dollar, British pound or Euro. These forward foreign currency contracts are
entered into with third parties and with terms generally identical to its
customers' transactions, thereby mitigating exposure to currency risk. Forward
foreign currency contracts generally do not extend beyond 14 days and realized
and unrealized gains and losses resulting from these transactions are recognized
in the Consolidated Statements of Operations as transaction fees in the period
during which they are incurred. These activities have not resulted in a material
impact to the Company's operations to date.

-9-

TREASURY STOCK

The Company's purchases of shares of its own common stock are recorded
as treasury stock under the cost method and are shown as a reduction to
stockholders' equity on the statement of financial condition.

3. MERGER WITH ISLAND ($ IN THOUSANDS)

On September 20, 2002 the Company acquired 100% of the outstanding
common stock of Island Holding Company, Inc., the parent company of The Island
ECN, Inc. (collectively, "Island"). Island's results of operations, since that
date, have been included in the Company's consolidated financial statements.
Island is a leading electronic securities marketplace, with a large liquidity
pool of orders to buy and sell securities that are published in its marketplace.
Island's proprietary technology enables it to offer low cost, rapid and reliable
order display and matching services to its customers. The Company believes this
acquisition will result in better execution opportunities for its customers, a
stronger technology and trading platform, an alternative to other offerings,
cost savings, and a stronger management team.

The aggregate purchase price was $555,349, comprised of $492,826
representing 80,658,886 shares of the Company's common stock, $20,141
representing additional common shares for the conversion of options, warrants
and stock appreciation rights, deferred tax liability of $32,560 related to
intangible assets and $9,822 representing direct costs of the acquisition. The
value of the common shares issued was determined based on the average closing
market price of the Company's common shares over the 2-day period before and
after June 10, 2002, the date the terms of the acquisition were agreed to and
announced.

The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition. The allocation of
the excess purchase price over the estimated fair values of Island's assets and
liabilities were performed by an independent valuation specialist and are as
follows:

September 20,
2002
---------

Cash $ 41,100
Receivables, net 26,575
Fixed assets, net 14,103
Other assets 11,776
Intangible assets 74,000
Goodwill 421,081
---------
Total assets acquired 588,635
Less liabilities assumed (33,286)
---------
Net assets acquired $ 555,349
=========

As part of the merger, the Company expects to incur various non-cash
charges related to the amortization of identified intangible assets and the
conversion of existing Island equity options. In addition, the Company expects
to incur one-time charges to enable them to achieve on-going cost synergies.
Management is currently evaluating the extent of this charge, but at this time,
has not made any estimate.

4. DIVIDEND

In connection with the merger, the Company paid a $1.00 per common
share cash dividend to its stockholders of record as of September 19, 2002,
which represented a distribution of $248,739, of which $206,900 was distributed
to the Company's Parent. The Company paid this dividend on October 3, 2002.

-10-

5. GOODWILL ($ in thousands)

The following table sets forth the changes in the carrying amount of
goodwill:

Balance as of December 31, 2001 $ 145,066
Goodwill acquired during the period 425,971
Goodwill impairment (571,037)
---------
Balance as of June 30, 2002 $ -
=========

The Company completed its acquisition of ProTrader on January 3, 2002,
thereby increasing its goodwill by $4,606. In addition, the Company recorded
additional goodwill of $23 related to contingency consideration paid to former
owners of trading offices purchased by its subsidiary ProTrader.

The Company completed its merger with Island on September 20, 2002 (Note
3), thereby increasing its goodwill by $421,081. In addition, Island had
existing goodwill of $261.

In the first quarter of 2002, during the Company's adoption of SFAS 142
and its transitional review test of goodwill, the Company identified indicators
of possible impairment of its recorded goodwill related to its ProTrader
acquisition. Such indicators were an overall decrease in customer transaction
volumes during the first quarter, which led to operating losses. As a result,
the Company closed several trading offices and restructured its operations in
the first quarter of 2002. In accordance with SFAS 142, based on the results of
a discounted cash flow analysis, the Company calculated a pre-tax level of
goodwill impairment of $15,750, which was represented by the shortfall of the
discounted cash flows versus the carrying amount of goodwill.

In May 2002, the Company closed its fixed income trading platform. Due to
a global economic slowdown and the uneven pace of acceptance of electronic fixed
income trading platforms, the business had been unable to reach a critical mass.
As a result, the Company's goodwill related to its acquisition of Montag Poepper
& Partner GmbH ("Montag"), a fixed income broker-dealer in Germany, was
impaired. Therefore, the Company recorded a pre-tax impairment loss of $3,296,
the remaining carrying value of its goodwill for that business in May 2002.

During the third quarter, the Company experienced a decline in its market
capitalization, particularly towards the end of the quarter. Due to this
significant decrease, the Company's book value exceeded its fair market value.
The Company believes that the significant decline in market value reflects the
ongoing challenging business environment, declining business fundamentals, the
commoditization of its services, the launch of significant competitive products
and a difficult regulatory environment. These events prompted the Company to
perform a goodwill impairment test.

In accordance with SFAS 142, based on the results of a valuation analysis
prepared by an independent specialist, the Company has determined that its
existing goodwill had been completely impaired and as a result the Company
recorded a pre-tax goodwill impairment loss of approximately $552 million, the
remaining carrying value of its goodwill, as of September 30, 2002.

-11-

For comparative purposes, the following table reflects the Company's
results for the periods ended September 30, 2001, adjusted as though the Company
had adopted SFAS 142 on January 1, 2001:

Three Months Nine Months
Ended Ended
September 30, September 30,
2001 2001
--------- ---------

Net income, as reported $ 8,210 $ 99,048
Goodwill amortization 2,011 6,033
Tax effect (356) (1,067)
--------- ---------
Net income, as adjusted $ 9,865 $ 104,014
========= =========

Basic and diluted earnings per share, as reported $ 0.04 $ 0.46
Basic and diluted earnings per share, as adjusted $ 0.04 $ 0.46

6. INTANGIBLE ASSETS ($ IN THOUSANDS)

Information regarding the Company's identifiable intangible assets are
as follows:

Estimated
Life Identifiable Accumulated September 30,
Intangible Assets (Years) Value Amortization 2002
- ----------------- --------- --------- --------- ---------

Technology 7.0 $ 122,984 $ (10,108) $ 112,876
Customer relationships 5.0 15,500 (78) 15,422
Trade name 1.5 4,800 (80) 4,720
Non-compete agreements 1.0 1,300 (32) 1,268
--------- --------- ---------
Total $ 144,584 $ (10,298) $ 134,286
========= ========= =========

