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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31,
2003

Commission file number 000-32717

Instinet Group Incorporated

(Exact Name of Registrant as Specified in Its
Charter)


|                                                                   |  |                                      
|------------------------------------------------------------------ |  | -------------------------------------
|Delaware                                                           |  | 13-4134098                           
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (IRS Employer
    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)


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

|                                       |  |                                     
|-------------------------------------- |  | ------------------------------------
|Title of Each Class                    |  | Name of Exchange on Which Registered
|                                       |  |                                     
|Common Stock $0.01 par value per share |  | NASDAQ National Market              

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.     þ Yes          o No

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment of this
Form 10-K.     o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act).     þ Yes          o No

As of June 30, 2003, the aggregate market
value of voting and non-voting common equity held by
non-affiliates of the registrant was approximately $353,775,392,
based upon the NASDAQ National Market closing price for such
shares on that date. For purposes of this calculation, the
Registrant has assumed that its directors and executive officers
are affiliates.

Portions of the Instinet Group Incorporated Proxy
Statement for the 2004 Annual Meeting of Stockholders are
incorporated by reference in Part III hereof.

The number of shares of Common Stock outstanding
as of March 5, 2004 was 331,571,049 shares.



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INSTINET GROUP INCORPORATED

ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2003

TABLE OF CONTENTS

|              |  |                                                                                           |     |      |     | 
|------------- |  | ----------------------------------------------------------------------------------------- | --- | ---- | --- | 
|              |  |                                                                                           |     | Page
|              |  |                                                                                           |     |     
|PART I       
|Item 1.       |  | Business                                                                                  |     |      | 2   | 
|              |  | Certain Factors that May Affect Our Business                                              |     |      | 37  | 
|Item 2.       |  | Properties                                                                                |     |      | 53  | 
|Item 3.       |  | Legal Proceedings                                                                         |     |      | 53  | 
|Item 4.       |  | Submission of Matters to a Vote of Security
    Shareholders                              |     |      | 55  | 
|PART II      
|Item 5.       |  | Market for the Companys Common Equity and
    Related Stockholder Matters                |     |      | 55  | 
|Item 6.       |  | Selected Financial Data                                                                   |     |      | 57  | 
|Item 7.       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |     |      | 59  | 
|Item 7A.      |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |     |      | 80  | 
|Item 8.       |  | Financial Statements and Supplementary Data                                               |     |      | 84  | 
|Item 9.       |  | Changes In and Disagreements With Accountants on
    Accounting and Financial Disclosure  |     |      | 116 | 
|Item 9A.      |  | Controls and Procedures                                                                   |     |      | 116 | 
|PART III     
|Item 10.      |  | Directors and Executive Officers of the Company                                           |     |      | 116 | 
|Item 11.      |  | Executive Compensation                                                                    |     |      | 116 | 
|Item 12.      |  | Security Ownership of Certain Beneficial Owners
    and Management                        |     |      | 116 | 
|Item 13.      |  | Certain Relationships and Related Transactions                                            |     |      | 117 | 
|Item 14.      |  | Principal Accountant Fees and Services                                                    |     |      | 117 | 
|PART IV      
|Item 15.      |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |     |      | 117 | 
|Signatures    |  |                                                                                           | 124 |     
|Exhibit Index |  |                                                                                           | 127 |     

Unless otherwise indicated or the context
otherwise requires, references to the company,
we, us, Instinet Group, and
our mean Instinet Group Incorporated and its
subsidiaries. Unless otherwise indicated or the context
otherwise requires, references to Instinet mean
Instinet, the Institutional Broker and references to
INET mean Inet ATS, Inc.

We have made forward-looking statements in this
Annual Report on Form 10-K for 2003, including in the
sections entitled Business, Certain Factors that May Affect Our
Business, Managements Discussion and Analysis of Financial
Condition and Results of Operations and Quantitative and
Qualitative Disclosures about Market Risk, that are based on our
managements beliefs and assumptions and on information
currently available to our management. 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.

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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, in addition to those
discussed in the section entitled Certain Factors that May
Affect Our Business and elsewhere in this annual report, could
cause our results to differ materially from those expressed or
suggested in forward-looking statements.

PART I



Item 1.     Business


Introduction

We are the largest global electronic agency
securities broker and have been providing investors with
electronic trading solutions and execution services for more
than 30 years. We provide sophisticated electronic trading
solutions and execution services to enable buyers and sellers
worldwide to trade securities directly and anonymously with each
other. We also give our customers the opportunity to use our
sales-trading expertise and sophisticated technology tools to
interact with global securities markets, improve their trading
and investment performance and lower their overall trading
costs. Through our electronic platforms, our customers can
access other U.S. trading venues, including NASDAQ and the NYSE,
and almost 30 securities markets throughout the world, including
stock exchanges in Frankfurt, Hong Kong, London, Paris, Sydney,
Tokyo, Toronto and Zurich. Our customers primarily consist of
broker-dealers and institutional investors, such as mutual
funds, pension funds, insurance companies and hedge funds.

Since the fourth quarter of 2003, we have been
implementing a business restructuring plan to establish two
distinct business lines:



| |   |                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Instinet, the Institutional BrokerSM,
    which serves our U.S. and international institutional customers
    including customers of Lynch, Jones & Ryan, our commission
    recapture subsidiary.                                                                                                                           
|
| |  | INETSM (formerly known as The Island
    ECN, Inc.), our electronic communications network
    (ECN) that combines the U.S. broker-dealer order flow
    of the Instinet ECN and the Island ECN and serves our U.S.
    broker-dealer customers. INET also includes our clearing broker,
    Instinet Clearing Services, Inc.

The aim of this restructuring is to empower each
business to pursue its own distinct interests and add strategic
clarity to each business. In December 2003, we began the
separation of our institutional broker and ECN businesses and
the consolidation of the order flow of our two ECNs. Our
reorganization was substantially completed on February 9,
2004.

Instinet, the Institutional Broker, our global
electronic agency securities broker, had over 1,030
institutional investor customers in the United States and
approximately 720 customers in Europe and Asia as of December
31, 2003. These customers can use our sales trading expertise,
sophisticated trading tools and advanced technology to execute
their equity securities orders with Instinets other
institutional customers on Instinets Continuous Block
Crossing trading platform (CBXSM) or access
other U.S. trading venues, including INET, or one of the
almost 30 non-U.S. securities markets to which we are
connected using Instinets smart order-routing technology.
Instinet customers can also seek superior execution of their
trades by displaying orders for U.S. equity securities in
multiple U.S. trading venues simultaneously using
Instinets ProActive SmartRouterSM. Instinet
customers can connect to its systems through third-party
front-ends, using financial information exchange
(FIX) protocols, or use Instinets specialized trading
front-ends such as our patent pending NewportTM
system, designed to automate and manage global portfolio
trading, and Instinet Trading PortalSM, which offers
flexible functionality for interacting with Instinets
other customers and accessing external markets. Instinet offers
its customers other services designed to enhance their ability
to achieve their trading objectives, including crossing
services, block trading and portfolio trading. Instinet

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customers can also trade outside traditional
market hours and obtain select proprietary and third-party
research.


Through our Lynch, Jones & Ryan,
Inc. subsidiary, Instinet is also one of the largest
providers of commission recapture services to pension plans and
other financial institutions worldwide. Instinet helps pension
plans and other financial institutions save money by rebating a
portion of their trading commissions back to the plans or
financial institutions. Instinet is also one of the largest
independent providers of research and other brokerage services
through soft-dollar or other similar arrangements.

INET, our single electronic U.S. marketplace
representing the consolidation of the order flow of our two
ECNs, had approximately 800 broker-dealer customers in the
United States as of December 31, 2003 (includes
broker-dealer customers of both Instinet ECN and Island ECN).
INET offers its customers one of the largest liquidity pools in
NASDAQ-listed stocks, as well as liquidity in
U.S. exchange-listed stocks and significant market share in
exchange-traded funds (ETFs), through the existing Island ECN
platform. This electronic platform executes trades quickly and
reliably, while operating at a low cost. INET also provides its
customers with access to other major U.S. trading venues,
currently through Instinets smart order-routing
technology, to give customers the opportunity to obtain superior
execution. During 2003, INETs average daily matched volume
(includes broker-dealer customers of both Instinet ECN and
Island ECN) was approximately 401 million shares in
NASDAQ-listed stocks and 44 million shares in
U.S. exchange-listed stocks. Matched volume reflects
transactions where the buyer and seller are matched on INET.
INET accounted for 23.8% of the total trading volume in
NASDAQ-listed stocks and 2.3% of the total trading volume in
U.S. exchange-listed stocks during 2003. For an explanation
of how we calculate our trading volumes, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Calculation of
INET Volumes. More than 80% of INET customers
transactions are generally executed within its internal
liquidity pool.

Through our Instinet Clearing Services
(ICS) subsidiary, INET provides clearing and settlement
services in nearly all of the U.S. markets in which INET or
Instinet executes trades for customers. ICS clears and settles
trades for both INET and Instinet and also provides
correspondent clearing services to a few securities brokers in
the United States.

In recent years, we have been operating in a
challenging business, economic and regulatory environment. Over
the past two years, we have experienced losses, with a net loss
of $73.8 million for the year ended 2003 (including a
restructuring charge of $59.5 million and a write down of
intangible assets of $21.6 million) compared to a net loss
of $735.2 million for the year ended 2002 (including a
restructuring charge of $120.8 million and a write down of
intangible assets of $552.0 million). Our revenues have
remained stable as higher share volume was offset by lower
revenue per share as well as decreases in revenue from
non-U.S. equities, investments and interest. In 2002, we
implemented a series of cost reduction plans that reduced annual
operating costs from the fourth quarter 2002 to the fourth
quarter 2003 by approximately $170 million on an annualized
basis. We are currently implementing further cost reductions
that target a reduction in operating costs of approximately
$30 million on an annualized basis by the end of 2004.

We were founded in 1969 and, although
continuously headquartered in New York, New York since then,
were a wholly owned subsidiary of Reuters Group PLC from May
1987 until our initial public offering in May 2001. Reuters
currently owns approximately 62.6% of our outstanding common
stock. In addition to New York, we have offices in Jersey City,
New Jersey, Boston, Massachusetts, London, Frankfurt, Hong Kong,
Paris, Tokyo, Toronto and Zurich.



| |            
| | -----------
| | Core Values

Our business  its organization,
technology and culture  has been structured to earn,
sustain and build our customers trust and help them to
obtain superior execution of their trades. This business model
incorporates the following four core values:



| |   |                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Independence and
    Neutrality We do not
    pursue business activities, such as investment banking, trading
    securities for our own account or maintaining inventories of
    securities for sale, that could create

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | conflicts of interest with our customers. As a
    result, unlike exchange specialists, market makers and other
    market participants that trade for their own account, we have no
    direct interest in, or in maintaining, the trading spread (the
    difference between the price offered by a buyer and that asked
    by a seller) in the NASDAQ market or on an exchange. We have no
    conflicts with our customers that interfere with their obtaining
    better pricing for their trades.                                                                                                                      
|
| |  | Anonymity
    Our systems do not require the identity of the ultimate buyer or
    seller to be disclosed to the counterparty or other market
    participants at any point in the trading process. We believe
    that anonymous trading can reduce the potential market impact of
    large transactions and transactions by certain investors whose
    trading activity, if known, may be more likely to influence
    other market activity, and may contribute to improved pricing
    for our customers.                                                                                                              
|
| |  | Customer
    Empowerment We use and
    develop technology to empower our customers to achieve their
    trading objectives. Our trading services and tools allow our
    customers to control the entire trading process from their own
    desktops, or turn their orders over to Instinets sales
    trading specialists who trade according to our customers
    instructions. We provide our customers, without regard to their
    size or volume of trading, with direct access to markets, which
    can increase the speed at which trades are executed and level
    the playing field among market participants.
|
| |  | Commitment to Agency
    Execution We are committed
    to providing our customers with a pure agency brokerage. Unlike
    the conflicts of interest in many traditional brokerage models,
    our electronic trading platforms give direct, efficient and
    unbiased access to equity markets around the world, and let our
    customers trade directly with each other in any marketplace
    without intermediation by other broker-dealers.                                                                                                                                                                          

As a result of these core values, we believe that
we provide our customers with valuable benefits that help them
achieve their trading objectives at reduced costs and with
greater speed and efficiency.



| |                              
| | -----------------------------
| | Acquisitions and Divestitures

In an effort to expand the scope of our business
and complement our existing services, in recent years, we have
acquired a number of companies. We acquired Harborview LLC, a
NYSE floor brokerage firm, in January 2003. In September 2002,
we completed our acquisition of Island Holding Company, Inc.,
the parent company of The Island ECN, Inc., a leading electronic
securities marketplace. In October 2001, we acquired ProTrader
Group, LP, a provider of advanced trading technologies and
electronic brokerage services, which we subsequently closed in
June 2003 after selling most of the ProTrader assets, including
most of the retail accounts, to Electronic Trading Group LLC,
one of our correspondent clearing customers. In February 2000,
we acquired Lynch, Jones & Ryan, a leading provider of
specialized brokerage, research and commission recapture
services to pension plan sponsors and managers and other
financial institutions.

On May 3, 2002, we closed our fixed income
business, which we began developing in 1998 and started trading
in the spring of 2000, and also closed Montag Pöpper &
Partner GmbH, a German fixed income broker-dealer, that we
acquired in October 1999 as part of the development of our
global fixed income business. Against the background of a global
economic slowdown and the uneven pace of acceptance of
electronic fixed income trading platforms, our fixed income
business was unable to reach a critical mass.

Industry Background



| |                     
| | --------------------
| | Recent Market Trends

Over the past five years, the major
U.S. market indices have experienced substantial growth up
to the first quarter of 2000 followed by a decline into early
2003. There has been renewed growth from the second quarter of
2003 and into first two months of 2004. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Business
Environment.

Similar to the U.S. markets, over the past
five years, the non-U.S. markets also experienced
considerable volatility and significant decline followed by
recent increases in stock prices. During this period,

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non-U.S. markets rose to record heights in
2000 in terms of consideration (which is based on the value of
transactions rather than the number of shares traded), and then
declined significantly, reverting back in 2003 to the
consideration levels achieved in 1999.




| |                      
| | ---------------------
| | U.S. Market Structure

U.S. stock exchanges traditionally operated
primarily in a physical environment  on a trading
floor  through an auction conducted by open outcry.
Indeed, while the NYSE has taken steps recently to enhance
market participants ability to execute orders on the
exchange electronically, the majority of trading on the NYSE
continues to occur through an auction system operating on a
physical trading floor, with orders for each listed stock being
routed for execution on the floor of the exchange, either
electronically or physically, to a designated dealer, known as a
specialist. In the over-the-counter market, dealers, known as
market makers, traditionally conducted trades with one another
through an inefficient telephone-based system.

In 1969, Instinet pioneered the electronic
trading of U.S. exchange-listed stocks. In 1971, the NASD
developed the NASDAQ system, which linked the quotations of
over-the-counter market makers together via a screen-based
electronic communications system.

Advances in technology have spurred the
automation of numerous aspects of the trading process and led to
gradual increases in competition for the trading of
U.S. exchange-listed and NASDAQ-listed stocks. Regulatory
developments have sought to foster this competition while
integrating the trading of stocks on different venues into the
National Market System (referred to as the NMS). The SEC has
required the national securities exchanges and associations
(referred to as self-regulatory organizations, or SROs) trading
those stocks to jointly operate and participate in NMS systems
for the consolidation, dissemination and sale of market data in
U.S. exchange-listed stocks (the Consolidated Tape Association
and Consolidated Quotation System) and NASDAQ-listed stocks (the
NASDAQ  UTP Plan), as well as an intermarket order
routing system for U.S. exchange-listed securities (the
Intermarket Trading System, or ITS Plan).

For NASDAQ-listed stocks, in 1997, the SECs
order handling rules for market makers and exchange specialists
took effect. These rules provided a specified role for ECNs,
electronic systems that widely disseminate orders entered into
them by a market maker or specialist to third parties and permit
execution of those orders against each other. Thereafter, in
1998, the SEC adopted Regulation ATS, which regulates the
operation of alternative trading systems (ATSs)  a
term that refers generally to systems, including ECNs, other
than traditional exchanges or NASDAQ, that bring together the
orders of buyers and sellers of securities and allow such orders
to interact through automated means and that are
registered as broker-dealers. The emergence of ECNs and ATSs has
provided efficient means of access to market centers and has
resulted in a shift in liquidity, or trading activity, away from
the major established market centers towards the ATSs,
particularly in NASDAQ-listed stocks.

NASDAQ itself has evolved from a quote-driven
display system to an order-driven execution system, called
SuperMontage, that directly competes with ECNs, ATSs and
exchange markets trading NASDAQ-listed stocks. NASDAQ completed
its implementation of SuperMontage on December 2, 2002 and
continues to make changes to the system in an effort to enhance
its competitiveness, including steps intended to facilitate the
ability of ATSs and ECNs to participate in SuperMontage.

As another initiative to enhance its
competitiveness, NASDAQ has submitted an application for
registration as a national securities exchange. A further
pending change to the NASDAQ market structure is the expected
eventual replacement of NASDAQ as exclusive collector and
distributor of consolidated data (known as an exclusive
securities information processor, or exclusive SIP), regarding
quotations and trades in NASDAQ-listed stocks. This role has
given NASDAQ financial and other competitive advantages. The
replacement is also expected to be an exclusive SIP but is
unlikely to compete directly with us.

The market for the trading of
U.S. exchange-listed stocks also continues to evolve. In
February 2004, the NYSE proposed rule changes that would expand
the automation of order execution on the exchange. Moreover, the
so-called third market  the trading of
exchange-listed stocks by non-exchange members without recourse
to the trading floor of an exchange  now accounts for
over 10% of trading in

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U.S. exchange-listed stocks. In March 2004,
NASDAQ received SEC approval to move trading in the third market
from NASDAQs ITS/ CAES system to SuperMontage. In
addition, regional exchanges, most specifically the Archipelago
Exchange and NSX, have grown in relative importance,
particularly in the trading of exchange-traded funds (ETFs)
(index funds that trade on an exchange and represent a basket of
stocks, with pricing throughout the day).


The regulations governing the various elements of
the U.S. market structure impose numerous requirements and
restrictions on the activities of market participants, including
ECNs and ATSs. The order handling rules deal specifically with
the processing of limit orders, which are orders with an
associated limit price above which a buyer, or below which a
seller, will not trade. In particular, the rules prohibit a
market maker or exchange specialist from displaying through an
ECN its own limit order for a security at a more favorable price
than its published quote unless the ECN publishes its
best-priced market maker and exchange specialist orders in that
security and permits execution against those orders through the
facilities, or pursuant to the rules, of a SRO. Similarly, a
market maker that receives a limit order better than its own
published quote must generally either execute the order,
incorporate the limit order price into its published quote or
pass the order on to an ECN for public display and execution
access. Regulation ATS expands upon these requirements and
requires any ATS meeting certain volume thresholds to provide an
SRO with its best-priced orders from all sources, not only
market makers and exchange specialists, and allow
non-subscribers execution access to those orders.

SuperMontage provides one of a number of
alternatives through which ECNs are able to meet these order
display and execution access obligations. INET currently meets
these obligations through the National Stock Exchange, Inc.
(NSX), although it has considered participation in SuperMontage.
See  Our Strategy  INET.

An ATS may seek to register with the SEC as a
national securities exchange or a facility of a registered
national securities exchange. As an exchange or exchange
facility, an ATS becomes an SRO or SRO facility itself, no
longer subject to regulation by the NASD or another SRO. In
addition, with exchange or exchange facility status, an ATS
gains direct access to ITS, enabling an ATS to access publicly
displayed orders in all ITS participant markets trading
U.S. exchange-listed stocks and make its own orders
available for execution through ITS. It also becomes a
participant in other NMS systems, affording it a role in their
governance, a share of the revenues generated by the sale of
consolidated market data to vendors and market participants, and
direct connectivity to those systems. Island ECN (now INET)
submitted a draft application for registration as a national
securities exchange in 1999. INET intends to submit a new draft
application for registration as a national securities exchange
in 2004. See Certain Factors that May Affect Our
Business  Risks Related to Our Industry 
We Operate in a Highly Regulated Industry, Which May Limit Our
Activities  ATS Status and Exchange
Registration. In 2002, another ATS, Archipelago, was
approved to operate as the Pacific Exchanges equity
trading facility.

For U.S. exchange-listed stocks only, the
ITS Plan imposes limitations and provides remedies with respect
to transactions by members of ITS participant markets that
involve a trade-through of bids and offers. A
trade-through occurs when a market participant trades at a price
that is inferior to a price displayed in another participating
market. The ITS Plan also imposes certain requirements when
market participants lock the market 
display bids and offers at prices that equal offers and bids
from other market participants  or cross
the market  display bids that exceed offers or
display offers that are less than bids of another market
participant  for a particular security. Orders in
U.S. exchange-listed stocks displayed on INET frequently
lock or cross other markets.

The SEC regularly considers a variety of
regulations or interpretative initiatives with respect to the
structure of the U.S. equity securities markets, including
initiatives intended to address issues relating to the
interaction of market centers (ECNs, ATSs, market makers, and
markets operated by SROs) and more fully integrate ECNs and ATSs
into the NMS. In particular, on February 24, 2004, the SEC
proposed the adoption of Regulation NMS, which contains a
number of interrelated substantive proposals designed to
modernize the regulatory structure of the U.S. equity
markets and also consolidates the existing rules governing the
NMS into one regulation.

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The ITS Plans trade-through
rule is one of the areas addressed in Regulation NMS.
Regulation NMS would require all market centers to adopt
procedures to prevent the execution of orders on their markets
that would trade through the best publicly displayed prices in a
stock, with two potentially significant exceptions.
Specifically, these exceptions would (1) enable market
centers that are deemed to be automated order execution
facilities to trade through the publicly displayed prices
of non-automated order execution facilities up to a specified
amount, ranging from one to five cents, based upon the current
trading price of the stock; and (2) allow market
participants to choose to opt out of trade-through protection on
an order-by-order basis. Regulation NMSs
trade-through requirements would apply not only to market
centers trading U.S. exchange-listed stocks, but also those
trading NASDAQ-listed stocks. Regulation NMS also would
require SROs to adopt rules that prevent their members from
publicly displaying orders to buy (or sell) through the SRO that
would lock or cross other publicly displayed quotations.

Regulation NMS also addresses two issues
relating to access to market centers. First, it would reduce the
volume threshold for the application of the Regulation ATS
requirement that ATSs provide access to their systems on terms
that are not unreasonably discriminatory. Second,
Regulation NMS would impose a cap of $0.001 per share
on the access fees that eligible non-SRO market centers can
charge other market participants to access their orders that are
provided to an SRO for display, while also imposing a $0.001 cap
on the access fees that an SRO market center itself can charge
market participants to access such orders.

In addition, Regulation NMS includes a rule
to prohibit market participants from accepting, ranking, or
displaying quotes in sub-penny pricing increments in stocks
priced over $1.00. Along with Regulation NMS, the SEC
proposed modified formulas for allocating among SROs the
revenues generated by the sale of market data by the various NMS
systems.

These proposals, as well as future SEC
rulemakings or interpretations in this area, could adversely
affect our business, financial condition and operating results.
The proposed Regulation NMS is now open for public comment,
and the SEC has indicated that its views on the proposals are
not yet firm. We are unable to predict the outcome of the
various deliberations and discussions on the evolution of the
U.S. equities market structure and regulatory framework,
although these issues or other issues of market structure may
have a significant impact on our equities business. For a
further discussion of Regulation NMS, see
Regulation  Proposed Regulation NMS;
Proposed Changes to NMS Market Data Revenue Allocation
Formulas and Certain Factors that May Affect Our
Business  Risks Related to Our Industry.



| |                                         
| | ----------------------------------------
| | Impact of Technological
    Developments

Innovations in technology, particularly the
growth of the Internet, have increased the speed of
communications and the availability of information, facilitated
the globalization of commerce, and simultaneously decreased the
cost of electronic commerce. New methods have developed to
enable institutional investors to access and participate in the
equity securities markets more easily and less expensively.
Electronic markets have substantially reduced the need for
intermediation, such as by NYSE members and NYSE specialists or
NASDAQ market makers, because direct access is effectively
unlimited and technology enhances the ability to determine the
best price at which a trade can be executed. These developments,
combined with the regulatory changes discussed above that
allowed for the emergence of ECNs and ATSs, have led to dramatic
growth in electronic trading and provide a challenging
competitive environment.

Technological developments have also affected
investing by individuals. Technological advances have created
new and inexpensive means for individual investors to access
markets directly on-line. As technology continues to improve and
regulatory and customer scrutiny of execution and trading
services intensifies, we believe that individual investors will
increasingly demand institutional-quality services.



| |                                     
| | ------------------------------------
| | International Securities
    Markets

Until the early 1990s, equity markets outside the
United States were generally less developed than those in the
United States, with relatively low trading volumes and less
advanced trading systems. Thereafter, technological and
regulatory changes, other competitive pressures, and increased
globalization contributed to increasing trading activity and
major structural changes in the established European exchanges,
which

7



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generally moved to an electronic model. In this
model, an electronic system receives and matches orders that are
routed through the system. Intermediaries provide execution
services to their customers primarily by providing connectivity
to the exchange system. In addition, in Europe there has been an
increasing trend towards consolidation of exchanges, encouraged
by technology and the adoption of the euro.


Our Competitive Strengths



| |                                                       
| | ------------------------------------------------------
| | We Are a Market Leader with Strong Brand
    Awareness

Through Instinet, we pioneered an electronic
screen-based trading system over 30 years ago and currently
provide investors with electronic trading solutions and
execution services in global markets. We have been a market
leader in the trading of NASDAQ-listed stocks for many years,
and our two ECNs on a combined basis, including broker-dealer
and institutional customers, accounted for 28.2% of the total
trading volume in that market in 2003. For an explanation of how
we calculate our trading volumes, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Volume Calculations and Calculation of
INET Volumes. Our substantial share trading volume,
particularly in NASDAQ-listed stocks, attracts significant
customer attention and order flow. As a result, Instinet has
strong name and brand recognition among broker-dealers and
institutional investors, and our INET brand awareness is growing.



| |                                                  
| | -------------------------------------------------
| | We Offer Compelling Benefits to Our
    Customers

We believe that our core values of independence,
neutrality, anonymity, customer empowerment and commitment to
agency execution enable our customers to obtain superior
execution of their trades through technologically advanced
tools, competitive pricing and reduced transaction costs than
are generally achievable using traditional trading channels. We
also believe that our unique unconflicted electronic business
model, providing sophisticated technology, trading and clearing
services, allows us to offer our customers a complete,
convenient global brokerage offering.

Instinet, the Institutional Broker offers its
customers sales trading expertise, advanced trading technology
and tools and sophisticated routing technology to allow them to
interact with Instinets institutional order flow on the
CBXSM platform and access other U.S. trading
venues, including the INET liquidity pool, and almost
30 non-U.S. securities markets, in order to seek
superior execution of their trades. Instinet customers can also
display orders for U.S. equity securities in multiple
U.S. trading venues simultaneously through Instinets
ProActive SmartRouterSM. We believe that this
technology, together with Instinets other tools and
services, enables Instinet to provide institutional customers
with the ability to trade equities quickly and reliably at
competitive rates, the opportunity for price and size
improvement and reduced transaction costs in executing their
trades.

Furthermore, we believe that one of the biggest
concerns of institutional investors in securities trading today
is the market impact of the disclosure of their identity and
trading intentions. Customers, therefore, often seek to break up
orders to hide their overall intentions. If the market becomes
aware of a large investor seeking to sell securities, the price
of those securities may drop before the investors position
can be fully liquidated. Similarly, market awareness of a large
investor seeking to buy a large amount of securities may result
in an increase in the price of the securities before the order
can be fully executed. Instinet allows institutional customers
to trade directly but anonymously through the CBX platform,
reducing the potential for this market impact, which we believe
can result in better pricing for the customer. Trading also
takes place in after-hours and periodic crossing sessions, which
can help institutional customers execute large blocks without
market impact.

INET, our ECN, offers its U.S. broker-dealer
customers the combined liquidity of the former Instinet and
Island ECNs. As a result, INET is an ATS and ECN that offers
direct trading between diverse customers

8



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##### 



that creates one of the largest liquidity pools
in NASDAQ-listed stocks, as well as liquidity in
U.S. exchange-listed securities and significant market
share in ETFs.


In addition, INETs trading platform is
designed for reliable, anonymous, high-speed trading at low
cost. It also offers advanced order functionality that we
believe allows our customers to control transaction costs and to
obtain superior execution by managing their own trade strategies.



| |                                       
| | --------------------------------------
| | We Offer a Broad Range of
    Services

Through Instinet and INET, we offer our customers
a wide variety of services. INET provides trade execution and
routing services for U.S. broker-dealer customers, and
Instinet provides sales trading expertise, sophisticated
technological tools and brokerage services to institutional
customers on a global basis. Companies acting solely as ECNs are
generally limited to small order electronic execution and order
routing. With both INET and Instinet, our broader business model
extends beyond these functions, and we provide service offerings
tailored to our customers diverse trading needs. These
service offerings include a variety of trading services, and
clearing and settlement, all of which add value for our
customers. For example, we provide services such as:



| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | technical assistance to customers in inputting
    orders;                                                                                                                                                   
|
| |  | management of the execution of orders for
    customers over time (often referred to as working orders);                                                                                                     
|
| |  | simultaneous execution of multiple orders of
    securities (known as portfolio trading);                                                                                                                    
|
| |  | trading of large orders (referred to as block
    trading);                                                                                                                                                  
|
| |  | directing orders to either our own liquidity
    pools or one of the various markets to which we are connected
    (known as smart order-routing);                                                           
|
| |  | block matching system with minimum order size,
    trade size, and display size parameters (known as Continuous
    Block CrossingSM or CBXSM);                                                              
|
| |  | simultaneously displaying orders for
    U.S. equity securities both on Instinet CBX and in multiple
    other U.S. markets to which we are connected, including
    INET (known as ProActive SmartRouterSM);
|
| |  | extended hours trading; and                                                                                                                                                                                  
|
| |  | automatic matching of orders at specified price
    levels (known as Instinet Crossing®).                                                                                                                    

Instinet is also one of the largest global
independent providers of research and other brokerage services
through soft dollars or other similar arrangements, and one of
the largest providers of commission recapture services to
pension plan sponsors and managers and other financial
institutions.



| |                    
| | -------------------
| | We Operate Globally

Through Instinet, our institutional customers
trade securities in almost 30 non-U.S. securities markets,
and we are a member of 11 non-U.S. exchanges. As of
December 31, 2003, approximately 570 customers in
Europe and approximately 150 customers in Asia had access
to the Instinet trading system. A total of 6.6 million
transactions in non-U.S. equity securities were executed
through Instinets systems in 2003.

In addition, Instinet is a global independent
provider of research and other brokerage services through soft
dollar and similar arrangements and a significant provider of
commission recapture services to pension plan sponsors and
managers and other financial institutions. We also offer
customers a choice of full service agency sales trading or
direct market access services worldwide.



| |                                                   
| | --------------------------------------------------
| | We Have a Proven Ability to Innovate and
    Adapt

Throughout our more than 30-year history, we have
been an innovator in using technology to enhance securities
trading, have seized market opportunities and have adapted to
numerous changes in our operating

9



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and regulatory environment while continuing to
grow. Some of our most significant developments include the
following:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | At a time when most investors were paying fixed
    commissions to trade in NYSE-listed stocks, we pioneered an
    electronic screen-based trading system that allowed customers to
    trade without paying fixed commissions.                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | After the abolition of fixed commissions in 1975
    placed significant price pressure on our business, we
    established the first service to display real-time information
    showing NYSE and regional exchange quotes together on an
    electronic screen and provided our customers direct access to
    trade NYSE-listed or regional exchange-listed stocks through the
    regional exchanges.                                                                                                                                                                                                             
|
| |  | In 1984, we created an electronic marketplace in
    which market makers and institutional investors could trade
    directly among themselves and obtain automated execution of
    trades inside the publicly quoted spreads for those stocks. In
    1989, we enhanced this service by enabling our customers to
    interact and trade anonymously on our system.                                                                                                                                                                                                                                                 
|
| |  | We have been an innovator in developing extended
    hours crossing and trading capabilities starting in 1986. These
    services responded to globalization and the continuous
    availability of information about markets and issuers, and the
    resulting demand by investors to trade equity securities after
    traditional exchanges and markets are closed.                                                                                                                                                                                                                                               
|
| |  | In the late 1990s, we adapted to cost and pricing
    pressures in our equities business, to the introduction of the
    SECs order handling rules, which substantially changed
    activity for NASDAQ participants, and to the SECs adoption
    of Regulation ATS, which imposed new requirements on our
    activities. We enhanced and modified our services, lowered our
    prices and changed our cost structure to adjust to these changes
    in our operating environment.                                                                                                                               
|
| |  | In response to the increasing volumes in
    cross-border trading and the fragmentation of securities
    markets, we offered our customers ways to access multiple
    liquidity pools. We introduced the first integrated electronic
    trading platform to permit direct electronic access to equities
    markets across Europe, together with facilities to negotiate and
    trade directly and anonymously with other customers.                                                                                                                                                                              
|
| |  | We introduced one of the first order management
    tools that allowed customers to manage, deliver and execute
    baskets of securities in the NASDAQ market. We also introduced
    tools that allow customers to use our technology to enter
    alternative pricing for trades (commonly referred to as
    discretionary pricing) or for alternative trade sizes (commonly
    referred to as reserve book features), which had in the past
    required a high degree of manual intervention.                                                                                                                  
|
| |  | In 2002, we introduced Newport, a patent pending
    execution management application for portfolio trading that is
    unique in that it allows customers to organize and manipulate
    database components supporting the interface instead of only
    permitting the customization of the display features.                                                                                                                                                                                                                                                                                                      
|
| |  | In January 2004, we introduced ProActive
    SmartRouterSM, the first routing technology that
    allows customers to simultaneously display orders for
    U.S. equity securities both on Instinets CBX trading
    platform, which is our block trading system with minimum order,
    trade-size and display-size parameters that we also introduced
    in the first quarter of 2004, and in multiple other
    U.S. markets to which Instinet is connected, instead of
    merely directing orders to either Instinets own liquidity
    pool or one of the various markets to which Instinet is
    connected.



| |                                                     
| | ----------------------------------------------------
| | We Have an Established Technology
    Infrastructure

We developed one of the earliest electronic
trading businesses and introduced the first screen-based system
through which institutional investors could trade NASDAQ-listed
stocks directly with each other. Our current technology enables
our customers to access the liquidity pools within our own
electronic trading systems in order to trade these securities
with one another or to access one of the various markets to
which we are connected. We recently enhanced our technology
allow our customers to display orders simultaneously both on our
own liquidity pools and in multiple other U.S. markets to
which we are connected. We continue to

10



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develop and enhance our technology to provide our
customers efficient access to our internal liquidity pools and
to most other liquidity pools, resulting in enhanced order
execution and order management capabilities and the opportunity
for superior execution. We believe that our ability to use
advanced technology effectively to improve our services has been
a key component in the development of our business.


Our Strategy

On February 9, 2004, we substantially
completed a reorganization that formally separated our global
institutional broker from our U.S. equity market ECNs in
order to gain strategic clarity for these businesses and to
empower each business to pursue its own distinct interests and
focus on serving its distinct customers. We are positioning each
of these businesses to succeed in the competitive environments
in which each of them operates and to serve the needs of
customers with more efficient products and services. Our
objective is to take advantage of growth opportunities that may
arise in the securities industry as a result of changing
technology, regulation, competition and increased trading
activity through electronic trading systems and brokerage
services in global equity markets. We believe that our global
presence, breadth and scale of operations, unique business model
and core values of independence and neutrality, anonymity,
customer empowerment and commitment to agency execution, and
proven ability to innovate and use technology give us an
advantage in this pursuit. We plan to build on these strengths
as the equity securities industry moves towards greater
efficiency and transparency, and to provide value by delivering
services that empower our customers to better achieve their
trading objectives by giving them the opportunity to reduce
their total transaction costs, improve their trading and
investment performance, gain price improvement on their trades
and manage their orders.



| |                                       
| | --------------------------------------
| | Instinet, the Institutional
    Broker

Instinet is focused on providing its global
institutional customers with products and services that enhance
trading efficiency, provide customers the opportunity for
improved investment performance and lower trading costs.
Instinets objective is to continue to strengthen its
global electronic agency brokerage business both in the United
States and internationally and align its resources to provide
customers with a complete service offering. We believe that
Instinet is uniquely positioned to provide these benefits to its
customers through its unconflicted business model, sophisticated
trading expertise, advanced technological tools, and direct,
efficient and unbiased access to other Instinet customers as
well as other U.S. and global equity markets.

The principal elements of Instinets
strategy include:

Continue to Enhance Instinet Products and
Services.Both in the United States
and internationally, Instinet will continue to focus its
initiatives on developing products and services to meet its
customers specific needs in an effort to improve their
execution performance by reducing their transaction costs,
providing better pricing for their trades and enabling them to
manage increasingly complex global equity trading strategies.
Instinet intends to continue to innovate and expand its offering
of sophisticated trading services, unconflicted professional
sales trading expertise and advanced technological trading tools
and products in order to enhance its customers equity
trading objectives. Recent new Instinet products and services
include the CBXSM platform, introduced in January
2004, which is a block-matching system with minimum order size,
trade size, and display size parameters that is designed to
minimize market impact, facilitate price and size discovery and
lower trading costs for its customers when executing large,
complex orders, and ProActive SmartRouterSM, also
introduced in January 2004, which is enhanced smart-order
routing technology that enables customers to display orders
simultaneously in multiple liquidity pools. Instinet believes
that ProActive SmartRouter will reduce opportunity cost and
result in price improvement for its customers.

Instinet is also currently developing an
intra-day crossing service, in addition to its pre- and
post-market crossing sessions, which will operate during regular
trading hours and which Instinet believes will provide enhanced
liquidity for block trades. Instinet expects to introduce its
intra-day crossing session by the end of the second quarter of
2004.

Leverage Instinets Unconflicted,
Low-Cost Agency Business Model to Increase Our Pension Plan and
Mutual Fund Customer Base.Instinet
seeks to increase its customer base among pension plans and
mutual funds by leveraging its unconflicted, low cost, agency
business model for the benefit of these customers by

11



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offering trading opportunities without the
conflicts of interest found in many traditional brokerage firms
which are the subject of increasing press and regulatory
scrutiny.


Enhance Instinets Independent Research
Offering.Instinet also plans to offer
customers access to a broader range of high-quality investment
research through exclusive distribution agreements with
independent research providers, especially providers that
produce research based on direct, unconflicted access to primary
sources of information.



| |     
| | ----
| | INET

INET is focused on continuing to deliver systems
and services that empower its customers to reduce their total
transaction costs, improve execution quality and better achieve
their trading objectives. INETs objective is to increase
its market share in NASDAQ-listed and U.S. exchange-listed
stocks and strengthen its competitive position in the
U.S. equities markets. We believe that INETs
substantial liquidity pool, competitively priced services,
high-speed and reliable technology, and routing services will
enable INET to achieve these goals.