Intangible assets arose in connection with the Company's acquisitions
of ProTrader in October 2001 and Island in September 2002. The intangible assets
are amortized on a straight line basis over their respective estimated useful
lives as shown above. Amortization expense for the three months and nine months
ended September 30, 2002 was $2,898 and $7,940, respectively. Estimated
amortization expense for each of the next 5 years is:

Year Expense
----- -------

2003 $24,813
2004 21,390
2005 20,670
2006 20,670
2007 19,817

7. INVESTMENTS ($ IN THOUSANDS)

From time to time, the Company makes strategic alliances and long-term
investments in other companies. The changes in the carrying values at the end of
each period result from additional investments, sales, and unrealized and
realized gains and losses, as well as fluctuations in exchange rates for
investments made in non-U.S. dollars. A description of the Company's more
significant investments are as follows:

- - WR Hambrecht + Co ("Hambrecht") -- In 1999 and 2000, the Company made
investments totaling $27,500, now representing a 7.8% interest, in Hambrecht.
Hambrecht underwrites initial public offerings through its auction-based
securities offering via the Internet, performs research and analysis, places and
invests in private equity transactions, and offers mergers and acquisition
advisory services. As of September 30, 2002 and December 31, 2001, the Company
carried its investment at

-12-

estimated fair value of $10,000 and $16,450, respectively. In addition, as of
September 30, 2002, the Company recorded a loan receivable from Hambrecht in the
amount of $1,989. This loan accrues interest at prevailing market rates and
matures in February 2007 and June 2007.

- - TP Group LDC -- In 1999 and 2000, the Company made investments, and also sold
certain portions of its investment, in TP Group LDC, now representing a 13.8%
interest. TP Group LDC is a consortium led by the Company that owns 38.9% of
virt-x, an electronic order driven equities market for pan-European securities.
As of September 30, 2002 and December 31, 2001, the Company carried its
investment at estimated fair value of $2,678 and $8,816, respectively.

- - Archipelago Holdings LLC ("Archipelago") -- In 1999, the Company made an
investment of 15,528 GBP, now representing approximately 4.8% interest, in
Archipelago. Archipelago, through its subsidiary, provides order entry and
execution capabilities using proprietary systems while providing customers
access to liquidity, including access to other electronic communication
networks. In March 2002, Archipelago merged with REDIBook ECN LLC, another ECN.
As of September 30, 2002 and December 31, 2001, the Company carried its
investment at estimated fair value of $25,000 and $40,000, respectively.

- - Starmine Corporation ("Starmine") -- In February 2002, the Company made an
investment of $2,000 representing a 12.8% interest in Starmine. Starmine
provides independent ratings of Wall Street equity analysts. As of September 30,
2002, the Company carried its investment at estimated fair value of $2,000.

- - The Nasdaq Stock Market, Inc. ("Nasdaq") -- In 2000, the Company made an
investment of $15,475 in Nasdaq and its subsidiaries, ProTrader and Island,
carried investments in Nasdaq totaling $2,817. As of September 30, 2002 and
December 31, 2001, the Company carried its investment at estimated fair value of
$18,292 and $15,736, which was unchanged from its original cost.

- - Tradeware S.A. ("Tradeware") -- In 2000, the Company made investments of 4,000
euros, and in 2001, 66,925 Belgian francs and 1,500 euros, now representing a
47.9% interest, in Tradeware. Tradeware is a European based provider of
integrated order routing solutions to broker-dealers in Europe. As of September
30, 2002 and December 31, 2001, the Company carried its investment at $3,411 and
$4,492, respectively, as determined under the equity method. In addition, as of
September 30, 2002, the Company recorded a loan receivable from Tradeware in the
amount of $2,006. This loan accrues interest at prevailing market rates and
matures on December 31, 2003.

- - Knight Roundtable Europe Ltd. ("Roundtable") -- In 2001, the Company made an
investment of $1,000 in Roundtable. Roundtable is a pan-European broker
consortium designed to compete for order flow from small investors in the
region. At December 31, 2001, the Company carried its investment at estimated
fair value of $250. In June 2002, the Company wrote off its investment in
Roundtable.

- - JapanCross Securities Co. Ltd. ("JapanCross") -- In 2001 and 2002, the Company
made a series of investments totaling $6,871, representing a 50% interest in
JapanCross, a joint venture which was established to provide a crossing service
for Japanese equity securities. As of September 30, 2002 and December 31, 2001,
the Company carried its investment at $2,485 and $3,782, respectively, as
determined under the equity method.

- - Vencast, Inc. ("Vencast") -- In 2000 and 2001, the Company made investments of
5,031 GBP and $1,500, respectively, in Vencast. Vencast provided solutions by
using the Internet to facilitate the process of raising capital and investing
for the private equity industry. As of December 31, 2001, the Company carried
its investment at $2,373, as determined under the equity method. In March 2002,
Vencast ceased operations and the Company wrote off its carrying value. In
addition, as of December 31, 2001, the Company had recorded a loan receivable
from Vencast in the amount of $3,000, which was subsequently written off.

- - e-Xchange Advantage Corporation. ("e-Xchange") -- In July 2002, the Company
made an investment of $2,000 representing a 9.8% interest in e-Xchange.
e-Xchange formed a partnership with The Nasdaq Stock Market to develop
securities electronic trading

-13-

systems and tools. As of September 30, 2002, the Company carried its investment
at estimated fair value of $2,000.

8. EARNINGS PER SHARE ($ AND SHARES IN THOUSANDS)

Basic earnings per share ("EPS") excludes dilution and is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential reduction in EPS that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock.

The Company has authorized the issuance of a maximum of 34,118 shares of
common stock under the Company's stock option plan. In addition the Company has
issued 2,851 warrants in connection with its merger with Island. Options and
warrants to purchase 30,497 shares of common stock at a weighted average
exercise price of $11.06 per share were outstanding as of September 30, 2002.
However, options and warrants to purchase 25,045 and 21,464 shares of common
stock were not included in the computation of dilutive EPS for the three and
nine months ended September 30, 2002 and 2001, respectively, as the exercise
price for these options and warrants exceeded the average market price of the
Company's common stock for each of the respective periods. Accordingly, the
diluted EPS computation does not include the antidilutive effect of these
options. Options expire on dates ranging from March 2003 to December 2011.

Earnings per share under the basic and diluted computations are as
follows:

-14-

9. COMPREHENSIVE INCOME ($ IN THOUSANDS)

Comprehensive income includes net income and changes in stockholders'
equity except those resulting from investments by, or distributions to,
stockholders. Comprehensive income is as follows:

Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------- ------- ---------- --------

Net income / (loss) $(528,439) $ 8,210 $(623,027) $99,048
Changes in other comprehensive income/(loss):
Foreign currency translation adjustment 5,725 (2,800) 13,382 (2,572)
---------- ------- ---------- --------
Total comprehensive income / (loss), net of tax $ (522,714) $ 5,410 $ (609,645) $ 96,476
========== ======= ========== ========

10. SEGMENT/GEOGRAPHIC DATA ($ IN THOUSANDS)

The Company's activities as a provider of agency brokerage services
constitute a single business segment pursuant to SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." The accompanying table
summarizes select data about the Company's U.S. and non-U.S. operations. Because
of the highly integrated nature of the financial markets in which the Company
competes and the integration of the Company's worldwide business activities, the
Company believes that results by geographic region are not necessarily
meaningful in understanding its business.

Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------

Total revenues:
U.S.......................... $ 213,142 $ 250,807 $ 635,728 $ 890,820
Non-U.S..................... 41,138 68,854 156,363 251,609
--------- -------- ------- ----------
Total....................... 254,280 319,661 792,091 1,142,429
========= ======== ======= ==========

Income/(loss) from continuing operations
before income taxes and cumulative
effect of change in accounting principle:
U.S.......................... (560,735) 23,787 (639,865) 160,443
Non-U.S...................... (7,662) 7,545 (1,712) 55,826
--------- ------- -------- ----------
Total....................... $ (568,397) $31,332 $ (641,577) $ 216,269
========= ======= ======== ==========

September 30, December 31,
2002 2001
------------- -------------

Identifiable assets:
U.S.......................... $ 2,272,729 $ 2,102,145
Non-U.S..................... 345,720 892,696
--------- ----------
Total............................. $ 2,618,449 $ 2,994,841
========= ==========

-15-

11. COLLATERAL ARRANGEMENTS ($ IN THOUSANDS)

As of September 30, 2002 and December 31, 2001, the fair value of
collateral held by the Company that could be sold or repledged totaled $706,460
and $607,069, respectively. Such collateral is generally obtained under resale
and securities borrowing agreements. Of this collateral, $696,112 and $548,487
had been sold or repledged generally to cover short sales or effect deliveries
of securities as of September 30, 2002 and December 31, 2001, respectively. In
addition, securities in customer accounts with a fair value of $21,790 and
$76,462 could be sold or repledged by the Company as of September 30, 2002 and
December 31, 2001, respectively.

12. NET CAPITAL REQUIREMENTS ($ IN THOUSANDS)

The Company's U.S. broker-dealer subsidiaries are subject to the SEC's
Uniform Net Capital Rule, which requires the maintenance of minimum net capital.
The subsidiaries have elected to use the alternative method, which requires that
they maintain minimum net capital equal to the greater of $250 or 2% of
aggregate debit items arising from customer transactions. As of September 30,
2002 and December 31, 2001, Instinet Clearing Services Inc., which is the
counterparty to each of the customer transactions in U.S. securities executed
through Instinet Corporation (but not the Island ECN, which clears its
securities transactions through another broker-dealer), had net capital of
$149,374 and $259,990, which was $145,372 and $256,443 in excess of its required
net capital of $4,002 and $3,547, respectively. Certain other U.S. broker-dealer
subsidiaries of the Company are also subject to capital adequacy requirements
and were in compliance with their respective requirements.

The Company's international broker-dealer subsidiaries are subject to
capital adequacy requirements promulgated by authorities of the countries in
which they operate. As of September 30, 2002 and December 31, 2001, these
subsidiaries had met their local capital adequacy requirements.

13. COMMITMENTS AND CONTINGENCIES

In the normal course of conducting its securities business, the Company has
been involved in various legal proceedings and regulatory investigations and
inquiries by the SEC and other self regulatory organizations. In the opinion of
management, after consultation with legal counsel, the ultimate outcome of
pending litigation matters and regulatory investigations and inquiries will not
have a material adverse effect on the financial condition, results of operations
or cash flows of the Company.

14. STOCK BASED PLANS

The Company has granted Restricted Stock Units ("RSU") to certain
members of senior management in lieu of cash for a portion of each members
calendar year 2001 bonus, as well as to Board members. The RSUs are convertible
into an equal number of shares of the Company's common stock and generally vest
either one or two years from the date of grant. As of September 30, 2002, the
Company had granted 154,106 RSUs.

Under the terms of the merger agreement with Island, the Company
converted 2,942,128 options, 2,851,327 warrants and 19,006 stock appreciation
rights as substitutions for options, warrants and stock appreciation rights to
holders of Island options, warrants and stock appreciation rights outstanding at
September 20, 2002. The options have exercise prices ranging from $0.91 to
$9.23, the warrants have an exercise price of $1.04 and the stock appreciation
rights have an exercise price of $0.91.

On October 7, 2002, the Company approved an adjustment to the exercise
prices of all outstanding options issued prior to September 19, 2002 to adjust
for the dividend to the Company's stockholders in accordance with FIN 44:
"Accounting for Certain Transactions involving Stock Compensation an
Interpretation of APB No. 25." The exercise prices of these options were
decreased by $0.98 a share. The $0.98

-16-

adjustment reflects the change in the price of Company's common stock between
the close of business on Friday, September 20, 2002, the last date on which the
common stock price included the dividend, and the open of business on Monday,
September 23, 2002, the first date on which the common stock began trading
without the right to the dividend.

15. TREASURY STOCK ($ IN THOUSANDS)

During the first half of 2002, the Company purchased 185,455 shares of
its own common stock at a cost of $1,335 in connection with its RSU plan (Note
14). During the three months ended September 30, 2002, the Company purchased an
additional 14,323 shares at a cost of $77 in connection with an additional RSU
grant to a Board member and reissued 39,153 shares as RSUs became vested.

16. STOCKHOLDERS' EQUITY ($ IN THOUSANDS)

The following table summarizes changes in the Company's stockholders
equity from December 31, 2001 to September 30, 2002.