The principal elements of INETs strategy
include:

Maintain and Expand
Liquidity.INET continues to seek ways
to maintain and expand its trading volumes in the
U.S. markets for NASDAQ-listed and
U.S. exchange-listed stocks. As part of its plans to build
market share and strengthen its competitive position in
U.S. equities securities, INET substantially completed the
consolidation of the Instinet and Island ECN order flow into its
single marketplace in February 2004. In addition, INET continues
to focus on making INET the trading venue of choice for other
liquidity pools and to capitalize on its use of routing services
to further build up its liquidity. INET also has liquidity in
U.S. exchange-listed stocks, particularly American Stock
Exchange-listed stocks, significant market share in ETFs, and is
continuing to explore various initiatives and pursue regulatory
changes to increase its market share in
U.S. exchange-listed stocks.

Maintain Competitive Prices.INET intends to continue to ensure
that its pricing for customers is competitive. In October 2003,
INET announced a routing pricing initiative that enabled its
customers to route orders in NASDAQ-listed securities to other
trading venues through Instinets smart order-routing
technology at significantly lowered prices. INET believes this
initiative will lead to an increase in both routed and matched
volume in NASDAQ-listed securities. In the future, INET will
continue to assess its pricing.

Offer Competitive
Services.INET intends to ensure that
it offers a range of services based on customer expectations and
to leverage its technology to provide its customers the
opportunity to obtain better executions of their trades. INET
also continues its efforts to expose INET customer orders to as
many other sources of liquidity as possible to achieve this
objective. For example, as a result of recently approved NASDAQ
rules changes relating to SuperMontage, INET has considered
participation in SuperMontage. However, INET first needs to
evaluate the consolidation of the Instinet and Island ECN order
flow into its marketplace and the impact of the recent SEC
proposals on U.S. market structure reform, as well as other
competitive alternatives. INET also is currently considering
registering as a national securities exchange. See Certain
Factors that May Affect Our Business  Risks Related
to Our Industry. Through this initiative, INET seeks to
gain greater control as an SRO or SRO facility that would no
longer be subject to regulation by the NASD or another SRO,
obtain greater efficiencies in its business, enter a level
playing field with its direct competitors, capture a larger
share of market data revenue than it currently captures and
lower its clearing costs. INET is currently in discussions with
the SEC on these issues.



| |               
| | --------------
| | Instinet Group

In addition to our strategies for each business
line, as part of our continued effort to operate as a low-cost
provider to increase our efficiency, Instinet Group recently
implemented a cost reduction plan to reduce our fixed cost base
in addition to our previous cost reduction actions in 2002, and
we continue to evaluate further cost reduction initiatives.

12



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In pursuit of our strategy, we periodically
engage in discussions regarding various types of transactions,
including possible acquisitions or investments, some of which
could be material to us. We may agree to pay the consideration
in connection with a transaction in cash, our securities or some
combination of the two. Some acquisition transactions that
involve our securities could have a dilutive effect on our
earnings per share. It is also possible that the number of
shares of our common stock that may be issued in connection with
a transaction could constitute a material portion of our then
outstanding common stock not held by Reuters, even if not
material compared to the total amount of common stock
outstanding. At present, we have no agreements or understandings
for any material acquisitions or investments.

Our Business



| |                                       
| | --------------------------------------
| | Instinet, the Institutional
    Broker

As a global agency securities broker, Instinet
offers its customers a broad range of trade, execution, order
management and ancillary services designed to enhance their
ability to obtain superior execution and to achieve their
trading objectives. Instinet customers can use Instinets
sales trading expertise, sophisticated trading tools and
advanced technology to either execute their equity securities
orders with Instinets other institutional customers on
Instinets CBXSM platform or access other
U.S. trading venues, including INET, or one of the almost
30 non-U.S. securities markets to which we are
connected, using Instinets smart order-routing technology.
Through Lynch, Jones & Ryan, Instinet also provides
commission recapture services to pension plans and other
financial institutions worldwide. In addition, Instinet is one
of the largest independent providers of research and other
brokerage services through soft-dollar or other similar
arrangements.

During 2003, Instinets average daily
trading volume in U.S. equities decreased 1% to
90 million shares from 91 million shares in 2002.
Instinets average daily consideration (which is based on
the value of transactions rather than the number of shares
traded) in non-U.S. equities decreased 23% in 2003 to an
average daily consideration of $676 million from
$874 million in 2002.

For an explanation of how we calculate our
trading volumes, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Volume Calculations and
Quarterly Results.



| |          
| | ---------
| | Customers

Institutional investors (including mutual funds,
hedge funds, pension funds, banks, insurance companies and
investment portfolio managers) are the core of Instinets
customer base. These customers included approximately
1,030 institutional investors in the United States,
approximately 567 customers in Europe and approximately
150 customers in Asia as of December 31, 2003.

Instinet customers fall into the following broad
categories:



| |   |                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Active Institutions,which generally include mutual funds and asset managers that
    make stock specific equity investment decisions based on
    fundamental company research;
|
| |  | Passive and Quantitative
    Institutions,which include mutual
    funds and asset managers with a passive or quantitative approach
    to investing;                          
|
| |  | Plan Sponsors,which
    generally include pension fund managers; and                                                                                                           
|
| |  | Hedge Funds.                                                                                                                                                                   

Instinet offers, and is continuing to develop,
product and service offerings tailored to the specific needs of
customers within its various customer categories. We believe
that by offering customers a tailored package of services and
order management and execution functionality, together with
anonymous trading and efficient connections to other trading
platforms, Instinet can enhance customers ability to
achieve their specific trading objectives.

13



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| |         
| | --------
| | Services

Instinet offers its customers a broad range of
sales trading, order management, trade execution and other
services, including the following:



| |                 
| | ----------------
| | Trading Services

Sales Trading
Assistance.Instinet has a dedicated
group of sales trading professionals who provide customers with
various types of sales and trading assistance and provide
technical assistance in the use of Instinets screen-based
trading systems. Customers trading through Instinet can also
place orders by telephone with sales trading professionals, who
enter the orders into Instinets system on behalf of a
customer, and in some cases will work those orders in an attempt
to reduce their market impact and achieve price improvement. For
example, they may divide a large order into a series of smaller
orders that are entered over a period of time, possibly at
different prices. Instinet has a dedicated team of sales trading
professionals available to assist its customers with their
portfolio trading and perform execution quality analysis to
assist Instinet customers in their review of transaction costs.
Also, Instinets Trading Research Group, internally and
through third party vendors, performs transaction cost analysis
to assist portfolio managers and traders in their effort to
track and evaluate trading costs. In addition, Instinets
Technical Analysis Group produces packaged and customized
technical analysis, as well as daily market commentary, to
enable customers trading through Instinet to design efficient
portfolio and trading strategies.

As of December 31, 2003, Instinet had
194 sales and trading professionals, of which 98 were
located in North America, 67 in Europe and 29 in Asia. In
Europe, Instinet sales traders in London are responsible for
providing brokerage services to all of its customers and
coverage of all of the markets where Instinet operates.
Recently, Instinet streamlined its local presence coverage in
Europe, centralizing most of its European brokerage services in
London. London also has a specialized desk to service European
portfolio traders. In Asia, Instinet provides coverage for its
Japanese customers and the Japanese market through its Tokyo
office, with the remainder of Asia and Australia serviced
through Instinets Hong Kong office. Instinet also has
coverage in each of its offices in the United States, Canada,
Europe and Asia to assist customers who wish to place orders
through Instinet in a different region (for example, a European
institutional investor seeking to trade a U.S. or Japanese
equity security). These cross-region trades are also covered by
Instinets sales and trading professionals for that market,
thereby affording our customers in other regions access to local
market expertise. Because Instinet has offices worldwide, it
also is able to provide sales trading assistance to Instinet
customers 24 hours a day without requiring additional sales and
trading professionals to be staffed in any one office on a
continuous basis throughout the day.



| |                     
| | --------------------
| | Trading Applications

NewportTMExecution Management Application. Newport,
Instinets patent pending execution management application,
offers Instinet customers an enhanced environment in which to
execute portfolio trade transactions and implement their trade
strategies on a global basis. Portfolio trading allows a
customer trading through Instinet to execute multiple orders in
a number of different securities concurrently, both individually
and in conjunction with others, including both orders to buy and
sell shares of stock as well as securities that are based on an
index or basket of stocks. This portfolio trading capability,
combined with Instinets global access, also enables
Instinet customers to manage and execute portfolios of
securities denominated in a number of different currencies.
Instinets Newport application was developed in conjunction
with passive and quantitative fund managers in the United States
and Europe and uses Instinets existing execution and smart
order-routing technology and ICS clearing capabilities, as
well as Reuters market data infrastructure. In addition, this
system facilitates collaboration between multiple traders at one
customer site, the automation of trading using algorithms
created by the customer, customization of the interface by the
customer and integration with other systems commonly used by
these customers. We believe these features and services help
Instinet customers to manage their orders in a more efficient
manner and reduce their operational and transaction costs.

14



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Instinet Trading
PortalSM. Instinet
Trading PortalSM (referred to as Portal) is a trading
application primarily for Instinets active asset managers
and hedge funds that enables these customers to enhance their
customer interface and smart order-routing technology. This
trading application uses Instinets existing infrastructure
while giving customers a broader view and broader access to
multiple markets. With Portal, Instinet customers have the
ability to view information for a single stock in multiple
markets, increasing their ability to execute their orders in
multiple markets for better execution. We believe this enhanced
functionality helps these customers to manage their orders in a
more efficient manner. In addition, as an Internet-based
product, Portal is designed to substantially reduce
communication and field service costs associated with our
traditional customer display screens.



| |                   
| | ------------------
| | Execution Services

Core Execution
Services.Instinet provides automated,
real-time matching of buy and sell orders for both NASDAQ-listed
stocks and U.S. exchange-listed stocks and enables
institutional customers to enter orders and execute trades
directly with one another through Instinets trading
applications. Instinet allows its customers to trade with other
investors in other U.S. trading venues, including INET,
market makers or other ECNs, and almost
30 non-U.S. securities markets using our smart
order-routing technology.

Instinet provides an automated market interaction
system with smart-order routing technology, which automatically
routes customers transactions in NASDAQ-listed and
U.S. exchange-listed stocks to Instinets
institutional liquidity pool or one of the various markets to
which Instinet is connected to obtain superior execution. These
customers use smart-router technology to route orders to sources
of U.S. exchange-listed volume that are not traded directly
on the U.S. exchanges, commonly referred to as the
upstairs market, including Instinets
institutional liquidity pool, INET and other ECNs and exchanges,
as well as to the NYSEs Super Designated Order Turnaround
System (SuperDot), by which NYSE member firms orders are
electronically transmitted to the NYSE floor.

In a report published in January 2004 based on
data for the 12 months ended September 30, 2003,
Plexus Group, an independent market research group, ranked
Instinet first in execution quality in U.S. exchange-listed
stocks and Instinet tied for second in NASDAQ-listed stocks when
compared to a universe of the 15 most-active full-service
brokers for which Plexus has data.

For non-U.S. securities that are not traded
in U.S. markets, Instinet primarily provides direct
connections to the principal non-U.S. exchanges on which
those securities are listed, although customers can also trade
directly with each other through Instinet. Instinet also
provides an automated market interaction system with smart-order
routing technology for these non-U.S. securities. Instinet
is a member of 11 non-U.S. exchanges and provides
customers with direct access to those exchanges to execute their
trades. For more than 20 additional non-U.S. markets,
Instinet provides access through local exchange members.

Negotiating Orders.Our Instinet trading platform utilizes technology that allows
our customers to communicate anonymously both with all customers
and with specific customers who have placed an order. As a
result, customers can determine whether there is interest by
another customer in a potential transaction and negotiate the
volume and price of that transaction, all directly and
anonymously through our system, without requiring any
intermediation from anyone or displaying any of the
communications or negotiations to other customers. This
capability is designed to improve Instinet institutional
customers performance and efficiency when executing large,
complex orders and also allows customers to manage the delivery
and execution of their orders by themselves to minimize the
market impact of a large order and obtain price improvement.

Enhanced Block Trading.In January 2004, Instinet introduced
CBXSM, an alternative trading platform that is based
on Instinets existing trading platform, including its
smart order-routing technology and anonymous communication and
negotiation functionality, and has minimum order, trade-size and
display-size parameters. We believe this functionality helps
Instinet institutional customers protect their identity and
trading strategy, reduce market impact, control information
leakage, reduce operational and transaction costs for large
orders and increase their opportunity for superior execution.

15



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The CBX platform is designed to give Instinet
customers the opportunity to trade directly with each other
without being exposed to other marketplaces unless they choose
to do so. Customers control the extent they want to expose their
trades to other marketplaces and can manage that exposure
effectively and strategically through ProActive
SmartRouterSM, which gives them exposure to a much
broader liquidity pool than Instinets institutional
liquidity pool alone. Introduced in January 2004, ProActive
SmartRouter allows parts of an order in U.S. equity
securities to be simultaneously displayed in both the CBX and
multiple other U.S. trading venues, instead of merely
directing orders to either Instinets institutional
liquidity pool or one of the various markets to which Instinet
is connected. Displaying an order in only one liquidity pool may
carry the opportunity cost of missing the potential for price
and size improvement in another liquidity pool. ProActive
SmartRouter is designed to reduce that opportunity cost, and we
believe use of the ProActive SmartRouter can result in price
improvement for the customer.

Rules Based Trading.Instinet offers customers rules-based
trading for systematic trading in global equity markets.
Customers can define algorithms to automate global order
execution and stock selection using Instinets rules
engine. The rules engine offers customers pre-defined trading
rule modules, enabling them to pick and choose the rules they
want to use to build customized trading strategies. We believe
this functionality significantly increases our customers
efficiency by making it easy to monitor thousands of orders
across U.S., European and Asian markets simultaneously.

Extended Hours
Trading.Instinet allows customers to
input orders for a security and execute the trade with other
customers in Instinets institutional liquidity pool
before, during and after normal market hours. This permits
Instinet to make the liquidity pool generated by its customers
available on a 24-hour basis. This service has also allowed
Instinet to expand globally to include customers and markets in
Europe and Asia, whose trading hours do not coincide with those
in the United States. Extended hours trading has been a
particularly important innovation for Instinet customers when
material information about a market or company is released or
reported after that market or the principal market for that
companys securities is closed. When a pre- or post-market
price-moving event occurs, market participants can interact
directly at their election to discover a price, which could be
significantly different from the closing price, at which they
can trade following dissemination of news regarding the event.
For example, after Comcast Corporation announced a surprise bid
for The Walt Disney Company before the open on February 11,
2004, 13.8 million Disney shares traded through Instinet
between the close on February 10, 2004 and the open on
February 11, 2004. This represented approximately 181% of
average daily trading volume of Disney during the prior 90-day
period.

Crossing Services.Through Instinet Crossing®, customers may
enter buy or sell orders in U.S. traded securities for
execution in a crossing session. In a crossing
session, Instinet electronically aggregates all orders to buy or
sell at a pre-specified time, matches (or crosses)
them with other orders to sell or buy, respectively, and
automatically executes them at a pre-determined benchmark price.
A crossing trade will be executed only if there is a
counterparty for that order (or portion of an order). Instinet
Crossing® provides an electronic platform with enhanced
liquidity for block trades and better pricing outside regular
trading hours than traditional brokerage or other intermediaries
might provide, together with the reduced trading risk of a
pre-determined benchmark price. Instinet has two crossing
sessions each trading day, both of which occur outside of
regular trading hours, the more significant of which is in the
evening. Following the close of the market each day, Instinet
has one crossing session for orders priced at that days
closing price. Before the market opens, Instinet has another
crossing session using the volume-weighted average price for
that trading day. Instinet is also currently developing an
intra-day crossing session, which will provide regularly
scheduled crossing sessions during regular market hours and
which Instinet believes will provide enhanced liquidity for
block trades. Instinet expects to introduce its intra-day
crossing session by the end of the third quarter of 2004.

In addition, Instinet offers customers a crossing
system for Japanese equity securities.
JapanCrossingSM enables customers worldwide to enter
orders to buy or sell Japanese equity securities in a pre-market
crossing session at the volume-weighted average price for that
trading day. Instinet also offers its customers access to a
crossing system for foreign currencies through the patent
pending Instinet FX CrossSM system, our alliance with
Citibank, N.A. The Instinet FX Cross, which began operating
in December 2002 for our North American customers, enables
customers to execute large currency transactions anonymously at
a transparent

16



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market price. The Instinet FX Cross
currently offers two crossing sessions per day in
12 currencies, to be executed at the CitiFX Benchmark rate
against Citibank, N.A., the counterparty.




| |               
| | --------------
| | Other Services

Soft Dollar Program.Institutional investors often allocate a portion of their gross
brokerage transaction fees for the purchase of independent
third-party research products, as well as other brokerage
services. The amounts allocated for those purposes are commonly
referred to as soft dollar revenues. Instinet is one of the
largest independent providers of research and other brokerage
services through soft dollar or other similar arrangements, and
has offered soft dollar programs for over 15 years.
Instinet offers soft dollar programs in order to increase the
amount of business institutional customers conduct through
Instinet, thereby increasing its transaction volumes and the
depth of its institutional liquidity pool. We continue to focus
on these programs, as part of our efforts to strengthen our
unconflicted global electronic agency brokerage business. In
particular, Instinet is continuing to develop tailored packages
of independent third-party research products for its various
customer categories. Instinet also offers customers proprietary
research tools and services, including The Great Lakes
Review, offered by our subsidiary, Lynch,
Jones & Ryan, which focuses on uncovering stock
opportunities among lesser-known companies in the Midwest. In
addition, Instinet continues to make available soft-dollar
payment options to its customers in connection with their use of
the Reuters Research and Analytics (R&A) product, an
integrated equity workstation that provides users with real-time
quotes and news as well as advanced analytics.

In 2003, more than one-third of Instinets
U.S. customers obtained third-party research services from
us on a soft dollar basis. The portion of our transaction fee
revenue representing soft dollar revenues is offset
dollar-for-dollar by expenses we incur in paying for research
from independent third parties. Instinet made approximately
$100 million in soft dollar payments to independent
research providers on behalf of all customers trading through
Instinet in 2003.

BrokerShareSM.
BrokerShare allows institutional customers to execute trades at
Instinet and allocate a portion of their gross brokerage
transaction fees to third party broker-dealers, chosen by the
customer, for the purchase of independent third-party research
products, as well as other brokerage services. BrokerShare
enables Instinet customers to enter orders directly into
Instinet, without the assistance of a third party broker-dealer,
which gives customers the ability to execute trades without
revealing their trading strategies to other broker dealers.

Research.Consistent
with our agency brokerage approach, we believe Instinet
customers can benefit from greater availability of research
provided by independent research providers who have no actual or
potential conflicts of interest with respect to the companies
they analyze. In addition to the independent third-party
research that Instinet provides to its customers through soft
dollar programs (described above), Instinet distributes research
for selected independent research providers and offers a
proprietary research service, through its subsidiary, Lynch,
Jones & Ryan. Instinet customers, primarily institutional
investors, generally use soft dollars or other similar
arrangements to pay for these products and services as well.

Instinets research is designed to enable
its clients to design efficient portfolio and trading
strategies. Instinet currently distributes research for the
following selected research providers:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Datamonitoris a
    leading strategic business information and market analysis
    company. Datamonitor provides highly customized healthcare
    research and analysis to Instinet clients.                                                                                                                                                                                                                            
|
| |  | Ross Smith Energy Groupis an independent research service
    focused on the Oil & Gas sector. RSEG Group has an in-house
    analyst team consisting of 15 energy, finance, and
    economics professionals. Additionally, RSEG clients have access
    to a network of more than 125 experts including Reservoir
    Engineers, Scouts, Pipeline Consultants, Geologists, Gas
    Marketers, and Forensic Accountants.
|
| |  | Retail Intelligence Groupis an independent market analysis and
    research company focused on providing investment research and
    analysis on the retail, restaurant, and food service sectors.                                                                                                                                                                                                                      

17



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| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Ducker Industrial Standardsis a consulting service that focuses
    on the auto, industrial and home-building sectors by using their
    own industry experts and external industry experts.

In proprietary research, Instinet offers:



| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | Technical Analysis Groupproduces packaged and customized
    technical analysis, as well as daily market commentary.
|
| |  | The Great Lakes Reviewfocuses on uncovering stock
    opportunities among lesser-known companies in the Midwest.    

Commission
Recapture.As part of the
transactional services Instinet provides to financial
institutions, pension plans and other funds through their
sponsors, such as corporations, unions, state and local
governments, endowments and foundations, Instinet, through its
subsidiary, Lynch, Jones & Ryan, enables customers to
recapture a portion of the gross transaction fees that their
fund managers pay us. As of December 31, 2003, Lynch,
Jones & Ryan provided these services to approximately
1,400 of its financial institution, pension plan and other fund
customers. In addition, Lynch, Jones & Ryan provides
its plan sponsor customers with services that assist them when
they transfer assets from one money manager to another. For
example, Instinets crossing, portfolio trading and trading
research services can help these customers manage this
transition.



| |     
| | ----
| | INET

INET is an electronic marketplace that offers
U.S. broker-dealers one of the largest liquidity pools in
NASDAQ-listed stocks, as well as liquidity in
U.S. exchange-listed securities and significant market
share in ETFs. INET also provides its customers with access to
other major U.S. trading venues, currently through
Instinets smart order-routing technology. In addition,
through ICS, INET provides clearing and settlement services for
both INET and Instinet, and also provides correspondent clearing
services to a several securities brokers in the United States.

During 2003, INET, which represents the
consolidation of the broker-dealer order flow of the Instinet
ECN and the Island ECN, accounted for 23.8% of the total trading
volume in NASDAQ-listed stocks. In 2003, INETs average
daily matched trading volume in NASDAQ-listed stocks increased
41.2% to 401 million shares from 284 million shares in
2002 (the Island ECNs trading volume is included in the
2002 figure only after September 20, 2002). INET also
accounted for 2.3% of the total trading volume in
U.S. exchange-listed stocks during 2003, and INETs
average daily matched trading volume in
U.S. exchange-listed stocks increased 122.0% to an average
volume of 44 million shares from 20 million shares in
2002 (similarly, the Island ECNs trading volume is
included in the 2002 figure only after September 20, 2002).
Matched volume reflects transactions where the buyer and seller
are matched on INET.

For an explanation of how we calculate our
trading volumes, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Volume Calculations,
Calculation of INET Volumes and Quarterly
Results.



| |          
| | ---------
| | Customers

Market professionals (broker-dealers, including
NASDAQ market makers) represent the core customer base of INET.
As of December 31, 2003, INET provided equities trading
services to approximately 800 broker-dealers in the United
States.

INETs customers fall into the following
broad categories:



| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Traditional
    Broker-Dealers,which include market
    makers, agency traders and broker-dealers sponsoring
    institutional and retail customers;                  
|
| |  | Direct Access
    Brokers-Dealers,who provide smaller
    institutions, retail customers and individual professional
    traders electronic access to the markets; and

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| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Program Driven
    Traders,which include customers who
    execute a variety of arbitrage strategies and use automated
    computer processes to trade.



| |         
| | --------
| | Services

INET offers its customers matching and routing
services through its ECN, representing the consolidation of the
order flow of Instinet ECN and Island ECN, including the
following:

Core Execution
Services.INET provides the automated
matching of buy and sell orders for both NASDAQ-listed stocks
and U.S. exchange-listed stocks. Through the INET trading
platform, INET customers are able to enter orders and execute
trades directly with one another. Direct trading between
customers over INETs platform creates a deep liquidity
pool, in particular for NASDAQ-listed stocks and ETFs.

Trading Platform.Inlet® is INETs proprietary Java-based,
Internet-based market data and order handling trading
application that permits its customers to place orders in
INETs marketplace. As part of INETs efforts to
consolidate its order handling trading applications into a
single platform, INET is in the process of deploying the INET
Terminal, INETs new proprietary market data and order
handling trading platform. The INET Terminal also allows INET
U.S. broker-dealer customers to access other major
U.S. trading venues, including other ECNs and the NYSE,
using Instinets smart order-routing technology. The INET
Terminal is designed for reliable, anonymous, high-speed trading
at low cost. It offers advanced order functionality that we
believe allows our customers to control transaction costs and to
obtain superior execution by managing their own trade
strategies. INET anticipates discontinuing use of Inlet by the
end of March 2004 and expects to complete the deployment of the
INET Terminal by the end of the third quarter of 2004.

Infocenter.Infocenter is an automated
Internet-based system for INET customers that provides quick
access to customer trade information, billing, and other
customer related information. Infocenter also enables INET
customers to place new orders through the Internet as well as
manage existing orders; however, Infocenter does not allow
customers to view other orders on the INET platform or access
other major U.S. trading venues.

Support Services.INET has a dedicated staff who provide
customers with technical assistance in the use of INETs
screen-based trading systems. INET also allows customers to
place orders by telephone with its staff, who enter the orders
into INETs system on behalf of a customer.

Extended Hours
Trading.INET allows customers to
input orders for a security and execute trades with other
customers in our liquidity pool before, during and after normal
market hours. This permits INET to make the liquidity pool
generated by its customers available from 7:00 a.m. until
8:00 p.m., New York City time.

Clearing and Settlement
Operations.Through our subsidiary,
ICS, INET provides clearing and settlement services in nearly
all of the markets in which we execute trades for customers.
INET and Instinet both self-clear through ICS, and ICS also
clears and settles for a number of broker-dealer customers. As
part of Instinet Groups cost saving initiatives and
integration efforts in connection with our acquisition of
Island, Islands trading activity from I-Clearing Corp. was
converted to ICS in January 2003.

ICS clearing and settlement operations are
similar in design and function to other clearing brokers. ICS is
responsible for a variety of activities that take place after a
securities trade has been executed, including confirming trades
before settlement, submitting executed transaction information
to industry clearing and settlement utilities, managing failed
trades, communicating trade and settlement data including
allocations to customers, managing corporate actions and
updating and maintaining books and records. ICS uses its
proprietary Clearing Information
SystemTM (CIS) to handle customer ticketing,
processing of allocations and communications with industry
clearing agents, depositories and books and records processing
providers. In February 2003, INET replaced portions of CIS with
a new system for the processing of trades for its
U.S. broker-dealer customers. We believe that this new
system will improve the efficiency of CIS by providing increased
capacity to process significantly higher volumes of trades for
these customers. ICS is in the process

19



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of replacing the remainder of CIS with a new
system for the processing of trades for institutional customers.
We expect this replacement to be substantially completed by the
end of 2004. For processing of books and records, ICS uses
Automated Data Processing, Inc. (ADP) in the United States,
Nomura Institutes I-Star system in Japan and ACT Fiscal
for all other non-U.S. business.


Correspondent Clearing.In addition to standard clearing
services, ICS provides a package of clearing services (known as
correspondent clearing) to several securities brokers in the
United States. These services include transaction processing,
clearing and settlement of trades, recordkeeping and financing,
as well as various products and services oriented toward the
institutional investor community.



| |                
| | ---------------
| | Our Investments

We have made a number of investments in companies
with operations or technology to enhance our core service
offerings in our global electronic agency securities business.
We have beneficial ownership interests in the following
companies:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 7.0% of WR Hambrecht + Co.,
    Inc., a U.S.-based investment banking firm that enables
    issuers to conduct auction-based securities offerings via the
    Internet through its OPENIPO®. In addition, we have an
    option to buy additional shares in the event WR Hambrecht
    becomes a publicly-traded company. WR Hambrecht has also
    issued warrants that, if fully exercised, would dilute our
    ownership interest to 6.36%.
|
| |  | 4.8% of the voting interest of Archipelago
    Securities, LLC, the parent company of Archipelago Exchange,
    which is Pacific Exchanges equity trading facility. In
    March 2002, Archipelago, LLC merged with REDIBook ECN LLC,
    another ECN.                                                                                                                                                                                        
|
| |  | 47.9% of Tradeware S.A., a European-based
    provider of integrated order routing solutions to broker-dealers
    in Europe. We also have warrants that, if fully exercised, would
    increase our beneficial ownership to 57.3%.                                                                                                                                                                                                            
|
| |  | 12.8% of Starmine Inc., a U.S.-based
    provider of independent ratings of Wall Street equity analysts.                                                                                                                                                                                                                                                                                                                                       
|
| |  | 9.8% of e-Xchange Advantage Corporation, a
    partnership with The NASDAQ Stock Market, formed to develop
    securities electronic trading systems and tools.                                                                                                                                                                                                                                                                                
|
| |  | 1.7% of The NASDAQ Stock Market, Inc., a
    company that operates an electronic stock market in the U.S.                                                                                                                                                                                                                                                                                                                                      

We owned 50% of Japan Cross Securities Co., Ltd.,
a joint venture with Nikko Salomon Smith Barney Ltd. established
to provide a crossing service for Japanese equity securities. In
September 2003, we sold our 50% interest to Nikko Salomon Smith
Barney Ltd. for approximately $1.5 million. As part of this
transaction, JapanCross Securities Co., Ltd. transferred the
JapanCross crossing service to us.

We also owned 13.8% of TP Group LDC, a
consortium that owned 38.9% of virt-x, an electronic
order-driven equities market for pan-European securities. In
February 2003, SWX Holding AG, a subsidiary of
SWX Swiss Exchange, the Swiss market body, acquired 92% of
virt-x. TP Group LDC received £13.6 million in
connection with the sale and was subsequently liquidated. We
received approximately $3.0 million as part of the
liquidation in March 2003.

20



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##### 



Exchange Memberships

Overall, through our subsidiaries, we are a
member of 21 exchanges in North America, Europe and Asia, and we
continue to develop our direct connections to non-U.S.
exchanges. The following chart shows our various exchange
memberships:

EXCHANGE MEMBERSHIPS

|                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                       |  |                                                  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------
|North America                                                                                                                                                                                                                                                                                |  | Europe                                                                                                                                                                                                |  | Asia-Pacific Region                              
|                                                                                                                                                                                                                                                                                             |  |                                                                                                                                                                                                       |  |                                                  
|American Stock Exchange
    Archipelago Exchange(1)
    Bermuda Stock Exchange
    Boston Stock Exchange
    Chicago Board Options Exchange
    Chicago Stock Exchange
    National Stock Exchange(2)
    New York Stock Exchange
    Philadelphia Stock Exchange
    Toronto Stock Exchange |  | Euronext(3)
    Frankfurt Stock Exchange
    London Stock Exchange
    Helsinki Stock Exchange
    Milan Stock Exchange
    OFEX plc
    Stockholm Stock Exchange
    Swiss Stock Exchange
    virt-x |  | Hong Kong Stock Exchange
    Tokyo Stock Exchange



---



|    |                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Archipelago is the Pacific Exchanges equity
    trading facility.                                                                                                                                 
|   
|(2) | As of November 7, 2003, Cincinnati Stock
    Exchange changed its name to National Stock Exchange.                                                                                                 
|   
|(3) | Euronext is a consolidation of the Paris,
    Amsterdam, Lisbon and Brussels stock exchanges. We currently
    provide customers with access to Euronext for trades in French
    and Dutch stocks.

Marketing and Communications

Our marketing and communications strategy is
focused on the following goals:

Instinet,
the Institutional Broker



| |   |                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Creating awareness and positive perceptions of
    key products and services, including unconflicted sales trading
    expertise, access to liquidity pools around the globe, and
    intelligent trading tools, as well as Lynch, Jones &
    Ryans commission recapture services.
|
| |  | Increasing business with existing customers as
    well as attracting new customers.                                                                                                                                                                                                

INET



| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | Creating awareness and positive perceptions of
    INETs deep and diverse liquidity, reliability, speed, and
    neutrality.
|
| |  | Increasing business with existing customers as
    well as attracting new customers.                                         

We pursue these goals through a combination of
several marketing communications strategies. These include print
and broadcast advertising, interactive marketing on our own
websites and other online channels, sponsorships of customer
events, direct one-to-one marketing, traditional public
relations and a variety of alliances and co-marketing programs
and the production of client newsletters, premiums and
promotional items. Through our website, prospective customers
can get detailed information on our services, as well as news
about us and our market environment.

21



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Our Technology and Intellectual
Property

Technology

Our sophisticated and proprietary technology
connects us to our customers, automates traditionally
labor-intensive securities transactions, provides us with a
platform to support our operations, and is an important part of
our compliance activities. We believe that our ability to use
technology effectively to expand and enhance our services has
been a key component in the development of our business. In the
future, we expect to continue to make significant investments in
systems technology to upgrade services for the development of
our business.

Our systems provide customers with efficient
service and have a proven track record of reliability and
adaptability as usage has increased and service and product
offerings have expanded. Our systems are designed to be
interoperable and flexible. For example, our core matching
systems use an architecture that allows us to independently
develop and evolve the functionality of the systems in different
areas as business needs and opportunities demand.

We have four core data centers that enhance the
capacity and reliability of our Instinet and INET trading
platforms. Our two core data centers for Instinet are located in
Jersey City, New Jersey and Bedford, Massachusetts. These two
data centers support client connectivity, as well as trading and
execution systems, clearing and settlement operations and
customer interfaces. They also provide redundancy for
Instinets critical applications, systems and services,
allowing Instinet to continue to operate from either site should
the other site fail. INET is supported by two data centers
located in Secaucus and Jersey City, New Jersey. These two data
centers support client connectivity, trading and execution
systems, as well as customer interfaces. If one of our four data
centers were to be damaged, disabled or otherwise fail or
experience difficulties, it might be more difficult for us to
continue operating without disruption to our services. In order
to mitigate this risk, we have installed additional power,
telecommunications and hardware at the four core data centers
that support both the Instinet and INET systems. In addition,
our network infrastructure is able to support both Instinet and
INET client connectivity and critical systems and services from
any of these four facilities, with each one being able to
provide independent support. We also have two subsidiary data
centers and distribution points in London serving
Instinets customers in Europe.



| |         
| | --------
| | Instinet

Instinet uses a range of sophisticated
technologies, including Linux, Tibcos Rendezvous, Oracle,
Java and Enterprise Java Beans (EJB), for the various components
of its systems, including its central order matching engines,
crossing services and order management functions.

Currently, customers can access Instinets
trading platform through Instinet® display screens, direct
links to Instinets systems from those of its customers
using the Financial Information Exchange (FIX) protocol, or
other protocols, or Instinets proprietary software. Recent
products that Instinet has developed to access its marketplace
include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Instinet Trading
    Portal SM,
    Instinets trading application primarily for active asset
    managers and hedge funds. Portals Internet-based
    deployment strategy is designed to substantially reduce
    communication and field service costs associated with
    traditional customer display screens.                                                                                                                                                                                 
|
| |  | NewportTM,
    a patent pending program-trading solution aimed primarily at
    passive and quantitative fund managers. Newport allows for
    interaction between multiple traders at one customer site, the
    automation of trading using algorithms created by the customer,
    customization of the interface by the customer and integration
    with other systems commonly used by these customers, which
    improves customers ability to execute program trades in
    global markets.
|
| |  | Direct-FIX
    technology, an upgrade that offers
    enhanced trade reporting functionality and access to
    Instinets smart order-routing technology and market data.
    This upgrade combines faster connectivity with richer trading
    functionality than its predecessor and is more cost-effective
    for Instinet.                                                                                                                                                                     

22



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Most of the methods of connecting to
Instinets system are by means of dedicated networks
provided by Radianz, a joint venture between by Reuters and
Equant Finance B.V. However, Instinet also provides alternative
methods of connectivity, if possible, to those customers who
choose not to use Radianz. Instinet no longer provides
proprietary communications and connectivity systems to
customers, but instead offers various other methods of
connectivity, including Internet-based systems and technology
provided by third party vendors. As a result, Instinet customers
are responsible for their own communications and connectivity
requirements. The availability of alternative methods of
connectivity also provide Instinet customers with multiple
options for access to Instinets trading platform.



| |     
| | ----
| | INET

INET uses a number of proprietary and other
technologies, including Linux, Windows, Java and Microsoft SQL,
for the various components and operational support of its
trading system.

Customers can access INETs trading platform
either directly, through the use of INETs proprietary
technology, or through third-party trading platforms for which
INET has developed various products to allow those trading
platforms to access its trading platform. Products that INET has
developed to access its trading platform include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Inlet®, a
    proprietary Java-based, Internet-based, market data and order
    handling platform that permits subscriber customers to place
    orders in INETs trading platform. As part of INETs
    efforts to consolidate its order handling trading applications
    into a single platform, INET is in the process of deploying the
    INET Terminal, INETs new proprietary market data and order
    handling trading platform. INET anticipates discontinuing use of
    Inlet by the end of March 2004 and expects to complete the
    deployment of the INET Terminal by the end of the third quarter
    of 2004.
|
| |  | OUCH®, a
    proprietary protocol that provides subscriber customers with a
    fast, efficient means of entering orders in INETs trading
    platform. OUCH® allows investors to access INETs
    trading platform, either directly or through a third-party
    trading platform, to place orders and monitor order and trade
    information. All orders, whether entered by direct OUCH®
    users or users of INETs other connectivity products, are
    entered into INETs trading platform through the OUCH®
    protocol.                                                                                            
|
| |  | ITCH®, a data
    feed provided to vendors that disseminates INETs order and
    trade information. INETs data feed contains information
    concerning buy and sell orders, last match price, and other
    information that is specific to INETs system. INETs
    data feed utilizes a proprietary protocol specifically designed
    for the high-speed dissemination of real-time order book
    information. INET has entered into arrangements with data
    vendors such as Reuters and Bloomberg that repackage INETs
    data feed and sell it to others.                                                         
|
| |  | BookViewer® a
    proprietary Internet application that provides a free,
    real-time, interactive venue for customers to view the INET
    order book.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | FIX Connectivity, a
    product that allows subscriber customers and vendors that have
    adopted the FIX protocol to connect to INETs trading
    platform quickly without incurring significant additional
    technology costs.                                                                                                                                                                                                                                                                                                                                                                                             

Currently, INET provides its customers with
access to other major U.S. trading venues by allowing its
customers to connect directly to Instinets smart
order-routing technology. As part of INETs efforts to
consolidate its order handling trading applications into a
single platform, INET is in the process of deploying the INET
Terminal, INETs new proprietary market data and order
handling trading platform. INET anticipates discontinuing use of
Inlet by the end of March 2004 and expects to complete the
deployment of the INET Terminal by the end of the third quarter
of 2004. INET is also considering developing its own smart
order-routing technology for use solely by INET customers that
would provide access to either the INET liquidity pool or one of
the various markets to which we are connected and would replace
INETs use of the Instinet smart order-routing technology.

23



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##### 



INET offers various methods of connectivity,
including Internet-based systems and technology provided by
third party vendors. As a result, INET customers are responsible
for their own communications and connectivity requirements. The
availability of alternative methods of connectivity also
provides INET customers with multiple options for access to
INETs trading platform.

INET is in the process of phasing out
IslandNet®, INETs managed network service that
provides simplified connectivity to INETs trading platform
and fully-redundant access over a private network to INETs
full range of products, by the end of the second quarter of
2004. INET no longer offers IslandNet to new customers; however,
INET has made arrangements through Radianz to accommodate those
customers still using IslandNet. INET has also partnered with
other leading providers of front-end trading platforms, network
services and trade and order management systems to expand access
to INETs matching services and data information. These
third-party systems generally connect to INETs trading
platform through OUCH® or FIX and then redistribute this
connectivity to their customers.

In order to deal with increasing demands on our
execution and clearing capacity in our equity securities trading
system due to greater service levels and external circumstances
such as decimalization, our technology staff is dedicated to
managing our capacity. We believe that it will be important not
only to add capacity in the future, but to make this capacity
more flexible to handle the complexity of changing
circumstances. We have a test network to simulate complex system
trading scenarios and to carry out various performance tests on
our capacity. In addition, we have other ongoing capacity
projects relating to clearing and other areas.

Intellectual Property

To protect our proprietary technology and
intellectual property rights, we rely primarily on patent,
copyright, trade secret and trademark law. We principally use
material, software and technology that we have developed and
that are protected by our own intellectual property rights.
However, we also use software, as well as other material and
technology, that is protected primarily by intellectual property
rights belonging to third parties. We have taken measures to
register and protect our trade name, logos, trademarks and
service marks both in the United States and in various countries
throughout the world. Notwithstanding the precautions we take to
protect our intellectual property rights, it is possible that
third parties may copy or otherwise obtain and use our
proprietary technology without authorization or otherwise
infringe on our proprietary rights.

Competition

The financial services industry generally, and in
particular, the securities brokerage business in which we engage
is very competitive, and we expect competition to remain intense
in the future. We expect to face competition from a number of
different sources varying in size, business objectives and
strategy. In our various businesses, we compete with the
following entities and types of entities, among others:



| |   |                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | market makers, exchange specialists, and other
    traditional broker-dealers (including many of our own customers)
    acting as agent or principal;                                                                                              
|
| |  | traditional and electronic trading methods in use
    on U.S. and international exchanges, including NYSE specialists
    and the electronic matching systems of international exchanges;                                                          
|
| |  | NASDAQs SuperMontage system, which enables
    market participants to trade electronically in NASDAQ-listed and
    U.S. exchange-listed stocks;                                                                                                  
|
| |  | Archipelago Exchange, which is the Pacific
    Exchanges equity trading facility;                                                                                                                                                                 
|
| |  | NYSE Direct+, which enables market
    participants to enter limit orders to execute electronically
    against the best-priced buy and sell orders displayed on the
    NYSE, the NYSEs Institutional XPressTM, and
    NYSE OpenbookTM products;
|
| |  | ECNs, ATSs, electronic brokers and other
    electronic trading systems, including but not limited to BRUT
    ECN, Bloomberg Tradebook, and ITG, Inc.;                                                                                            

24



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##### 





| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | automated trade execution services developed by
    third party vendors for commercialization in a wide range of
    financial products markets;
|
| |  | commercial banks and other financial
    institutions; and                                                                                      
|
| |  | trading system software companies.                                                                                                              

Both Instinet and INET compete on the basis of a
number of factors, including:



| |   |                                                                    
| | - | -------------------------------------------------------------------
| |  | total transaction cost;                                            
|
| |  | amount and frequency of price improvement;                         
|
| |  | quality and frequency of executions;                               
|
| |  | price;                                                             
|
| |  | the depth and breadth of our liquidity pools;                      
|
| |  | our speed and quality of connectivity to other
    trading markets;
|
| |  | anonymity of customer orders;                                      
|
| |  | quality of service;                                                
|
| |  | functionality and ease of use of our trading
    platforms; and    
|
| |  | reputation.                                                        

Instinet also competes based upon the quality and
availability of our value-added brokerage and research services.

We have experienced intense price competition in
our equity securities business in recent years that may continue
as a result of the following factors:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | continuing advances in technology;                                                    
|
| |  | regulatory limitations;                                                               
|
| |  | abundance of providers and ease of entry into the
    business, particularly for INET;
|
| |  | increased customer awareness and regulatory
    scrutiny of execution costs; and      
|
| |  | continuing unbundling of financial services.                                          

Some of our competitors may have more modern
technology and a broader range of services and, therefore, may
be able to offer brokerage services to customers at lower prices
than we can. To maintain our customer base and attempt to
counter this pressure, we have aggressively reduced pricing,
reduced fees for taking liquidity and offered rebates for
providing liquidity for our U.S. broker-dealer customers.
In addition, we seek to continue to enhance our products and
services; leverage our unconflicted, low-cost agency business
model; enhance our independent research offering; maintain and
expand liquidity; maintain competitive prices and offer
competitive services.

In our correspondent clearing business, we face
competition from traditional clearing firms. Our main
competitive factors are price competition and quality of
execution.

Many of the financial service providers with
which we compete are substantially larger than we are and have
substantially greater financial, technical, marketing and other
resources. Outside the United States, in addition to our U.S.
competitors with international capabilities, we compete with
banks and other financial institutions that are well-capitalized
and larger than we are and may have long-standing,
well-established and, in some cases, dominant positions in their
trading markets.

25



---



##### 



Competition may remain intense for the following
principal reasons:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | When the profitability of broker-dealers came
    under significant pressure due to the general economic downturn
    as well as the impact of decimalization, broker-dealers
    increased their focus on expenses and awareness of cost.
    Although volumes have improved somewhat recently, the focus on
    trading costs and resulting price pressure may persist.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | As our customers have improved their technology,
    their ability to change their trading venue has increased,
    allowing changes based upon relatively small changes in prices.
    This trend may persist.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | NASDAQ is a for-profit entity that operates
    SuperMontage, an order-driven execution system that directly
    competes with ECNs. NASDAQ continues to make changes to
    SuperMontage to enhance its competitiveness. NASDAQs
    enhancements to SuperMontage are intended to further its ability
    to compete with us and other market participants for order flow,
    trading volume, and revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | The NYSE has proposed enhancements to its
    Direct+ system to expand market participants
    ability to execute orders electronically at the best bid and
    offer on the NYSE.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Regulatory changes have altered, and may continue
    to alter, the competitive landscape in which we operate.
    Sometimes these changes give our competitors competitive
    advantages over us. For example, the structure of the
    U.S. equity securities markets may be due for significant
    changes as a result of the SECs proposed
    Regulation NMS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Competitors who apply for and receive status as
    securities exchanges or facilities of an exchange will be able
    to benefit from their exclusive participation in the various NMS
    systems. As a result, these competitors may have an advantage
    over us in attracting business in, and generating revenues from,
    their activity in U.S. exchange-listed and NASDAQ-listed
    stocks. In addition, there may be other potential competitive
    advantages associated with securities exchange status, including
    a role in the governance of NMS systems, a share of the revenues
    generated by the sale of consolidated market data to vendors and
    market participants, and direct connectivity to NMS systems,
    including ITS, which enables an ATS to access publicly displayed
    orders in all ITS participant markets trading
    U.S. exchange-listed stocks and make its own orders
    available for execution through ITS. In addition, as exchanges,
    these competitors would become SROs or SRO facilities, no longer
    subject to regulation by the NASD or another SRO. NASDAQ has
    applied to register as a national securities exchange. Another
    competitor, Archipelago Exchange, currently operates as the
    equity trading facility of the Pacific Exchange.
|
| |  | Competitors may be able to obtain advantages over
    us through their association with SROs that impose less
    restrictive rules and regulations on their operations than our
    SROs apply to us. These SROs also may share a greater percentage
    of revenues they obtain from these competitors trading
    activity with them than our SROs share with us. For example, the
    NASD regulates and polices the NASDAQ market, regulates the
    activities of our U.S. broker-dealer subsidiaries, holds a
    controlling stake in NASDAQ and operates the ADF. The NASD is
    thus able to propose, and often obtain, SEC approval of rule
    changes that we believe can be to NASDAQs competitive
    benefit as a securities marketplace and our competitive
    disadvantage.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Multi-service competitors are able to
    cross-subsidize their agency brokerage and market making
    activities, with which we directly compete, with their revenues
    and profits from their other activities in which we do not
    engage, such as principal trading and investment banking.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | New competitors have emerged, including companies
    who provide use of order routers or similar technology, that may
    not need to have any securities industry experience or be
    subject to securities industry regulations and potentially may
    compete against us effectively with lower overhead costs. Some
    of these competitors may also be better positioned than we are
    to exploit recent developments in Internet-related technology
    and to build more attractive or flexible competing products that
    could capture some of our business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

26



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A variety of existing companies may seek to
    expand their own businesses to compete against us because of the
    size of the securities markets, the relationships between
    information and trading, and the importance of technology in
    creating efficient trading systems. These potential competitors
    could include companies that provide trading services for
    products and services other than securities, software companies,
    information and media companies, and other companies that are
    not currently in the securities business.                                                                                                                                                         
|
| |  | Commercial banks and other financial institutions
    have expanded their product offerings to include many of the
    financial services traditionally provided by broker-dealers. We
    expect competition from commercial banks to increase as a result
    of regulatory initiatives in the United States to remove or
    relax restrictions on combining commercial banks and other types
    of financial service providers.                                                                                                                                                                                                                                                                                           
|
| |  | Consolidations and alliances among broker-dealers
    and ECNs and between commercial banks and broker-dealers have
    resulted, and we believe will continue to result, in
    increasingly large and well-capitalized financial service
    providers. Consolidation has occurred between multi-service
    financial institutions and market makers (including exchange
    specialists) that could result in better-capitalized market
    makers that compete directly with us and our agency brokerage
    model.                                                                                                                                                                                                       
|
| |  | As a result of decimalization and other factors,
    some market makers continue to move from a business model in
    which they trade as principal for their own account to an agency
    business model in which they charge commissions rather than
    profit from the bid-ask spread. The SECs
    interpretation of Section 28(e) of the Exchange Act
    allowing institutional investors to obtain soft dollar credits
    from certain transactions executed through broker-dealers on a
    riskless principal basis, rather than only on an
    agency basis, may further encourage this trend. These
    developments may increase our competition, particularly in the
    provision of soft dollar programs.
|
| |  | Certain ATSs that are not subject to the fair
    access requirement of Regulation ATS in particular
    securities may have greater flexibility than INET in pricing
    their services to specific customers and therefore may have a
    competitive advantage over INET in attracting the business of
    such customers.                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | NASDAQ currently acts as exclusive SIP for
    NASDAQ-listed stocks, and the SROs trading NASDAQ-listed
    securities, including NSX, are required to provide quotation and
    trade data to NASDAQ in its role as exclusive SIP. NASDAQ
    receives a share of the fees its collects from market
    participants to whom it disseminates these data. This role has
    given NASDAQ certain financial and other competitive advantages.
    In recognition of NASDAQs role as a competitor, however,
    the replacement of NASDAQ as exclusive SIP is expected to occur
    sometime in the future. See  Industry
    Background and  Regulation.                                                                 

For a further discussion of the risks relating to
our competitive environment, see Risk Factors 
We Face Substantial Competition That Could Reduce Our Market
Share and Harm Our Financial Performance.

Regulation

As a securities broker, an operator of several
systems considered ATSs and an ECN under SEC regulations and an
operator of a clearing business for our own customers and third
parties, we are subject to extensive regulation in the United
States and in certain other jurisdictions in which we operate.
This regulatory framework generally applies directly to our
subsidiaries that are registered or licensed in the various
jurisdictions. Instinet, LLC, Inet ATS, Inc., Island Execution
Services, Inc., Instinet Clearing Services, Inc., Lynch,
Jones & Ryan, Inc. and Harborview LLC are each
registered as U.S. broker-dealers with, and are subject to
regulation by, the SEC and other entities, as described below.
Inet Futures Exchange, LLC is registered as a contract market
with the CFTC and a limited purpose national securities exchange
with the SEC.

The purpose of these regulations is to generally
safeguard the integrity of the markets and to protect the
interests of investors participating in those markets, rather
than the interests of securities firms or their creditors or
stockholders. As a result, these regulations cannot be expected
to protect or further the interests of our company and may have
the effect of limiting or curtailing our activities, including
activities that might be

27



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##### 



profitable. Furthermore, additional rulemaking or
the initiation of proceedings could adversely affect our
business, financial results and condition, prospects and
reputation.


Regulation covers all aspects of our brokerage
business, including:



| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | registration of offices and personnel;                                                                                  
|
| |  | conduct of personnel;                                                                                                   
|
| |  | access to our ECN and ATSs;                                                                                             
|
| |  | acceptance, execution, clearing and settlement of
    customer orders;                                                  
|
| |  | trading practices;                                                                                                      
|
| |  | record keeping;                                                                                                         
|
| |  | capital structure;                                                                                                      
|
| |  | capacity, integrity and security standards for
    our trading systems;                                                 
|
| |  | sales practices and advertising; and                                                                                    
|
| |  | handling of customer funds and securities and
    supervision of accounts in connection with our wholesale
    business.

In addition, our business may be significantly
affected by regulation that extends to the structure of the
markets for equities securities.

The various governmental authorities and industry
SROs that supervise and regulate us generally have broad
enforcement powers. If we fail to remain in regulatory
compliance, we could be censured or fined. Alternatively,
regulators could issue cease-and-desist orders against us,
prohibit us from engaging in some of our businesses, or suspend
or expel us or any of our officers or employees from the
securities industry. We face the risk of significant
intervention by regulatory authorities, including extensive
examination and surveillance activity. In the case of
non-compliance or alleged non-compliance with regulations, we
could be subject to investigations and judicial or
administrative proceedings that may result in substantial
penalties. In the case of non-compliance, we could also, in some
situations, be subject to civil lawsuits by customers, in some
cases for substantial damages. Our ability to comply with all
applicable laws and rules is largely dependent on our
establishment and maintenance of compliance, audit and reporting
systems, as well as our ability to attract and retain qualified
compliance and other personnel.

Our U.S. Activities

The securities industry in the United States is
subject to extensive regulation under both federal and state
laws. The SEC is the federal agency responsible for the
administration of the federal securities laws. Our
U.S. brokerage and clearing subsidiaries are registered
with the SEC as broker-dealers, and our brokerage subsidiary,
Instinet, LLC, is also registered with the SEC as an investment
advisor. The SEC has delegated much of the regulation of
broker-dealers to SROs, including the NASD, which has been
designated by the SEC as our principal regulator. The NASD
adopts rules (subject to approval by the SEC) that regulate the
broker-dealer industry and govern the market structure of
NASDAQ. These rules regulate the conduct of our
U.S. broker-dealer subsidiaries and their activities in
NASDAQ-listed and U.S. exchange-listed stocks. The NASD
also conducts periodic examinations of the operations of those
subsidiaries. Our U.S. broker-dealer and clearing
subsidiaries also are registered as broker-dealers in a number
of states and are subject to regulation by state securities
administrators in states in which they conduct business.
Instinet, LLC, Instinet Clearing Services, Inc., The Inet ATS,
Inc., Island Execution Services, Inc., Lynch, Jones &
Ryan, Inc. and Harborview LLC are also subject to regulation by
the exchanges of which they are members.

28



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In addition, our U.S. broker-dealer subsidiaries
are members of the Securities Investor Protection Corporation
(SIPC). SIPC provides certain protection for customers
accounts in the event of the liquidation of a broker-dealer.
SIPC is funded through assessments on registered broker-dealers,
including us.

This regulatory environment is also subject to
change. Our business, financial condition and operating results
may be adversely affected as a result of new or revised
regulations or rules imposed by the SEC, other
U.S. regulatory authorities or self-regulatory
organizations, such as the NASD. Our business, financial
condition and operating results also may be adversely affected
by changes in the interpretation or enforcement of existing laws
and rules by the SEC, other regulatory authorities and SROs.

In recent years, the SEC and the NASD have
proposed and adopted a number of regulatory changes in an effort
to shape or respond to developments in the securities markets
and market structure that have resulted from advances in
technology and the growth of electronic trading. Because a
substantial part of our business involves electronic trading and
relies heavily on technological advances, these proposals may
have a direct and substantial impact on us.



| |                         
| | ------------------------
| | The Order Handling Rules

The SEC adopted the order handling rules for
market makers and exchange specialists in 1996. These rules took
effect with respect to NASDAQ-listed stocks in 1997. The order
handling rules prohibit a market maker or exchange specialist
from displaying its own limit order for a stock through an ECN
at a more favorable price than its published quote unless the
ECN publishes its best-priced market maker and exchange
specialist orders in that stock and permits execution against
those orders through the facilities, or pursuant to the rules,
of an SRO. Similarly, a market maker that receives a limit order
priced better than its own published quote must generally either
execute the order, incorporate the limit order price into its
published quote or pass the order on to an ECN for public
display and execution access. Regulation ATS, discussed
below, requires an ATS meeting certain volume thresholds in a
particular stock to provide all of its best-priced subscriber
orders in that stock, including institutional orders, to an SRO
for public display and provide execution access to these orders.

When the order handling rules were introduced,
Instinet was the first and only existing ECN, and the best bids
and offers from the Instinet trading system were directly
displayed for the first time in the NASDAQ quote montage. The
order handling rules, however, facilitated the proliferation of
ECNs by providing a role for ECNs in the display and execution
of orders. As additional ECNs came into existence, their quotes
were also displayed in and accessible through the NASDAQ market,
which has produced greater price transparency for investors in
the market for NASDAQ-listed stocks and resulted in greater
competition for us.

Since the introduction of the order handling
rules, the SECs Division of Market Regulation has issued a
series of no-action letters to the ECNs operated by
Instinet and Island (now INET) over a number of years verifying
and extending their status as ECNs in compliance with these
rules. The most recent no-action letter for Island
ECN (now INET) is valid until April 6, 2004. The Division
continues to condition its no-action positions upon,
among other things, specified limitations on the fees we charge
brokers who are not subscribers to our systems for executing
orders on our systems displayed on an SRO through the SROs
facilities or according to the SROs rules (fees commonly
known as access fees). The Division also conditions
its positions upon our representation that the trade execution
and communication systems of the ECN operated by INET are able
to handle anticipated present and future peak trading volumes.
In connection with its annual examination of the capacity of
market participants, the Division has in the past raised issues
regarding the adequacy of our capacity, our testing of capacity
limits and our plans for increasing capacity, which we believe
we have addressed. The Division also has in the past raised
issues regarding our access fees. We expect that the Division
will continue to extend its no-action positions, but
we cannot assure you that it will do so or that its applicable
rules or the enforcement of those rules will not change.



| |               
| | --------------
| | Regulation ATS

In December 1998, the SEC promulgated new rules
relating to the regulation of certain ATSs. The SEC expanded its
interpretation of the definition of exchange under
the U.S. securities laws to encompass a range

29



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##### 



of electronic brokerage activities, including
certain of those conducted by us. Specifically, the Instinet
Real-Time Trading Service (Instinet RTTS), Instinet
CrossingSM systems, Instinet Continuous Block
CrossingSM system, and INET. At the same time,
Regulation ATS permits an ATS to be registered as a
broker-dealer, rather than as a national securities exchange
with the SEC, if the ATS complies with the applicable
requirements of the regulation.


The requirements of Regulation ATS
applicable to us include:



| |   |                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | mandatory public display of the best-priced buy
    and sell orders displayed within certain of our systems to
    subscribers through an SRO and providing broker-dealers with
    access to these orders via an SROs facilities or according
    to an SROs rules;                                                 
|
| |  | limitations on the fees charged to broker-dealers
    for accessing system orders displayed through an SRO, and
    compliance with SRO rules relating to these fees;                                                                                                                                                  
|
| |  | the establishment of written standards for
    granting access to trading on our systems, and not unreasonably
    prohibiting or limiting access to the services offered by our
    systems by applying these access standards in an unfair or
    discriminatory manner (known as the fair access
    requirement);
|
| |  | the establishment of and application of capacity,
    integrity and security standards; and                                                                                                                                                                                                                            
|
| |  | additional notice, recordkeeping, reporting,
    confidential treatment and other requirements.                                                                                                                                                                                                                        

We have modified and enhanced our trading systems
to comply with Regulation ATS and continue to review and
monitor our systems and procedures for compliance. The
SECs proposed Regulation NMS would reduce the volume
threshold for the application of the fair access requirement of
Regulation ATS. See  Proposed
Regulation NMS; Proposed Changes to NMS Market Data Revenue
Allocation Formulas.



| |                                                            
| | -----------------------------------------------------------
| | Exchange Registration and the INET Exchange
    Application

As a consequence of their compliance with the
requirements of Regulation ATS, none of the ATSs we operate
currently are required to register as a national securities
exchange under applicable U.S. securities laws. However, it is
possible that INETs future share of the average daily
trading volume in specified securities or classes of securities
could result in an SEC determination that exchange registration
is necessary. Moreover, INET intends to submit to the SEC a
draft application for registration as a national securities
exchange. If the SEC were to require INET to register as a
national securities exchange, or if any of our subsidiaries were
to voluntarily register as a national securities exchange, we
could become subject to substantial additional regulation. In
addition, if any of our subsidiaries were to register as a
national securities exchange, it may gain greater control over
its business operations as an SRO that would no longer be
subject to regulation by the NASD or another SRO. INET also
would obtain greater efficiencies in its business, enter a level
competitive playing field with direct competitors, capture a
larger share of market data revenue than it currently captures
and lower its clearing costs. We might also be required to
comply with fair representation or ownership restriction
requirements.

Under our amended and restated corporate
agreement with Reuters, in the event the SEC seeks to require
any of our ATSs to register as a national securities exchange,
we have agreed to take all commercially reasonable actions to
mitigate the effect of such actions on Reuters rights, including
the implementation of appropriate changes in our corporate
structure and operations, although we would not be required to
take any action that would have a material adverse effect on any
material part of our business or its consolidated financial
condition or results of operations. In addition, neither our
ATSs nor any of our subsidiaries may voluntarily register as a
national securities exchange without the prior written consent
of Reuters if such registration would materially affect Reuters
ability to exercise its voting and other rights related to its
ownership of our common shares.



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | Quote Display and Order Execution Access in
    Exchange-Listed Stocks; Intermarket Trading System

Under Regulation ATS, an ATS meeting certain
trading volume thresholds in a stock during four calendar months
in any six calendar month period in a stock for which it
displays orders to its subscribers must

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provide to an SRO its best priced orders in that
stock for public display and must provide other broker-dealers
execution access to such orders. Under current
SRO regulations, ATSs that provide order information for
U.S. exchange-listed stocks to an SRO, including
INETs ATS, are subject to the rules of the
ITS Plan. The ITS Plan imposes limitations and
provides remedies with respect to transactions by members of ITS
participant markets that involve a trade-through of
bids and offers. A trade-through occurs when a market
participant trades at a price that is inferior to a price
displayed in another participating market. The ITS Plan
also imposes certain requirements when market participants
lock the market  display bids or offers
at prices that equal offers or bids from other market
participants  or cross the
market  display bids that exceed offers or display
offers that are less than bids of another market
participant  for a particular security. Orders in
U.S. exchange-listed stocks displayed on INETs ATS
frequently lock or cross other markets.


On May 30, 2003, an SEC order became
effective that extended a temporary de minimisexemption
from the ITS trade-through rule for the trading of SPYs, QQQs
and Diamonds. This temporary de minimisexemption, which
has been extended through December 4, 2004, enables ATSs
and other market participants to effect trade-throughs up to
three cents away from the current best bid and offer in these
three stocks. This temporary de minimisexemption has
facilitated the ability of INET (and the Instinet and Island
ECNs previously) to display order information in and maintain
its liquidity pool in SPYs, QQQs, and Diamonds. Without the
de minimisexception, INETs ATS would be
required either to discontinue the display of order information
in SPYs, QQQs, and Diamonds or to continue its participation in
NSX or another SROs market with restrictions on its
ability to execute trades that would result in trade-throughs
and to display aggressively priced orders. Either alternative
could have a significant adverse effect on INETs ability
to attract orders to its liquidity pool and maintain and grow
its market share and liquidity pool in the affected stocks.

Because of its concerns regarding the ITS Plan
restrictions, notwithstanding the availability of the temporary
de minimisexemption from the trade-through rules,
effective September 23, 2002, INET discontinued the display
of order information for QQQs, Diamonds and SPYs, although it
still permitted subscribers to trade those stocks on a
non-displayed basis. This resulted in a decline in INETs
market share in these stocks, which has had a negative impact on
our financial results and our business. On October 31,
2003, Island ECN (now INET) began providing quotation data for
QQQs, Diamonds, and SPYs through the NSX in compliance with the
requirements of Regulation ATS and the temporary de
minimisexemption from the ITS trade-through rule.

Instinet CBX does not display its customers
orders and provide access to such orders in any SRO market. In
addition, Instinet CBX neither provides market makers a means to
meet their ECN order display obligations nor currently meets the
Regulation ATS volume thresholds that would require it to
do so. However, if Instinet CBX did meet the ATS trading volume
thresholds in any stock, because Instinet CBX orders are
conditional in nature, they would be ineligible for display on
any SRO, as the rules of all SROs prohibit the display of
conditional orders. Accordingly, if Instinet CBX were to meet
the Regulation ATS volume thresholds in any stock, we are
unsure what, if any, steps the SEC would require Instinet to
take to comply with the Regulation ATS order display and
execution access requirements.

We have been engaged in discussions with the SEC
regarding issues relating to the ITS Plan rules, their
application to INETs ATS and their potential application
to Instinet CBX, but we are unable to predict the outcome of
these discussions. See  Proposed
Regulation NMS; Proposed Changes to NMS Market Revenue
Allocation Formulas.



| |             
| | ------------
| | SuperMontage

On December 2, 2002, NASDAQ completed its
implementation of SuperMontage, a new trading platform for the
NASDAQ market. Any ECN or market maker using NASDAQ facilities
to display quotations in NASDAQ-listed stocks or to access
quotations on NASDAQ is now required to use SuperMontage.
SuperMontage significantly altered the way the NASDAQ market
operates. SuperMontage combines a computer display containing
more bid and offer information about trading interest in
individual NASDAQ-listed stocks than was previously displayed by
NASDAQ and new rules establishing the execution

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priority of quotes and orders submitted to the
system. SuperMontage includes functionality that facilitates
participation by ECNs and non-market maker broker-dealers on the
platform.


INET does not currently display its quotations in
NASDAQ-listed stocks on SuperMontage, although as a result of
recently approved NASDAQ rules changes relating to SuperMontage,
INET has considered participation in SuperMontage. However, INET
first needs to evaluate the consolidation of the Instinet and
Island ECN order flow into its marketplace and the impact of the
recent SEC proposals on U.S. market structure reform, as well as
other competitive alternatives. If INET participates in
SuperMontage, it could be disadvantaged by comparison to other
SuperMontage participants by a type of order available in
SuperMontage called the auto-ex order, which does
not execute against orders from participants like INET that do
not accept automatic execution from SuperMontage and charge an
access fee to non-subscribers. In addition, INET would be
subject to a recently approved $0.003 per share cap on the
access fees it could charge market participants accessing its
orders through SuperMontage.

On May 12, 2003, the SEC approved a rule
change to enable broker-dealers not registered as market makers
to enter non-marketable limit orders directly on SuperMontage
for execution. This rule change allows NASDAQ for the first time
to compete with us and other market centers in attracting orders
that provide liquidity from non-market maker broker-dealers.

NASDAQ began disseminating a proprietary NASDAQ
Official Closing Price in April 2003 and a NASDAQ Official
Opening Price in January 2004, both derived from SuperMontage
market information. NASDAQ also has announced its intent to
utilize these proprietary official opening and closing prices in
SuperMontage opening and closing crossing sessions it expects to
introduce in March and June 2004, respectively, pending receipt
of necessary SEC approvals. We are unable to predict what the
impact of the adoption of these official prices or the
implementation of the NASDAQ opening and closing crossing
sessions may have on our business.



| |                            
| | ---------------------------
| | NASDAQ Exchange Application

NASDAQ is in the process of becoming a for-profit
exchange, independent from the NASD. On March 15, 2001,
NASDAQ submitted its application for registration as a national
securities exchange to the SEC. By operating as an exchange with
SuperMontage as its trading platform, NASDAQ is continuing to
evolve as a direct competitor of ATSs. If NASDAQ is approved as
an exchange, we are unable to predict what changes to its
operations it might propose or eventually implement. We are also
unable to predict what impact NASDAQs registration as an
exchange may have on our business.



| |                                     
| | ------------------------------------
| | Securities Information
    Processor

Another pending change to the NASDAQ market
structure, in recognition of NASDAQs growing role as a
competitor, is the anticipated replacement of NASDAQ as the
exclusive SIP for NASDAQ-listed stocks. This role has given
NASDAQ financial and other competitive advantages. The
replacement is also expected to be an exclusive SIP, but is
unlikely to compete directly with us.



| |                     
| | --------------------
| | Market Data Revenues

In the past, Island ECN (now INET) has earned
market data revenues by participating in market data
revenue-sharing programs and other revenue-sharing programs
provided by NASDAQ and the Cincinnati Stock Exchange, Inc. (now
NSX). Market data revenues consist of a portion of the fees that
the SROs and NASDAQ receive for selling quotation and
transaction data to independent market data providers and market
participants such as broker-dealers. On July 2, 2002, the
SEC announced that it had abrogated proposals that were
submitted by several markets, including NASDAQ and the NSX, to
continue certain of their market data revenue-sharing programs.
As a result, the NASDAQ and the NSX revenue-sharing programs
from which Island ECN (now INET) earned most of its market
data revenues were suspended, and Island ECN (now INET)
suspended its program of sharing market data revenue-rebates
with its subscribers. The NASDAQ market data revenue-sharing
program for U.S. exchange-listed stocks, which represented
a substantial portion of INETs market data revenues, was
subsequently reinstated. The NSX has submitted a

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proposal to share a reduced proportion of the
market data revenues it receives (50% instead of 75%) in
NASDAQ-listed stocks. The SEC, however, has not taken any action
on this or any other market data revenue-sharing programs for
NASDAQ-listed stocks, 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 U.S. exchange-listed
stocks will continue or remain in their current form. See
 Proposed Regulation NMS; Proposed Changes
to NMS Market Data Revenue Allocation Formulas.




| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | Proposed Regulation NMS; Proposed
    Changes to NMS Market Data Revenue Allocation
    Formulas

On February 24, 2004, the SEC proposed the
adoption of Regulation NMS, which contains a number of
interrelated substantive proposals designed to modernize the
regulatory structure of the U.S. equity markets. First,
Regulation NMS would require all market centers, including
INET, to adopt procedures to prevent trade-throughs in not only
U.S. exchange-listed stocks, to which the ITS trade-through
rule currently applies, but also NASDAQ-listed stocks. The SEC
is proposing to provide two potentially significant exceptions
to the rule. Specifically, these exceptions would
(1) enable market centers that are deemed to be automated
order execution facilities, which, as currently proposed, would
include INET, to trade through the publicly displayed prices of
non-automated order execution facilities up to a specified
amount, ranging from one to five cents, based upon the current
trading price of the stock; and (2) allow market
participants to opt-out of trade-through protection on an
order-by-order basis. In this regard, the proposal would enable
a market center to choose not to comply with the trade-through
prohibition by only accepting opt-out orders.

Second, Regulation NMS would impose a cap of
$0.001 per share on the access fees that non-SRO market
participants, including ATSs such as INET, can charge other
market participants to access their orders that are provided to
an SRO for public display, while also imposing a $0.001 cap on
the access fees an SRO market center itself can charge market
participants to access such orders. As a result, this proposal
would, for the first time, enable Nasdaq market makers and
certain other broker-dealers to charge an access fee for their
orders that are displayed on an SRO market center.

Third, Regulation NMS would require SROs to
adopt rules that prevent their members from displaying quotes
that would lock or cross publicly displayed quotations. Although
the ITS Plan already prohibits locked and crossed markets in
U.S. exchange-listed stocks, this proposal would, for the first
time, apply intermarket locked and crossed market prohibitions
to the trading of NASDAQ-listed stocks.

Fourth, Regulation NMS would prohibit market
participants from accepting, ranking, or displaying quotes in
sub-penny pricing increments in stocks priced over $1.00.
Finally, Regulation NMS would update the existing rules
governing the NMS and consolidate them into a single regulation.

Concurrent with the proposal of
Regulation NMS, the SEC proposed amendments to the rules
governing the Consolidated Tape Association, Consolidated
Quotation System, and the NASDAQ-UTP Plan to modify the formula
for allocating the market data revenues generated by these
systems and to revise the terms of their governance. The SEC
also proposed to reduce the trading volume threshold necessary
for an ATS to become subject to the application of the fair
access requirement of Regulation ATS in a particular stock
from twenty percent of the stocks average daily trading
volume to five percent. See Certain Factors that May
Affect Our Business  Risks Relating to Our
Industry.



| |          
| | ---------
| | NASD Fees

The NASD has implemented proposed changes in its
fee structure, including the introduction of a fee based on all
NASD members transactions in U.S. exchange-listed and
NASDAQ-listed stocks regardless of where those transactions
occur. The NASDs new trading activity fee requires NASD
member clearing firms to report and remit payment to the NASD on
a monthly basis based on the trading activity cleared and
settled by the firm on behalf of itself and other NASD members.
We are unable to predict what impact these fee changes and
required reporting will have on our business, financial
condition or operating results. However, the NASD has
established an exemption from the trading activity fee for NASD
members that act as agent on behalf of another NASD member. As a
result of the exemption, INET has experienced a reduction in its
transaction-based NASD regulatory fees. Because the NASDs
proposed fee structure is still subject to

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revision by the NASD and review by the SEC, we
are unable to predict what future impact the fee structure will
have on our business.




| |               
| | --------------
| | Decimalization

The introduction of decimalization in April 2001
has also had an impact on the U.S. securities markets and
increased competition for ECNs and ATSs. Decimalization may
assist investors in obtaining price improvement because
improvement in smaller increments is possible. Because
decimalization narrows average trading spreads, it has also had
a significant negative impact on the profitability of
traditional broker-dealers. As a result, we have received, and
may continue to receive, fewer orders from our broker-dealer
customers. We believe that decimalization has led to traditional
broker-dealers executing a higher percentage of their
customers orders internally (a practice known as
internalization) instead of routing them to external market
centers, for execution, because the additional price risk they
incur to fill orders internally has decreased to as little as a
penny a share. Increased internalization by traditional
broker-dealers has also reduced, and could continue to reduce,
our order flow.

In addition, the decline in broker-dealer
profitability has resulted in some market makers moving from a
business model in which they trade as principal for their own
account to an agency business model. The SECs
interpretation of Section 28(e) of the Exchange Act,
discussed below, may further encourage this trend, which may
increase our competition.



| |              
| | -------------
| | Section 28(e)

Section 28(e) of the Exchange Act creates a
limited safe harbor that allows investment advisers to cause
their client accounts to pay more than the lowest available
commission rate, as long as the adviser determines in good faith
that the commission is reasonable in relation to the value of
the research and brokerage services the broker provides to the
adviser. In December 2001, the SEC issued an expanded
interpretation of Section 28(e) allowing institutional
investors to obtain soft dollar credits from certain
transactions executed through broker-dealers on a
riskless principal basis, rather than only on an
agency basis (which is how Instinet executes transactions).
Coupled with the move of some market makers from a business
model in which they trade as principal for their own account to
an agency business model as a result of decimalization, this SEC
interpretation may create greater competition for our soft
dollar business.



| |             
| | ------------
| | Soft Dollars

In the wake of ongoing investigations and
regulatory actions taken against alleged trading abuses by
investment advisors and certain of their clients, the US
Congress currently is considering proposed legislation that
would restrict the use of soft dollars and similar arrangements.
In addition, according to some reports, the SEC staff is
considering recommending rulemaking that may impose restrictions
relating to the use of soft dollars by investment advisors.



| |                                            
| | -------------------------------------------
| | NASDAQ Market Data-Related
    Rule Changes

Instead of using consolidated market data for
NASDAQ-listed stocks for closing price calculations and meeting
certain market data-related regulatory requirements, NASDAQ has
obtained SEC approval to establish NASDAQ-specific market data
for these purposes. For example, NASDAQ has established NASDAQ
official opening and closing prices and is actively marketing
their use instead of the consolidated closing price for market
participants closing price-related activities. In
addition, NASDAQ has received approval to require market
participants using NASDAQ facilities to execute or report trades
to use the NASDAQ best bid instead of the consolidated best bid
in meeting their short sale regulatory requirements. However,
any competitive advantage this requirement may confer to NASDAQ
may be eliminated by SEC action on proposed rulemaking to adopt
a marketwide short sale rule that would require the use of the
consolidated best bid and offer.

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| |                                      
| | -------------------------------------
| | Regulation of Clearing
    Activities

We are a self-clearing broker in the
United States through our subsidiary Instinet Clearing
Services, Inc. We also have a correspondent clearing business in
which we provide clearing services in the United States for
broker-dealers that are not affiliated with us. Brokers that
clear their own trades or clear trades for other broker-dealers
are subject to substantially more regulatory requirements than
brokers that rely on others to perform those functions. Errors
in performing clearing functions, including clerical,
technological and other errors related to the handling of funds
and securities held by us on behalf of customers and
broker-dealers, could lead to civil penalties imposed by
applicable regulatory authorities as well as losses and
liability in related lawsuits and proceedings brought by our
customers, the customers of our wholesale customers and others.
Any liability that arises as a result of our clearing operations
could have a material adverse effect on our business, financial
condition and operating results.

In addition, securities industry regulators in
the United States continue to review the extent to which
clearing firms should be held accountable for the improper
activities of the broker-dealers for which they provide clearing
services. We cannot assure you that our procedures will be
sufficient to protect us from liability for the acts of
broker-dealers that use our correspondent clearing services
under current laws and regulations. We can also not assure you
that securities industry regulators will not enact more
restrictive laws or regulations or change their interpretations
of current laws and regulations in a manner that would increase
our potential liability.



| |                         
| | ------------------------
| | Net Capital Requirements

The SEC and the NASD, as well as other regulatory
agencies and securities exchanges within and outside the United
States, have stringent rules with respect to the maintenance of
specific levels of net capital by regulated broker-dealers.
These rules include the SECs net capital rule, to which
our U.S. broker-dealer subsidiaries are subject. The failure by
one of these subsidiaries to maintain its required net capital
may lead to suspension or revocation of its registration by the
SEC and its suspension or expulsion by the NASD and other U.S.
or international regulatory bodies, and ultimately could require
its liquidation. In addition, a change in the net capital rules,
the imposition of new rules or any unusually large charge
against the net capital of one of our broker-dealer subsidiaries
could limit its operation, particularly those, such as
correspondent clearing, that are capital intensive. A large
charge to the net capital of one of these subsidiaries could
result from an error or other operational failure or a failure
of a customer to complete one or more transactions, including as
a result of that customers insolvency or other credit
difficulties, and we cannot assure you that we would be able to
furnish the affected subsidiary with the requisite additional
capital to offset that charge. The net capital rules could also
restrict our ability to withdraw capital from our broker-dealer
subsidiaries, which could limit our ability to pay cash
dividends, repay debt or repurchase shares of our outstanding
stock. A significant operating loss or any unusually large
charge against net capital could adversely affect our ability to
maintain our present levels of business, or to expand, which
could have a material adverse effect on our business, financial
condition and operating results.



| |                      
| | ---------------------
| | Other U.S. Regulation

The SEC and NASD are currently considering, and
we are periodically in discussions with them regarding, other
regulatory issues. These currently include:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | data dissemination requirements;                                                        
|
| |  | the capacity, scalability and back-up of our
    trading systems; and                   
|
| |  | rules affecting market interaction in U.S.
    exchange-listed and NASDAQ-listed stocks.

We are unable to predict the outcome of the
various deliberations and discussions on the evolution of the
U.S. equities market structure and regulatory framework,
although these issues or other issues of market structure may
have a significant impact on our equities business. In this
regard, we may consider it desirable to modify the regulatory
position for one or more of our ATSs to advance our business
strategy. Potential steps could include the creation of new
subsidiaries regulated in the United States or abroad, efforts
to register

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INET as an exchange to conduct some or all of its
business, the establishment of linkages that would enable us to
act as a facility of a registered national securities exchange,
the display of some or all of our orders in NASDAQ-listed stocks
on another exchange, or the reporting of additional trades to
another exchange.