Additional Other Total
Common Paid-In Treasury Retained Comprehensive Unearned Stockholders
Stock Capital Stock Earnings Income Compensation Equity
------ ---------- -------- --------- ------- -------- ----------

As of Dec. 31, 2001 $2,483 $1,396,551 $74,116 $ (726) $ (9,915) $1,462,509
Net loss - - - (623,027) - - (623,027)
Stock issuance for 495,878
acquisitions 811 - - - - 496,689
Stock based 17,335
Compensation, net - - - - 6,261 23,596
Treasury stock, net - - (1,151) - - - (1,151)
Currency translation
adjustment - - - - 13,382 - 13,382
Dividend - (248,739) - - - - (248,739)
------ ---------- -------- --------- ------- -------- ----------
As of Sept. 30, 2002 $3,294 $1,661,025 $ (1,151) $(548,911) $12,656 $ (3,654) $1,123,259
====== ========== ======== ========= ======= ======== ==========

17. RELATED PARTY TRANSACTIONS ($ IN THOUSANDS)

The Company transacts business and has extensive relationships with
Reuters and its related parties. Due to these relationships, it is possible that
the terms of these transactions are not the same as those that would result from
transactions among unrelated parties. All receivables and payables with Reuters
and affiliates arise from normal operating activities between the Company and
Reuters and its affiliates and are generally settled on a quarterly basis.
Included within Payable to Parent of $211,268, as of September 30, 2002, is a
dividend payment (Note 4) of $206,900.

18. RESTRUCTURING ($ IN THOUSANDS)

In 1998, the Company began to design and develop a web-based retail
brokerage operation. In December 2000, based upon a review of market conditions
and an evaluation of possible alternate strategies, the Company decided to
re-direct its retail brokerage efforts. As part of this redeployment, the
Company recorded a restructuring charge of $4,000 for the nine months ended
September 30, 2001. All of the liability related to this restructuring charge
had been paid as of December 31, 2001.

In July 2001, the Company announced a review of spending initiatives
with the aim of reducing its underlying operating cost structure by
approximately $70,000 annually. This restructuring was completed in 2001 at a
pre-tax cost of $24,400 in the year ended December 31, 2001 and included:

-17-

- - Workforce reduction -- the Company reduced its employee headcount levels by
226. The departments primarily affected were various operational areas in
technology support functions, sales and trading, administrative functions and
clearing operations in its U.S. and international offices. The Company recorded
a pre-tax charge of approximately $21,000 related to its workforce reduction
during the second half of 2001.

- - Office closures/consolidation -- the Company closed its office in Sydney,
Australia and consolidated its European trading and clearing operations,
significantly reducing the size of its Zurich office. In the U.S., the Company
closed the Greenwich, Detroit and Seattle trading offices of its ProTrader
subsidiary. The Company recorded a pre-tax charge of approximately $3,000
related to its office closures during the second half of 2001.

As of September 30, 2002, the Company carried a liability of $3,383
associated with this restructuring on its Consolidated Statements of Financial
Condition, which is reflected as follows:

Balance Balance
Dec. 31, Sept 30, Due by Due after
2001 Payments 2002 12/31/02 12/31/02
-------- -------- -------- -------- --------

Workforce reduction $ 5,694 $ (2,846) $ 2,848 $ 1,405 $1,443
Office closures/consolidation 1,085 (550) 535 278 257
------ ------- ------- -------- --------
Total $ 6,779 $ (3,396) $ 3,383 $ 1,683 $ 1,700
====== ======== ======== ======== ========

In March, 2002, the Company announced that it would reduce its
annualized fixed operating costs by approximately $120,000, compared to its
annualized fixed cost run rate in the fourth quarter of 2001, in order to offset
the impact of reduced revenues due to its price reductions to U.S. broker-dealer
customers. This restructuring included reducing staff levels and related
occupancy costs, improving system and network efficiencies, and restructuring
non-core businesses. During the three months and six months ended June 30, 2002,
the Company incurred a pre-tax restructuring charge of $42,410 and $57,440,
respectively, which included:

- - Workforce reduction -- the Company reduced its employee headcount levels by
489. The departments primarily affected were various operational areas in
technology support functions, clearing operations, sales and trading, and
administrative functions in its U.S. and international offices. The Company
recorded a pre-tax charge of $29,804 and $39,034 for the three months and nine
months ended September 30, 2002, respectively, related to its workforce
reduction.

- - Office closures/consolidation -- the Company closed the Houston, Los Angeles
and San Jose trading offices of its ProTrader subsidiary, consolidated its
European trading and clearing operations, significantly reduced the size of its
offices in Switzerland, U.K. and France, and consolidated its office space in
the U.S. given its lower headcount. The Company recorded a pre-tax charge of
$12,606 and $18,406 for the three and nine months ended September 30, 2002,
respectively, related to its office closures.

As of September 30, 2002, the Company carried a liability of $ 31,181
associated with this restructuring on its Consolidated Statements of Financial
Condition, which is reflected as follows:

Balance
Original Additional Sept 30, Due by Due after
Accrual Accrual Payments 2002 12/31/02 12/31/02
-------- ---------- -------- -------- -------- --------

Workforce reduction $ 9,230 $ 29,804 $ (20,748) $ 18,286 $ 7,595 $ 10,691
Office closures/consolidation 5,800 12,606 (5,511) 12,895 4,231 8,664
------- -------- -------- ------- -------- --------
Total $15,030 $ 42,410 $ (31,800) $ 31,181 $11,826 $19,355
======= ======== ======== ======== ======== ========

-18-

19. DISCONTINUED OPERATIONS ($ IN THOUSANDS)

On May 3, 2002, the Company closed its fixed income trading platform.
The Company began developing its fixed income business in 1998 and started
trading in the spring of 2000. Against the background of a global economic
slowdown and the uneven pace of acceptance of electronic fixed income trading
platforms, the business had been unable to reach a critical mass. As a result of
the closure, the Company incurred the following charges:

Three Months Nine Months
Ended Ended
September 30, September 30,
2001 2002 2001

Loss from discontinued operations:

Loss from operation of fixed income business $ 11,871 $ 33,356 $ 34,598
Income tax benefit (4,434) (10,770) (12,925)
------- -------- -------
Net loss from discontinued operations $ 7,437 $ 22,586 $ 21,673
======= ======== =======
Loss per share - basic and diluted:

Loss from operation of fixed income business $0.05 $0.13 $0.16
Income tax benefit (0.02) (0.04) (0.06)
------ ------ ------
Net loss from discontinued operations $0.03 $0.09 0.10
====== ====== ======

A restructuring charge of $22,514 related to the closure of the
Company's fixed income platform is reflected in the nine month period ended
September 30, 2002. As of September 30, 2002, the Company carried a liability of
$549 associated with this restructuring on its consolidated statements of
financial condition, which is expected to be substantially paid by December 31,
2002.

-19-

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

OVERVIEW

Introduction

We are the largest global electronic agency securities broker and have
been providing investors with electronic trading solutions for more than 30
years. Our services enable buyers and sellers worldwide to trade securities
directly and anonymously with each other, gain price improvement for their
trades and lower their overall trading costs. Through our electronic platforms,
our customers also can access over 40 securities markets throughout the world,
including Nasdaq, the NYSE, and stock exchanges in Frankfurt, Hong Kong, London,
Paris, Sydney, Tokyo, Toronto and Zurich. We also provide our customers with
access to research generated by us and by third parties, as well as various
informational and decision-making tools. Our customers primarily consist of
institutional investors, such as mutual funds, pension funds, insurance
companies and hedge funds, as well as broker-dealers.

We have been operating in a challenging business, economic and
regulatory environment. Ongoing geopolitical and global conflicts, coupled with
the current corporate governance and accounting concerns, has led to a decreased
pace of global economic growth, particularly in the U.S. This has resulted in
lower equity prices, decreased corporate activity, increased market volatility,
and decreased customer trading volumes, particularly from our broker-dealer
clients. In addition, intense competition from other liquidity providers and
trading venues, coupled with the SEC's recent approval of Nasdaq's SuperMontage
trading system and recent SEC regulations and interpretive initiatives, have
prompted us to reduce our prices, which has resulted in decreased revenues and
losses from operations. As a result, our transaction fee revenues have declined
from $1.1 billion for the nine months ended September 30, 2001 to $799.7 million
for the comparable period in 2002 and our average net transaction fee revenue
per U.S. share, which excludes revenues directly related to soft dollar and
commission recapture and broker-dealer rebates, decreased 45.5% from $0.0066 for
the nine months ended September 30, 2001 to $0.0036 for the comparable period in
2002.

Total U.S. market share volume in the nine months ended September 30,
2002 increased to 676.7 billion shares from 611.7 billion in the nine months
ended September 30, 2001. Total Nasdaq share volumes were 336.5 billion shares
in the nine months ended September 30, 2002, down from 352.1 billion shares in
the nine months ended September 30, 2001. U.S. exchange-listed share volumes
were 340.2 billion shares in the nine months ended September 30, 2002, up from
259.6 billion shares in the nine months ended September 30, 2001. Our percentage
of overall market share decreased to 9.0% of total U.S. market share volume,
which represented 15.1% of Nasdaq share volume, and 3.0% of U.S. exchange-listed
share volume, in the nine months ended September 30, 2002. However, our market
share in Nasdaq-quoted stocks has increased significantly since the first
quarter from 11.0% for the three months ended March 31, 2002 to 20.5% for the
three months ended September 30, 2002. Island's data, subsequent to September
20, 2002, is consolidated with our results.

We incurred a loss of $623.0 million for the nine months ended
September 30, 2002, compared to net income of $99.0 million for the comparable
period in 2001, primarily as a result of goodwill impairment recognized in the
third quarter of 2002. However, on an adjusted operating basis, we had income of
$3.0 million (See Non-GAAP Financial Measurement - Adjusted Operating Income).
This positive result on an adjusted basis, as compared to our losses in the
first and second quarter of 2002, reflects the actions we have taken in the
second half of last year and beginning of this year - adjusting/revising our
pricing to maintain and expand our Nasdaq market share, increasing the breadth
and depth of our liquidity pool, and reducing our cost base to return to
sustainable profitability.

Merger with Island

On September 20, 2002, we completed our merger with Island.
Historically, Island has concentrated on the program trading and direct-access-
to-retail segments in the U.S. domestic market. We believe the transaction
brings together

-20-

complementary capabilities in the global equity markets, creating a company
better able to serve customer needs. Under the terms of the merger agreement, we
issued 80,658,886 shares of our common stock to Island stockholders and
converted options, warrants and stock appreciation rights to holders of Island
options, warrants and stock appreciation rights outstanding at September 20,
2002.

As part of the merger, we expect to incur various non-cash charges
related to the amortization of identified intangible assets and the conversion
of existing Island equity options. In addition, we expect to incur one-time
charges to enable us to achieve on-going cost synergies. We expect the merger to
deliver synergies as a result of expanded liquidity and cost savings in
technology, clearing, facilities and compensation. Management is currently
evaluating the extent of this charge, but at this time, has not made any
estimate.

Special Dividend

In connection with the merger, we paid a $1.00 per common share cash
dividend to our stockholders of record as of September 19, 2002, which
represented a distribution of $248.7 million, of which $206.9 million was paid
to Reuters. We paid this dividend on October 3, 2002.

Goodwill Impairment

During the third quarter, we experienced a decline in our market
capitalization, particularly towards the end of the quarter. Due to this
significant decrease, the Company's book value exceeded its fair market value.
The Company believes that the significant decline in market value reflects the
ongoing challenging business environment, declining business fundamentals, the
commoditization of its services, the launch of significant competitive products
and a difficult regulatory environment. These events prompted the Company to
perform a goodwill impairment test.

In accordance with SFAS 142, based on the results of a valuation analysis
prepared by an independent specialist, the Company has determined that its
existing goodwill had been completely impaired and as a result recorded a
pre-tax goodwill impairment loss of approximately $552 million, the remaining
carrying value of its goodwill, as of September 30, 2002. This is a non-cash
charge and results in no reduction in tangible book value. We recorded a related
tax benefit of approximately $26.0 million related to this charge.

Pricing Changes

In order to address the decline in our Nasdaq share volume and related
transaction fee revenues, in the second half of 2001 we reduced our pricing for
our U.S. broker-dealer customers, adjusted certain pre-set volume levels at
which we offer those customers lower per share transaction fees, and established
a pilot program to test pricing incentives for liquidity providers. In March
2002, we implemented a new pricing plan to offer further pricing incentives to
our U.S. broker-dealer customers, reducing prices paid by broker-dealers trading
Nasdaq-quoted stocks by approximately 60% and simplifying the pricing schedule
by further adjusting certain pre-set volume levels. In August 2002, we changed
our prices to offer a uniform rate to all broker-dealer customers. These
initiatives were in response to intense price competition that we experienced in
the fourth quarter of 2001 and into 2002, particularly for Nasdaq-quoted
trading. As a result, our average net transaction fee revenue per U.S. share,
per side, which excludes revenues directly related to soft dollar and commission
recapture and broker-dealer rebates, decreased 45.5% from $0.0066 for the nine
months ended September 30, 2001 to $0.0036 for the comparable period in 2002. We
will continue to monitor future price competition and evaluate our pricing
structure as part of our ongoing efforts to maintain and expand our liquidity
pool.