Our business, especially our communications with
and connectivity to customers, increasingly relies on the
Internet and other electronic communications gateways. We are in
the process of expanding use of these gateways. Although to date
the use of the Internet has been relatively free from regulatory
restraints, the SEC, certain SROs and certain states are
beginning to address the regulatory issues that may arise in
connection with the use of the Internet for securities and
financial services transactions. Accordingly, new regulations or
interpretations may be adopted that could constrain our ability
and our customers ability to transact business through the
Internet or other electronic communications gateways and could
have a material adverse effect on our business, financial
condition and operating results.

Regulation of the Non-U.S. Securities
Industries and Investment Service Providers

The financial services industry, including the
securities brokerage business, is heavily regulated outside of
the United States. We are required to comply with
regulatory controls of each specific country in which we or our
subsidiaries conduct business, as well as the regulations of
each exchange of which we or our subsidiaries are members. As we
expand our international operations, we may be required to
comply with requirements that are inconsistent with our existing
international activities. As a result, the varying compliance
requirements of these different regulatory jurisdictions and
other factors may affect our business or limit our ability to
expand our international operations.

In many countries, the laws and regulations
applicable to the securities and financial services industries
are uncertain and evolving. In these countries, it may be
difficult for us to determine the exact requirements of local
laws and regulations in every market, particularly because legal
and regulatory developments generally trail technological
advances. Our inability to remain in compliance with regulatory
requirements in a particular jurisdiction could have a
materially adverse effect on our operations in that market and
on our reputation generally.

The securities industry in the member states of
the European Union (EU) is regulated by a number of
agencies in each member state. European Union legislation,
however, allows investment firms like us to obtain single
authorization, or passport, which is generally valid
throughout the European Union and which in particular allows for
remote membership of regulated markets or exchanges. Because our
largest international operations are in the United Kingdom, our
principal European regulator is the Financial Services Authority
and we currently passport out of the UK into most EU
member states.

European legislation governing investment
services (Investment Services Directive) is currently being
amended and includes new rules for investment firms operating
multilateral trading facilities (MTFs, also known as ATSs).
These are based on the ATS standards already agreed upon and
published by the Committee of European Securities Regulators
(CESR) in July 2002. The seven main CESR standards require
investment firms to notify regulators that they are operating an
ATS; to ensure that users are treated fairly; to provide price
transparency; to monitor user compliance with the rules of the
system; to assist regulators in preventing market manipulation;
to have adequate systems capacity; and to explain their
arrangements for clearing and settlement. The revised provisions
of the Investment Services Directive relating to MTFs are
expected to take effect in 2007. However, the UK FSA has
decided to implement ATS standards prior to the implementation
of the Investment Services Directive, to go in effect in April
2004. We are unable at this time to predict how both the
additional FSA regulation and the finalized European legislation
will affect our business. We expect that only a small portion of
our European business operations will be subject to these
requirements.

In the U.K., the FSA has been reviewing its
regime governing the use of execution commissions to pay for
additional services such as research. In a 2003 consultation
paper, the FSA proposed disallowing the use of commissions,
under, for example, soft dollar and similar arrangements, to pay
for Reuters and Bloomberg terminals and requiring all asset
managers to reimburse their clients for commissions spent on
additional

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services such as research. We are unable to
predict what final rules will be proposed by the FSA or how they
might affect our business, financial condition and operating
results.


The provision of investment services is also
regulated by other agencies in other jurisdictions outside of
the European Union in which we operate, such as the Securities
and Futures Commission in Hong Kong and the Financial
Supervisory Authority in Japan.

Any of these non-U.S. regulatory agencies, as
well as many non-U.S. exchanges of which we are a member, may
conduct administrative proceedings against us which could result
in censure, fine, the prevention of activities or our suspension
or expulsion from their country or exchange as an investment
services provider. The applicable regulations cover minimum
financial resource requirements and conduct of business rules
for all authorized investment businesses.

New regulations, changes in existing regulations
or changes in the interpretation or enforcement of existing
regulations outside the United States may adversely affect or
limit our business or operations and adversely affect our
financial condition and operating results.

Certain Factors that May Affect Our
Business

You should carefully consider the risks described
below before making a decision to invest in our company. There
may be additional risks that we do not currently know of or that
we currently deem immaterial based on the information available
to us. All of these risks may impair our business operations.

RISKS RELATED TO OUR INDUSTRY

Economic, Political and Market Factors Beyond
Our Control Could Reduce Demand for Our Services and Harm Our
Business

We earn revenues primarily from securities
brokerage and related services and expect to continue to do so.
The demand for these services is directly affected by domestic
and international factors that are beyond our control, including
economic, political and market conditions; unforeseen market
closures or other disruptions in trading; the availability of
short-term and long-term funding and capital; the level and
volatility of interest rates; currency exchange rates; and
inflation. Any one or more of these factors may contribute to
reduced activity and prices in the securities markets generally.
Over the past few years, the global markets have experienced
economic downturns and political uncertainty which have led to
volatile trading volumes, intensified price competition and
generally a more difficult business environment for us. These
conditions may continue and may have a material adverse effect
on our business, financial condition and operating results.

Decreases in Trading Volumes or Prices Could
Harm Our Business and Profitability

Declines in the volume of securities trading and
in market liquidity generally result in lower revenues from our
trade execution, brokerage, and related activities. In addition,
our revenues from trading outside the United States are
determined on the basis of the value of transactions (rather
than the number of shares traded), which are adversely affected
by price declines. Our profitability would be adversely affected
by a decline in our revenues because a significant portion of
our costs is fixed. Volatility in trading volumes has had, and
may continue to have, a significant adverse effect on our
business, financial condition and operating results. Our
competitors with more diversified business lines might withstand
these declines better than we could.

We Face Substantial Competition that Could
Reduce Our Market Share and Harm Our Financial
Performance

The financial services industry generally, and
the securities brokerage business in which we engage in
particular, is very competitive, and we expect competition to
intensify in the future. Many of the financial service providers
with which we compete are well-capitalized and substantially
larger than we are and have substantially greater financial,
technical, marketing and other resources. Many of them offer a
wider range of

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services, have broader name recognition and have
larger customer bases than we do. Some of them may be able to
respond more quickly to new or evolving opportunities,
technologies and customer requirements than we can and may be
able to undertake more extensive promotional activities.


Consolidation and alliances within the industry
have resulted, and may continue to result, in increasingly
intense competition. Outside the United States, in addition to
our U.S. competitors with international capabilities, we
compete with non-U.S. banks and other financial
institutions that may also have long-standing, well-established
and, in some cases, dominant positions in their trading markets.
If we are not able to compete successfully in the future, our
business, financial condition and operating results could be
adversely affected.

We compete with NASDAQ as a trading venue for
NASDAQ-listed stocks. The NASD regulates and polices the NASDAQ
market, regulates the activities of our U.S. broker-dealer
subsidiaries, holds a controlling stake in NASDAQ and operates
the ADF. The NASD, either directly or through its subsidiaries,
is thus able to propose, and often obtain, SEC approval of rule
changes that we believe can be to NASDAQs competitive
benefit as a securities marketplace and our competitive
disadvantage.

NASDAQ has applied to register as a national
securities exchange, and another of our competitors, Archipelago
has been approved to serve as the equity trading facility of the
Pacific Exchange. Competitors that receive status as national
securities exchanges or operate as facilities of exchanges will
be able to gain certain benefits from their exclusive
participation in the various NMS systems. These benefits
may give these competitors an advantage over us in attracting
business in, and generating revenues from, their activity in
U.S. exchange-listed and NASDAQ-listed stocks. In addition,
by operating as an exchange independent from the NASD with
SuperMontage as its trading platform, NASDAQ is continuing to
evolve as a direct competitor of ECNs, including INET, which
could negatively impact our business, financial condition and
operating results.

We have experienced intense price competition in
our equity securities business in recent years. Some of our
competitors may have more modern technology and a broader range
of services and, therefore, may be able to offer brokerage
services to customers at lower prices than we can. As a result,
we have aggressively reduced pricing for our
U.S. broker-dealer customers and reduced fees for taking
liquidity and offered rebates for providing liquidity. In the
past, these pricing changes have caused volatility in our market
share and a significant decline in the transaction fee revenue
we received from this customer group. We may continue to
experience price competition, which could result in the loss of
market share and revenue.

We Operate in a Highly Regulated Industry,
Which May Limit Our Activities



| |        
| | -------
| | General

The securities markets and the brokerage industry
in which we operate are highly regulated. In our case, the
impact of regulation extends beyond traditional
areas of securities regulation, such as disclosure and
prohibitions on fraud and manipulation by market participants,
to the regulation of the structure of markets. We are subject to
regulation as a securities broker, as an operator of ATSs and an
ECN, and as an operator of a clearing business for our own
customers and third parties. Many of the regulations applicable
to us may have the effect of limiting our activities, including
activities that might be profitable, or causing us to modify our
business model in ways that may adversely affect our revenues.



| |                                         
| | ----------------------------------------
| | ATS Status and Exchange
    Registration

As a result of our compliance with the
requirements of Regulation ATS, none of our ATSs currently
is required to register as a national securities exchange. In
June 2002, Island ECN, the predecessor of INET, submitted to the
SEC an application in draft form for registration as a national
securities exchange. INET intends to submit a new draft
application to the SEC for registration as a national securities
exchange in 2004. If INET or any of our subsidiaries were to
voluntarily register as a national securities exchange, or if
the SEC were to require INET to register as a national
securities exchange, we could become subject to substantial
additional regulation, which might reduce our operational
flexibility in ways that could have a material adverse

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effect on our business. Among other consequences,
we might also be required to comply with fair representation or
ownership requirements that the SEC has applied to other
for-profit national securities exchanges. These and other
requirements could adversely affect our operations and could
also result in material limitations or restrictions on Reuters
equity interest in us or Reuters ability to exercise its voting
and other governance rights in the manner contemplated by our
amended and restated corporate agreement with Reuters. In
addition, our amended and restated corporate agreement with
Reuters requires Reuters consent for any voluntary registration
of INET or any of our subsidiaries as a national securities
exchange. We cannot assure you that Reuters would not withhold
its consent to such a registration, even if our management
determines that exchange registration would be beneficial to us
or one of our subsidiaries.




| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | Quote Display and Order Execution Access in
    Exchange-Listed Stocks; Intermarket Trading System

The requirements of Regulation ATS requiring
ATSs to display order information and provide order execution
access for securities for which certain trading volume
thresholds have been met, as well as the rules of the
ITS Plan for ATSs that provide order information for
U.S. exchange-listed stocks to an SRO, and a determination
by the SEC to adopt proposed Regulation NMS, could have a
significant adverse effect on our business, financial condition
and operating results, including the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We cannot assure you that the SEC will extend the
    temporary de minimisexemption from the trade-through
    rules of the ITS Plan beyond December 4, 2004 or
    extend it to any other U.S. exchange-listed stocks in which
    we may cross the Regulation ATS trading volume thresholds.
    Without the de minimisexemption, INETs ATS
    would be required either to discontinue the display of order
    information in SPYs, QQQs, and Diamonds or to continue its
    participation in NSX or another SROs market with
    restrictions on its ability to execute trades that would result
    in trade-through and to display aggressively priced orders.
    Either alternative could have a significant adverse effect on
    INETs ability to attract orders to its liquidity pool and
    maintain and grow its market share and liquidity pool in the
    affected stocks.                                                                                                                                                                                                       
|
| |  | We cannot assure you that INET will not reach the
    ATS trading volume thresholds in other
    U.S. exchange-listed stocks, requiring us either to provide
    quotes and comply with ITS Plan rules or discontinue the display
    of order information.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | We cannot assure you that Instinet CBX will not
    reach the ATS trading volume thresholds in U.S. exchange-listed
    or NASDAQ-listed stocks. However, if Instinet CBX did reach such
    thresholds in any stock, because Instinet CBX orders are
    conditional in nature, they would be ineligible for display on
    any SRO, as the rules of all SROs prohibit the display of
    conditional orders. Accordingly, if Instinet CBX did meet the
    ATS trading volume thresholds in any stock, we are unsure what,
    if any steps the SEC would require Instinet CBX to take to
    comply with Regulation ATS order display and execution
    access requirements. Any such steps could have a significant
    adverse effect on the operations of Instinet CBX and our
    financial condition and operating results.                                                                                                                                                                                                                                                                   
|
| |  | As part of Regulation NMS, the SEC is
    proposing the adoption of a uniform trade-through rule for
    U.S. exchange-listed and NASDAQ-listed stocks, which would
    extend the application of trade-through protection to
    NASDAQ-listed stocks for the first time. The proposed rule would
    contain exceptions that would enable automated market centers to
    trade through non-automated market centers up to a specified
    amount and allow market participants to elect to opt out of the
    rule on an order-by-order basis. We are unable to determine at
    this time what impact the adoption of this proposal will have on
    our business, particularly on our trading of NASDAQ-listed
    stocks. We also cannot assure you that the SEC will adopt either
    of the exceptions as part of any final rule, or whether these
    exceptions will mitigate any adverse consequences of the
    adoption of this rule on our business. See
    Business  Regulation  Proposed
    Regulation NMS; Proposed Changes to NMS Market Data
    Revenue Allocation Formulas.
|
| |  | In addition, the SECs proposed
    Regulation NMS includes a uniform rule prohibiting locked
    and crossed markets in U.S. exchange-listed and
    NASDAQ-listed stocks, which would extend the application of this
    prohibition to the markets trading NASDAQ-listed stocks,
    including INET. We are                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | unable to determine what impact the adoption of
    such a prohibition will have on our business, particularly on
    our trading of NASDAQ-listed stocks. The adoption of this rule
    could have a serious adverse impact on our trading of
    NASDAQ-quoted stocks. See Business 
    Regulation  Proposed Regulation NMS; Proposed Changes
    to NMS Market Data Revenue Allocation Formulas.

We have been engaged in discussions with the SEC
regarding issues relating to the ITS Plan rules and their
application to INET and the potential application of the order
display and access requirements of Regulation ATS to
Instinet CBX. We intend to continue to work on solutions to
these issues and to discuss these issues, and issues relating to
proposed Regulation NMS, with the SEC; however, we are
unable to predict the outcome of these discussions.

Structural Developments in the Markets in
Which We Operate May Place Us at a Competitive
Disadvantage

The structure of the market for NASDAQ-listed
stocks is currently undergoing a fundamental change, which may
place us at a competitive disadvantage, adversely affecting our
business, financial condition and operating results.

NASDAQ has moved from a quote-driven display
system to an order-driven execution system that directly
competes with ECNs and ATSs. SuperMontage, NASDAQs new
trading platform that NASDAQ completed implementing on
December 2, 2002, incorporates enhanced functionality,
including the display of more quotation information than was
previously displayed. NASDAQ continues to make various changes
to SuperMontage to enable it to compete with other market
centers trading NASDAQ-listed stocks, including enabling
broker-dealers not registered as market makers to enter
non-marketable limit orders directly on SuperMontage for
execution in 2003, and introducing opening and closing crossing
sessions in 2004. INET does not currently display its quotations
in NASDAQ-listed stocks on SuperMontage, although as a result of
recently approved NASDAQ rules changes relating to SuperMontage,
INET has considered participation in SuperMontage. However, INET
first needs to evaluate the consolidation of the Instinet and
Island ECN order flow into its marketplace and the impact of the
recent SEC proposals on U.S. market structure reform, as
well as other competitive alternatives. If INET were to display
quotations on SuperMontage, the availability of an auto-ex order
type in the system, which does not execute against orders from
participants like INET that do not accept automatic execution
from SuperMontage and charge an access fee to non-subscribers,
could disadvantage us by comparison to market makers and any ATS
that accepts automatic execution and does not charge access
fees. INET also would become subject to a cap of $0.003 per
share on the access fees it could charge market participants
accessing its orders via SuperMontage, which could limit our
pricing flexibility.

We are unable to predict the extent to which
NASDAQs changes and proposed changes to SuperMontage, and
Inets participation or non-participation in SuperMontage
may cause INET to receive fewer orders for NASDAQ-listed stocks.

Moreover, if at any time INET were to be unable
to use the NSX to meet its regulatory requirements, we would be
required to consider possible alternatives, including
participation in SuperMontage. We cannot assure you that any of
these alternatives would not have a significant material adverse
effect on our business.

In addition, the structure of the U.S.
exchange-listed markets may be due for significant changes, as a
result of the SECs proposed Regulation NMS, ongoing
investigations of trading practices of NYSE specialists, the
NYSEs proposal to enhance its Direct+ system to
expand market participants ability to execute orders
electronically at the best bid and offer on the exchange, and
the SECs approval of NASDAQs proposal to utilize
SuperMontage for the trading of U.S. exchange-listed securities
in place of NASDAQs existing ITS/ CAES system, all or any
of which may place us at a competitive disadvantage, adversely
affecting our business, financial condition and operating
results.

40



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Our Business May Be Affected by SEC Actions
Relating to ECNs



| |        
| | -------
| | General

The SEC regularly considers a variety of
regulations or interpretative initiatives with respect to the
structure of the equity securities markets, including
initiatives intended to reduce fragmentation, integrate ECNs and
ATSs into the NMS and create a national consolidated limit order
book. Future SEC rulemakings or interpretations in this area
could adversely affect our business, financial condition and
operating results.



| |            
| | -----------
| | Access Fees

The SEC is currently considering, and we are
periodically in discussions with it regarding, other important
issues, such as the fees (including subscriber and
non-subscriber access fees) ECNs charge, the levels of those
fees, the circumstances in which access fees may be charged 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. We are currently in a dispute with one
of our customers regarding the application of these rules or
interpretations to our past pricing policies. We are unable to
predict the outcome of this dispute. See also Legal
Proceedings. 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 and
interpretations with the SEC, and we are unable to predict the
outcome of these discussions.

On February 24, 2004, the SEC published its
Regulation NMS proposal for public comment. Among other
things, Regulation NMS would impose a cap of $0.001 per
share on the access fees charged by ECNs such as INET for
accessing their orders that are provided to an SRO for public
display. Certain broker-dealers, including Nasdaq market makers
which currently cannot charge access fees, would be able to
charge the same maximum $0.001 per share access fee for their
quotes that are publicly displayed through an SRO market. An SRO
market would be able to charge a maximum fee of $0.001 per share
to market participants that access the quotes displayed in its
market, which would be in addition to any access fee charged by
its members. The adoption of the proposal could cause INET to
receive and execute fewer orders in its liquidity pool, or have
an adverse impact on INETs ability to compete with other
market centers for the display and execution of limit orders
from market participants, thereby having a serious adverse
affect on INETs business, financial condition, and
operating results.

We also continue to evaluate our services and the
fees we charge for them. the Island ECN (now INET) implemented a
pricing change on September 2, 2003. the Island ECN (now
INET) implemented a further pricing change on a temporary basis
on October 14, 2003, and made this change permanent on
December 31, 2003.

In 2002, Island ECN received a subpoena from the
SEC for information regarding Islands access policies,
including pricing, in connection with an investigation by the
SEC of possible non-compliance with certain provisions of
Regulation ATS by certain ECNs. Island ECN has submitted
its complete response to the subpoena. 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. There have
been no recent communications or contact with the SEC regarding
these issues.



| |                    
| | -------------------
| | Market Data Revenue

In July 2002, the SEC abrogated certain market
data revenue sharing programs. For Island ECN (now INET) at the
time, market data revenues represented approximately 5% and
14% of its total revenues for 2001 and the first three months of
2002, respectively. For the first three months of 2002, these
revenues were offset in part by market data rebates that the
Island ECN (now INET) paid to some of its customers. Since then,
the SEC has not taken any action on SRO proposals to reinstate
market data revenue sharing programs in NASDAQ-listed stocks. In
addition, we cannot assure you that the market data revenue
sharing programs for U.S. exchange-listed stocks will
continue or remain in their current form. As a result, we cannot
assure you

41



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that INETs ATS will continue to earn market
data revenues or, if it does, what the level of those revenues
will be in the future. If INETs ATS is unable to resume
earning market data revenue for NASDAQ-listed stocks or continue
earning market data revenue for U.S. exchange-listed
stocks, this could adversely affect our business, financial
condition and operating results. We also cannot predict the
impact of the suspension of INETs market data revenue
rebates sharing on our business, financial condition and
operating results.


On February 24, 2004, the SEC proposed
changes to the NMS Plans formulas governing the allocation
of market data revenue among SROs, and thus the revenues
available for SRO revenue sharing programs. At this time, we are
unable to determine whether the adoption of the proposed
formulas would have an adverse impact the value of INETs
market data for purposes of determining an SROs share of
market data revenue, and thus the revenues INET would be
eligible to receive through SRO revenue sharing programs.

In addition, in 2002, the Island ECN (now INET)
received a subpoena from the SEC for information regarding
trading and market rebate practices with respect to some of its
market data revenue rebate programs, in connection with an
investigation by the SEC of customer trading practices in some
ETFs. The Island ECN has submitted its complete response to the
subpoena. 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. There have been no recent communications or
contact with the SEC regarding these issues.

Regulatory Changes Could Adversely Affect Our
Business

The securities industry generally has been and is
subject to continuous regulatory changes, including changes in
the rules of the SEC and of SROs such as the NYSE and the NASD.
In the future, the industry may become subject to new
regulations or changes in the interpretation or enforcement of
existing regulations. We cannot predict the extent to which any
future regulatory changes may adversely affect our business.
Although regulatory changes can affect all aspects of our
business, the markets for equity securities have been subject to
very significant regulatory changes. Our activities as an agency
broker in equity securities are the principal source of our
revenues and profits.

Recent and proposed regulatory changes that have
had or could have a significant effect on our equity securities
business include the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A proposed uniform trade through rule for U.S.
    exchange-listed and NASDAQ-listed stocks, which would extend the
    application of trade through protection to NASDAQ-listed stocks
    on an intermarket basis for the first time, while including
    exceptions that would enable automated market centers to trade
    through non-automated market centers up to a specified amount
    and allow market participants to elect to opt out of the rule on
    an order-by-order basis. See We Operate in a Highly
    Regulated Industry, Which May Limit Our Activities 
    Quote Display and Order Execution Access in Exchange-Listed
    Stocks; Intermarket Trading System.
|
| |  | A proposed $0.001 per share cap on access fees
    charged by market centers and market participants that display
    quotes, including INET, which also would, for the first time,
    enable NASDAQ market makers and certain other broker-dealers to
    charge access fees. See Our Business May Be Affected by
    SEC Actions Relating to ECNs  Access Fees.                                                                                                                                                                                                                                                                                                                       
|
| |  | A proposed uniform locked and crossed market rule
    for U.S. exchange-listed and NASDAQ-listed stocks. See We
    Operate in a Highly Regulated Industry, Which May Limit Our
    Activities  Quote Display and Order Execution
    Access in Exchange-Listed Stocks; Intermarket Trading
    System.                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | A proposed rule prohibiting the accepting,
    ranking, or displaying quotes in subpenny pricing increments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Proposed SEC-mandated changes to NMS Plan market
    data revenue allocation formulas. See Our Business May Be
    Affected By SEC Actions Relating to ECNs  Market
    Data.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The NASD has also implemented proposed changes in
    its fee structure, including the introduction of a new trading
    activity fee and related reporting requirements for transactions
    in U.S. exchange-listed and                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | NASDAQ-listed stocks regardless of where those
    transactions occur. We are unable to predict what impact these
    fee changes and required reporting will have on our business,
    financial condition or operating results. Although an exemption
    from the trading activity fee was established for NASD members
    that act as agent on behalf of another NASD member, which has
    reduced the fees of INETs ATS, we cannot assure you that
    this exemption will continue to be available. Because the
    NASDs proposed fee structure is still subject to review by
    the SEC, we are unable to predict what future impact the fee
    structure will have on our business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | The SECs Division of Market Regulation has
    issued a series of no-action letters to the ECNs
    operated by Instinet and Island (now INET) over a number of
    years verifying and extending their status as ECNs. The most
    recent no-action letter for INET is valid until
    April 6, 2004. The Divisions no-action
    position is subject to our continuing to satisfy certain
    conditions, including those regarding our systems capacity, fair
    access for participants and a limitation on our maximum
    non-subscriber access fees. See Risks Related to Our
    Business  Insufficient Systems Capacity or Systems
    Failures Could Harm Our Business. We are in discussions
    with the Division from time to time regarding these issues, and
    we cannot assure you that the Division will continue to extend
    its no-action position. An adverse change in the
    Divisions position could interfere with the ability of
    INET to act as an ECN or participate in the NSX, SuperMontage or
    other SRO markets and thereby have a material adverse effect on
    our business, financial condition and operating results.
|
| |  | NASDAQ has obtained SEC approval of several rule
    changes that would have the result of establishing
    NASDAQ-specific market data for use in opening and closing price
    calculations and for meeting certain regulatory requirements in
    NASDAQ-listed stocks. We are unable to predict the impact of the
    approval and implementation of these proposals, including
    whether they will result in market participants directing a
    greater percentage of order flow to NASDAQ as opposed to
    INETs ATS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | The adoption of any proposed legislation by the
    U.S. Congress, or potential SEC rulemaking proposals, that would
    restrict the use of soft dollars and similar arrangements by
    investment advisors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

International Regulation Could Adversely
Affect Our Business

The financial services industry, including the
securities brokerage business, is heavily regulated in many
jurisdictions outside the United States. We are required to
comply with the regulatory regime of each country in which we
conduct business, as well as the regulations of each exchange of
which we are a member. The varying requirements of these
jurisdictions may adversely affect our business or limit our
ability to expand our international operations. We may not be
able to obtain the necessary regulatory approvals for planned
expansion or restructuring; if approvals are obtained, they may
impose restrictions on our business; or we may not be able to
continue to comply with the terms of the approvals or applicable
regulations. In addition, in many countries, the regulations
applicable to the securities and financial services industries
are uncertain and evolving, and it may be difficult for us to
determine the exact regulatory requirements. Our inability to
remain in compliance with regulatory requirements in a
particular jurisdiction could have a materially adverse effect
on our operations in that market and on our reputation
generally. Changes in regulations or changes in the
interpretation or enforcement of existing regulation outside the
United States may adversely affect our business, financial
condition and operating results.

European legislation governing investment
services (Investment Services Directive) is currently being
amended and includes new rules for investment firms operating
MTFs. The revised provisions of the Investment Services
Directive relating to the MTFs are expected to take effect in
2007. However, the UK FSA has decided to implement ATS
standards prior to the implementation of the Investment Services
Directive, to go in effect in April 2004. We are unable at this
time to predict how both the additional FSA regulation and the
finalized European legislation will affect our business.

In the U.K., the FSA has been reviewing its
regime governing the use of execution commissions to pay for
additional services such as research. In a 2003 consultation
paper, the FSA proposed disallowing the use of commissions,
under, for example, soft dollar and similar arrangements, to pay
for Reuters and Bloomberg

43



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terminals and requiring all asset managers to
reimburse their clients for commissions spent on additional
services such as research. We are unable to predict what final
rules will be proposed by the FSA or how they might affect our
business, financial condition and operating results.


Our Inability to Manage the Risks of
International Operations Effectively Could Adversely Affect Our
Business

Instinet has operations in Europe and Asia, and
there are a number of risks inherent in doing business in
international markets, including the following:



| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | less developed and less centralized technological
    infrastructures and generally higher costs, which could result
    in lower customer acceptance of our services or customers having
    difficulty accessing our electronic marketplace;
|
| |  | less automation in clearing and settlement
    systems, resulting in higher expenses and increased operational
    difficulties (including an increased risk of transactional
    errors and failure to complete customers transactions);    
|
| |  | difficulties in recruiting and retaining
    personnel, and managing international operations;                                                                                                                                                
|
| |  | reduced protection for intellectual property
    rights;                                                                                                                                                                                      
|
| |  | seasonal reductions in business activity during
    the summer months and local holiday periods; and                                                                                                                                          
|
| |  | potentially adverse tax consequences.                                                                                                                                                                                                         

Instinets inability to manage these risks
effectively could adversely affect our business, financial
condition and operating results.

Instinets international operations also
expose us to the risk of fluctuations in currency exchange
rates. If our risk management strategies relating to exchange
rates prove ineffective, we could suffer losses that would
adversely affect our business, financial condition and operating
results.

Regulatory Net Capital Requirements Could
Adversely Affect Our Ability to Continue to Conduct or Expand
Our Business Operations or to Pay Dividends

Our broker-dealer subsidiaries are subject to
stringent rules with respect to the maintenance of specific
levels of net capital by regulated broker-dealers, including the
SECs net capital rule. The failure by one of these
subsidiaries to maintain its required net capital may lead to
suspension or revocation of its registration by the SEC and its
suspension or expulsion by the NASD or other U.S. or
international regulatory bodies, and ultimately could require
its liquidation. In addition, changes in net capital regulation
or a significant operating loss or any unusually large charge
against the net capital of one of our broker-dealer subsidiaries
could limit its operations, particularly those, such as
correspondent clearing, that are capital intensive. A large
charge to the net capital of one of these subsidiaries could
result from an error or other operational or systems failure or
a failure of a customer to complete one or more transactions,
including as a result of that customers insolvency or
other credit difficulties. Our inability to maintain our present
levels of business or to expand as a result of the net capital
rules could have a material adverse effect on our business,
financial condition and operating results. The net capital rules
also could restrict our ability to withdraw capital from our
broker-dealer subsidiaries, which could limit our ability to pay
cash dividends, repay debt or repurchase shares of our
outstanding stock.

RISKS RELATED TO OUR BUSINESS

We May Have Difficulty Managing Our
Restructuring Successfully

In the fourth quarter of 2003, we began
implementing a business restructuring plan to establish Instinet
and INET, our two distinct business lines. The aim of this
restructuring is to empower each business to pursue its own
distinct interests and add strategic clarity to each business.
Although this restructuring was

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substantially completed at the end of February
2004, we may incur additional and unanticipated costs as a
result of our restructuring, and consequently, our operating
margins and profitability could be adversely affected. In
addition, new services that we developed and introduced as part
of the restructuring may not achieve market acceptance. We also
may fail to realize some or all of the benefits that we expect
as a result of the restructuring, in particular, if we have
difficulty managing our two distinct business lines separately.
Increased costs or our failure to achieve the benefits of our
restructuring could have a material adverse effect on our
business, financial condition and operating results.


Our Inability to Adjust Our Cost Structure If
Revenues Decline Suddenly Could Adversely Affect Our
Results

Our expense structure is based on historical
expense levels and historical and expected levels of demand for
our services. If demand for our services and our resulting
revenues should decline suddenly (as has occurred in the past),
we may be unable to adjust our fixed cost base on a timely
basis, which could have a material adverse effect on our
operating results and financial condition.

Shifts in Our Business Mix May Decrease Our
Profitability and Net Income

Changes in the mix of customers we serve (large
institutional investors, portfolio managers, hedge funds and
broker-dealers) and in the use of our trading system by our
customers can materially affect our profitability and net
income. A substantial portion of our trading volume is derived
from our broker-dealer customers. A shift in our customer mix
toward fewer broker-dealers or a further decline in the use of
our trading system by broker-dealers could reduce the depth and
breadth of INETs liquidity pool, which could reduce its
attractiveness to our customers and adversely affect our trading
volumes, operating results and financial condition.

We May Have Difficulty Managing Our
Acquisitions Successfully

From time to time, to achieve our strategic
objectives, we have acquired or invested in, and in the future
may seek to acquire or invest in, other companies or businesses.
We cannot assure you that we will realize, when anticipated or
at all, the benefits we expect as a result of our acquisitions.
Achieving the benefits of our acquisitions will depend on many
factors, including the successful and timely integration and, in
some cases, the consolidation of products, technology,
operations and administrative functions, of two companies that
have previously operated separately. Considering the highly
technical and complex nature of our products, these integration
efforts may be difficult and time consuming. Acquisitions entail
numerous other risks, including the following:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | difficulties in the assimilation of acquired
    operations and products;                             
|
| |  | diversion of managements attention from
    other business concerns;                                 
|
| |  | failure of our combined management to oversee and
    manage newly acquired companies effectively;    
|
| |  | assumption of unknown material liabilities;                                                           
|
| |  | failure to integrate successfully any operations,
    personnel, services or products that we acquire;
|
| |  | failure to achieve financial or operating
    objectives;                                             
|
| |  | failure to implement adequate compliance and risk
    management methods for new operations;          
|
| |  | impairment of certain acquired intangible assets,
    which would reduce future reported earnings; and
|
| |  | potential loss of customers or key employees of
    acquired companies.                               

Failure to manage our acquisitions to avoid these
risks could have a material adverse effect on our business,
financial condition and operating results.

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If We Fail to Introduce New Services and
Service Enhancements and Adapt Our Technology in a Timely
Manner, We May Be Unable to Compete Effectively

Our business environment is characterized by
rapid technological change, changing and increasingly
sophisticated customer demands and evolving industry standards.
If we are unable to anticipate and respond to the demand for new
services, products and technologies on a timely and
cost-effective basis and to adapt to technological advancements
and changing standards, we will be less competitive, which could
have a material adverse effect on our business, financial
condition and operating results. In addition, new services that
we may develop and introduce may not achieve market acceptance.

Costs Related to Our Investments in Technology
May Adversely Affect Our Profitability and Net Income

In the past, we have incurred significant costs
associated with our efforts to strengthen, expand and diversify
our business and enhance our technology. Any technological
innovations may require significant expenditures over long
periods of time, so that our operating margins and profitability
could be adversely affected.

We Depend on Our Executive Officers and Key
Personnel

Our future success depends, in significant part,
upon the continued service of our executive officers, as well as
various key sales, trading and technical personnel. The loss of
these key people could have a material adverse effect on our
business, financial condition and operating results. We also
cannot assure you that our recent management changes and
headcount reductions as part of our cost-cutting initiatives
will not have a material adverse effect on our business,
financial condition and operating results.

Our future success also will depend in
significant part on our ability to recruit and retain highly
skilled and often specialized individuals as employees,
particularly in light of the rapid pace of technological
advances. The level of competition in our industry for people
with these skills is intense, and from time to time we have
experienced losses of key employees. Significant losses of key
personnel, particularly to other firms with which we compete,
could have a material adverse effect on our business, financial
condition and operating results.

Insufficient Systems Capacity or Systems
Failures Could Harm Our Business

We are heavily dependent on the capacity and
reliability of the our proprietary software, computer and
communications systems supporting our operations. Heavy use of
our computer systems during peak trading times or at times of
unusual market volatility could cause our systems to operate
slowly or even to fail for periods of time. We also cannot
assure you that our recent headcount reductions as part of our
cost-cutting initiatives will not impact our ability to respond
to system problems. Instinets CBXSM and
Instinet Crossing®, as well as INET, are each
SEC-recognized ATSs. Their status as SEC-recognized ATSs
requires that our trade execution and communications systems be
able to handle anticipated present and future peak trading
volumes. In addition, the status of our subsidiaries as
SEC-registered broker-dealers and NASD members is conditioned in
part on their ability to process and settle trades. If any of
our systems do not operate properly or are disabled, that
ability could be compromised and we could suffer financial loss,
liability to clients, regulatory intervention or reputational
damage.

To accommodate potential increases in order
message volume and trading volume, including as a result of our
recent reorganization, the trading practices of new and existing
clients, the development of new and enhanced trading system
functionalities, sub-penny pricing, and regulatory changes, we
have made and will continue to make significant investments in
additional hardware and software. We cannot assure you that our
estimates of future trading volumes and order messages will be
accurate or that our systems will always be able to accommodate
actual trading volumes and order messages without failure or
degradation of performance. System failure or degradation could
result in regulatory inquiries or proceedings, and could also
lead our customers to file formal complaints with industry
regulatory organizations, file lawsuits against us, trade less
frequently through us or cease doing business with us
altogether. In connection with its examination of the capacity
of market participants, the SECs Division of Market
Regulation has in the past raised issues

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regarding the adequacy of our capacity, our
testing of capacity limits and our plans for increasing
capacity. The inability of our systems to accommodate an
increasing volume of transactions and order messages could also
constrain our ability to expand our businesses.


From time to time in the past, we have
experienced periods of extremely high trading volume in the
equity securities markets. On a few occasions during these
periods, the volume order messages and trading activity may have
caused a slowing of our order execution, trade allocation and
related systems. Sustained periods of high trading volumes in
the past have enabled us to identify specific areas of
vulnerability in our transaction processing systems. These or
similar events could interfere with our customers ability
to execute orders, and settle trades through us or prevent us
from satisfying our responsibilities to clearing and settlement
organizations and could result in financial exposure or
regulatory action.

We continually upgrade and modify our systems,
including our order handling trading platforms, as necessary,
but we cannot assure you that a hardware or software error will
not occur that could impact our ability to execute transactions.
We may use new technologies to upgrade our established systems,
and the development of these new technologies entails technical,
financial and business risks.

We also cannot assure you that we will
successfully implement new technologies or adapt our existing
technology and transaction processing systems to customer
requirements, emerging industry standards, or new regulatory
requirements. In the past year, we have had occasions where we
experienced unintended consequences from enhancements to our
customer interface technology. If similar events were to occur
in the future, we could suffer financial loss, liability to
clients, regulatory intervention or reputational damage.

Our core data centers support our trading and
execution systems, clearing and settlement operations and
customer interfaces. If one of our data centers were to be
damaged, disabled or otherwise fail or experience difficulties,
it may be more difficult for us to continue operating without
disruption to our services. Our electronic systems could be
adversely affected by general power or telecommunications
failures, computer viruses or natural or other disasters
(including terrorist attacks). They are also vulnerable to
damage or failure due to human error and sabotage (both external
and internal). The loss of support services from third parties
could also have a material adverse effect on our electronic
systems.

Financial or Other Problems Experienced by
Third Parties, Including Customers, Trading 
 Counterparties, Clearing Agents and Exchanges, Could Have an
Adverse Effect on Our Business

We are exposed to credit risk from third parties
that owe us money, securities or other obligations. These
parties include our customers, trading counterparties, clearing
agents, exchanges and other financial intermediaries. These
parties may default on their obligations to us due to
bankruptcy, lack of liquidity, operational failure or other
reasons. Although we believe we have no obligation to do so, we
generally settle trades with a counterparty even if our customer
fails to meet its obligations to us.

We are exposed to substantial credit risk from
both parties to a securities transaction during the period
between the transaction date and the settlement date. This
period is three business days in the U.S. equities markets
and can be as much as 30 days in some international
markets. In addition, we have credit exposure that extends
beyond the settlement date in the case of a party that does not
settle in a timely manner by failing either to make payment or
to deliver securities. Adverse movements in the prices of
securities that are the subject of these open transactions can
increase our credit risk. Credit difficulties or insolvency or
the perceived possibility of credit difficulties or insolvency
of one or more large or visible market participants could also
result in market-wide credit difficulties or other market
disruptions whereby a large number of market participants may
not settle transactions or otherwise perform their obligations.
Credit losses could adversely affect our financial condition and
operating results.

We May Have Difficulty Managing Our Joint
Ventures and Alliances Successfully

From time to time we consider forming joint
ventures or alliances with various strategic partners throughout
the world. Entering into joint ventures and alliances entails
risks, including:



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | difficulties in developing and expanding the
    business of newly formed joint ventures;

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| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | exercising influence over the activities of joint
    ventures in which we do not have a controlling interest; and
|
| |  | potential conflicts with our joint venture or
    alliance partners.                                              

Unsuccessful joint ventures or alliances could
have a material adverse effect on our business, financial
condition and operating results.