Cost Reduction Initiatives

Given the impact of price reductions on revenue from our U.S.
broker-dealer customers, we have taken further action to reduce costs. We
previously announced that we intended to reduce our annualized fixed operating
costs by approximately

-21-

$120 million, compared to our annualized fixed cost run rate in the fourth
quarter of 2001, through a number of measures including reducing staff levels
and related occupancy costs, improving system and network efficiencies, and
restructuring non-core businesses. We incurred a pre-tax restructuring charge of
$58.4 million for the nine months ended September 30, 2002 in connection with
the cost reduction program, which entailed the following:

- We reduced our employee headcount levels by 489 (excluding our
fixed income business). The departments primarily affected
were various operational areas in technology support
functions, clearing operations, sales and trading, and
administrative functions in our U.S. and international
offices. We recorded a pre-tax charge of approximately $39.0
million for the nine months ended September 30, 2002 related
to our workforce reduction.

- We closed the Houston, Los Angeles and San Jose trading
offices of our ProTrader subsidiary, consolidated our European
trading and clearing operations, significantly reduced the
size of our offices in Switzerland, U.K. and France, and
consolidated our U.S. office space given our lower headcount.
We recorded a pre-tax charge of approximately $19.4 million
for the nine months ended September 30, 2002 related to our
office closures and consolidations.

- On May 3, 2002, we closed our fixed income trading platform.
We began developing our fixed income business in 1998 and
started trading in the spring of 2000. Against the background
of a global economic slowdown and the uneven pace of
acceptance of electronic fixed income trading platforms, the
business had been unable to reach a critical mass. Our fixed
income business had 105 employees at the time of its closure.
As a result of the closure, we incurred a discontinued
operations charge, net of tax, of $22.6 million.

As a result of these actions, we have met our cost reduction target. We
achieved these reductions without diminishing our ability to provide high
quality service to our customers, our capacity to design, develop and deploy
innovative new technology, and our control environment. We continue to evaluate
further cost initiatives, which might result in further charges. As discussed
above, as part of the merger with Island, we expect to incur one-time charges to
enable us to achieve on-going cost synergies.

Our annualized fixed-cost base relating to continuing operations was
$634.4 million in the nine months ended September 30, 2002, down $213.1 million
from the comparable period in 2001. Our fixed-cost base excludes non-operating
expenses (goodwill impairment and restructuring costs) and variable costs (soft
dollar and commission recapture, broker-dealer rebates and brokerage, clearing
and exchange fees).

Our variable expenses are generally related to transaction volumes
rather than share volumes. Our average number of shares per transaction has
declined primarily due to a change in our customer mix and has led to lower
average revenue per transaction. Although our average cost per transaction has
also declined, average revenue per transaction has decreased at a faster rate,
resulting in pressure on our margins.

Regulatory and Competitive Environment

The SEC regularly considers a variety of regulations or interpretative
initiatives with respect to the structure of the equity securities markets that
affect our business, financial condition and operating results.

- ETFs - Under Regulation ATS, an ATS, meeting certain trading volume
thresholds in securities for which it displays quotation data, must
provide to a self-regulatory organization ("SRO") its best bid and
offer data for those securities and must provide other
broker-dealers execution access to such quotes. Instinet and Island
currently provide all of their quotation data for Nasdaq-quoted
stocks to various SROs in order to comply with

-22-

Regulation ATS. Instinet and Island have reached the ATS thresholds
in certain exchange-traded funds ("ETF"), which are US listed
stocks, such as the Nasdaq-100 Index, known as QQQs, the Dow Jones
Industrial Average Index, known as Diamonds, and the Standard &
Poor's 500 Index, or SPYs. Because Instinet was unable to provide
quotation data for US listed stocks to an SRO prior to November 4,
2002, Instinet had temporarily suspended trading in SPYs in order to
comply with applicable SEC regulations. On November 4, 2002,
Instinet began providing its quotation data for SPYs and QQQs
through a system commonly referred to as Intermarket. Instinet also
expects to begin providing quotation data for Diamonds if it reaches
the applicable trading volume thresholds as of December 1, 2002.
Trading in SPYs accounted for approximately 1.3% of Instinet's total
US equity volumes and 0.5% of its net transaction fee revenue from
US equities in the first nine months of 2002; trading in QQQs
accounted for approximately 2.8% of Instinet's total US equity
volumes and 1.2% of its net transaction fee revenue from US equities
in the first nine months of 2002; trading in Diamonds accounted for
approximately 0.2% of Instinet's total US equity volumes and 0.1% of
its net transaction fee revenue from US equities in the first nine
months of 2002.

Island, however, does not currently provide its quotation data for
US listed stocks to any SRO and, effective September 23, 2002,
Island discontinued the display of order information for QQQs,
Diamonds and SPYs, although it still permits subscribers to trade
those securities on a non-displayed basis. Since September 23, 2002,
Island's market share in QQQs has declined from approximately 35-40%
to approximately 15-20%; in Diamonds, Island's market share has
declined from approximately 35% to approximately 10-15%; and in
SPYs, Island's market share has declined from approximately 20-25%
to approximately 5-10%. Island is currently exploring alternatives
to enable it to provide quotation data for US listed stocks in
compliance with the requirements of the ATS, including limited
participation in Intermarket.

Instinet and Island have been engaged in discussions with the SEC
regarding these issues. We intend to continue to work on solutions
to these issues and to discuss the quotation display requirement and
alternatives to our participation in Intermarket with the SEC.

- Access Fees - the SEC is currently considering fees ECNs charge, the
levels of those fees, the circumstances in which access fees may be
changed and the criteria for customers' access to an ECN's system
and the requirements of Regulation ATS. For example, the SEC has, at
times, approved rules or issued interpretations that directly govern
how we determine prices for different types of customers and
services. Future SEC rules or interpretations regarding any of these
issues could have a significant and material adverse impact on our
equity securities business. We are currently discussing the
application of those rules to our past and future pricing policies
with the SEC and some of our customers, and we are unable to predict
the outcome of these discussions. We also continue to evaluate our
services and the fees we charge for them. The Instinet ECN
implemented a new pricing policy that took effect on August 1, 2002,
and The Island ECN implemented a new pricing policy that took effect
on September 5, 2002. A further change in pricing became effective
on October 21, 2002. The Island ECN has received a subpoena from the
SEC for information regarding Island's subscriber policies,
including pricing, in connection with an investigation by the SEC of
possible violations of Regulation ATS by certain ECNs. We currently
do not know the intended scope or primary objectives of this
investigation and cannot predict its outcome, but it could have a
significant adverse effect on our equity securities business.

- Market Data Revenue - the SEC has also taken recent action with
respect to market data revenue sharing programs. In the past, the
Island ECN has earned market data revenues by participating in
market data revenue sharing programs provided by Nasdaq and the CSE.
Market data revenues consist of a portion of the fees that exchanges
and Nasdaq receive for selling quotation and transaction data to
independent market data providers and market participants such as
broker-dealers. Market data revenues represented approximately 5%
and 14% of Island's total revenues for 2001 and the first three
months of

-23-

2002, respectively. For the first three months of 2002, these
revenues were offset in part by market data rebates that Island paid
to some of its customers, which represented approximately 8% of
Island's expenses for the period. On July 2, 2002, the SEC announced
that it had abrogated proposals that were submitted by several
markets, including Nasdaq and the CSE, to continue certain of their
market data revenue sharing programs. As a result, the Nasdaq and
the CSE revenue sharing programs from which Island has earned most
of its market data revenues were suspended, and Island suspended its
market data revenue sharing program. Some market data revenue
sharing programs for exchange-listed securities, which represented a
substantial portion of Island's market data revenues, were
subsequently reinstated. The CSE has submitted a proposal to share a
reduced proportion of the market data revenues it receives (50%
instead of 75%) in Nasdaq-quoted securities. The SEC, however, has
not taken any action on this or any other market data revenue
sharing programs for Nasdaq securities, and we cannot assure you
that the SEC will approve any of them. In addition, we cannot assure
you that the market data revenue sharing programs for
exchange-listed securities will continue or remain in their current
form. As a result, we cannot assure you that Island will continue to
earn market data revenues or, if it does, the level of those
revenues in the future. We also cannot predict the impact of the
suspension of Island market data revenue rebates sharing on Island's
business, financial condition and operating results. In addition,
the Island ECN has received a subpoena from the SEC for information
regarding trading and market rebate practices with respect to some
of Island's market data revenue rebate programs, in connection with
an investigation by the SEC of customer trading practices in some
exchange-traded funds. We cannot predict its outcome, but it could
have a significant adverse effect on our equity securities business.

- SuperMontage - Nasdaq's SuperSoes order execution system is being
incorporated into and replaced by a new trading platform for Nasdaq,
generally referred to as SuperMontage, which Nasdaq began to roll
out on October 14, 2002. SuperMontage incorporates enhanced
functionality, including the display of more quotation information.
The implementation of SuperMontage could cause us to receive fewer
orders in Nasdaq-quoted stocks and also could cause fewer of the
orders we receive to be executed in our liquidity pool. The Instinet
ECN currently provides its customers with order-routing access to
SuperMontage, but it has begun to display customer orders for some
stocks by posting quotations in the NASD's alternative display
facility (ADF) instead of SuperMontage and plans to continue
shifting quotations to the ADF as it opens to additional stocks. The
Island ECN currently displays its customer orders in Nasdaq-quoted
stocks by posting quotations on the Cincinnati Stock Exchange (CSE)
and not on SuperMontage or in the ADF. Instinet's participation in
SuperMontage only for order routing and not for order display may
have a significant negative impact on Instinet's order flow or other
business related to its Nasdaq-quoted stocks. We are unable to
predict accurately at this time the impact SuperMontage will have on
our business, financial condition and operating results.

New Products and Services

Throughout this difficult market environment, we have stayed focused on
delivering value added brokerage services to our clients coupled with credible
financial results. To this end, we continue to develop and enhance our
technology, pricing and service options with the aim of providing tailored
solutions that improve our clients performance as well as stimulate growth in
our liquidity pool:

- We continued to improve our core trading functionality to enhance
our customers' ability to execute large share blocks cost
efficiently. Beginning in October 2002, we launched in test phase
our newest initiative in this area - 'targeted orders'- to a select
group of institutional clients. This functionality is designed to
help traders with a block order identify potential counterparties
for the order, and negotiate directly with them, without diminishing
their ability to expose the order anonymously to the market as a
whole.

-24-

- Instinet Trading Portal (SM), our new trading application primarily
developed for our active asset manager and hedge fund customers, has
now been deployed at approximately 300 Instinet client sites at the
end of the third quarter of 2002, many with multiple site licenses.
Deployment was ahead of schedule. Portal has achieved significant
volume penetration transacting 26.9 million shares on November 4,
2002, its peak trading day to date. We are targeting a total of 400
Portal installations by year-end. The application's Internet-based
deployment strategy is designed to substantially reduce
communication and field service costs associated with our
traditional customer display screens.

- Newport(SM)(patent pending), a program-trading solution aimed
primarily at passive and quantitative fund managers, which combines
global liquidity with sophisticated trading analytics and support
for collaboration, was being used by 22 major clients in the U.S.
and Europe by the end of the third quarter of 2002, primarily
multinational banks and global index fund managers. We are targeting
a total of 40-50 client-site installations by year-end. In addition,
Newport is used actively on our own program-trading and working
order desks to trade portfolios on behalf of clients.

- We continued our program to convert our FIX clients to our new
Direct-FIX technology. This upgrade combines faster connectivity
with richer trading functionality than its predecessor and is more
cost-effective for us. By the end of the third quarter, we converted
approximately 98% of our FIX client base. We expect to complete the
entire conversion process by the end of the year, ahead of our
original schedule.

Management Changes

On September 20, 2002, Edward J. Nicoll, Chairman of Island, was appointed
Chief Executive Officer and Director of Instinet.

On October 3, 2002, Matthew Andresen, resigned as President and Chief
Executive Officer of Island. Island has appointed William Sterling to serve as
President of Island and will also continue to serve as Chief Technology Officer.

On November 1, 2002, we announced a new senior management team which
represents a combination of Instinet and Island senior executives. Jean-Marc
Bouhelier will continue to serve as Chief Operating Officer. Paul Merolla will
continue to serve as General Counsel. Mark Nienstedt, Instinet's President and
Chief Financial Officer, will continue to serve as Instinet's President,
however, John Fay, formerly Island's Chief Financial Officer, will now serve as
Instinet's Chief Financial Officer. Will Sterling will continue in his dual
capacity of Island's President and Chief Technology Officer while taking on the
additional responsibility of leading Instinet's Broker-Dealer Execution and
Clearing Group. Andrew Goldman, formerly the head of Corporate Communications
for Island, will now head up Global Marketing and Communications for Instinet.
Alex Goor, now serving as head of the Instinet-Island integration effort, will
also take on the responsibilities of Strategy and Planning for Instinet. All of
these individuals will report to Ed Nicoll.

Seasonality

We have experienced, and may continue to experience, significant
seasonality in our business. As a result of this and other factors described
above and under "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quarterly Results" in our Annual Report on Form 10-K,
period-to-period comparisons of our revenues and operating results are not
necessarily meaningful, and the results for any quarter are not necessarily
indicative of results for any future period.