Our Compliance Systems Might Not Be Fully
Effective

Our ability to comply with all applicable laws
and rules is largely dependent on our establishment and
maintenance of compliance, audit and reporting systems and
procedures, as well as our ability to attract and retain
qualified compliance, audit and risk management personnel. We
cannot assure you that these systems and procedures are fully
effective. We also cannot assure you that our recent headcount
reductions as part of our cost-cutting initiatives will not
reduce the effectiveness of these systems and procedures. We
face the risk of significant intervention by regulatory
authorities, including extensive examination and surveillance
activity. In the case of actual or alleged non-compliance with
regulations, we could be subject to investigations and judicial
or administrative proceedings that may result in substantial
penalties or civil lawsuits, including by customers, for
damages, which can be substantial. Any of these could adversely
affect our business, reputation, financial condition and
operating results and, in extreme cases, our ability to conduct
our business or portions thereof.

Our Risk Management Methods Might Not Be Fully
Effective

Our policies and procedures to identify, monitor
and manage our risks may not be fully effective and may vary
among our various businesses and subsidiaries worldwide. Some of
our risk management methods depend upon evaluation of
information regarding markets, customers or other matters that
are publicly available or otherwise accessible by us. That
information may not in all cases be accurate, complete,
up-to-date or properly evaluated. We cannot assure you that our
recent headcount reductions as part of our cost-cutting
initiatives will not reduce the effectiveness of our risk
management policies and procedures. If our policies and
procedures are not fully effective or we are not always
successful in monitoring or evaluating the risks to which we are
or may be exposed, our business, reputation, financial condition
and operating results could be materially adversely affected. In
addition, although we maintain insurance policies proportionate
with those maintained by others in the securities industry, we
cannot assure you that our insurance policies will provide
adequate coverage.

We May Not Be Able to Obtain Additional
Financing If We Need It

Our business is dependent upon the availability
of adequate funding and regulatory capital under applicable
regulatory requirements. Historically, we have satisfied these
needs from internally generated funds and from lines of credit
made available to us by commercial banking institutions. Prior
to our initial public offering, Reuters had issued non-binding,
short-term letters to certain of these institutions confirming
its ownership of us and indicating that if we were to default
under the relevant facility, Reuters would consider, without any
obligation, requests by these institutions for compensation.
Reuters has withdrawn these letters and advised us that it will
not issue any additional letters in the future, and we will thus
not have the benefits of these letters.

Based on managements experience and current
industry trends, we anticipate that our available cash resources
will be sufficient to meet our presently anticipated working
capital and capital expenditure requirements for at least the
next 12 months. However, if for any reason we need to raise
additional funds, we may not be able to obtain additional
financing when needed on terms favorable to us. In addition, so
long as Reuters owns a majority of our common stock, we will
need Reuters consent to incur net indebtedness (indebtedness for
borrowed money less cash on hand) in excess of an aggregate of
$400 million, excluding any indebtedness incurred by us in
the ordinary course of our brokerage or similar business or in
connection with our clearing of securities trades or our
obligations to securities exchanges or clearing systems. We
cannot

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assure you that we will receive Reuters consent
to incur indebtedness above this amount in the future if we need
to do so for any reason.


We Depend on Third Party Suppliers for Key
Services

Our reliance on third parties to supply elements
of our trading, clearing and other systems, as well as computers
and other equipment, and related support and maintenance has
increased. We cannot assure you that any of these third party
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. If we are
unable to make alternative arrangements for the supply of
critical services in the event of an interruption in or the
cessation of service by an existing service provider, our
business, financial condition and operating results could be
materially adversely affected.

In particular, we depend largely on the services
of Radianz for the telecommunications network that connects us
with our customers. Radianz, a joint venture between Reuters and
Equant Finance B.V. that is 51% owned by Reuters but under joint
control of Reuters and Equant, provides these services to us
pursuant to an agreement it has entered into with Reuters. We
are not a party to this agreement. Therefore, although we have
rights under this agreement, we must rely on Reuters to enforce
this agreement in the event of any breach by Radianz, but
Reuters has no legal obligation or sole ability to do so.
Disruptions in Radianz network services to us, including
as a result of the termination of the agreement between Reuters
and Radianz, or its inability to continue to support our
business, would have a material adverse effect on our business,
financial condition and operating results.

Our Clearing Operations Could Expose Us to
Potential Liability

Errors in performing clearing functions,
including clerical, technological and other errors related to
the handling of funds and securities held by us on behalf of
customers and broker-dealers, could lead to civil penalties
imposed by applicable regulatory authorities, as well as losses
and liability in related lawsuits brought by customers and
others. Any liability that arises as a result of our clearing
operations could have a material adverse effect on our business,
financial condition and operating results.

Securities industry regulators in the United
States are continually reviewing the extent to which clearing
firms will be held accountable for the improper activities of
broker-dealers for which they provide clearing services. In our
correspondent clearing activities, our procedures may not be
sufficient to protect us from liability for the acts of
broker-dealers or other wholesale customers that use our
correspondent clearing services under current laws and
regulations. Securities industry regulators may also enact more
restrictive laws or regulations or change their interpretations
of current laws and regulations.

Employee Misconduct or Errors Could Harm Us
and Are Difficult to Detect and Deter

Employee misconduct could subject us to financial
losses or regulatory sanctions and seriously harm our
reputation. It is not always possible to deter employee
misconduct, and the precautions we take to prevent and detect
this activity may not be effective in all cases. Misconduct by
our employees could include fraud, misappropriation of our
assets, hiding unauthorized activities from us, improper or
unauthorized activities on behalf of customers or improper use
of confidential information.

Employee errors in recording or executing
transactions for customers can cause us to enter into
transactions that customers may disavow and refuse to settle.
These transactions expose us to risk of loss, which can be
material, until we detect the errors in question and unwind or
reverse the transactions. As with any unsettled transaction,
adverse movements in the prices of the securities involved in
these transactions before we unwind or reverse them can increase
this risk.

Our Quarterly Results May Fluctuate
Significantly

We have experienced, and may continue to
experience, significant seasonality in our business. This
seasonal trend may continue for the foreseeable future and
similar trends may affect our business, financial

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condition and operating results in the future. As
a result of this and the other factors and risks discussed in
this section and under Managements Discussion and
Analysis of Financial Condition and Results of Operations,
period-to-period comparisons of revenues and operating results
are not necessarily meaningful, and the results of any quarter
are not necessarily indicative of results for any future period.


We May Not Be Able to Protect Our Intellectual
Property Rights

We rely primarily on trade secret, copyright,
trademark and patent law to protect our proprietary technology.
However, it is possible that third parties may copy or otherwise
obtain and use our proprietary technology without authorization
or otherwise infringe on our rights. We may also face claims of
infringement that could result in substantial defense costs to
us and could interfere with our ability to use technology that
is material to our business operations.

In addition, in the future, we may have to rely
on litigation to enforce our intellectual property rights,
protect our trade secrets, determine the validity and scope of
the proprietary rights of others or defend against claims of
infringement or invalidity. Any such litigation, whether
successful or unsuccessful, could result in substantial costs to
us and diversions of our resources, either of which could
negatively affect our business.

Use of the Internet to Access Our Services
Could Expose Us to Risks of Failure of Internet Performance and
Adverse Customer Reaction

Our business has traditionally been conducted
with our customers through the use of proprietary networks for
the execution of trades and the communication of information. To
achieve better economies of distribution or to improve the
delivery of our services to our customers, we have moved a
portion of our business from our proprietary networks to
non-proprietary networks and the Internet. Existing and
prospective customers may react unfavorably to these changes due
to their concerns regarding the security, reliability, cost,
ease of use, accessibility and quality of service of the
Internet or other systems.

The Services We Provide to Professional
Non-Institutional Traders May Increase Our Exposure to Private
Securities Litigation

Many aspects of the securities brokerage
business, including on-line trading services, involve
substantial risk of liability. In recent years, there has been
an increasing incidence of litigation involving the securities
brokerage industry, including class action suits that generally
seek substantial damages, including in some cases punitive
damages. The services we provide to professional
non-institutional traders may subject us to a greater risk of
customer complaints, litigation and potential liability,
including with respect to suitability and delays or errors in
execution or settlement. Any litigation brought in the future
could have a material adverse effect on our business, financial
condition and operating results.

RISKS RELATING TO OUR RELATIONSHIP WITH
RELATED PARTIES

Reuters Has Significant Control Over Us and
May Not Always Exercise Its Control in a Way that Benefits Our
Public Stockholders

Reuters beneficially owns approximately 62.6% of
our common stock. Under our amended and restated certificate of
incorporation, for as long as it continues to beneficially own
more than 50% of our common stock, Reuters will control many
matters that require a stockholder vote. These matters include
the election of directors and the removal of directors without
cause, mergers, acquisitions and other business combinations. In
addition, Reuters exercises a significant amount of influence
over corporate matters, such as payment of dividends and stock
issuances, and over our management, business activities and
operations. Currently, five of our directors are also officers,
former officers or directors of Reuters. In addition, if we are
deemed to supply news services at a time when Reuters
beneficially owns more than 50% of our common stock, we will be
required to adhere to certain principles relating to integrity,
independence, reliability and freedom from bias which apply to
Reuters generally. If applicable, these principles may influence
how we conduct our business.

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In addition, to the extent that these principles
apply, they may affect Reuters ability to enter into a
transaction that would effect a change of control of our company.


Our amended and restated certificate of
incorporation and our amended and restated corporate agreement
with Reuters also include provisions that provide Reuters with
rights, including when it beneficially owns less than a majority
of our voting stock, that may be less favorable to you and us
than the corporate law governing these matters would be in the
absence of these provisions. These provisions include the right,
when Reuters beneficially owns between 35% and 50% of our voting
stock, to block some issuances of equity securities and some
dispositions and acquisitions of assets or businesses exceeding
specified thresholds.

We have agreed not to take any action voluntarily
that would reduce Reuters ownership of our then-outstanding
voting stock to less than 51% of our capital stock or
then-outstanding voting stock without Reuters consent. In
addition, we have agreed with Reuters not to take any action
that would violate a stock exchange rule or similar requirement
applicable to Reuters, or that would result in adverse tax
consequences for Reuters as a result of its relationship with
us. We have also agreed with Reuters not to voluntarily register
our ATSs or any of our subsidiaries as a national securities
exchange without Reuters consent, even if our management
determines that exchange registration would be beneficial to us
or one of our subsidiaries. Reuters substantial ownership
position could also limit our ability to enter into a
transaction that involves a change of control, which might
adversely affect the market price of our common stock.

Certain Other of Our Stockholders Have
Significant Contractual Rights and May Exercise Those Rights in
a Manner that May Not Benefit Our Public Stockholders

TA Associates and Bain Capital each have the
right to nominate one member to our board of directors as long
as each respectively owns 8,000,000 shares of our common
stock that they received as consideration in our acquisition of
Island. If the size of our board of directors is increased
beyond its current size, then in most instances these
stockholders would have the right to appoint additional
directors. The right of these stockholders to nominate directors
is based on the number of shares of our common stock issued to
them as a result of the acquisition that they continue to own in
the future and not the percentage of our outstanding common
stock represented by those shares. If we issue a significant
number of additional shares in the future, then these
stockholders may retain the right to nominate directors to our
board in a manner disproportionate to their overall ownership of
our outstanding common stock.

Reuters and Certain Other Stockholders May
Have Interests that Conflict with the Interests of Our Other
Stockholders and Us and May Cause Us to Forego
Opportunities

Various conflicts of interest between Reuters,
TA Associates or Bain Capital and us may arise in the
future in a number of areas relating to our business and
relationships, including the following:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | potential competitive business activities;                                                   
|
| |  | potential acquisitions of businesses or
    properties;                                      
|
| |  | incurrence of indebtedness;                                                                  
|
| |  | tax matters;                                                                                 
|
| |  | financial commitments;                                                                       
|
| |  | marketing functions;                                                                         
|
| |  | indemnity arrangements;                                                                      
|
| |  | service arrangements; and                                                                    
|
| |  | the exercise by Reuters or those stockholders of
    control over our management and affairs.

Individuals who are officers or directors of us
and either Reuters, one of its other subsidiaries or one of the
former stockholders of Island may have fiduciary duties to both
companies. Our amended and restated certificate of incorporation
includes provisions confirming the right of Reuters,
TA Associates or Bain Capital,

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who have the right to nominate directors to our
board, to engage in activities that compete with us and relating
to the allocation of business opportunities between Reuters,
TA Associates or Bain Capital and us. The resulting
situation may be more advantageous to Reuters,
TA Associates or Bain Capital than the corporate law
governing those opportunities would be in the absence of those
provisions.


None of Reuters, TA Associates or Bain
Capital are prohibited from engaging in our lines of business,
including brokerage and research, and they may directly or
indirectly compete with us in the future. Bridge Trading, a
Reuters subsidiary, is a broker-dealer that competes with us,
primarily in the area of U.S. exchange-listed stocks and in the
soft-dollar business.

Some of Our Agreements with Reuters May Not Be
the Result of Arms-Length Negotiations Between Independent
Parties

Previously, we have entered into a number of
commercial agreements with Reuters. Some of these agreements
were negotiated in the context of a parent-subsidiary
relationship and therefore may not be the result of
arms-length negotiations between independent parties.
Accordingly, we cannot assure you that the terms of those
agreements, including pricing and other material terms, are as
advantageous to us as the terms we could have negotiated with
unaffiliated third parties.

RISKS ASSOCIATED WITH PURCHASING OUR COMMON
STOCK

Certain Provisions of Our Certificate of
Incorporation, Bylaws and Delaware Corporate Law Could Make a
Take-Over More Difficult, Could Adversely Affect the Market
Price of Our Common Stock or Deprive You of a Premium over Our
Market Price

Our amended and restated certificate of
incorporation and amended and restated bylaws and the laws of
Delaware (the state in which we are organized) contain
provisions that might make it more difficult for someone to
acquire control of us in a transaction not approved by our board
of directors. These provisions could also discourage proxy
contests and make it more difficult for you and other
stockholders to elect directors other than the candidates
nominated by our board. For example, our certificate of
incorporation authorizes our board of directors to determine the
rights, preferences, privileges and restrictions of unissued
series of preferred stock, without any vote or action by our
stockholders. Thus, the board can authorize and issue shares of
preferred stock with voting or conversion rights that could
adversely affect the voting or other rights of holders of our
common stock. In addition, the issuance of preferred stock may
have the effect of delaying, deferring, or preventing a change
of control of our company, because the terms of the preferred
stock that might be issued could potentially prohibit our
consummation of any merger, reorganization, sale of
substantially all of our assets, liquidation or other
extraordinary corporate transaction without the approval of our
stockholders.

The existence of these provisions could adversely
affect the market price of our common stock. Although these
provisions do not have a substantial practical significance to
investors while Reuters controls us, these provisions could have
the effect of depriving stockholders of an opportunity to sell
their shares at a premium over prevailing market prices should
Reuters voting power decrease to less than 50%. See the
information incorporated in this annual report by reference from
the Certain Business Relationships section of the
Proxy Statement.

Future Sales of Our Shares Could Adversely
Affect the Market Price of Our Common Stock

As of December 31, 2003, there were
330,991,354 shares of our common stock outstanding. Of this
amount, 206,900,000 shares are owned beneficially by our parent,
Reuters. Reuters will be able to sell its shares in the public
markets from time to time, subject to certain limitations on the
timing, amount, and method of such sales imposed by SEC
regulations. We have also granted Reuters (and its transferees)
rights to demand registration of their shares and to include
their shares in future registration statements. If Reuters were
to sell a large number of its shares, the market price of our
stock could decline significantly. In addition,

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the perception in the public markets that sales
by Reuters might occur could also adversely affect the market
price of our common stock.


In connection with our acquisition of ProTrader
Group, L.P. in October of 2001, we issued 5,017,058 common
shares to former ProTrader stockholders. All of these shares may
now be sold without restriction.

On September 23, 2002, we filed a
registration statement on Form S-8 under the Securities Act
with respect to up to 1,553,151 shares of our common stock
that are reserved for issuance pursuant to our stock option
plan. As a result, shares received by employees upon exercise of
their options will be eligible for resale by the holders in the
public markets, subject to certain lock-up agreements and
Rule 144 limitations applicable to affiliates. We may
increase the size of its option plan and include additional
shares in the Form S-8 under the Securities Act. We may
file a registration statement permitting resale of these shares
by affiliates.

In connection with our acquisition of Island, we
issued 80,658,829 common shares to former Island
stockholders along with warrants and options to purchase an
additional 5,793,455 of our common shares. Many of these shares
may now be sold without restriction. In addition, we have agreed
to provide some Island securityholders with registration rights
that would facilitate their future sales of our common shares
received as a result of the acquisition of Island.

In the future, we may issue our securities in
connection with acquisitions or investments. The amount of our
common stock issued in connection with an acquisition or
investment could constitute a material portion of our then
outstanding common stock not held by Reuters.

Sales of substantial amounts of our common shares
in the public market could adversely affect the market price of
those shares. A decline in the market price of our common shares
could adversely affect its access to the equity capital markets.
In addition, any issuance of shares by us could dilute our
earnings per share.

Website Access

We make our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K and all amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act available, free of charge, on the Investor
Relations section of our Internet website at
www.instinetgroup.comunder the heading SEC
Filings as soon as reasonably practicable after we
electronically file this material with, or furnish this material
to, the Securities and Exchange Commission.

Item 2.     Properties

We lease all of our office space, most of which
is located in New York City and Jersey City, New Jersey. Our
principal offices are located at 3 Times Square, New York,
New York. Our principal offices for Instinet are located at
3 Times Square, New York, New York while our principal
offices for INET are located at Harborside Plaza 10, Jersey
City, New Jersey. We sublease the space for our principal
offices from an affiliate of Reuters. For further information
about this lease, see Certain Relationships and Related
Transactions. In addition we have lease agreements for
office space outside the United States in Frankfurt, Hong Kong,
London, Paris, Tokyo and Zurich. For further information about
our leased properties, see Notes to Consolidated Financial
Statements.

Item 3.     Legal
Proceedings

From time to time, we are involved in various
legal proceedings (including those described below) arising in
the ordinary course of business. We are also subject to periodic
regulatory audits and inspections. While any litigation contains
an element of uncertainty, we believe that the outcomes of such
proceedings or claims are unlikely to have a material adverse
effect on Instinet Group.

53



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##### 



The Island ECN, Inc. v. B-Trade Services
LLC

On September 20, 2002, Island commenced an
arbitration proceeding against respondents Archipelago L.L.C.
(Archipelago); B-Trade Services LLC
(B-Trade); and REDIBook ECN L.L.C.
(REDIBook) before the NASD. Island alleged that each
respondent entered into a subscriber agreement with Island which
prescribed certain fees and, despite Islands demand that
each respondent abide by the terms of its contract, each
respondent has refused to pay such fees. Island sought total
damages in the amount of at least approximately $11,100,000, of
which approximately $1,900,000 was due from B-Trade, $5,200,000
from Archipelago and $4,000,000 from REDIBook.

The claim against B-Trade was severed from those
claims against Archipelago and REDIBook, and was tried to
conclusion. (By agreement of the parties, the claims against
Archipelago and REDIBook were stayed for most of calendar year
2003, and were subsequently consolidated with Archipelago
Securities L.L.C. v. Instinet Group Incorporated
described below.) B-Trade denied Islands claims, asserted
affirmative defenses and counterclaimed against Island for
$2,750,000. On October 21, 2003, the parties were notified
that Islands motion for summary judgment had been granted
by the panel in the matter. As part of that decision, the
arbitration panel (i) sustained Islands claims
against B-Trade in their entirety and awarded Island $1,979,385
(inclusive of interest) and costs, and (ii) dismissed
B-Trades defenses and counter-claims against Island.
B-Trade has satisfied the arbitration award.

The Island ECN Inc. v. Archipelago L.L.C.
and REDIBook ECN L.L.C. Archipelago Securities LLC v.
Instinet Group Incorporated

As noted above, Island commenced an arbitration
against Archipelago and REDIBook before the NASD seeking
approximately $5,200,000 and $4,000,000, respectively, in unpaid
transaction fees allegedly incurred by respondent in 2002.
Archipelago and REDIBook have answered and counterclaimed
against Island by denying the substantive allegations of
Islands statement of claim, asserting certain affirmative
defenses and counterclaims against Island, alleging that Island
engaged in unfair, discriminatory pricing practices against
these respondents and asserting claims involving breach of
contract, breach of obligations of good faith, and attempted
monopolization and conspiracy to restrain trade under the
Sherman Act. The counterclaims allege damages of no less than
$30 million before trebling, for a total of no less than
$90 million treble damages pursuant to the federal
antitrust laws. Archipelago is also seeking attorneys fees.

Additionally, on February 19, 2003,
Archipelago commenced a separate action against Instinet Group
before the NASD, in which it alleged that Instinet Group also
engaged in unfair, discriminatory pricing practices against it
and asserted claims involving breach of contract, breach of
obligation of good faith, and attempted monopolization and
conspiracy to restrain trade under Sherman Act. Archipelago
seeks no less than $41 million before trebling for a total
of no less than $123 million trebled damages. Instinet
Group has answered and intends to vigorously defend the
proceeding.

These two actions have been consolidated by
agreement of the parties and are in the discovery phase.

NexTrade Holdings, Inc. v. ProTrader
Group, LP, ProTrader Securities Corp., ProTrader
Technologies LP, ProTrader Trading LLC, ProTrader Services,
LP and ProTrader.com LP

On February 4, 2003, NexTrade Holdings, Inc.
commenced an action against certain ProTrader subsidiaries in
the United States District Court, Middle District of Florida,
Tampa Division. The complaint alleges that these subsidiaries
adopted and used the mark ProTrader in violation of
§ 32(1) of the Lanham Act. The complaint further
alleges that these subsidiaries use of the ProTrader mark
is likely to cause confusion, mistake or deception among
purchasers of software, services and goods bearing the name
ProTrader, which allegedly constitutes false
designation of origin and unfair competition in violation of
§ 43(a) of the Lanham Act. The complaint also alleges
that these subsidiaries use constitutes trademark
infringement in violation of Florida state statutes and its
common law, and unfair competition based on trademark
infringement in violation of the common law of Florida. Finally,
the complaint alleges fraud in the inducement based on
defendants alleged deceitful negotiations to resolve the
dispute. Plaintiff seeks to recover all of these
subsidiaries profits, gains and advantages resulting from
the unauthorized use of the

54



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##### 



ProTrader mark, damages sustained by
the plaintiff of no less than $15 million before trebling
and that such damages be trebled, and exemplary and punitive
damages of not less than $90 million. Defendants have
answered the complaint by denying the substantive allegations,
asserting certain affirmative defenses and by counterclaiming
against NexTrade, seeking a cancellation of the
Pro-Trade trademark on the ground that it is
descriptive and Plaintiff committed fraud on the Patent and
Trademark Office during the prosecution of its application.


Datamize Inc. v. Fidelity Brokerage
Services, LLC, Scottrade, Inc., Interactive Brokers Group, LLC,
Instinet Corporation, Charles Schwab & Co., Inc.,
CyberTrader, Inc., E*Trade Securities, LLC, TradeStation
Securities, Inc., and TerraNova Trading LLC

On September 5, 2003, Datamize Inc.
commenced an action against a variety of financial services
providers, including Instinet Corporation, in United States
District Court, Eastern District of Texas, Marshall Division.
The complaint alleges that certain of the defendants
trading platforms infringe United States Patent
No. 6,460,040, either directly or indirectly, through acts
of contributory infringement or inducement, by making, using,
selling, and/or offering online trading platforms in violation
of 35 U.S.C. § 271. Plaintiff seeks to
recover an unspecified amount of damages.

In lieu of answering, Instinet has moved to
dismiss for improper venue, and (jointly with the other
defendants) to transfer the case to California. The motions are
currently pending with the court.

Item 4.     Submission
of Matters to a Vote of Security Shareholders

No matters were submitted to security holders for
a vote during the fourth quarter ended December 31, 2003.

PART II

Item 5.     Market
for the Companys Common Equity and Related Stockholder
Matters

Our common stock commenced trading on the NASDAQ
National Market on May 18, 2001 under the symbol
INET. Prior to that date, there was no public market
for our common stock. We subsequently changed our ticker symbol
to INGP on October 27, 2003. The following
table sets forth, for the periods indicated, the high and low
closing prices per share for our common stock as reported on the
NASDAQ National Market and the dividend declared per share of
our common stock:

|                    |  |      |       |     |  |                   |      |   |  |   |      | 
|------------------- |  | ---- | ----- | --- |  | ----------------- | ---- | - |  | - | ---- | 
|                    |  |      |       |     |  | Dividend Declared
|Period              |  | High |       | Low |  | per Share        
|                    |  |      |       |     |  |                  
|First quarter 2002  |  | $    | 10.30 |     |  | $                 | 6.41 |   |  | $ | 0    | 
|Second quarter 2002 |  | $    | 7.95  |     |  | $                 | 6.30 |   |  | $ | 0    | 
|Third quarter 2002  |  | $    | 7.09  |     |  | $                 | 2.93 | * |  | $ | 1.00 | 
|Fourth quarter 2002 |  | $    | 4.23  |     |  | $                 | 2.45 |   |  | $ | 0    | 
|First quarter 2003  |  | $    | 4.38  |     |  | $                 | 2.86 |   |  | $ | 0    | 
|Second quarter 2003 |  | $    | 4.81  |     |  | $                 | 3.27 |   |  | $ | 0    | 
|Third quarter 2003  |  | $    | 5.72  |     |  | $                 | 4.00 |   |  | $ | 0    | 
|Fourth quarter 2003 |  | $    | 6.65  |     |  | $                 | 4.74 |   |  | $ | 0    | 



---



|  |                           
|- | --------------------------
|* | Adjusted for cash dividend

On March 5, 2004, the last reported sales
price for our common stock on the NASDAQ National Market was
$6.83. As of March 5, 2004, there were approximately
11,100 holders of record of our common stock.

The equity compensation plan information required
to be furnished pursuant to this item is incorporated by
reference from the Equity Compensation Plan
Information section of the Proxy Statement.

55



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##### 



Dividends

Prior to our reorganization in 2000, most of our
international operations and some of our other activities were
conducted by other companies within the Reuters Group. In order
to fund these operations, we paid dividends to Reuters, which
then made capital contributions to those companies. As a result
of our reorganization, all of our international operations are
now conducted by our own subsidiaries.

In connection with our acquisition of Island, 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.

We intend to retain our future earnings for use
in our business and do not anticipate paying any cash dividends
in the foreseeable future. Any decision to declare and pay
dividends in the future will be made at the discretion of our
board of directors, after taking into account our financial
results, capital requirements and other factors they may deem
relevant. So long as Reuters continues to beneficially own more
than 50% of our outstanding common stock, it will be able to
exercise control over our payment of dividends.

Recent Sales of Unregistered
Securities

The following information relates to securities
issued or sold by the Registrant since January 1, 2001.
During that time, the Registrant has issued unregistered
securities in the transactions described below. Securities
issued in such transactions were offered and sold in reliance
upon the exemption from registration under Section 4(2) of
the Securities Act, relating to offers of securities by an
issuer not involving any public offering, or in reliance upon
the exemption from registration under Regulation S under
the Securities Act, relating to offers of securities outside the
United States to persons who are not citizens or residents of
the United States. The offers and sales of securities described
below were made without an underwriter and the certificates
representing the securities bear a restrictive legend permitting
the transfer of the securities only upon their registration
under, or pursuant to an exemption from the registration
requirements of, the Securities Act.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) On October 1, 2001, we acquired
    ProTrader Group, LP pursuant to an Interest Purchase Agreement
    dated as of July 23, 2001, as amended as of October 1,
    2001 (the Purchase Agreement), between us and
    David G. Jamail, David R. Burch, Overunder, LLC,
    John A. McEntire IV, John Bunda, Laura Horne, Currin
    Van Eman and Shayne Young (together, the ProTrader
    Sellers). Pursuant to the Purchase Agreement, we paid the
    ProTrader Sellers a purchase price of $100 million in cash and
    an aggregate of 5,017,058 shares of our common stock,
    valued at $50 million. We sold 4,629,427 shares to the
    ProTrader Sellers on October 1, 2001 in a private placement
    pursuant to Regulation D of the Securities Act. We sold the
    remaining 387,631 shares to one of the ProTrader Sellers on
    January 3, 2002 in a private placement pursuant to
    Regulation D of the Securities Act.                                                                                                                                                                                                                                       
|
| | (2) In connection with our merger with
    Island on September 20, 2002, we assumed two hedge option
    agreements with Ameritrade Holding Corporation. These hedge
    option agreements were originally entered into between Island
    and Datek Online Holdings Corp. (which Ameritrade acquired on
    September 9, 2002) and hedged Ameritrades obligations
    under a stock appreciation rights (SARs) plan. The SARs were
    granted to various directors, officers and employees of Datek
    and, upon exercise, entitled the holders to receive cash in an
    amount equal to the excess of the market value of our common
    shares over the exercise price of the SAR. In connection with
    our merger with Island, Ameritrade accelerated the SARs, in
    accordance with the terms of the SAR plan. Pursuant to an option
    exercise agreement dated as of October 18, 2002 we entered
    into with Ameritrade and Datek, we sold 1,651,238 shares of
    our common stock to Ameritrade for an exercise price of $0.91
    per share in a series of private placements pursuant to
    Regulation D of the Securities Act in November and December
    2002.

56



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##### 





|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected consolidated historical
financial and operating information of Instinet Group should be
read in conjunction with Business,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and related notes that appear elsewhere in
this Form 10-K. The information as of December 31,
2003 and 2002 and for the years ended December 31, 2003,
2002 and 2001 were derived from our audited consolidated
financial statements and related notes, which appear in
Item 8 in this Form 10-K. The information as of
December 31, 2001, 2000 and 1999 and for the years ended
December 31, 2000 and 1999 set forth below was derived from
our audited consolidated financial statements that are not
included in this Form 10-K. The historical financial
information may not be indicative of our future performance and
does not reflect what our financial position and results of
operations would have been had we operated as a separate
stand-alone entity during 2000 and 1999.

|                                           |                   |                                                            |           |           |           |      |           |           |           |      |           |           |           |   |           |           |           |   |         |         |         | 
|------------------------------------------ | ----------------- | ---------------------------------------------------------- | --------- | --------- | --------- | ---- | --------- | --------- | --------- | ---- | --------- | --------- | --------- | - | --------- | --------- | --------- | - | ------- | ------- | ------- | 
|                                           |                   |                                                           
|                                           |                   | Year Ended December 31,                                   
|                                           |                   |                                                           
|                                           |                   | 2003(1)                                                    |           | 2002(1)   |           | 2001 |           | 2000      |           | 1999
|                                           |                   |                                                            |           |           |           |      |           |           |           |     
|                                           |                   |                                                           
|                                           |                   | (In thousands, except per share amounts and share volumes)
|REVENUE                                    |                   |                                                            |           |           |           |      |           |           |           |      |           |           |           |   |           |           |           |   |         |        
|Transaction fees                           |                   | $                                                          | 1,079,051 |           |           | $    | 1,078,172 |           |           | $    | 1,424,343 |           |           | $ | 1,381,405 |           |           | $ | 935,550 |        
|Interest                                   |                   |                                                            | 23,828    |           |           |      | 40,137    |           |           |      | 49,296    |           |           |   | 38,015    |           |           |   | 23,916  |        
|Investments                                |                   |                                                            | (9,236    | )         |           |      | (59,109   | )         |           |      | 17,388    |           |           |   | 9,059     |           |           |   | 8,570   |        
|                                           |                   |                                                            |           |           |           |      |           |           |           |      |           |           |           |   |           |           |           |   |         |        
|                                           | Total revenues    |                                                            |           | 1,093,643 |           |      |           | 1,059,200 |           |      |           | 1,491,027 |           |   |           | 1,428,479 |           |   |         | 968,036 |        
|EXPENSES                                   |                   |                                                            |           |           |           |      |           |           |           |      |           |           |           |   |           |           |           |   |         |        
|Compensation and benefits                  |                   |                                                            | 227,262   |           |           |      | 281,761   |           |           |      | 406,348   |           |           |   | 379,320   |           |           |   | 239,607 |        
|Soft dollar and commission recapture       |                   |                                                            | 212,373   |           |           |      | 217,314   |           |           |      | 220,050   |           |           |   | 180,035   |           |           |   | 89,469  |        
|Broker-dealer rebates                      |                   |                                                            | 217,109   |           |           |      | 124,399   |           |           |      |          |           |           |   |          |           |           |   |        |        
|Brokerage, clearing and exchange fees      |                   |                                                            | 140,299   |           |           |      | 149,521   |           |           |      | 146,223   |           |           |   | 136,163   |           |           |   | 78,966  |        
|Communications and equipment               |                   |                                                            | 108,144   |           |           |      | 125,720   |           |           |      | 156,002   |           |           |   | 143,194   |           |           |   | 89,234  |        
|Depreciation and amortization              |                   |                                                            | 88,516    |           |           |      | 78,424    |           |           |      | 80,754    |           |           |   | 74,158    |           |           |   | 70,710  |        
|Occupancy                                  |                   |                                                            | 54,322    |           |           |      | 55,528    |           |           |      | 49,918    |           |           |   | 35,946    |           |           |   | 27,096  |        
|Professional fees                          |                   |                                                            | 27,916    |           |           |      | 24,594    |           |           |      | 39,990    |           |           |   | 90,208    |           |           |   | 56,648  |        
|Marketing and business development         |                   |                                                            | 16,702    |           |           |      | 17,094    |           |           |      | 22,143    |           |           |   | 32,145    |           |           |   | 22,340  |        
|Other                                      |                   |                                                            | 26,578    |           |           |      | 58,984    |           |           |      | 54,534    |           |           |   | 37,065    |           |           |   | 24,283  |        
|Restructuring                              |                   |                                                            | 59,497    |           |           |      | 120,800   |           |           |      | 24,378    |           |           |   |          |           |           |   |        |        
|Goodwill and intangible asset impairment   |                   |                                                            | 21,668    |           |           |      | 551,991   |           |           |      |          |           |           |   |          |           |           |   |        |        
|Loss of fixed assets at World Trade Center |                   |                                                            |          |           |           |      |          |           |           |      | 20,346    |           |           |   |          |           |           |   |        |        
|Insurance recovery of fixed assets lost    |                   |                                                            | (10,481   | )         |           |      |          |           |           |      | (21,000   | )         |           |   |          |           |           |   |        |        
|                                           |                   |                                                            |           |           |           |      |           |           |           |      |           |           |           |   |           |           |           |   |         |        
|                                           |                   | Total expenses                                             |           |           | 1,189,905 |      |           |           | 1,806,130 |      |           |           | 1,199,686 |   |           |           | 1,108,234 |   |         |         | 698,353 | 
|                                           |                   |                                                            |           |           |           |      |           |           |           |      |           |           |           |   |           |           |           |   |         |        
|Income (loss) from continuing operations   |                   |                                                            | (96,262   | )         |           |      | (746,930  | )         |           |      | 291,341   |           |           |   | 320,245   |           |           |   | 269,683 |        
|                                           | Net income (loss) |                                                            | $         | (73,808   | )         |      | $         | (735,230  | )         |      | $         | 144,767   |           |   | $         | 148,182   |           |   | $       | 136,118 |        
|                                           |                   |                                                            |           |           |           |      |           |           |           |      |           |           |           |   |           |           |           |   |         |        

57



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##### 



|                                                                           |                                                             |                                                            |         |           |         |      |         |           |         |      |         |           |         |   |         |           |        |   |         |           |        | 
|-------------------------------------------------------------------------- | ----------------------------------------------------------- | ---------------------------------------------------------- | ------- | --------- | ------- | ---- | ------- | --------- | ------- | ---- | ------- | --------- | ------- | - | ------- | --------- | ------ | - | ------- | --------- | ------ | 
|                                                                           |                                                             |                                                           
|                                                                           |                                                             | Year Ended December 31,                                   
|                                                                           |                                                             |                                                           
|                                                                           |                                                             | 2003(1)                                                    |         | 2002(1)   |         | 2001 |         | 2000      |         | 1999
|                                                                           |                                                             |                                                            |         |           |         |      |         |           |         |     
|                                                                           |                                                             |                                                           
|                                                                           |                                                             | (In thousands, except per share amounts and share volumes)
|Income (loss) per share from continuing
    operations  basic and diluted |                                                             | $                                                          | (0.29   | )         |         | $    | (2.75   | )         |         | $    | 1.26    |           |         | $ | 1.55    | (2)       |        | $ | 1.30    | (2)      
|Income (loss) per share  basic
    and diluted                            |                                                             | $                                                          | (0.22   | )         |         | $    | (2.71   | )         |         | $    | 0.63    |           |         | $ | 0.72    | (2)       |        | $ | 0.66    | (2)      
|Weighted average shares outstanding 
    basic                            |                                                             |                                                            | 330,859 |           |         |      | 271,542 |           |         |      | 230,561 |           |         |   | 206,900 | (2)       |        |   | 206,900 | (2)      
|Weighted average shares outstanding 
    diluted                          |                                                             |                                                            | 330,859 |           |         |      | 271,542 |           |         |      | 230,564 |           |         |   | 206,900 | (2)       |        |   | 206,900 | (2)      
|Statement of Financial Condition Data (As of
    End of Period)            |                                                             |                                                            |         |           |         |      |         |           |         |      |         |           |         |   |         |           |        |   |         |          
|                                                                           | Cash and cash equivalents                                   |                                                            | $       | 534,562   |         |      | $       | 275,837   |         |      | $       | 703,678   |         |   | $       | 415,199   |        |   | $       | 349,522   |       
|                                                                           | Securities owned, at market value                           |                                                            |         | 261,552   |         |      |         | 348,051   |         |      |         | 236,007   |         |   |         | 185,151   |        |   |         | 214,625   |       
|                                                                           | Total assets                                                |                                                            |         | 2,066,639 |         |      |         | 2,282,895 |         |      |         | 2,994,841 |         |   |         | 2,440,424 |        |   |         | 1,747,470 |       
|                                                                           | Stockholders equity                                        |                                                            |         | 970,783   |         |      |         | 1,023,534 |         |      |         | 1,462,509 |         |   |         | 927,336   |        |   |         | 778,842   |       
|Consolidated Statistical Data(3)(4)                                        |                                                             |                                                            |         |           |         |      |         |           |         |      |         |           |         |   |         |           |        |   |         |          
|                                                                           | Our NASDAQ-listed equity share volume (millions)            |                                                            |         | 119,730   |         |      |         | 81,943    |         |      |         | 65,893    |         |   |         | 57,390    |        |   |         | 35,211    |       
|                                                                           | Our U.S. exchange-listed equity share volume
    (millions) |                                                            |         | 20,252    |         |      |         | 15,680    |         |      |         | 11,016    |         |   |         | 9,390     |        |   |         | 5,935     |       
|                                                                           |                                                             |                                                            |         |           |         |      |         |           |         |      |         |           |         |   |         |           |        |   |         |          
|                                                                           |                                                             | Our U.S. equity share volume (millions)                    |         |           | 139,982 |      |         |           | 97,623  |      |         |           | 76,909  |   |         |           | 66,780 |   |         |           | 41,146 | 
|                                                                           |                                                             |                                                            |         |           |         |      |         |           |         |      |         |           |         |   |         |           |        |   |         |          
|                                                                           | Our U.S. equity transaction volume (thousands)              |                                                            |         | 296,465   |         |      |         | 148,415   |         |      |         | 98,346    |         |   |         | 82,437    |        |   |         | 44,902    |       
|                                                                           | Our non-U.S. equity transaction volume (thousands)          |                                                            |         | 6,573     |         |      |         | 7,618     |         |      |         | 7,685     |         |   |         | 5,181     |        |   |         | 2,827     |       
|                                                                           |                                                             |                                                            |         |           |         |      |         |           |         |      |         |           |         |   |         |           |        |   |         |          
|                                                                           |                                                             | Our total equity transaction volume (thousands)            |         |           | 303,038 |      |         |           | 156,033 |      |         |           | 106,031 |   |         |           | 87,618 |   |         |           | 47,729 | 
|                                                                           |                                                             |                                                            |         |           |         |      |         |           |         |      |         |           |         |   |         |           |        |   |         |          



---



|    |                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Subsequent to September 20, 2002, Island
    ECN, Inc.s results are consolidated with our results for
    the periods described.                                                                                                                                                                                             
|   
|(2) | Calculated based on the number of common shares
    that would have been held by Reuters after giving effect to a
    return of capital payment of $150 million to Reuters and
    our conversion from a limited liability company to a
    corporation, which is pushed back for earnings per share
    calculation purposes.
|   
|(3) | Historical amounts may be restated due to updates
    of volume information.                                                                                                                                                                                                                                                  
|   
|(4) | For a description of how we calculate our share
    volumes, see  Volume Calculations and
     Calculation of INET Volumes.                                                                                                                                                                                             

58



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion and analysis of our
financial condition and results of operations should be read in
conjunction with our consolidated financial statements,
including the notes to those statements, which are included in
Item 8 of this Form 10-K and in conjunction with the
sections of Item 1 of this Form 10-K entitled
Forward-Looking Statements and Certain Factors
That May Effect Our Business. Historical results and
percentage relationships set forth in the audited consolidated
financial statements, including trends that might appear, should
not be taken as indicative of future operations.