-25-

Non-GAAP Financial Measurement - Adjusted Operating Income

In evaluating our financial performance and results of operations,
management reviews adjusted operating income from continuing operations. This
financial measurement excludes non-operating or one-time charges, which by their
nature, management does not consider to be a true reflection of the operating
results and financial performance of our global agency brokerage business. These
non-operating charges are investment gains and losses, restructuring charges,
goodwill impairment and the related tax effects of those items. The following
schedule reconciles our operating income to our GAAP financial results (in
thousands):

Three Months Ended Nine Months Ended
September 31, September 31,
2002 2001 2002 2001
-------- -------- -------- ---------

Total revenues, as reported $ 254,280 $ 319,661 $ 792,091 $ 1,142,429
Less investments (20,336) (6,330) (39,231) (429)
-------- -------- -------- ---------
Adjusted operating revenues 274,616 325,991 831,322 1,142,858
======== ======== ======== =========

Total expenses, as reported 822,677 288,329 1,433,668 926,160
Less goodwill impairment 551,991 - 551,991 -
Less restructuring 955 22,821 58,395 22,821
-------- -------- --------- --------
Adjusted operating expenses 269,731 265,508 823,282 903,339
======== ======== ========= ========

Adjusted operating income/(loss) from continuing
operations before income taxes and cumulative change
in accounting principle 4,885 60,483 8,040 239,519
======== ======= ========= ========

Income tax provision/(benefit), as reported (39,958) 15,685 (59,778) 95,548
Less tax effect related to adjustments 41,833 (19,274) 63,316 (12,236)
-------- ------- -------- --------
Adjusted operating income tax provision/(benefit) 1,875 34,959 3,538 107,784
======== ======= ======== ========
Income/(loss) from continuing operations before
cumulative change in accounting principle, as
reported (528,439) 15,647 (581,799) 120,721
Less net effect of adjustments 531,449 (9,877) 586,301 (11,014)
--------- -------- -------- --------
Adjusted operating income $3,010 $ 25,524 $ 4,502 $ 131,735
========= ======== ======== ========

-26-

KEY STATISTICAL INFORMATION

The following table presents key transaction volume information, as well as
certain other operating information.

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, (6) SEPTEMBER 30, (6)
------------------------ -------------------------
2002 2001 2002 2001
-------- ------- -------- -------

Total U.S. market share volume (millions)(1)(2)........ 239,100 180,711 676,658 611,687
Our total U.S. market share volume (millions)(1)....... 26,471 15,550 60,852 59,681
Our percentage of total U.S. market share volume(1)(2). 11.1% 8.6% 9.0% 9.8%
- ------------------------------------------------------- ----------- ----------- ----------- -----------
Nasdaq share volume (millions)(2)(3)................... 110,195 96,496 336,470 352,131
Our Nasdaq share volume (millions)(3)............... 22,569 13,048 50,761 51,877
Our percentage of Nasdaq share volume (2)(3).......... 20.5% 13.5% 15.1% 14.7%
- ------------------------------------------------------- ----------- ----------- ----------- -----------
U.S. exchange-listed share volume (millions)........... 128,905 83,933 340,188 259,546
Our U.S. exchange-listed share volume (millions)...... 3,902 2,502 10,091 7,804
Our percentage of U.S. exchange-listed share volume.... 3.0% 3.0% 3.0% 3.0%
- ------------------------------------------------------- ----------- ----------- ----------- -----------
Our U.S. equity transaction volume (thousands)......... 37,789 19,713 83,742 74,409
Our international equity transaction volume (thousands) 2,376 1,887 6,288 5,211
Our total equity transaction volume (thousands)...... 40,165 21,600 90,030 79,620
- ------------------------------------------------------- ----------- ----------- ----------- -----------
Our average U.S. equity transaction size (shares per
transaction) ....................................... 700 788 727 802
Our average equity transactions per day (thousands).... 628 366 479 433

- ------------------------------------------------------- ----------- ----------- ----------- -----------
Our net transaction fees from U.S. equities
(thousands)(4) $130,121 $214,578 $437,106 $783,475

Our net transaction fees from non-U.S. equities
(thousands)(4) ...................................... $40,495 $43,662 $119,654 $152,250
Our total net equity transaction fees (thousands)(4)... $170,616 $258,240 $556,760 $935,725
Our average U.S. net equity transaction fee
revenue (per share, per side)(5) $0.0025 $0.0069 $0.0036 $0.0066

(1) U.S. shares consist of shares of U.S exchange-listed and Nasdaq-quoted
stocks.

(2) Historical amounts may be restated due to updates of volume information
from Nasdaq.

(3) For a description of how we calculate our Nasdaq share volumes, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Nasdaq Volume Calculations" in our Annual Report on Form
10-K.

(4) Our net equity transaction fee revenues are calculated by subtracting the
soft dollar and commission recapture expenses for equity transactions, as
well as broker-dealer rebates from the related transaction fees. The
required accounting for our soft dollar and commission recapture
businesses and broker-dealer rebates is to add the related
dollar-for-dollar expenses to those equity transaction fee revenues.

(5) Our average U.S. net equity transaction fee revenue is calculated by
dividing our net U.S. equity transaction fee revenue for the buy and sell
side of each transaction by our total U.S. share volume.

(6) Island's results, subsequent to September 20, 2002, are consolidated with
our results for the periods described.

-27-

RESULTS OF OPERATIONS

The following table sets forth our Consolidated Statements of Operations
data for the periods presented as a percentage of total revenues:

Three Months Ended Nine Months Ended
September 30, Sept 30,
-------------------- ------------------
2002 2001 2002 2001
----------- --------- --------- ---------

REVENUES

Transaction fees......................................... 103.8 97.5 101.0% 96.7%
Interest................................................. 4.2 4.5 4.0 3.3
Investments.............................................. -8.0 -2.0 (5.0) 0.0
------- ------- ------- -------
Total revenues................................. 100.0% 100.0% 100.0 100.0
EXPENSES
Compensation and benefits................................ 25.1 26.5 27.9 28.2
Communications and equipment............................. 10.5 11.6 11.3 10.8
Soft dollar and commission recapture..................... 20.4 16.1 21.1 14.2
Brokerage, clearing and exchange fees.................... 16.5 10.4 14.2 9.3
Depreciation and amortization............................ 6.6 6.6 6.8 5.2
Professional fees........................................ 2.0 2.5 2.1 2.8
Occupancy................................................ 4.8 4.5 5.0 3.4
Marketing and business development....................... 1.0 0.3 1.7 1.7
Broker-dealer rebates.................................... 15.3 0.0 8.6 0.0
Other.................................................... 3.9 4.5 5.4 3.6
Goodwill impairment...........