Overview

Instinet Group is the largest global electronic
agency securities broker, and we have been providing investors
with electronic trading solutions and execution services for
more than 30 years. We provide sophisticated electronic
trading solutions and execution services to enable buyers and
sellers worldwide to trade securities directly and anonymously
with each other. We also give our customers the opportunity to
use our sales-trading expertise and sophisticated technology
tools to interact with global securities markets, improve their
trading and investment performance and lower their overall
trading costs. Through our electronic platforms, our customers
can access other U.S. trading venues, including NASDAQ and
the NYSE and almost 30 securities markets throughout the
world, stock exchanges in Frankfurt, Hong Kong, London, Paris,
Sydney, Tokyo, Toronto and Zurich. Our customers primarily
consist of broker-dealers and institutional investors, such as
mutual funds, pension funds, insurance companies and hedge
funds. In May 2001, we converted from a limited liability
corporation and completed our initial public offering.

In recent years, we have been operating in a
challenging business, economic and regulatory environment. Over
the past two years, we have experienced losses, with a net loss
of $73.8 million for the year ended 2003 (including a
restructuring charge of $59.5 million and a write down of
intangible assets of $21.6 million) compared to a net loss
of $735.2 million for the year ended 2002 (including a
restructuring charge of $120.8 million and a write down of
intangible assets of $552.0 million). Our revenues remained
level as higher share volumes traded were offset by lower
revenue per share, as well as decreases in revenue from non-U.S.
equities, investments and interest. In 2002 and 2003, we
implemented a series of cost reduction plans that reduced annual
operating costs from the fourth quarter 2002 to the fourth
quarter 2003 by approximately $170.0 million on an
annualized basis. We are currently implementing further cost
reductions that target a reduction in operating costs of
approximately $30.0 million on an annualized basis by the
end of 2004.

Strategic Developments

Since the fourth quarter of 2003, we have been
implementing a business restructuring plan to establish two
distinct business lines:



| |   |                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Instinet, the Institutional BrokerSM,
    which serves our U.S. and international institutional customers
    including customers of Lynch, Jones & Ryan, our
    commission recapture subsidiary.                                                                         
|
| |  | INETSM (formerly known as Island ECN),
    our ECN that combines the U.S. broker-dealer order flow of the
    Instinet ECN and the Island ECN and serves our U.S.
    broker-dealer customers. INET also includes our clearing broker,
    Instinet Clearing Services, Inc.

Upon the completion of the business
restructuring, we currently anticipate that we will provide
separate financial disclosures for the Instinet and INET as
established by Statement of Financial Accounting Standard
(SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information for the
first quarter of 2004. This reorganization was substantially
completed on February 9, 2004.

In September 2002, we acquired Island Holding
Company, Inc., the parent company of The Island ECN, Inc., a
leading electronic securities marketplace, and paid a $1.00 per
common stock cash dividend, which represented a distribution of
approximately $248.7 million.

59



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##### 



Business Environment and Key Business
Drivers

Our business is impacted by several main factors:
trading volumes in U.S. securities markets, consideration (value
of transactions) traded internationally and the competitive
environment within the brokerage business. Trading volumes are
affected by many factors, including investor confidence, stock
price performance, global economic growth and political
stability, and the level of corporate activity, including
capital-raising. International consideration levels, as a
multiple of trading volumes and stock price, are also affected
by these factors. Our overall competitive environment, which is
reflected in our market share of overall trading volume and the
prices that we are able to charge our customers, is shaped in
part by the level of market trading activity, but also by the
abundance of competitors, continuing advances in technology,
ongoing regulatory developments, increased customer awareness
and regulatory scrutiny of execution costs and continuing
unbundling of financial services. In addition, the securities
markets and the brokerage industry in which we operate are
highly regulated, and these regulations may limit or shape our
activities. These factors all affect our future revenues as well
as our ability to achieve our strategic objectives.

A key measure of trading volume in the U.S.
securities markets is average daily trading volume. While
average daily trading volume in the U.S. equity markets as a
whole has continued to show moderate growth since 2001, the
market in which we trade a significant portion of our volume,
NASDAQ, has experienced a decline since 2001. Average daily
trading volume in NASDAQ-listed stocks was down 3.5% for the
full year 2003; however, during the last half of 2003, volume
increased and was maintained at a higher level than 2002.
Average daily trading volume in U.S. exchange-listed stocks has
grown steadily over the past five years, although the growth
rate has slowed since 2001.

Our market share, both in NASDAQ-listed and U.S.
exchange-listed stocks, has increased significantly,
particularly in 2003, primarily as a result of our acquisition
of Island in September 2002. Within 2003, however, our NASDAQ
market share has fluctuated, and it had declined significantly
at the end of 2001 and into 2002. The following charts
illustrate the trend of U.S. equity trading volume and our
market share of this volume over the past five years:



| |     
| | ----
| | LOGO

60



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##### 





| |     
| | ----
| | LOGO

The volatility in our market share reflects the
intense competitive environment within the brokerage business.
As a result of this competition, we have decreased our prices
significantly since 2001. In September 2001, we implemented a
new pricing schedule for our U.S. broker-dealer customers and
adjusted certain pre-set volume levels at which we offer those
customers lower per share transaction fees. In March 2002, we
offered further pricing incentives to our U.S. broker-dealer
customers, reducing prices paid by broker-dealers trading listed
stocks by approximately 60.0% and simplifying the pricing
schedule by further adjusting certain pre-set volume levels. In
October 2003, we reduced price for routing orders in
NASDAQ-listed stocks to other trading venues through our smart
order-routing by 37.0%. Additionally, the average net revenue
capture per share from our institutional customers declined
35.0% from in 2003 compare to 2002. Following these changes in
pricing, our average U.S. equity transaction fee revenue (per
share, per side) has declined 27.3% to $0.0032 in 2003 from
$0.0045 in 2002, which in turn was a 40.8% decrease from $0.0076
in 2001. This decline also reflects a shift in our business mix
towards our lower-priced broker-dealer customers. Net of the
impact of soft-dollar and commission recapture revenues and
broker-dealer rebates, our average transaction fee revenue for
U.S. equities (per share, per side) (a non-GAAP measure)
has decreased to $0.0018 in 2003 from $0.0030 in 2002 and
$0.0065 in 2001. We will continue to monitor future price
competition and evaluate our pricing structure as part of our
ongoing efforts to maintain and expand INETs liquidity
pool.

As a result of these changes in pricing and
business mix, our transaction fee revenue from
U.S. equities increased only 4.0% in 2003 to
$900.5 million from $865.8 million in 2002, and 2002
represented a 25.8% decline from $1.2 billion in 2001, despite
the substantial increases in our trading volumes that in 2003
were primarily due to our acquisition of Island. Overall, our
customers traded 140.0 billion U.S. equity shares with
us in 2003, representing an increase of 43.4% over
97.6 billion in 2002, which in turn represented a 26.9%
increase over 76.9 billion in 2001. Of that amount,
NASDAQ-listed equity shares comprised 119.7 billion in
2003, 81.9 billion in 2002 and 65.9 billion in 2001,
also reflecting a steady increase, while our
U.S. exchange-listed share volume rose to 20.3 billion
in 2003 and 15.7 billion in 2002 from 11.0 billion in 2001.

61



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##### 



The following graph depicts our U.S. equity
share volumes and our U.S. equity transaction fee revenues,
on a quarterly basis from 1999 to 2003:



| |     
| | ----
| | LOGO

Outside the United States, where our revenues
from international transactions are determined on the basis of
market consideration rather than the number of shares traded,
average daily market consideration increased to
$45.0 billion in 2003 from $33.6 billion in 2002,
primarily reflecting both higher trading volumes and a recovery
in stock prices, as well as the impact of a decline in value of
the U.S. dollar. However, our average daily consideration
traded declined to $676 million in 2003 from
$874 million in 2002, primarily as a result of lower
volumes of trading due to our decreased focus on lower margin
clients in 2003. Our pricing for non-U.S. equity trading
remained largely unchanged at an average of 5.7 basis points of
consideration traded in both 2003 and 2002, reflecting a shift
in our volume away from lower margin clients offset by an
overall decline in pricing. As a result of the lower average
daily consideration traded our net transaction fees from
non-U.S. equities declined in 2003 to $120.0 million
from $154.3 million in 2002. Transactions fees in 2002
declined 22.4% from $198.8 million in 2001 primarily due to
price reductions.

Also in response to the intense competitive
environment in the United States and our resulting pricing
reduction actions, we began a series of cost-cutting efforts in
2001 that have continued through 2003. In connection with these
cost-cutting efforts, which primarily involved headcount
reductions and office closures, we recorded restructuring
charges of $59.5 million and $17.5 million of
severance costs in 2003, and restructuring charges of
$120.8 million and $24.4 million in 2002 and 2001,
respectively.

Our expenses have declined as a result of these
cost-cutting efforts, to $1.2 billion in 2003 from
$1.8 billion in 2002 and $1.2 billion before the
acquisition of Island in 2001. These expense figures also
include the restructuring charges and expenses mentioned above,
as well as charges for the impairment of intangible assets of
$21.7 million in 2003 and $552.0 million in 2002, and
net insurance recoveries from the loss of fixed assets at the
World Trade Center of $10.5 million in 2003 and
$0.7 million in 2001. In addition to these expenses, we
recorded an $18.6 million charge for the cumulative effect
of a change in accounting principle in 2002 when we adopted SFAS
No. 142 and incurred losses of $22.7 million in 2002
and $24.4 million in 2001 related to our fixed income
operations, which we closed in 2002. As a result of the cost
reduction efforts, total expenses, excluding the above items and
broker-dealer rebates and soft dollar and commission recapture,
declined to $679.2 million in 2003 from $791.6 in 2002 and
$955.2 million in 2001.

62



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##### 



Non-GAAP Financial Measurement

In evaluating our financial performance and
results of operations, management reviews certain financial
measures that are not in accordance with generally accepted
accounting standards in the United States
(non-GAAP). Non-GAAP measurements do not have any
standardized meaning and are therefore unlikely to be comparable
to similar measures presented by other companies. Management
uses non-GAAP financial measures in evaluating our operating
performance. In light of the use by management of these non-GAAP
measurements to assess our operational performance, we believe
it is useful to provide information with respect to these
non-GAAP measurements so as to share this perspective of
management. These non-GAAP financial measures should be
considered in the context with our GAAP results.

Our transaction fees earned from our customers
trading equity securities have represented, and continue to
represent, a substantial portion of our revenues. GAAP requires
us to add our soft dollar and commission recapture expenses and
broker-dealer rebates, dollar-for-dollar, to related equity
transaction fee revenues, which has a dilutive effect on our
operating margins. Therefore, when evaluating our revenues from
equity transactions, management reviews our net equity
transaction fee revenue, based on U.S. securities and non-U.S.
securities. Our net equity transaction fee revenues are
calculated by subtracting the soft dollar and commission
recapture expenses as well as broker-dealer rebates from the
related equity transaction fees, as well as non-equity related
revenues, and is calculated as follows:

|                                                                                    |  |                                                  |           |      |  |      |           |   |  |   |           |  
|----------------------------------------------------------------------------------- |  | ------------------------------------------------ | --------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                                                                                    |  |                                                 
|                                                                                    |  | Year Ended December 31,                         
|                                                                                    |  |                                                 
|                                                                                    |  | 2003                                             |           | 2002 |  | 2001
|                                                                                    |  |                                                  |           |      |  |     
|                                                                                    |  |                                                 
|                                                                                    |  | (in thousands, except revenue capture per share)
|Total revenue                                                                       |  |                                                  |           |      |  |      |           |   |  |   |           |  
|Transaction fee revenue, as reported                                                |  | $                                                | 1,079,051 |      |  | $    | 1,078,172 |   |  | $ | 1,424,343 |  
|Less: non equity related transaction fee revenue                                    |  |                                                  | (15,197   | )    |  |      | (11,517   | ) |  |   | (10,766   | )
|Less: soft dollar revenues and commission
    recapture expenses                    |  |                                                  | (212,373  | )    |  |      | (217,314  | ) |  |   | (220,050  | )
|Less: broker-dealer rebates                                                         |  |                                                  | (217,109  | )    |  |      | (124,399  | ) |  |   |          |  
|                                                                                    |  |                                                  |           |      |  |      |           |   |  |   |           |  
|Net equity transaction fee revenue                                                  |  | $                                                | 634,372   |      |  | $    | 724,942   |   |  | $ | 1,193,527 |  
|                                                                                    |  |                                                  |           |      |  |      |           |   |  |   |           |  
|U.S.                                                                                |  |                                                  |           |      |  |      |           |   |  |   |           |  
|Transaction fee revenue from U.S. equities                                          |  | $                                                | 900,488   |      |  | $    | 865,777   |   |  | $ | 1,167,155 |  
|Less: non equity related transaction fee revenue                                    |  |                                                  | (15,197   | )    |  |      | (11,517   | ) |  |   | (10,766   | )
|Less: soft dollar revenues and commission
    recapture expenses from U.S. equities |  |                                                  | (153,849  | )    |  |      | (159,208  | ) |  |   | (161,624  | )
|Less: broker-dealer rebates                                                         |  |                                                  | (217,109  | )    |  |      | (124,399  | ) |  |   |          |  
|                                                                                    |  |                                                  |           |      |  |      |           |   |  |   |           |  
|Net equity transaction fee revenue from
    U.S. equities                           |  | $                                                | 514,333   |      |  | $    | 570,653   |   |  | $ | 994,765   |  
|                                                                                    |  |                                                  |           |      |  |      |           |   |  |   |           |  
|Average U.S. revenue capture per
    share                                          |  |                                                  |           |      |  |      |           |   |  |   |           |  
|Average U.S. equity transaction fee revenue
    (per share, per side)               |  | $                                                | 0.0032    |      |  | $    | 0.0045    |   |  | $ | 0.0076    |  
|Less: non equity related transaction fee revenue                                    |  |                                                  | (0.0001   | )    |  |      | (0.0001   | ) |  |   | (0.0001   | )
|Less: soft dollar revenues and commission
    recapture expenses from U.S. equities |  |                                                  | (0.0005   | )    |  |      | (0.0008   | ) |  |   | (0.0010   | )
|Less: broker-dealer rebates                                                         |  |                                                  | (0.0008   | )    |  |      | (0.0006   | ) |  |   |          |  
|                                                                                    |  |                                                  |           |      |  |      |           |   |  |   |           |  
|Average U.S. equity net transaction fee
    revenue (per share, per side)           |  | $                                                | 0.0018    |      |  | $    | 0.0030    |   |  | $ | 0.0065    |  
|                                                                                    |  |                                                  |           |      |  |      |           |   |  |   |           |  

63



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##### 



|                                                                                        |  |                                                  |           |      |  |      |           |   |  |   |           |  
|--------------------------------------------------------------------------------------- |  | ------------------------------------------------ | --------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                                                                                        |  |                                                 
|                                                                                        |  | Year Ended December 31,                         
|                                                                                        |  |                                                 
|                                                                                        |  | 2003                                             |           | 2002 |  | 2001
|                                                                                        |  |                                                  |           |      |  |     
|                                                                                        |  |                                                 
|                                                                                        |  | (in thousands, except revenue capture per share)
|Non-U.S.                                                                                |  |                                                  |           |      |  |      |           |   |  |   |           |  
|Transaction fee revenue from
    non-U.S. equities                                      |  | $                                                | 178,563   |      |  | $    | 212,395   |   |  | $ | 257,188   |  
|Less: soft dollar revenues and commission
    recapture expenses from non-U.S. equities |  |                                                  | (58,524   | )    |  |      | (58,106   | ) |  |   | (58,426   | )
|                                                                                        |  |                                                  |           |      |  |      |           |   |  |   |           |  
|Net equity transaction fee revenue from non-U.S.
    equities                           |  | $                                                | 120,039   |      |  | $    | 154,289   |   |  | $ | 198,762   |  
|                                                                                        |  |                                                  |           |      |  |      |           |   |  |   |           |  
|Total expenses                                                                          |  |                                                  |           |      |  |      |           |   |  |   |           |  
|Total expenses, as reported                                                             |  | $                                                | 1,189,905 |      |  | $    | 1,806,130 |   |  | $ | 1,199,686 |  
|Less: soft dollar and commission recapture                                              |  |                                                  | (212,373  | )    |  |      | (217,314  | ) |  |   | (220,050  | )
|Less: broker-dealer rebates                                                             |  |                                                  | (217,109  | )    |  |      | (124,399  | ) |  |   |          |  
|Less: restructuring                                                                     |  |                                                  | (59,497   | )    |  |      | (120,800  | ) |  |   | (24,378   | )
|Less: goodwill and intangible assets impairment                                         |  |                                                  | (21,668   | )    |  |      | (551,991  | ) |  |   |          |  
|                                                                                        |  |                                                  |           |      |  |      |           |   |  |   |           |  
|Net expenses                                                                            |  | $                                                | 679,258   |      |  | $    | 791,626   |   |  | $ | 955,258   |  
|                                                                                        |  |                                                  |           |      |  |      |           |   |  |   |           |  

Revenues

Our revenues consist of transaction fees,
interest and investment income.

Transaction fees accounted for the significant
portion of our revenues. These fees are commission and other
revenues earned on our customers use of our various
brokerage and related services, and fluctuate based upon share
volumes and pricing changes. These services include ECN
transaction revenues, service bureau transaction fees, market
data, communication, clearing and other brokerage services.
Transaction fees also include soft dollar revenues and revenues
that are subject to commission recapture which offset
dollar-for-dollar the expenses we incur in paying for research
from independent third parties and for commission recapture
payments to pension plan and other fund sponsors. ECN
transaction fee revenues include commissions charged to
broker-dealers who consume liquidity from our ECN. The
commissions we charge to liquidity consumers more than offset
the amount we pay broker-dealers who provide liquidity to our
ECN.

For transactions in U.S. equity securities,
we generally base our fees on a per share basis. Our
broker-dealer customers are subject to a fee schedule that
provides for a per share amount that declines based upon pre-set
volume levels. Our institutional customers pay a per share
amount based upon the customers level of usage of our
services. For transactions in non-U.S. equity securities,
we generally base our fees on the transaction value per trade as
is customary in the international markets in which we operate,
and also take into account the customers level of trading
activity as well as local market settlement costs.

Clearing fees are earned on a per ticket basis. A
ticket refers to one or more customer transactions grouped
together for clearing purposes. In some cases, a single
transaction is cleared using more than one ticket.

Interest income is interest earned on the cash
provided as collateral on stock borrow transactions related to
our clearing business, our interest earning assets, which
primarily consist of fixed income securities, and on our cash
balances.

Investment income consists of realized and
unrealized gains and losses, dividends and other income earned
on a series of strategic alliances and long-term investments we
have made in other companies, as well as realized and unrealized
gains and losses from our marketable securities.

Operating Expenses

Employee compensation and benefits expense
includes salaries, incentive compensation and related employee
benefits and taxes. Salaries and benefits account for just over
half of our employee compensation

64



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##### 



and benefits expense. Many employees receive
annual incentive compensation based on our overall operating
results. Some employees, such as sales employees, receive
periodic incentive compensation based on new customer
acquisitions and revenues. As a result, a portion of this
expense fluctuates based on our operating results and our
revenue. As part of our cost reduction initiatives, we have been
reducing our employee base, which we expect will result in lower
compensation expense in the future.


Soft dollar and commission recapture expense
consists primarily of expenses we incur to purchase research
products from third parties for our customers in connection with
our soft dollar research business, as well as commission
recapture payments to pension plan and other fund sponsors. Our
soft dollar and commission recapture expense fluctuates based
upon the level of our customers demand for these services
and overall market transaction volumes.

Broker-dealer rebates represent commission
rebates paid to broker-dealers who provide liquidity to our ECNs
as part of our pricing for broker-dealers. We charge commissions
to broker-dealers who remove liquidity from our ECNs, which is
recorded as transaction fee revenue. The commissions we charge
to liquidity removed more than offset the rebate amounts we pay
to broker-dealers who provide liquidity to our ECNs.

Brokerage, clearing and exchange fees include
fees paid to clearing entities for clearing and settlement
services, fees paid to floor brokers exchanges and other ECNs
for trade execution and fees paid to third-party vendors for
data processing services. These costs generally fluctuate based
on transaction volumes.

Communications and equipment expense consists
primarily of costs for our network connections with our
customers, costs for maintenance of our core network, costs for
software, computers and other equipment; and fees for access to
stock market data. Communications and equipment expense
generally fluctuates based upon long-term trends in our business
activity and the services we offer to our customers. Certain
elements of this expense, which we incur in anticipation of
certain transaction volume levels, have both a fixed and
variable nature. Once we incur these expenses initially, we may
not incur them going forward on a recurring, annual basis. As a
result of the importance of our systems to the viability of our
business, we continue to invest heavily in areas such as system
capacity and reliability, increased functionality and
performance, and security. We also must modify our systems from
time to time to comply with various regulatory requirements,
such as the SEC order handling rules and Regulation ATS.
The expenses we incur for these modifications may vary
substantially from period to period.

Depreciation and amortization expense results
primarily from the depreciation of the fixed assets we purchase,
as well as the amortization of goodwill resulting from our
acquisitions and other intangible assets. Goodwill amortization
was recorded until January 1, 2002, when we adopted new
accounting rules, which require that goodwill no longer be
amortized to earnings. In 2002, we wrote off all of our
goodwill. Write-offs of fixed assets and an impairment charge in
2003 are expected to reduce future depreciation and amortization
by $4.0 million in 2004.

Occupancy expense includes the costs of leasing,
furnishing and maintaining our office and operations space,
primarily in the New York metropolitan area. Occupancy expense
is primarily affected by increases or decreases in the number of
employees and expansion or contraction of our services and
related support functions. As part of our cost cutting
initiatives and reduction of workforce, we consolidated our
office space and expect lower occupancy costs in 2004.

Professional fees include fees paid to
consultants as well as legal and accounting fees.

Marketing and business development expense
consists primarily of production, media, print, client
entertainment and other expenses incurred to create brand
awareness, promote our services and introduce new products. It
also includes client entertainment expenses.

Other expenses consist primarily of interest
expense, administrative expenses, provision for bad debt, as
well as other general office costs.

Provision (benefit) for income taxes
includes taxes related to our income in each country or
jurisdiction in which we operate. The difference between our
effective tax rate and the U.S. statutory tax rate may differ

65



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##### 



period to period, but primarily results from
state and local taxes in the U.S., foreign income taxes,
valuation allowances against losses that may not be realized and
the effect of certain non-deductible expenses.


Critical Accounting Policies

Our accounting policies related to our strategic
alliances and long term investments (investments),
allowance for doubtful accounts and goodwill are the most
critical accounting policies that require us to make estimates
and use judgments that could affect our results.



| |            
| | -----------
| | Investments

Our investments are stated at estimated fair
value as determined in good faith by management. Generally, we
will initially value investments at cost as a proxy for fair
value, 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
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.

We use our best judgment in estimating the fair
value of these investments. There are inherent limitations to
any estimation technique. The fair value estimates presented
herein are not necessarily indicative of an amount that we 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. The following table summarizes
the carrying value of our investments as of:

|                                |       |                |        |        |  |      |        |        |  |   |        |        | 
|------------------------------- | ----- | -------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                |       |               
|                                |       | December 31,  
|                                |       |               
|                                |       | 2003           |        | 2002   |  | 2001
|                                |       |                |        |        |  |     
|                                |       |               
|                                |       | (In thousands)
|Archipelago Holdings LLC        |       | $              | 20,000 |        |  | $    | 15,000 |        |  | $ | 40,000 |       
|NASDAQ Stock Market, Inc.       |       |                | 7,499  |        |  |      | 14,792 |        |  |   | 15,736 |       
|Starmine Corporation            |       |                | 2,000  |        |  |      | 2,000  |        |  |   |       |       
|Tradeware S.A.                  |       |                |       |        |  |      | 3,254  |        |  |   | 4,492  |       
|TP Group LDC                    |       |                |       |        |  |      | 2,695  |        |  |   | 8,816  |       
|Japan Cross Securities Co. Ltd. |       |                |       |        |  |      | 2,096  |        |  |   | 3,782  |       
|e-Xchange Advantage Corporation |       |                |       |        |  |      | 2,000  |        |  |   |       |       
|WR Hambrecht & Co.              |       |                |       |        |  |      |       |        |  |   | 16,450 |       
|Vencast, Inc.                   |       |                |       |        |  |      |       |        |  |   | 2,373  |       
|Knight Roundtable Europe Ltd.   |       |                |       |        |  |      |       |        |  |   | 250    |       
|                                |       |                |        |        |  |      |        |        |  |   |        |       
|                                | Total |                | $      | 29,499 |  |      | $      | 41,837 |  |   | $      | 91,899 | 
|                                |       |                |        |        |  |      |        |        |  |   |        |       

In 2003, our investment in Japan Cross Securities
Co. Ltd. was written off and subsequently sold to Nikko Salomon
Smith Barney for approximately $1.5 million. TP Group LDC was
liquidated and as part of the liquidation we received
approximately $3.0 million.



| |                                    
| | -----------------------------------
| | Allowance for Doubtful
    Accounts

The allowance for doubtful accounts is based on
our assessment of the collectibility of customer accounts. We
regularly review the allowance by considering factors such as
historical experience, credit quality, age of the accounts
receivable balances, and current economic conditions that may
affect a customers ability to pay. If a major
customers creditworthiness deteriorates, or if actual
defaults are higher than our historical experience, or if other
circumstances arise, our estimates of the recoverability of
amounts due to us could be overstated, and additional allowances
could be required, which could have an adverse impact on our
revenue.

66



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The allowance for doubtful accounts as of
December 31, 2003 and 2002 was $21.7 million and
$22.0 million, respectively.




| |                                                        
| | -------------------------------------------------------
| | Accounting for Goodwill and Other
    Intangible Assets

Statement of Financial Accounting Standard
(SFAS) No. 142 Goodwill and Other
Intangible Assets requires that goodwill and certain
intangible assets be assessed for impairment using fair value
measurement techniques and that management perform a detailed
review of the carrying value of the Companys tangible and
intangible assets. In this process, management is required to
make estimates and assumptions in order to determine the fair
value of the Companys assets and liabilities and projected
future earnings using various valuation techniques. Management
uses its best judgment and information available to it at the
time to perform this review, as well as the services of an
expert valuation specialist. Because managements
assumptions and estimates are used in the valuation, actual
results may differ.

In 2003, our annual impairment testing indicated
impairment in the value of technology assets capitalized at the
time of the Island acquisition. In accordance with SFAS
No. 142, based on the results of managements
analysis, we determined that our intangible assets had been
impaired and as a result, we recorded a pre-tax charge of
$21.7 million. In 2002, we performed the same impairment
test and determined that our book value exceeded its fair market
value. Based on the results of management and a valuation
analysis prepared by an independent specialist, we determined
that our existing goodwill had been completely impaired and as a
result, we recorded a pre-tax goodwill impairment loss of
$552.0 million, the remaining carrying value of our
goodwill, as of September 30, 2002.

See Note 2 to the consolidated financial
statements for a summary of our significant accounting policies.

Key Statistical Information

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

|                                                                   |  |                         |         |         |  |      |         |   |  |  |         |  
|------------------------------------------------------------------ |  | ----------------------- | ------- | ------- |  | ---- | ------- | - |  |  | ------- | -
|                                                                   |  |                        
|                                                                   |  | Year Ended December 31,
|                                                                   |  |                        
|                                                                   |  | 2003                    |         | 2002(5) |  | 2001
|                                                                   |  |                         |         |         |  |     
|Total U.S. equity share volume (millions)(1)(2)                    |  |                         | 910,454 |         |  |      | 905,350 |   |  |  | 832,339 |  
|Our U.S. equity share volume (millions)(1)(2)                      |  |                         | 139,982 |         |  |      | 97,623  |   |  |  | 76,909  |  
|Our share of total U.S. equity share volume(1)(2)                  |  |                         | 15.4    | %       |  |      | 10.8    | % |  |  | 9.2     | %
|                                                                   |  |                         |         |         |  |      |         |   |  |  |         |  
|Total NASDAQ-listed equity share volume
    (millions)(2)          |  |                         | 424,847 |         |  |      | 441,586 |   |  |  | 471,216 |  
|Our NASDAQ-listed equity share volume
    (millions)(2)            |  |                         | 119,730 |         |  |      | 81,943  |   |  |  | 65,893  |  
|Our share of total NASDAQ-listed equity share
    volume(2)        |  |                         | 28.2    | %       |  |      | 18.6    | % |  |  | 14.0    | %
|                                                                   |  |                         |         |         |  |      |         |   |  |  |         |  
|Total U.S. exchange-listed equity share volume
    (millions)(2)   |  |                         | 485,608 |         |  |      | 463,764 |   |  |  | 361,123 |  
|Our U.S. exchange-listed equity share volume
    (millions)(2)     |  |                         | 20,252  |         |  |      | 15,680  |   |  |  | 11,016  |  
|Our share of total U.S. exchange-listed equity
    share volume(2) |  |                         | 4.2     | %       |  |      | 3.4     | % |  |  | 3.1     | %
|                                                                   |  |                         |         |         |  |      |         |   |  |  |         |  
|Our U.S. equity transaction volume (thousands)                     |  |                         | 296,465 |         |  |      | 148,415 |   |  |  | 98,346  |  
|Our non-U.S. equity transaction volume (thousands)                 |  |                         | 6,573   |         |  |      | 7,618   |   |  |  | 7,685   |  
|                                                                   |  |                         |         |         |  |      |         |   |  |  |         |  
|Our total equity transaction volume (thousands)                    |  |                         | 303,038 |         |  |      | 156,033 |   |  |  | 106,031 |  
|                                                                   |  |                         |         |         |  |      |         |   |  |  |         |  

67



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|                                                                                                |  |                         |           |         |  |      |           |  |  |   |           | 
|----------------------------------------------------------------------------------------------- |  | ----------------------- | --------- | ------- |  | ---- | --------- |  |  | - | --------- | 
|                                                                                                |  |                        
|                                                                                                |  | Year Ended December 31,
|                                                                                                |  |                        
|                                                                                                |  | 2003                    |           | 2002(5) |  | 2001
|                                                                                                |  |                         |           |         |  |     
|Our average U.S. equity transaction size (shares
    per transaction)                           |  |                         | 472       |         |  |      | 658       |  |  |   | 782       | 
|Our average equity transactions per day
    (thousands)                                         |  |                         | 1,203     |         |  |      | 619       |  |  |   | 428       | 
|                                                                                                |  |                         |           |         |  |      |           |  |  |   |           | 
|Transaction fees from U.S. equities (thousands)                                                 |  |                         | 900,488   |         |  |      | 865,777   |  |  |   | 1,167,155 | 
|Transaction fees from non-U.S. equities
    (thousands)                                         |  |                         | 178,563   |         |  |      | 212,395   |  |  |   | 257,188   | 
|                                                                                                |  |                         |           |         |  |      |           |  |  |   |           | 
|Total equity transaction fees (thousands)                                                       |  | $                       | 1,079,051 |         |  | $    | 1,078,172 |  |  | $ | 1,424,343 | 
|Net transaction fees from U.S. equities
    (thousands) (non-GAAP financial measure)(3)         |  |                         | 514,333   |         |  |      | 570,653   |  |  |   | 994,765   | 
|Net transaction fees from non-U.S. equities
    (thousands) (non-GAAP financial measure)(3)     |  |                         | 120,039   |         |  |      | 154,289   |  |  |   | 198,762   | 
|                                                                                                |  |                         |           |         |  |      |           |  |  |   |           | 
|Total net equity transaction fees (thousands)
    (non-GAAP financial measure)(3)               |  | $                       | 634,372   |         |  | $    | 724,942   |  |  | $ | 1,193,527 | 
|Our average equity transaction fee revenue per
    share(4)                                     |  | $                       | 0.0032    |         |  | $    | 0.0045    |  |  | $ | 0.0076    | 
|Our average net equity transaction fee revenue
    per share (non-GAAP financial measure)(3)(4) |  | $                       | 0.0018    |         |  | $    | 0.0030    |  |  | $ | 0.0065    | 
|                                                                                                |  |                         |           |         |  |      |           |  |  |   |           | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | U.S. shares consist of shares of U.S.
    exchange-listed and NASDAQ-listed stocks.                                                                                                                                                                                                                                                                                                                                             
|   
|(2) | For a description of how we calculate our share
    volumes, see  Volume Calculations.                                                                                                                                                                                                                                                                                                                                       
|   
|(3) | Our net equity transaction fee revenues are
    calculated by subtracting the soft dollar and commission
    recapture expenses and broker-dealer rebates from the related
    equity transaction fees. GAAP requires us to add our soft dollar
    and commission recapture expenses and broker-dealer rebates,
    dollar-for-dollar, to related equity transaction fee revenues.
    See  Non-GAAP Financial Measurements.
|   
|(4) | Average transaction fee revenue is calculated by
    dividing transaction fee revenue for the buy and sell side of
    each transaction by total share volume.                                                                                                                                                                                                                                                                  
|   
|(5) | Represents Instinet Group Incorporated volume
    from all sources, including the Island ECN subsequent to
    September 20, 2002.                                                                                                                                                                                                                                                                                              

Volume Calculations

In computing our U.S. share volume in either
NASDAQ-listed or U.S. exchange-listed equities, we count
the customer share volume on one side of the trade, whether or
not the trade matches with another customer or is routed to
another execution venue.

For example, where a customer sells
100 shares to another customer as a matched trade, we count
100 shares; if the trade were routed we count
100 shares.

In computing our total market share, our
numerator share volume is counted as described above for each
market where we disclose a market share statistic. The
denominator for NASDAQ market share is total NASDAQ share volume
as published by NASDAQ. Historical amounts may be restated due
to updates of volume information from NASDAQ. For
U.S. exchange-listed market share, the denominator is the
total share volume of U.S. listed markets obtained from a
widely recognized market data vendor. Listed markets include the
New York Stock Exchange, American Stock Exchange, Boston Stock
Exchange, Philadelphia Stock Exchange, National Stock Exchange,
Chicago Stock Exchange and Pacific Stock Exchange.

We count our volume differently in our customer
operating data disclosures as described therein.

Calculation of INET Volumes

Prior to 2004, we operated Instinet and Island
ECN as two separate ATSs; however, we disclosed the volumes from
our two ATSs on a combined basis. Instinet customers had the
option, for certain orders, to

68



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##### 



automatically send parts of orders that could not
be filled on the Instinet system to the Island system. In
calculating our combined volumes, we eliminate one side of these
routed orders. In February 2004, we substantially completed our
consolidation of order flow to the INET ATS.


Results of Operations  Year Ended
December 31, 2003 Compared to Year Ended December 31,
2002



| |         
| | --------
| | Overview

Our net loss decreased to $73.8 million for
2003 from a net loss of $735.2 million for 2002 primarily
due to a $552.0 million charge for goodwill impairment, a
higher restructuring charge and write downs in our investments
in 2002.

Revenues of $1.1 billion in 2003 were level
compared to 2002 as higher share volumes traded were offset by
lower revenue per share, as well as decreases in revenue from
non-U.S. equities, investments and interest. Our total
U.S. equity share volume traded for the year increased
43.4% for 2003 compared to 2002 due to our acquisition of Island
and our price reductions; however, the impact of this higher
volume was almost entirely offset by lower average pricing.

Expenses decreased 34.1% to $1.2 billion for
2003 from $1.8 billion for 2002. Our expenses for 2003
included a restructuring charge of $59.5 million,
intangible asset impairment write-down of $21.7 million and
$10.5 million in insurance recoveries for assets lost in
the World Trade Center. Our expenses for 2002 included a
goodwill impairment charge of $552.0 million and
restructuring charges of $120.8 million. Expenses were
lower in 2003 compared to 2002 due to a $530.3 million
decline in goodwill impairment and declines in restructuring and
compensation expenses offset in part by an increase in
broker-dealer rebates.



| |         
| | --------
| | Revenues

Transaction fee revenue was unchanged at
$1.1 billion for 2003 and 2002. The 2003 amount reflects a
full year of Islands activity compared to approximately
three months in 2002. Our total net equity transaction fee
revenue (a non-GAAP financial measure) declined 12.5% to
$634.4 million for 2003 from $724.9 million for 2002
as higher U.S. equity volume was more than offset by a decrease
in our average pricing for U.S. equities and a decline in
non-U.S. consideration traded. Our average net U.S. equity
transaction fee revenue per U.S. share (a non-GAAP financial
measure) decreased approximately 40.0% to $0.0018 in 2003 from
$0.0030 in 2002. Our average U.S. equity transaction fee revenue
per U.S. share (the equivalent GAAP measure) decreased
approximately 27.3% to $0.0032 in 2003 from $0.0044 in 2002. The
decline in our average pricing reflects an increase in
broker-dealer rebate expense and an increase in lower priced
broker-dealer volume as a result of our acquisition of Island as
well as a full year impact in 2003 of significant price cuts
implemented in 2002. We will continue to monitor future price
competition and evaluate our pricing structure as part of our
ongoing efforts to protect and grow our business.

Interest revenue decreased 40.6% to
$23.8 million in 2003 from $40.1 million in 2002. This
decrease was primarily due to a decrease in interest rates,
which affects the revenue generated by our stock borrowing
activities related to our clearing services.

Losses on our investments were $9.2 million
in 2003 compared to $59.1 million in 2002. In 2003, our
losses were due to deteriorating business conditions or
decreased market capitalization on our investments primarily in
TP Group LDC, The Nasdaq Stock Market, Inc., Tradeware
S.A., Japan Cross Securities Co. Ltd. and e-Xchange Advantage
Corporation partially offset by a gain in the value of
Archipelago Holding LLC and the carrying value of certain of our
investments in non-U.S. exchanges. In 2002, we recorded
losses on our investments primarily in Archipelago Holding LLC,
WR Hambrecht & Co., TP Group LDC, Tradeware
S.A., Japan Cross Securities Co. Ltd. and Vencast, Inc, offset
by market gains in securities owned and sale of shares in the
Toronto Stock Exchange.

Our soft dollar revenues and our revenues that
are subject to commission recapture, which are offset
dollar-for-dollar by our soft dollar research payments and
commission recapture expenses, decreased 2.3% to
$212.3 million in 2003 from $217.3 million in 2002.
This decrease was primarily due to a decrease in volume

69



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from our soft dollar clients partially offset by
increased client use of the commission recapture services
provided by our clients of our Lynch, Jones & Ryan
subsidiary.




| |         
| | --------
| | Expenses

Compensation and benefits expense decreased 19.3%
to $227.3 million in 2003 from $281.8 million in 2002
due to declines in salary and benefits expense and lower
incentive compensation. The decline in salary and benefits
expense was due to declines in our employee base as a result of
our cost reduction initiatives and reduction of certain benefit
programs. Lower incentive compensation was due to our lower
profitability. This decrease was partially offset by a severance
charge of $17.5 million in 2003 related to employee
reductions. Our average number of employees was 1,324 in 2003
and 1,672 in 2002 (which includes Island employees from
September 2002). Our total headcount decreased to 1,210
employees as of December 31, 2003 from 1,474 employees
as of December 31, 2002 including 133 employees from Island.

Soft dollar and commission recapture expense
decreased 2.3% to $212.4 million in 2003 from
$217.3 million in 2002. This expense is offset
dollar-for-dollar by soft dollar revenues and revenues that are
subject to commission recapture. This decrease was primarily due
to a decrease in volume from our soft dollar clients partially
offset by increased client use of commission recapture services
provided by our Lynch, Jones & Ryan subsidiary.

Broker-dealer rebates increased to
$217.1 million in 2003 from $124.4 million in 2002.
The increase was due to higher volume resulting primarily from
our acquisition of Island and the inclusion in 2003 of a full
year of rebate expenses. We began offering broker-dealer rebates
in March 2002.

Brokerage, clearing and exchange fees decreased
6.2% to $140.3 million in 2003 from $149.5 million in
2002. The impact of higher transaction volume was more than
offset by lower clearing and settlement costs, particularly in
the U.S., due to a decline in trade reporting expenses and
benefits from technology efficiencies.

Communications and equipment expense decreased
14.0% to $108.1 million in 2003 from $125.7 million in
2002. Our costs declined throughout 2003 as we migrated certain
clients off of our proprietary in-house network to a third-party
platform. The migration was substantially complete by the end of
the third quarter of 2003.

Depreciation and amortization expense increased
12.9% to $88.5 million in 2003 from $78.4 million in
2002. This increase was primarily due to higher amortization
related to our intangible assets, which we acquired in
connection with our acquisitions of Island and ProTrader. This
increase was partially offset by lower depreciation of our
leasehold improvements associated with reduced space needs as
part of our cost reduction efforts.

Occupancy expense decreased 2.2% to
$54.3 million in 2003 from $55.5 million in 2002, primarily
due to decreased rent expense due to consolidation of our office
space in the New York metropolitan area as part of our cost
reduction initiative. This decrease was partially offset by a
one-time charge of $2.3 million related to the
consolidation of our office space as part of the cost reduction
initiative announced in March 2003, as well as our acquisition
of Island.

Other expenses decreased 54.9% to
$26.6 million in 2003 from $59.0 million in 2002. This
decrease was primarily due to lower bad debt expense related to
commission receivables from customers and lower bad debt expense
associated with loans made to strategic investment partners in
2002, as well as lower interest expense due to lower interest
rates and lower discretionary and office related expenses.



| |                                             
| | --------------------------------------------
| | Goodwill and Intangible Asset
    Impairment

During the fourth quarter of 2003, our annual
impairment testing indicated impairment in the value of
technology assets capitalized at the time of the Island
acquisition. In accordance with SFAS No. 142, based on an
impairment analysis conducted by management, we determined that
our intangible assets had been impaired and as a result, we
recorded a pre-tax charge of $21.7 million. We recorded a
related tax benefit of $9.3 million related to this charge.

70



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##### 



During the third quarter of 2002, in accordance
with SFAS No. 142, based on the results of a valuation
analysis prepared by an independent specialist, we determined
that our existing goodwill had been completely impaired and as a
result and as a result we recorded a pre-tax goodwill impairment
loss of $552.0 million, the remaining carrying value of our
goodwill. This was a non-cash charge and resulted in no
reduction in tangible book value. We recorded a related tax
benefit of approximately $26.0 million related to this
charge.



| |                      
| | ---------------------
| | Restructuring Expense

In the fourth quarter of 2003, we recorded a
pre-tax charge of $59.5 million related to the reduction of
workforce by approximately 185 employees (or approximately 15%
of full-time employees), expected to be substantially completed
by July 2004, and the consolidation of the companys office
space, which accounts for a significant portion of the charge.
This cost reduction action is primarily due to the strategic
decisions related to the separation of Instinet and INET, and
the companys ongoing efforts to streamline its operations.

In March 2002, we recorded a pre-tax charge of
$58.4 million in order to offset the impact of reduced
revenues due to our price reductions to U.S. broker-dealer
customers. In December 2002, we announced additional cost
reductions, and as a result we recorded a pre-tax charge of
$62.4 million primarily due to cost synergies in connection
with our acquisition of Island. The charge also reflects
expenses associated with reducing staff, consolidation of office
space within the New York City area and internationally and the
closure of the remaining offices of our ProTrader subsidiary.



| |                        
| | -----------------------
| | Discontinued Operations

In May 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. As a result
of the closure, we incurred a charge, net of tax, of
$22.7 million in 2002.



| |                                                        
| | -------------------------------------------------------
| | Cumulative Effect of Change in Accounting
    Principle

The cumulative effect of a change in accounting
principle related to goodwill, net of tax, was
$18.6 million in 2002. We adopted SFAS No. 142 on
January 1, 2002. SFAS No. 142 requires that goodwill
no longer be amortized to earnings, but instead be reviewed for
impairment. Impairment is deemed to exist when the carrying
value of goodwill exceeds its implied fair value. This
methodology differs from our previous policy, as permitted under
accounting standards existing before SFAS No. 142, of using
undiscounted cash flows of the businesses acquired over its
estimated life. Upon adoption of SFAS No. 142, we incurred
goodwill impairment before tax of $15.7 million related to
our acquisition of ProTrader and $3.3 million related to
our acquisition of Montag Pöpper & Partner GmbH, a
fixed income broker-dealer in Germany. Decreased customer
transaction volumes led to operating losses, closure of several
trading offices and restructuring of our ProTrader subsidiary.
In addition, after a review of market conditions we determined
our fixed income operations could not reach critical mass and
therefore the carrying value of goodwill related to our
acquisition of Montag was impaired and written off.



| |                     
| | --------------------
| | Income Taxes Benefit

Our tax benefit decreased to $22.5 million
in 2003 from a benefit of $53.1 million in 2002 as a result
of decreased loss from continuing operations before income
taxes. Our effective income tax rate increased to 23.3% in 2003
from 7.11% in 2002. This increase primarily resulted from the
permanent impairment of goodwill that was not deductible for tax
purposes in 2002.

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##### 



Results of Operations  Year Ended
December 31, 2002 Compared to Year Ended December 31,
2001



| |         
| | --------
| | Overview

Net loss decreased to $735.2 million for
2002 from net income of $144.8 million for 2001 primarily
due to a $552.0 million charge for goodwill impairment, a
restructuring charge and a write down in our investments in
2002. Our revenues decreased 29.0% to $1.1 billion for 2002
from $1.5 billion for the comparable period in 2001,
primarily as a result of lower average pricing, which more than
offset revenues related to our increased share volumes and
acquisition of Island.

Expenses increased 50.6% to $1.8 billion for
2002 from $1.2 billion for 2001. Our expenses for 2002
included a goodwill impairment charge of $552.0 million and
restructuring charges of $120.8 million. Our expenses for
2001 included a restructuring charge of $24.4 million.
Island contributed $60.3 million of expenses in 2002.



| |         
| | --------
| | Revenues

Transaction fee revenue decreased 24.3% to
$1.1 billion in 2002 to $1.4 billion in 2002.
Transaction fee revenue excluding revenues directly related to
soft dollar and commission recapture as well as broker-dealer
rebates declined 39.3% to $724.9 million in 2002 from
$1.2 billion in 2001. These decreases were primarily due to
a decline in average pricing as a result of our pricing changes.
Our average transaction fee revenue per U.S. share
decreased 40.8% to $0.0045 in 2002 from $0.0076 in 2001. Our
average net transaction fee revenue per U.S. share (a
non-GAAP financial measure), which excludes revenues directly
related to soft dollar and commission recapture as well as
broker-dealer rebates, decreased 53.8% to $0.0030 in 2002 from
$0.0065 in 2001. On a quarterly basis, our average net
U.S. equity transaction fee revenue has fluctuated
significantly and was $0.0018, $0.0025, $0.0036 and $0.0055 for
the three months ended December 31, 2002,
September 30, 2002, June 30, 2002 and March 31,
2002, respectively.

Primarily due to the acquisition of Island in
September 2002, our various pricing changes, and the
introduction of our broker-dealer rebates, we increased our
trading volumes and market share in NASDAQ-listed and
U.S. exchange-listed stocks from 2001 through 2002,
however, the decrease in our average pricing more than offset
the effect of the increases in our trading volumes. Our trading
volumes in NASDAQ-listed stocks increased 24.4% and our trading
volumes in U.S exchange-listed stocks increased 42.3% in
2002, compared to 2001. Island contributed 90.8% or
14.6 billion shares, of the increase in NASDAQ-listed
stocks and 50.3% or 2.3 billion shares, of the increase in
U.S. exchange-listed stocks. Our share of volume in
NASDAQ-listed stocks, while fluctuating during the period,
increased to 18.6% in 2002 to 14.0% in 2001, and our share of
volume in U.S. exchange-listed stocks increased to 3.4% in
2002 from 3.1% in 2001. Our Instinet ATS alone accounted for
15.3% of the total trading volume in the NASDAQ-listed stocks
for 2002. Following our acquisition of Island, our two ATS
accounted for 29.7% of the total trading volume in NASDAQ-listed
stocks for the three months ended December 31, 2002.

Our transaction fee revenue earned from U.S.
equity transactions decreased 25.8% to $865.8 million in
2002 from $1.2 billion in 2001. Our transaction fee revenue
earned from non-U.S. equities declined 17.4% to
$212.4 million in 2002 from $257.2 million in 2001.
This amount represented 19.7% of our total equity transaction
fee revenue in 2002 and 18.1% in 2001. Our net transaction fee
revenue earned from U.S. equity transactions (a non-GAAP
financial measurement), which excludes revenues directly related
to soft dollar and commission recapture and broker-dealer
rebates, decreased 42.6% to $570.7 million in 2002 from
$994.8 million in 2001 due to the decrease in our average
pricing resulting from lower rates for U.S. broker-dealer
customers following the price reductions we initiated for this
group in March 2002. Our net transaction fee revenue earned from
non-U.S. equities (a non-GAAP financial measurement), which
excludes revenues directly related to soft dollar and commission
recapture and broker-dealer rebates, declined 22.4% to $154.3 in
2002 from $198.8 million in 2001. This amount represented
21.3% of our total net equity transaction fee revenue in 2002
and 16.7% in 2001. This increase was primarily due to a greater
decrease in our U.S. net equity transaction fees as a
result of our price changes versus our non-U.S. net equity
transaction fees.

72



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##### 



Our soft dollar revenues and our revenues that
are subject to commission recapture, which are offset
dollar-for-dollar by our soft dollar research payments and
commission recapture expenses, decreased 1.2% to
$217.3 million in 2002 from $220.1 million in 2001,
primarily due to a decrease in our soft dollar revenues due to
reduced use of this service partly offset by increased use of
the commission recapture services provided by our Lynch, Jones
and Ryan subsidiary.

Interest revenue decreased 18.6% to
$40.1 million in 2002 from $49.3 million in 2001. This
decrease was primarily due to a decrease in interest rates,
which affects the revenue generated by our stock borrowing
activities related to our clearing services, as well as a
decrease in our interest bearing cash and cash equivalents.

Investments revenue decreased to a loss of
$59.1 million in 2002 from a gain of $17.4 million in
2001. The loss was primarily due to write downs of
$45.2 million where management made a determination that
the fair value of investments was impaired and
$12.1 million for investments accounted for under the
equity method, offset by gains on our securities owned,
including $2.7 million on our sale of shares in the Toronto
Stock Exchange upon its demutualization and initial public
offering in November 2002.



| |         
| | --------
| | Expenses

Compensation and benefits expense decreased 30.7%
to $281.8 million in 2002 from $406.3 million in 2001.
This decrease was primarily due to a decrease in our worldwide
headcount, particularly in our U.S. offices, the closure of our
fixed income business as part of our cost reduction initiatives,
as well as a decline in incentive compensation due to our lower
revenues. Our average headcount was 1,672 in 2002 and 2,083 in
2001. Our total headcount decreased to 1,474 employees
(including 133 employees from Island) as of December 31,
2002 from 2,132 employees as of December 31, 2001.

Soft dollar and commission recapture expense
decreased 1.2% to $217.3 million in 2002 from
$220.1 million in 2001. This expense is offset
dollar-for-dollar by soft dollar revenues and revenues that are
subject to commission recapture. This decrease was primarily due
to a decrease in our soft dollar costs due to lower volumes
partly offset by expanded use of our commission recapture
services offered by our Lynch Jones & Ryan subsidiary.

Broker-dealer rebates were $124.4 million in
2002. As noted above, as part of our pricing incentives for
broker-dealers, we now offer commission rebates to
broker-dealers who provide liquidity, which is recorded as an
expense, and charge commissions to broker-dealers who consume
liquidity, which is recorded as transaction fee revenue. The
commissions we charge to liquidity consumers more than offset
the amount we pay to broker-dealers who provide liquidity to our
ECNs.

Brokerage, clearing and exchange fees increased
2.3% to $149.5 million in 2002 from $146.2 million in
2001. This increase was due to higher brokerage and exchange
fees as a result of our new order routing technology (which
allows us to route trades to other ECNs, which in turn, charge
us fees for this service), our acquisition of Island and fees
charged to our ProTrader subsidiary. Partly offsetting these
increases were a reduction in our regulatory fees and lower
U.S. clearing costs as a result of implementing certain
technology efficiencies, such as trade compression.

Communications and equipment expense decreased
19.4% to $125.7 million in 2002 from $156.0 million in
2001. This decrease was due in large part to lower core
communications costs, which decreased 23.1% to
$62.8 million in 2002 from $77.9 million in 2001,
reflecting the benefit of improved network and systems
efficiencies. Our equipment and software costs for upgrading our
existing systems and other enhancements decreased 21.2% to
$30.0 million in 2002 from $38.0 million in 2001
primarily due to decreased spending in this area. Our exchange
data access charges also decreased 19.7% to $15.9 million
in 2002 from $19.8 million in 2001, primarily due to the
sale of our Research and Analytics product to Reuters in
September 2001.

Depreciation and amortization expense decreased
2.9% to $78.4 million in 2002 from $80.8 million in
2001. This decrease was primarily due a reduction in
depreciation of our capitalizable assets, which decreased as
part of our cost reduction initiatives, offsetting a slight
increase due to our acquisition of Island. In addition, we
ceased amortizing goodwill as a result of our adoption of SFAS
No. 142. Offsetting this decrease in

73



---



##### 



goodwill amortization was amortization related to
our intangible assets, which we acquired in connection with our
acquisition of Island and ProTrader.


Occupancy expense increased 11.2% to
$55.5 million in 2002 from $49.9 million in 2001,
primarily due to increased property insurance, maintenance and
one time costs associated with our move to new corporate
headquarters in New York and our acquisition of Island. Partly
offsetting these increases was a decrease in rent expense due to
consolidation of our office space in the New York metropolitan
area.

Professional fees decreased 38.5% to
$24.6 million in 2002 from $40.0 million in 2001. This
decrease was primarily due to reduced use of technical and
management consultants, partly offset by an increase in our
legal expenses and our acquisition of Island.

Marketing and business development decreased
22.8% to $17.1 million in 2002 from $22.1 million in
2001. This decrease was due to a scaling back of our branding
campaign as a result of our cost reduction initiatives.

Other expenses increased 8.2% to
$59.0 million in 2002 from $54.5 million in 2001. This
increase was primarily due to an increase in our provision for
bad debts due to loans we made to our strategic investments,
payments to Reuters in connection with the sale of our R&A
product in order to allow our customers to receive this service
and support from Reuters instead of us, and interest costs
related to our securities lending and other clearing activities.
Partly offsetting these increases were decreases in our travel
expenses as part of our cost reduction initiatives, a one-time
refund of value added tax previously paid to certain non-U.S.
tax authorities and interest expense related to a loan Reuters
provided to us to fund our acquisition of Lynch Jones &
Ryan in February 2000. This loan was repaid in June 2001.



| |                      
| | ---------------------
| | Restructuring Expense

In March 2002, we recorded a pre-tax charge of
$58.4 million in order to offset the impact of reduced
revenues due to our price reductions to U.S. broker-dealer
customers. In December 2002, we announced additional cost
reductions, and as a result, we recorded a pre-tax charge of
$62.4 million primarily due to cost synergies in connection
with our acquisition of Island. The charge also reflects
expenses associated with reducing staff, consolidation of office
space within the New York City area and internationally and the
closure of the remaining offices of our ProTrader subsidiary.

In 2001, in order to address the declines in our
margins, we announced a cost reduction and restructuring
program. As a result, we recorded a pre-tax charge of
$24.4 million 2001. This charge reflects expenses
associated with employee severance and consolidation costs for
certain office locations.



| |                                     
| | ------------------------------------
| | Income Taxes Provision
    (Benefit)

Our tax benefit was $53.1 million in 2002
compared to a provision of $122.2 million in 2001 as a
result of our loss from continuing operations before income
taxes and cumulative effect of change in accounting principle.
Our effective income tax rate decreased to 7.11% in 2002 from
41.9% in 2001. This decrease resulted from the permanent
impairment of goodwill that was not deductible for tax purposes,
restructuring charges, write-down in our investments, operating
losses in tax jurisdictions where utilization of tax losses is
doubtful and other valuation allowances.

74



---



##### 



Quarterly Results

The following table set forth certain unaudited
consolidated quarterly statement of income and operating data.
This unaudited information has been prepared on substantially
the same basis as the consolidated financial statements and
should be read together with the consolidated financial
statements and related notes included in Item 8 of this
Form 10-K. The results for any quarter are not necessarily
indicative of results for any future period or for an entire
year.

|                                         |                                                                                                                                                       |                                          |         |         |         |      |         |         |       |      |         |         |        |      |         |         |         |   |         |          |          |   |         |          |          |   |         |         |         |   |         |         |         |  
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ------- | ------- | ------- | ---- | ------- | ------- | ----- | ---- | ------- | ------- | ------ | ---- | ------- | ------- | ------- | - | ------- | -------- | -------- | - | ------- | -------- | -------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                         |                                                                                                                                                       | Q4                                       |         | Q3      |         | Q2   |         | Q1      |       | Q4   |         | Q3      |        | Q2   |         | Q1     
|                                         |                                                                                                                                                       |                                          |         |         |         |      |         |         |       |      |         |         |        |      |         |        
|                                         |                                                                                                                                                       | 2003                                     |         | 2003    |         | 2003 |         | 2003    |       | 2002 |         | 2002    |        | 2002 |         | 2002   
|                                         |                                                                                                                                                       |                                          |         |         |         |      |         |         |       |      |         |         |        |      |         |        
|                                         |                                                                                                                                                       |                                         
|                                         |                                                                                                                                                       | (In thousands, except per share amounts)
|REVENUE                                  |                                                                                                                                                       |                                          |         |         |         |      |         |         |       |      |         |         |        |      |         |         |         |   |         |          |          |   |         |          |          |   |         |         |         |   |         |        
|Transaction fees                         |                                                                                                                                                       | $                                        | 279,708 |         |         | $    | 268,210 |         |       | $    | 275,909 |         |        | $    | 255,224 |         |         | $ | 278,441 |          |          | $ | 263,917 |          |          | $ | 269,933 |         |         | $ | 265,881 |        
|Interest                                 |                                                                                                                                                       |                                          | 5,899   |         |         |      | 4,931   |         |       |      | 6,651   |         |        |      | 6,347   |         |         |   | 8,546   |          |          |   | 10,699  |          |          |   | 11,958  |         |         |   | 8,934   |        
|Investments                              |                                                                                                                                                       |                                          | 10,268  |         |         |      | (667    | )       |       |      | 2,841   |         |        |      | (21,678 | )       |         |   | (19,878 | )        |          |   | (20,336 | )        |          |   | (13,181 | )       |         |   | (5,714  | )      
|                                         |                                                                                                                                                       |                                          |         |         |         |      |         |         |       |      |         |         |        |      |         |         |         |   |         |          |          |   |         |          |          |   |         |         |         |   |         |        
|                                         | Total revenues                                                                                                                                        |                                          |         | 295,875 |         |      |         | 272,474 |       |      |         | 285,401 |        |      |         | 239,893 |         |   |         | 267,109  |          |   |         | 254,280  |          |   |         | 268,710 |         |   |         | 269,101 |        
|EXPENSES                                 |                                                                                                                                                       |                                          |         |         |         |      |         |         |       |      |         |         |        |      |         |         |         |   |         |          |          |   |         |          |          |   |         |         |         |   |         |        
|Compensation and benefits                |                                                                                                                                                       |                                          | 51,079  |         |         |      | 51,450  |         |       |      | 60,749  |         |        |      | 63,984  |         |         |   | 60,745  |          |          |   | 63,809  |          |          |   | 70,989  |         |         |   | 86,218  |        
|Soft dollar and commission recapture     |                                                                                                                                                       |                                          | 58,817  |         |         |      | 54,894  |         |       |      | 49,604  |         |        |      | 49,058  |         |         |   | 50,161  |          |          |   | 51,824  |          |          |   | 61,738  |         |         |   | 53,591  |        
|Broker-dealer rebates                    |                                                                                                                                                       |                                          | 54,507  |         |         |      | 53,552  |         |       |      | 58,630  |         |        |      | 50,420  |         |         |   | 56,601  |          |          |   | 39,004  |          |          |   | 25,503  |         |         |   | 3,291   |        
|Brokerage, clearing and exchange fees    |                                                                                                                                                       |                                          | 37,275  |         |         |      | 35,553  |         |       |      | 33,446  |         |        |      | 34,025  |         |         |   | 36,994  |          |          |   | 42,079  |          |          |   | 33,767  |         |         |   | 36,681  |        
|Communications and equipment             |                                                                                                                                                       |                                          | 20,890  |         |         |      | 24,917  |         |       |      | 31,617  |         |        |      | 30,720  |         |         |   | 36,604  |          |          |   | 26,620  |          |          |   | 29,187  |         |         |   | 33,309  |        
|Depreciation and amortization            |                                                                                                                                                       |                                          | 18,500  |         |         |      | 22,408  |         |       |      | 23,534  |         |        |      | 24,074  |         |         |   | 24,659  |          |          |   | 16,712  |          |          |   | 17,930  |         |         |   | 19,123  |        
|Occupancy                                |                                                                                                                                                       |                                          | 12,122  |         |         |      | 12,567  |         |       |      | 13,175  |         |        |      | 16,458  |         |         |   | 16,158  |          |          |   | 12,223  |          |          |   | 13,595  |         |         |   | 13,552  |        
|Professional fees                        |                                                                                                                                                       |                                          | 8,611   |         |         |      | 5,739   |         |       |      | 7,228   |         |        |      | 6,338   |         |         |   | 7,820   |          |          |   | 5,110   |          |          |   | 6,646   |         |         |   | 5,018   |        
|Marketing and business development       |                                                                                                                                                       |                                          | 7,483   |         |         |      | 2,958   |         |       |      | 3,480   |         |        |      | 2,781   |         |         |   | 3,756   |          |          |   | 2,451   |          |          |   | 7,480   |         |         |   | 3,407   |        
|Other                                    |                                                                                                                                                       |                                          | 4,583   |         |         |      | 5,728   |         |       |      | 8,407   |         |        |      | 7,860   |         |         |   | 16,559  |          |          |   | 9,899   |          |          |   | 16,852  |         |         |   | 15,674  |        
|Restructuring                            |                                                                                                                                                       |                                          | 59,497  |         |         |      |        |         |       |      |        |         |        |      |        |         |         |   | 62,405  |          |          |   | 955     |          |          |   | 42,410  |         |         |   | 15,030  |        
|Goodwill and intangible asset impairment |                                                                                                                                                       |                                          | 21,668  |         |         |      |        |         |       |      |        |         |        |      |        |         |         |   |        |          |          |   | 551,991 |          |          |   |        |         |         |   |        |        
|Insurance recovery of fixed assets lost  |                                                                                                                                                       |                                          | (2,492  | )       |         |      | (2,989  | )       |       |      |        |         |        |      | (5,000  | )       |         |   |        |          |          |   |        |          |          |   |        |         |         |   |        |        
|                                         |                                                                                                                                                       |                                          |         |         |         |      |         |         |       |      |         |         |        |      |         |         |         |   |         |          |          |   |         |          |          |   |         |         |         |   |         |        
|                                         | Total expenses                                                                                                                                        |                                          |         | 352,540 |         |      |         | 266,777 |       |      |         | 289,870 |        |      |         | 280,718 |         |   |         | 372,462  |          |   |         | 822,677  |          |   |         | 326,097 |         |   |         | 284,894 |        
|                                         |                                                                                                                                                       |                                          |         |         |         |      |         |         |       |      |         |         |        |      |         |         |         |   |         |          |          |   |         |          |          |   |         |         |         |   |         |        
|                                         | Income (loss) from continuing operations before
    income taxes, discontinued operations and cumulative effect of
    change in accounting principle |                                          |         | (56,665 | )       |      |         | 5,697   |       |      |         | (4,469  | )      |      |         | (40,825 | )       |   |         | (105,353 | )        |   |         | (568,397 | )        |   |         | (57,387 | )       |   |         | (15,793 | )      
|                                         | Income tax provision (benefit)                                                                                                                        |                                          |         | (18,331 | )       |      |         | 1,652   |       |      |         | 732     |        |      |         | (6,507  | )       |   |         | 6,690    |          |   |         | (39,958  | )        |   |         | (14,117 | )       |   |         | (5,703  | )      
|                                         |                                                                                                                                                       |                                          |         |         |         |      |         |         |       |      |         |         |        |      |         |         |         |   |         |          |          |   |         |          |          |   |         |         |         |   |         |        
|                                         | Income (loss) from continuing operations before
    discontinued operations and cumulative effect of change in
    accounting principle               |                                          |         | (38,334 | )       |      |         | 4,045   |       |      |         | (5,201  | )      |      |         | (34,318 | )       |   |         | (112,043 | )        |   |         | (528,439 | )        |   |         | (43,270 | )       |   |         | (10,090 | )      
|Discontinued operations:                 |                                                                                                                                                       |                                          |         |         |         |      |         |         |       |      |         |         |        |      |         |         |         |   |         |          |          |   |         |          |          |   |         |         |         |   |         |        
|                                         | Loss from operations of fixed income business                                                                                                         |                                          |         |        |         |      |         |        |       |      |         |        |        |      |         |        |         |   |         | (412     | )        |   |         |         |          |   |         | (23,581 | )       |   |         | (9,775  | )      
|                                         | Income tax benefit                                                                                                                                    |                                          |         |        |         |      |         |        |       |      |         |        |        |      |         |        |         |   |         | 252      |          |   |         |         |          |   |         | 6,946   |         |   |         | 3,824   |        
|                                         |                                                                                                                                                       |                                          |         |         |         |      |         |         |       |      |         |         |        |      |         |         |         |   |         |          |          |   |         |          |          |   |         |         |         |   |         |        
|                                         | Income (loss) before cumulative effect of change
    in accounting principle                                                                          |                                          |         | (38,334 | )       |      |         | 4,045   |       |      |         | (5,201  | )      |      |         | (34,318 | )       |   |         | (112,203 | )        |   |         | (528,439 | )        |   |         | (59,905 | )       |   |         | (16,041 | )      
|                                         | Cumulative effect of change in accounting
    principle, net of tax                                                                                   |                                          |         |        |         |      |         |        |       |      |         |        |        |      |         |        |         |   |         |         |          |   |         |         |          |   |         |        |         |   |         | (18,642 | )      
|                                         |                                                                                                                                                       |                                          |         |         |         |      |         |         |       |      |         |         |        |      |         |         |         |   |         |          |          |   |         |          |          |   |         |         |         |   |         |        
|                                         |                                                                                                                                                       | Net income (loss)                        |         | $       | (38,334 | )    |         | $       | 4,045 |      |         | $       | (5,201 | )    |         | $       | (34,318 | ) |         | $        | (112,203 | ) |         | $        | (528,439 | ) |         | $       | (59,905 | ) |         | $       | (34,683 | )
|                                         |                                                                                                                                                       |                                          |         |         |         |      |         |         |       |      |         |         |        |      |         |         |         |   |         |          |          |   |         |          |          |   |         |         |         |   |         |        

75



---



##### 



|                                   |                                                       |                                                                        |  |         |        |      |  |         |        |      |  |         |        |      |  |         |        |   |  |         |        |   |  |         |        |   |  |         |        |   |  |         |        |  
|---------------------------------- | ----------------------------------------------------- | ---------------------------------------------------------------------- |  | ------- | ------ | ---- |  | ------- | ------ | ---- |  | ------- | ------ | ---- |  | ------- | ------ | - |  | ------- | ------ | - |  | ------- | ------ | - |  | ------- | ------ | - |  | ------- | ------ | -
|                                   |                                                       | Q4                                                                     |  | Q3      |        | Q2   |  | Q1      |        | Q4   |  | Q3      |        | Q2   |  | Q1     
|                                   |                                                       |                                                                        |  |         |        |      |  |         |        |      |  |         |        |      |  |        
|                                   |                                                       | 2003                                                                   |  | 2003    |        | 2003 |  | 2003    |        | 2002 |  | 2002    |        | 2002 |  | 2002   
|                                   |                                                       |                                                                        |  |         |        |      |  |         |        |      |  |         |        |      |  |        
|                                   |                                                       |                                                                       
|                                   |                                                       | (In thousands, except per share amounts)                              
|Operating data:                    |                                                       |                                                                        |  |         |        |      |  |         |        |      |  |         |        |      |  |         |        |   |  |         |        |   |  |         |        |   |  |         |        |   |  |        
|                                   | Total U.S. equity share volume
    (millions)(1)(2)   |                                                                        |  | 234,554 |        |      |  | 231,762 |        |      |  | 239,780 |        |      |  | 204,358 |        |   |  | 228,692 |        |   |  | 239,100 |        |   |  | 225,445 |        |   |  | 212,113 |       
|                                   | Our U.S. equity share volume (millions)(1)(2)         |                                                                        |  | 37,208  |        |      |  | 34,168  |        |      |  | 37,065  |        |      |  | 31,541  |        |   |  | 36,771  |        |   |  | 26,471  |        |   |  | 19,221  |        |   |  | 15,160  |       
|                                   | Our share of total U.S. equity share
    volume(1)(2) |                                                                        |  | 15.9    | %      |      |  | 14.7    | %      |      |  | 15.5    | %      |      |  | 15.4    | %      |   |  | 16.1    | %      |   |  | 11.1    | %      |   |  | 8.5     | %      |   |  | 7.1     | %     
|Customer Operating Data(3)         |                                                       |                                                                        |  |         |        |      |  |         |        |      |  |         |        |      |  |         |        |   |  |         |        |   |  |         |        |   |  |         |        |   |  |        
|Instinet, the Institutional Broker |                                                       |                                                                        |  |         |        |      |  |         |        |      |  |         |        |      |  |         |        |   |  |         |        |   |  |         |        |   |  |         |        |   |  |        
|                                   | U.S. Equities                                         |                                                                        |  |         |        |      |  |         |        |      |  |         |        |      |  |         |        |   |  |         |        |   |  |         |        |   |  |         |        |   |  |         |       
|                                   |                                                       | Average daily volume (million shares)(4)                               |  |         | 99     |      |  |         | 91     |      |  |         | 87     |      |  |         | 83     |   |  |         | 85     |   |  |         | 88     |   |  |         | 90     |   |  |         | 100    |  
|                                   |                                                       | Amount charged to client per share(5)                                  |  | $       | 0.0130 |      |  | $       | 0.0148 |      |  | $       | 0.0144 |      |  | $       | 0.0141 |   |  | $       | 0.0150 |   |  | $       | 0.0154 |   |  | $       | 0.0168 |   |  | $       | 0.0176 |  
|                                   | Non-U.S. Equities                                     |                                                                        |  |         |        |      |  |         |        |      |  |         |        |      |  |         |        |   |  |         |        |   |  |         |        |   |  |         |        |   |  |         |       
|                                   |                                                       | Average daily consideration (millions)(6)                              |  | $       | 609    |      |  | $       | 649    |      |  | $       | 666    |      |  | $       | 783    |   |  | $       | 751    |   |  | $       | 936    |   |  | $       | 874    |   |  | $       | 940    |  
|                                   |                                                       | Average basis points charged to client per
    consideration traded(6) |  |         | 5.9    |      |  |         | 6.2    |      |  |         | 5.7    |      |  |         | 5.1    |   |  |         | 5.5    |   |  |         | 5.6    |   |  |         | 5.8    |   |  |         | 5.9    |  
|INET                               |                                                       |                                                                        |  |         |        |      |  |         |        |      |  |         |        |      |  |         |        |   |  |         |        |   |  |         |        |   |  |         |        |   |  |        
|                                   | Matched average daily
    volume(7)                   |                                                                        |  |         |        |      |  |         |        |      |  |         |        |      |  |         |        |   |  |         |        |   |  |         |        |   |  |         |        |   |  |         |       
|                                   |                                                       | NASDAQ-listed equity share volume (million shares)                     |  |         | 390    |      |  |         | 389    |      |  |         | 444    |      |  |         | 380    |   |  |         | 450    |   |  |         | 313    |   |  |         | 208    |   |  |         | 155    |  
|                                   |                                                       | Share of total market                                                  |  |         | 22.1   | %    |  |         | 22.5   | %    |  |         | 24.8   | %    |  |         | 26.1   | % |  |         | 27.4   | % |  |         | 18.2   | % |  |         | 11.4   | % |  |         | 8.5    | %
|                                   |                                                       | U.S. exchange-listed equity share volume
    (million shares)          |  |         | 43     |      |  |         | 40     |      |  |         | 45     |      |  |         | 48     |   |  |         | 47     |   |  |         | 17     |   |  |         | 6      |   |  |         | 8      |  
|                                   |                                                       | Share of total market                                                  |  |         | 2.3    | %    |  |         | 2.1    | %    |  |         | 2.2    | %    |  |         | 2.5    | % |  |         | 2.4    | % |  |         | 0.8    | % |  |         | 0.4    | % |  |         | 0.5    | %
|                                   |                                                       | U.S. total equity share volume (million shares)(1)                     |  |         | 433    |      |  |         | 429    |      |  |         | 489    |      |  |         | 428    |   |  |         | 497    |   |  |         | 330    |   |  |         | 214    |   |  |         | 163    |  
|                                   |                                                       | Share of total market                                                  |  |         | 11.8   | %    |  |         | 11.9   | %    |  |         | 12.8   | %    |  |         | 12.8   | % |  |         | 13.9   | % |  |         | 8.8    | % |  |         | 6.1    | % |  |         | 4.6    | %



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | U.S. shares consist of shares of U.S.
    exchange-listed and NASDAQ-listed stocks.                                                                                                                                                                                                                                                                                                                                                 
|   
|(2) | For a description of how we calculate our share
    volumes, see  Volume Calculations.                                                                                                                                                                                                                                                                                                                                           
|   
|(3) | The information set forth certain unaudited
    operating data that reflects our ongoing business restructuring
    plan. Upon the completion of this business restructuring, we
    currently anticipate that we will provide separate financial
    disclosures for Instinet and INET as established by SFAS
    No. 131, Disclosures about Segments of an Enterprise
    and Related Information for the first quarter of 2004.
|   
|(4) | Average daily U.S. equity share volume is counted
    as the sum of our customers share volume per side related
    to a trade. For example a matched trade where one customer buys
    100 shares and the other sells 100 shares is counted
    as 200 shares; if the buy or sell order were routed out we
    would count 100 shares on the customer side.                                                                       
|   
|(5) | Net of soft dollar and commission recapture
    expenses and broker-dealer rebates.                                                                                                                                                                                                                                                                                                                                                 
|   
|(6) | Commissions on European and Asian transactions
    are calculated as a percentage (i.e., basis points) of the
    total value (i.e., consideration of the transaction) (price
    times number of shares).                                                                                                                                                                                                                          
|   
|(7) | Matched volume reflects transactions where the
    buyer and seller are matched on INET.                                                                                                                                                                                                                                                                                                                                            

Note: Results for Island Holding Company, Inc.
are included subsequent to September 20, 2002.

76



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##### 





| |                                    
| | -----------------------------------
| | Liquidity and Capital
    Resources

We finance our business primarily through cash
generated by our operating activities. In addition, we have
access to a number of credit facilities, although our borrowings
under these facilities have been traditionally low. In 2001, the
net proceeds from our initial public offering were also a source
of funding for us. Our financial liquidity is primarily
determined by the performance of our business and partly by the
return on our investments. We maintain a highly liquid balance
sheet that can fluctuate significantly between financial
statement dates. Capital expenditures are for the purchase of
data processing and communications equipment, leasehold
improvements and purchases of furniture for our office
facilities. Our cash equivalents and securities owned are
primarily comprised of highly liquid investments that can be
sold in the secondary market, if necessary. We currently
anticipate that our existing cash resources and credit
facilities will be more than sufficient to meet our anticipated
working capital, capital expenditures and regulatory capital
requirements, operating losses, restructuring charges and other
anticipated requirements for at least the next twelve months.

Since our initial public offering, acquisitions
have generally been funded from the proceeds from our initial
public offering, cash generated by our operations or through
issuance of our common stock. To the extent that overall market
volumes and our trading volumes decrease beyond certain levels,
we may be required to obtain additional financing from third
parties or Reuters. Prior to our initial public offering in
2001, acquisitions of new businesses had generally been funded
through subordinated borrowings from Reuters.

Cash and cash equivalents, together with assets
readily convertible into cash, accounted for 71.1% and 65.9% of
our assets as of December 31, 2003 and 2002, respectively.
Assets readily convertible into cash consist primarily of the
following components as set forth on our Statements of Financial
Condition:



| |   |                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Receivables from broker-dealers principally
    represent amounts due on securities transactions that have not
    been completed as of the settlement date. The settlement date
    generally occurs within three business days of the trade date
    for U.S. securities transactions, but can take as long as
    30 days for non-U.S. equity transactions.
|
| |  | Receivables from customers principally represent
    customer debit balances and amounts due on securities
    transactions that have not been completed as of the settlement
    date.                                                                                                                                                                       
|
| |  | Commission receivable represents commissions
    (transactions fees) principally from broker-dealers.                                                                                                                                                                                                                                                         
|
| |  | Securities owned consist principally of
    U.S. government and agency securities, municipal bonds and
    corporate bonds in which we invest our excess cash. For the
    purpose of this calculation, we have excluded the shares we own
    in various stock exchanges.                                                                                    
|
| |  | Securities borrowed represent the amount of
    collateral deposited with brokers securing marketable equity
    securities borrowed by us in connection with covering customer
    securities transactions in our clearing business.                                                                                                                         



| |                                         
| | ----------------------------------------
| | For the Year Ended December 31,
    2003

Cash and cash equivalents increased
$258.8 million to $534.6 million as of
December 31, 2003 from $275.8 million as of
December 31, 2002. Cash of $159.6 million was provided
by operating activities, reflecting cash from operations (net
loss less non-cash items) and lower net levels of securities
borrowed and restricted cash due to lower customer settlement
requirements. Cash of $86.7 million was generated from
investing activities primarily from the sale of securities
owned, net of purchases, of $86.5 million and insurance
proceeds of $10.5 million for fixed assets lost at the
World Trade Center, partially offset by capital expenditures of
$15.2 million for fixed assets and leasehold improvements.
Cash of $5.6 million was used in financing activities
primarily for the repayment of short-term borrowings.



| |                                         
| | ----------------------------------------
| | For the Year Ended December 31,
    2002

Cash and cash equivalents decreased
$427.9 million to $275.8 million as of
December 31, 2002 from $703.7 million as of
December 31, 2002. Cash of $27.2 million was used in
operating activities, primarily reflecting our operating loss
during the year. Cash of $133.7 million was used in
investing activities primarily

77



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for the purchase of securities owned, net of
sales, of $112.0 million and capital expenditures of
$43.6 million for fixed assets and leasehold improvements,
partially offset by cash acquired in excess of net assets of
$26.0 million from our Island acquisition. Cash of
$290.9 million was used in financing activities primarily
due to our special dividend payment of $248.7 million in
connection with our acquisition of Island and repayment of
short-term borrowings of $42.0 million. Additionally, we
issued approximately 80.7 million common stock shares for
the Island acquisition.




| |                                         
| | ----------------------------------------
| | For the Year Ended December 31,
    2001

Cash and cash equivalents increased
$288.5 million to $703.7 million as of
December 31, 2001 from $415.2 million as of
December 31, 2001. Cash of $264.8 million was provided
by operating activities, primarily reflecting our operating
income during the year. Cash of $216.6 million was used in
investing activities primarily for capital expenditures of
$113.4 million for fixed assets and leasehold improvements,
the sale of securities owned, net of purchases, of
$50.9 million and strategic investments of
$71.2 million to fund our acquisition of Protrader. This
was partially offset by insurance proceeds of $21.0 million
for fixed assets lost at the World Trade Center. Cash of
$239.0 million was provided by financing activities
primarily from our initial public offering of
$486.9 million. Partially offsetting cash received from our
offering was a return of capital of $150.0 million to
Reuters. We funded that return of capital through an
intercompany advance from Reuters. We repaid that advance in May
2001 out of the net proceeds we received from our initial public
offering. In addition, Reuters loaned us $49.0 million to
fund our acquisition of Lynch, Jones & Ryan 2000. This
loan bore interest at an annual rate based on six-month LIBOR
plus 1.25% and was repaid in 2001.

Changes in our total assets and liabilities, in
particular, receivable from broker-dealers and customers,
securities borrowed, and commissions receivable and payable to
broker-dealers and customers, generally lead to large
fluctuations in our cash flows from operating activities from
period to period and within periods.



| |                        
| | -----------------------
| | Contractual Obligations

The table below summarizes our future cash
payments associated with contractual obligations, which are
primarily operating leases for office space and capital leases
for equipment under non-cancelable operating leases with Reuters
and third parties. Our aggregate minimum lease commitments after
5 years primarily relate to our 20-year lease (cancellable
after 2011) for our headquarters in New York.

|                              |  |                                    |       |           |  |       |      |       |  |         |      |  |  |   |      |  |  |   |       | 
|----------------------------- |  | ---------------------------------- | ----- | --------- |  | ----- | ---- | ----- |  | ------- | ---- |  |  | - | ---- |  |  | - | ----- | 
|                              |  |                                   
|                              |  | Contractual Payments Due by Period
|                              |  |                                   
|                              |  |                                    |       | Less than |  | 2-3   |      | 3-5   |  | After 5
|                              |  | Total                              |       | 1 Year    |  | Years |      | Years |  | Years  
|                              |  |                                    |       |           |  |       |      |       |  |        
|                              |  |                                   
|                              |  | (in millions)                     
|Operating leases              |  | $                                  | 300.2 |           |  | $     | 34.9 |       |  | $       | 59.7 |  |  | $ | 54.2 |  |  | $ | 151.4 | 
|Capital lease obligation      |  |                                    | 4.1   |           |  |       | 1.8  |       |  |         | 1.4  |  |  |   | 0.9  |  |  |   |      | 
|                              |  |                                    |       |           |  |       |      |       |  |         |      |  |  |   |      |  |  |   |       | 
|Total contractual obligations |  | $                                  | 304.3 |           |  | $     | 36.7 |       |  | $       | 61.1 |  |  | $ | 55.1 |  |  | $ | 151.4 | 
|                              |  |                                    |       |           |  |       |      |       |  |         |      |  |  |   |      |  |  |   |       | 



| |                  
| | -----------------
| | Other Obligations

As of December 31, 2003 and 2002, we had
letter of credit agreements and guarantees totaling
$250.1 million and $262.5 million issued by commercial
banking institutions on our behalf to various
non-U.S. securities clearing and regulatory agencies, as
well as other corporate services and obligations. We pay an
annual fee of up to one percent of the value of the agreement.

As of December 31, 2003 and 2002, we had
access to $200.0 million and $201.0 million,
respectively, of uncommitted credit lines from commercial
banking institutions to meet the funding needs of our
U.S. operations. These credit lines are collateralized by a
combination of customer securities and our marketable
securities. As of December 31, 2003, there were no
borrowings outstanding under these credit lines. We currently
pay no annual fees to maintain these facilities. In addition, as
of December 31, 2003 and 2002, we had access to
$95.6 million and $197.7 million, respectively, of
uncommitted credit lines from commercial banking institutions to
meet the funding needs of our European and Asian subsidiaries.
During

78



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##### 



2003, our lenders reviewed our credit facility
usage and reduced these lines of credit accordingly. The credit
lines are uncollateralized, and we currently pay no annual fees
to maintain these facilities. As of December 31, 2003 and
2002, there were $21.4 million and $27.3 million,
respectively, outstanding under these credit lines. Prior to our
initial public offering, Reuters had issued non-binding,
short-term letters to certain of these institutions confirming
its ownership of us and indicating that if we were to default
under the relevant facility, Reuters would consider, without any
obligation, requests by these institutions for compensation.
Reuters has withdrawn these letters and advised us that it will
not issue any additional letters


Our broker-dealer subsidiaries are subject to
regulatory requirements intended to ensure their respective
general financial soundness and liquidity, which require that
they comply with certain minimum capital requirements. These
regulations, which differ in each country, generally prohibit a
broker-dealer subsidiary from repaying borrowings from us or our
affiliates, paying cash dividends, making loans to us or our
affiliates or otherwise entering into transactions that would
result in a significant reduction in its regulatory net capital
position without prior notification or approval of its principal
regulator. Our capital structure is designed to provide each of
our subsidiaries with capital and liquidity consistent with its
business and regulatory requirements.

The table below summarized the minimum capital
requirements for our U.S. broker-dealer subsidiaries:

|                                               |       |                   |       |                   |  |            |     |             |  |             |       |            |  |   |       |       |  |   |     |     |  |   |       |       | 
|---------------------------------------------- | ----- | ----------------- | ----- | ----------------- |  | ---------- | --- | ----------- |  | ----------- | ----- | ---------- |  | - | ----- | ----- |  | - | --- | --- |  | - | ----- | ----- | 
|                                               |       |                   |       |                  
|                                               |       | December 31, 2003 |       | December 31, 2002
|                                               |       |                   |       |                  
|                                               |       |                   |       | Net Capital       |  | Excess Net |     |             |  | Net Capital |       | Excess Net
|                                               |       | Net Capital       |       | Requirement       |  | Capital    |     | Net Capital |  | Requirement |       | Capital   
|                                               |       |                   |       |                   |  |            |     |             |  |             |       |           
|                                               |       |                  
|                                               |       | (in millions)    
|Instinet Clearing Services                     |       | $                 | 109.1 |                   |  | $          | 5.4 |             |  | $           | 103.8 |            |  | $ | 163.1 |       |  | $ | 2.9 |     |  | $ | 160.2 |      
|Instinet, LLC (formerly Instinet Corporation)  |       |                   | 133.6 |                   |  |            | 0.3 |             |  |             | 133.4 |            |  |   | 98.1  |       |  |   | 0.3 |     |  |   | 97.9  |      
|INET ATS, Inc. (formerly The Island ECN, Inc.) |       |                   | 28.1  |                   |  |            | 1.0 |             |  |             | 27.1  |            |  |   | 9.4   |       |  |   | 1.0 |     |  |   | 8.4   |      
|Lynch, Jones & Ryan, Inc.                      |       |                   | 8.6   |                   |  |            | 0.3 |             |  |             | 8.4   |            |  |   | 8.0   |       |  |   | 0.3 |     |  |   | 7.7   |      
|Island Execution Services, LLC                 |       |                   | 2.4   |                   |  |            | 1.0 |             |  |             | 1.4   |            |  |   | 1.9   |       |  |   | 1.0 |     |  |   | 0.9   |      
|Harborview, LLC                                |       |                   | 0.8   |                   |  |            | 0.3 |             |  |             | 0.5   |            |  |   |      |       |  |   |    |     |  |   |      |      
|                                               |       |                   |       |                   |  |            |     |             |  |             |       |            |  |   |       |       |  |   |     |     |  |   |       |      
|                                               | Total |                   | $     | 282.6             |  |            | $   | 8.1         |  |             | $     | 274.5      |  |   | $     | 280.4 |  |   | $   | 5.4 |  |   | $     | 275.0 | 
|                                               |       |                   |       |                   |  |            |     |             |  |             |       |            |  |   |       |       |  |   |     |     |  |   |       |      

In January 7, 2003, pursuant to an existing
option purchase agreement, we purchased Harborview, a NYSE floor
brokerage firm for $0.6 million.

Our international broker-dealer subsidiaries are
subject to capital adequacy requirements promulgated by
authorities of the countries in which they operate. As of
December 31, 2003 and 2002, these subsidiaries had met their
local capital adequacy requirements.

We have an active securities borrowing and
lending business, where we borrow securities from one party and
lend them to another, as well as to facilitate the settlement
process to meet our customers needs. Under these
transactions, we either receive or provide collateral, generally
cash. When we borrow securities, we provide cash to the lenders
as collateral and earn interest on the cash. Similarly, when we
loan securities, we receive cash as collateral and pay interest
to the borrower. The initial collateral advanced or received
approximates, or is greater than, fair value of the securities
borrowed or loaned. In the event the counterparty is unable to
meet its contractual obligations to return the pledged
collateral, we may be exposed to the market risk of acquiring
the collateral at prevailing market prices. We provided
$327.1 million and $608.5 million as collateral for
securities borrowed as of December 31, 2003 and 2002,
respectively. We also received $220.5 million and
$453.3 million as collateral for securities loaned as of
December 31, 2003 and 2002, respectively.

Included in commissions and other receivables is
approximately $23.6 million from Archipelago Holdings,
L.L.C. and REDIBook ECN L.L.C. of which we have commenced
arbitration proceedings before the NASD for approximately
$9.2 million. We have established an appropriate reserve
against the disputed amount based upon a review of the facts and
circumstances surrounding the dispute.

79



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##### 



In connection with our correspondent clearing
business, we are required to maintain segregated funds in a
special reserve bank account for the exclusive benefit of our
customers. As of December 31, 2003 and 2002, these funds
amounted to $177.4 million and $251.8 million.

In addition, so long as Reuters owns a majority
of our common stock, we will need Reuters consent to incur net
indebtedness (indebtedness for borrowed money less cash on hand)
in excess of an aggregate of $400.0 million and any
indebtedness incurred by us in the ordinary course of our
brokerage or similar business or in connection with the
clearance of securities or obligations to securities exchanges
or clearing systems. We cannot assure you that we will receive
Reuters consent to incur indebtedness above this amount in the
future if we need to do so for any reason.



| |                               
| | ------------------------------
| | Off-Balance Sheet Arrangements

We do not have any obligations that meet the
definition of an off-balance sheet arrangement and
which have or are reasonably likely to have a material effect on
our financial position or results of operations.

Recently Issued Accounting Standards

In April 2003, the Financial Accounting Standards
Board (FASB) issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities. In addition, the statement clarifies
when a contract is a derivative and when a derivative contains a
financing component that warrants special reporting in the
statement of cash flows. SFAS No. 149 is generally
effective prospectively for contracts entered into or modified,
and hedging relationships designated, after June 30, 2003.
Management does not expect adoption of this standard to have a
material effect on our financial condition, results of
operations or cash flows.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS
No. 150 establishes standards for classifying and measuring
as liabilities certain financial instruments that embody
obligations of the issuer and have characteristics of both
liabilities and equity. SFAS No. 150 is effective for all
financial instruments created or modified after May 31,
2003 and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. Management
does not expect adoption of this standard to have a material
effect on our financial condition, results of operations or cash
flows.

Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

Market risk generally represents the risk of
changes in value of a financial instrument that might result
from fluctuations in interest rates, foreign exchange rates and
equity prices. We have established policies, procedures and
internal processes governing our management of market risks in
the normal course of our business operations.

Interest Rate Risk

We invest a portion of our available cash in
marketable securities, classified as securities owned in our
consolidated statements of financial condition, to maximize
yields while continuing to meet our cash and

80



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liquidity needs and the net capital requirements
of our regulated subsidiaries. We maintain a short-term
investment portfolio of securities consisting of the following:


|                                                   |       |               |       |       |  |   |       |       | 
|-------------------------------------------------- | ----- | ------------- | ----- | ----- |  | - | ----- | ----- | 
|                                                   |       |              
|                                                   |       | December 31, 
|                                                   |       |              
|                                                   |       | 2003          |       | 2002 
|                                                   |       |               |       |      
|                                                   |       |              
|                                                   |       | (In millions)
|Municipal bonds                                    |       | $             | 150.9 |       |  | $ | 157.7 |      
|Corporate bonds                                    |       |               | 28.2  |       |  |   | 91.9  |      
|Foreign sovereign obligations                      |       |               | 50.0  |       |  |   | 58.1  |      
|U.S. government and federal agency
    obligations |       |               |      |       |  |   | 10.9  |      
|                                                   |       |               |       |       |  |   |       |      
|                                                   | Total |               | $     | 229.1 |  |   | $     | 318.6 | 
|                                                   |       |               |       |       |  |   |       |      

These securities are subject to interest rate
risk and will fall in value if interest rates increase. If
interest rates had increased immediately and uniformly by 100
basis points, or 65 basis points in the case of municipal bonds,
as of December 31, 2003 and 2002, the fair value of the
portfolio would have declined by $1.0 million and
$1.5 million, respectively. We generally hold these
securities until maturity and therefore would not expect our
financial condition, operating results or cash flows to be
affected to any significant degree by a sudden change in
interest rates.

In addition, as a part of our brokerage business,
we invest portions of our cash in short-term interest earning
assets (mainly cash and money market instruments), which totaled
$534.6 million and $275.8 million as of
December 31, 2003 and 2002, respectively. We also had
short-term borrowings of $21.4 million and
$27.3 million as of December 31, 2003 and 2002,
respectively, on which we are generally charged rates that
approximate the U.S. Federal Funds rate or the local
equivalent rate. As a result, we do not anticipate that changes
in interest rates will have a material impact on our financial
condition, operating results or cash flows.

Exchange Rate Risk

A portion of our operations consists of brokerage
services provided outside of the U.S.. Therefore, our results of
operations could be adversely affected by factors such as
changes in foreign currency exchange rates or economic
conditions in the foreign markets in which we have operations.
We are primarily exposed to changes in exchange rates on the
British pound and the Euro. When the U.S. dollar
strengthens against these currencies, the U.S. dollar value
of non-U.S. dollar-based revenues decreases. When the
U.S. dollar weakens against these currencies, the
U.S. dollar value of non-U.S. dollar-based revenues
increases. Correspondingly, the U.S. dollar value of
non-U.S. dollar-based costs increases when the
U.S. dollar weakens and decreases when the U.S. dollar
strengthens. Accordingly, changes in exchange rates may affect
our results. However, we do not believe that our exchange rate
exposure will have a material adverse effect on our financial
condition, results of operations or cash flows; therefore, we
have not hedged this exposure. In the future, we may enter into
derivative financial instruments as a means of hedging this risk.

We manage currency exposure related to our
brokerage business on a geographic basis. We generally match
each of the non-U.S. subsidiarys liabilities with
assets denominated in the same local currency and manage each
subsidiarys balance sheet in local currency. This
generally results in the net equity of the subsidiary being
reported in its functional currency and subject to the effect of
changes in currency exchange rates when translated into the
U.S. dollar, our reporting currency. We currently do not
seek to mitigate this exchange rate exposure, but we may in the
future.

We may enter into forward foreign currency
contracts to facilitate our customers settling
transactions in various currencies, primarily the
U.S. dollar, British pound or Euro. These forward foreign
currency contracts are with third parties and with terms
generally identical to our customers transactions. Because
our customers transactions are matched to the forward
foreign exchange contract, our exposure to exchange rate risk is
not material.

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The following is a breakdown of the currency
denominations of our securities owned:

|                 |       |               |      |      |  |   |      |      | 
|---------------- | ----- | ------------- | ---- | ---- |  | - | ---- | ---- | 
|                 |       |              
|                 |       | December 31, 
|                 |       |              
|                 |       | 2003          |      | 2002
|                 |       |               |      |     
|                 |       |              
|                 |       | (In millions)
|British pounds   |       | $             | 29.7 |      |  | $ | 52.7 |     
|Euros            |       |               | 34.7 |      |  |   | 18.1 |     
|Japanese yen     |       |               | 9.3  |      |  |   | 8.4  |     
|Canadian dollar  |       |               | 8.7  |      |  |   | 7.2  |     
|Hong Kong dollar |       |               |     |      |  |   | 1.0  |     
|                 |       |               |      |      |  |   |      |     
|                 | Total |               | $    | 82.4 |  |   | $    | 87.4 | 
|                 |       |               |      |      |  |   |      |     

Our resulting exposure to exchange rate risk is
estimated as the potential loss in fair value resulting from a
hypothetical 10% adverse change in foreign exchange rates due to
functional versus reporting currency exposure and was
$7.5 million and $7.9 million as of December 31,
2003 and 2002, respectively.

A portion of our revenues are denominated in
non-U.S. dollar currencies. Approximately 16.5%, 19.7% and
18.1% of our revenues for the years ended December 31,
2003, 2002 and 2001, respectively, were so denominated. Our
profits are therefore exposed to foreign currency
risk  not a loss of funds but rather a loss for
financial reporting purposes. We estimate this risk as the
potential loss in revenue resulting from a hypothetical 10%
adverse change in foreign exchange rates on the mix in our
profits between our functional currency and the respective
reporting currencies of our subsidiaries. On this basis, the
estimated risk of revenue loss was approximately
$12.0 million, $15.4 million and $19.9 million
for the years ended December 31, 2003, 2002 and 2001,
respectively.

Equity Price Risk

As an agency broker, we do not trade securities
for our own account or maintain inventories of securities for
sale. However, as of December 31, 2003, we own marketable
securities of the London and Euronext stock exchanges as a
result of their demutualizations, and we are exposed to market
price risk. As of December 31, 2002, we also owned
marketable securities of the Hong Kong stock exchange. This risk
is estimated as the potential loss in fair value resulting from
a hypothetical 10% adverse change in quoted market prices and
amounted to approximately $3.2 million and
$2.9 million as of December 31, 2003 and 2002,
respectively.

Credit Risk on Unsettled Trades

We are exposed to substantial credit risk from
both parties to a securities transaction during the period
between the transaction date and the settlement date. This
period is generally three business days in the U.S. equities
markets and can be as much as 30 days in some international
markets. In addition, we have credit exposure that extends
beyond the settlement date in the case of a party that does not
settle in a timely manner by failing either to make payment or
to deliver securities. We hold the securities that are the
subject of the transaction as collateral for our customer
receivables. Adverse movements in the prices of these securities
can increase our credit risk. The majority of the Companys
transactions and, consequently, the concentration of its credit
exposure are with broker-dealers and other financial
institutions, primarily located in the U.S. and the U.K. The
Company seeks to control its credit risk through a variety of
reporting and control procedures, including establishing credit
limits and enforcing credit standards based upon a review of the
counter-parties financial condition and credit ratings.
The Company monitors trading activity and collateral levels on a
daily basis for compliance with regulatory and internal
guidelines and obtains additional collateral, if appropriate.
For the years ended December 31, 2003, 2002 and 2001,
losses from transactions in which a party refused or was unable
to settle have been immaterial.

We are also exposed to credit risks from third
parties that owe us money, securities or other obligations.
These parties include our customers, trading counterparties,
clearing agents, exchanges and other financial institutions.
These parties may default on their obligations due to
bankruptcy, lack of liquidity, operational

82



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##### 



failure or other reasons. Over the last three
years, our loss from a counterparty refusing to pay or was
unable to settle with us have been immaterial.


We are exposed to the credit worthiness of
agencies with which we invest a portion of our available cash,
primarily U.S. and non-U.S. government and agency
obligations, as well as corporate and municipal bonds. For
investments maturing within nine months, our credit policy is
that all investments have at least an A1/P1 credit rating from
Standard & Poors and Moodys Investors
Service. We also maintain counterparty concentration limits that
specify the amount that we can invest with any one counterparty.

83



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##### 



Item 8.     Financial
Statements and Supplementary Data

INSTINET GROUP INCORPORATED

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                        |  |      |    | 
|----------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                        |  | Page
|                                                                                                                        |  |     
|Report of Independent Auditors                                                                                          |  |      | 85 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2003, 2002 and 2001                          |  |      | 86 | 
|Consolidated Statements of Financial Condition as
    of December 31, 2003 and 2002                                     |  |      | 87 | 
|Consolidated Statements of Changes in
    Stockholders Equity for the years ended December 31,
    2003, 2002 and 2001 |  |      | 88 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001                          |  |      | 89 | 
|Notes to Consolidated Financial Statements                                                                              |  |      | 90 | 

84



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##### 



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of
Instinet Group Incorporated

In our opinion, the consolidated financial
statements listed in the accompanying index present fairly, in
all material respects, the financial position of Instinet Group
Incorporated and its subsidiaries at December 31, 2003 and
2002, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. These
consolidated financial statements are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and
significant estimates made by management and evaluating the
overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.

As discussed in Notes 2 and 8 to the
consolidated financial statements, on January 1, 2002 the
Company adopted the provisions of Statement of Financial
Accounting Standard No. 142, Goodwill and Other
Intangible Assets.

/S/ PRICEWATERHOUSECOOPERS LLP

New York, New York

February 12, 2004


85



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##### 



INSTINET GROUP INCORPORATED

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


|                                                    |                                                                                                                                                       |                             |           |         |           |      |           |          |           |   |           |         |           | 
|--------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | --------- | ------- | --------- | ---- | --------- | -------- | --------- | - | --------- | ------- | --------- | 
|                                                    |                                                                                                                                                       |                            
|                                                    |                                                                                                                                                       | Year Ended December 31,    
|                                                    |                                                                                                                                                       |                            
|                                                    |                                                                                                                                                       | 2003                        |           | 2002    |           | 2001
|                                                    |                                                                                                                                                       |                             |           |         |           |     
|REVENUE                                             |                                                                                                                                                       |                             |           |         |           |      |           |          |           |   |           |        
|Transaction fees                                    |                                                                                                                                                       | $                           | 1,079,051 |         |           | $    | 1,078,172 |          |           | $ | 1,424,343 |        
|Interest                                            |                                                                                                                                                       |                             | 23,828    |         |           |      | 40,137    |          |           |   | 49,296    |        
|Investments                                         |                                                                                                                                                       |                             | (9,236    | )       |           |      | (59,109   | )        |           |   | 17,388    |        
|                                                    |                                                                                                                                                       |                             |           |         |           |      |           |          |           |   |           |        
|                                                    |                                                                                                                                                       | Total revenues              |           |         | 1,093,643 |      |           |          | 1,059,200 |   |           |         | 1,491,027 | 
|EXPENSES                                            |                                                                                                                                                       |                             |           |         |           |      |           |          |           |   |           |        
|Compensation and benefits                           |                                                                                                                                                       |                             | 227,262   |         |           |      | 281,761   |          |           |   | 406,348   |        
|Soft dollar and commission recapture                |                                                                                                                                                       |                             | 212,373   |         |           |      | 217,314   |          |           |   | 220,050   |        
|Broker-dealer rebates                               |                                                                                                                                                       |                             | 217,109   |         |           |      | 124,399   |          |           |   |          |        
|Brokerage, clearing and exchange fees               |                                                                                                                                                       |                             | 140,299   |         |           |      | 149,521   |          |           |   | 146,223   |        
|Communications and equipment                        |                                                                                                                                                       |                             | 108,144   |         |           |      | 125,720   |          |           |   | 156,002   |        
|Depreciation and amortization                       |                                                                                                                                                       |                             | 88,516    |         |           |      | 78,424    |          |           |   | 80,754    |        
|Occupancy                                           |                                                                                                                                                       |                             | 54,322    |         |           |      | 55,528    |          |           |   | 49,918    |        
|Professional fees                                   |                                                                                                                                                       |                             | 27,916    |         |           |      | 24,594    |          |           |   | 39,990    |        
|Marketing and business development                  |                                                                                                                                                       |                             | 16,702    |         |           |      | 17,094    |          |           |   | 22,143    |        
|Other                                               |                                                                                                                                                       |                             | 26,578    |         |           |      | 58,984    |          |           |   | 54,534    |        
|Restructuring                                       |                                                                                                                                                       |                             | 59,497    |         |           |      | 120,800   |          |           |   | 24,378    |        
|Goodwill and intangible asset impairment            |                                                                                                                                                       |                             | 21,668    |         |           |      | 551,991   |          |           |   |          |        
|Loss of fixed assets at World Trade Center          |                                                                                                                                                       |                             |          |         |           |      |          |          |           |   | 20,346    |        
|Insurance recovery of fixed assets lost             |                                                                                                                                                       |                             | (10,481   | )       |           |      |          |          |           |   | (21,000   | )      
|                                                    |                                                                                                                                                       |                             |           |         |           |      |           |          |           |   |           |        
|                                                    |                                                                                                                                                       | Total expenses              |           |         | 1,189,905 |      |           |          | 1,806,130 |   |           |         | 1,199,686 | 
|                                                    |                                                                                                                                                       |                             |           |         |           |      |           |          |           |   |           |        
|                                                    | Income (loss) from continuing operations before
    income taxes, discontinued operations and cumulative effect of
    change in accounting principle |                             |           | (96,262 | )         |      |           | (746,930 | )         |   |           | 291,341 |          
|                                                    | Income tax provision (benefit)                                                                                                                        |                             |           | (22,454 | )         |      |           | (53,088  | )         |   |           | 122,210 |          
|                                                    |                                                                                                                                                       |                             |           |         |           |      |           |          |           |   |           |        
|                                                    | Income (loss) from continuing operations before
    discontinued operations and cumulative effect of change in
    accounting principle               |                             |           | (73,808 | )         |      |           | (693,842 | )         |   |           | 169,131 |          
|Discontinued operations:                            |                                                                                                                                                       |                             |           |         |           |      |           |          |           |   |           |        
|                                                    | Loss from operations of fixed income business,
    net of tax                                                                                         |                             |           |        |           |      |           | (22,746  | )         |   |           | (24,364 | )        
|                                                    |                                                                                                                                                       |                             |           |         |           |      |           |          |           |   |           |        
|                                                    | Income (loss) before cumulative effect of
    change in accounting principle                                                                          |                             |           | (73,808 | )         |      |           | (716,588 | )         |   |           | 144,767 |          
|                                                    | Cumulative effect of change in accounting
    principle, net of tax                                                                                   |                             |           |        |           |      |           | (18,642  | )         |   |           |        |          
|                                                    |                                                                                                                                                       |                             |           |         |           |      |           |          |           |   |           |        
|                                                    |                                                                                                                                                       | Net income (loss)           |           | $       | (73,808   | )    |           | $        | (735,230  | ) |           | $       | 144,767   | 
|                                                    |                                                                                                                                                       |                             |           |         |           |      |           |          |           |   |           |        
|NET INCOME (LOSS) PER SHARE  BASIC
    AND DILUTED |                                                                                                                                                       |                             |           |         |           |      |           |          |           |   |           |        
|                                                    | Income (loss) from continuing operations                                                                                                              |                             | $         | (0.22   | )         |      | $         | (2.56    | )         |   | $         | 0.73    |          
|Discontinued operations:                            |                                                                                                                                                       |                             |           |         |           |      |           |          |           |   |           |        
|                                                    | Loss from operations of fixed income business,
    net of tax                                                                                         |                             |           |        |           |      |           | (0.08    | )         |   |           | (0.10   | )        
|                                                    |                                                                                                                                                       |                             |           |         |           |      |           |          |           |   |           |        
|                                                    | Income (loss) before cumulative effect of
    change in accounting principle                                                                          |                             |           | (0.22   | )         |      |           | (2.64    | )         |   |           | 0.63    |          
|                                                    | Cumulative effect of change in accounting
    principle, net of tax                                                                                   |                             |           |        |           |      |           | (0.07    | )         |   |           |        |          
|                                                    |                                                                                                                                                       |                             |           |         |           |      |           |          |           |   |           |        
|                                                    |                                                                                                                                                       | Net income (loss) per share |           | $       | (0.22     | )    |           | $        | (2.71     | ) |           | $       | 0.63      | 
|                                                    |                                                                                                                                                       |                             |           |         |           |      |           |          |           |   |           |        
|Weighted average shares outstanding 
    basic     |                                                                                                                                                       |                             | 330,859   |         |           |      | 271,542   |          |           |   | 230,561   |        
|Weighted average shares outstanding 
    diluted   |                                                                                                                                                       |                             | 330,859   |         |           |      | 271,542   |          |           |   | 230,564   |        

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

86



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##### 



INSTINET GROUP INCORPORATED

CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION

(In thousands, except per share
amounts)


|                                                                                                                                                                                                                                     |                                            |              |           |           |  |   |           |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------------ | --------- | --------- |  | - | --------- | --------- | 
|                                                                                                                                                                                                                                     |                                            |             
|                                                                                                                                                                                                                                     |                                            | December 31,
|                                                                                                                                                                                                                                     |                                            |             
|                                                                                                                                                                                                                                     |                                            | 2003         |           | 2002     
|                                                                                                                                                                                                                                     |                                            |              |           |          
|ASSETS                                                                                                                                                                                                                              
|Cash and cash equivalents                                                                                                                                                                                                            |                                            | $            | 534,562   |           |  | $ | 275,837   |          
|Cash and securities segregated under federal
    regulations                                                                                                                                                                         |                                            |              | 177,400   |           |  |   | 251,775   |          
|Securities owned, at market value                                                                                                                                                                                                    |                                            |              | 261,552   |           |  |   | 348,051   |          
|Securities borrowed                                                                                                                                                                                                                  |                                            |              | 327,113   |           |  |   | 608,475   |          
|Receivable from broker-dealers                                                                                                                                                                                                       |                                            |              | 188,006   |           |  |   | 159,695   |          
|Receivable from customers                                                                                                                                                                                                            |                                            |              | 107,221   |           |  |   | 56,257    |          
|Commissions and other receivable, net                                                                                                                                                                                                |                                            |              | 82,708    |           |  |   | 85,296    |          
|Receivable from affiliates, net                                                                                                                                                                                                      |                                            |              |          |           |  |   | 3,216     |          
|Investments                                                                                                                                                                                                                          |                                            |              | 29,499    |           |  |   | 41,837    |          
|Fixed assets and leasehold improvements, net                                                                                                                                                                                         |                                            |              | 119,051   |           |  |   | 176,775   |          
|Deferred tax asset, net                                                                                                                                                                                                              |                                            |              | 73,658    |           |  |   | 70,223    |          
|Intangible assets, net                                                                                                                                                                                                               |                                            |              | 82,281    |           |  |   | 127,993   |          
|Other assets                                                                                                                                                                                                                         |                                            |              | 83,588    |           |  |   | 77,465    |          
|                                                                                                                                                                                                                                     |                                            |              |           |           |  |   |           |          
|                                                                                                                                                                                                                                     | Total assets                               |              | $         | 2,066,639 |  |   | $         | 2,282,895 | 
|                                                                                                                                                                                                                                     |                                            |              |           |           |  |   |           |          
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                                                                                                            
|LIABILITIES                                                                                                                                                                                                                          |                                            |              |           |           |  |   |           |          
|Short-term borrowings                                                                                                                                                                                                                |                                            | $            | 21,372    |           |  | $ | 27,279    |          
|Securities loaned                                                                                                                                                                                                                    |                                            |              | 220,465   |           |  |   | 453,251   |          
|Payable to broker-dealers                                                                                                                                                                                                            |                                            |              | 141,821   |           |  |   | 115,565   |          
|Payable to customers                                                                                                                                                                                                                 |                                            |              | 306,763   |           |  |   | 278,569   |          
|Taxes payable                                                                                                                                                                                                                        |                                            |              | 60,538    |           |  |   | 19,943    |          
|Accounts payable, accrued expenses and other
    liabilities                                                                                                                                                                         |                                            |              | 344,897   |           |  |   | 364,754   |          
|                                                                                                                                                                                                                                     |                                            |              |           |           |  |   |           |          
|                                                                                                                                                                                                                                     | Total liabilities                          |              |           | 1,095,856 |  |   |           | 1,259,361 | 
|                                                                                                                                                                                                                                     |                                            |              |           |           |  |   |           |          
|Commitments and contingencies (Note 14)                                                                                                                                                                                              |                                            |              |           |           |  |   |           |          
|STOCKHOLDERS EQUITY                                                                                                                                                                                                                 |                                            |              |           |           |  |   |           |          
|Common stock, $0.01 par value (950,000 shares
    authorized, 331,032 and 330,920 issued as of December 31,
    2003 and 2002, respectively, and 330,991 and 330,714 outstanding
    as of December 31, 2003 and 2002, respectively) |                                            |              | 3,310     |           |  |   | 3,309     |          
|Additional paid-in capital                                                                                                                                                                                                           |                                            |              | 1,661,476 |           |  |   | 1,661,118 |          
|Accumulated deficit                                                                                                                                                                                                                  |                                            |              | (734,922  | )         |  |   | (661,114  | )        
|Treasury stock, at cost (41 and 206 shares as of
    December 31, 2003 and 2002, respectively)                                                                                                                                       |                                            |              | (78       | )         |  |   | (1,270    | )        
|Accumulated other comprehensive income                                                                                                                                                                                               |                                            |              | 41,339    |           |  |   | 23,235    |          
|Unearned compensation                                                                                                                                                                                                                |                                            |              | (342      | )         |  |   | (1,744    | )        
|                                                                                                                                                                                                                                     |                                            |              |           |           |  |   |           |          
|                                                                                                                                                                                                                                     | Total stockholders equity                 |              |           | 970,783   |  |   |           | 1,023,534 | 
|                                                                                                                                                                                                                                     |                                            |              |           |           |  |   |           |          
|                                                                                                                                                                                                                                     | Total liabilities and stockholders equity |              | $         | 2,066,639 |  |   | $         | 2,282,895 | 
|                                                                                                                                                                                                                                     |                                            |              |           |           |  |   |           |          

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

87



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##### 



INSTINET GROUP INCORPORATED

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

(In thousands)


|                             |                                                              |           |         |         |   |            |       |            |  |               |           |          |   |               |         |              |   |               |          |          |   |   |        |        |   |   |        |        |  |   |         |        |   |   |           |          |  
|---------------------------- | ------------------------------------------------------------ | --------- | ------- | ------- | - | ---------- | ----- | ---------- |  | ------------- | --------- | -------- | - | ------------- | ------- | ------------ | - | ------------- | -------- | -------- | - | - | ------ | ------ | - | - | ------ | ------ |  | - | ------- | ------ | - | - | --------- | -------- | -
|                             |                                                              |           |         |         |   |            |       |            |  | Retained      |           |          |   | Accumulated   |         |              |   |              
|                             |                                                              | Shares of |         |         |   | Additional |       |            |  | Earnings      |           |          |   | Other         |         |              |   | Total        
|                             |                                                              | Common    |         | Common  |   | Paid-In    |       | Historical |  | (Accumulated) |           | Treasury |   | Comprehensive |         | Unearned     |   | Stockholders
|                             |                                                              | Stock     |         | Stock   |   | Capital    |       | Equity     |  | (Deficit)     |           | Stock    |   | Income (Loss) |         | Compensation |   | Equity       
|                             |                                                              |           |         |         |   |            |       |            |  |               |           |          |   |               |         |              |   |              
|BALANCE AT DECEMBER 31, 2000 |                                                              |           |        |         |   | $          |      |            |  | $             |          |          |   | $             | 948,363 |              |   | $             |         |          |   | $ |       |        |   | $ | (2,029 | )      |  | $ | (18,998 | )      |   | $ | 927,336   |         
|                             | Net income January 1, 2001 to May 17,
    2001               |           |         |        |   |            |       |           |  |               |           |         |   |               |         | 70,651       |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         |       |   |   |           | 70,651   |  
|                             | Return of capital                                            |           |         |        |   |            |       |           |  |               |           |         |   |               |         | (150,000     | ) |               |          |         |   |   |        |       |   |   |        |       |  |   |         |       |   |   |           | (150,000 | )
|                             | Conversion from limited liability company to
    corporation |           |         | 206,900 |   |            |       | 2,437      |  |               |           | 866,577  |   |               |         | (869,014     | ) |               |          |         |   |   |        |       |   |   |        |       |  |   |         |       |   |   |           |         |  
|                             | Net proceeds from initial public offering                    |           |         | 36,800  |   |            |       |           |  |               |           | 486,916  |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         |       |   |   |           | 486,916  |  
|                             | Net income May 17, 2001 to December 31,
    2001             |           |         |        |   |            |       |           |  |               |           |         |   |               |         |             |   |               |          | 74,116   |   |   |        |       |   |   |        |       |  |   |         |       |   |   |           | 74,116   |  
|                             | Stock options exercised                                      |           |         | 19      |   |            |       |           |  |               |           | 279      |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         |       |   |   |           | 279      |  
|                             | Tax benefit for options exercised                            |           |         |        |   |            |       |           |  |               |           | 28       |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         |       |   |   |           | 28       |  
|                             | Stock options forfeited                                      |           |         |        |   |            |       |           |  |               |           | (3,365   | ) |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         | 3,365  |   |   |           |         |  
|                             | Amortization of stock based plans                            |           |         |        |   |            |       |           |  |               |           |         |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         | 5,718  |   |   |           | 5,718    |  
|                             | Currency translation adjustment                              |           |         |        |   |            |       |           |  |               |           |         |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        | 1,303  |  |   |         |       |   |   |           | 1,303    |  
|                             | Issuance of common stock for acquisition                     |           |         | 4,629   |   |            |       | 46         |  |               |           | 46,091   |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         |       |   |   |           | 46,137   |  
|                             | Issuance of common stock to board member                     |           |         | 3       |   |            |       |           |  |               |           | 25       |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         |       |   |   |           | 25       |  
|                             |                                                              |           |         |         |   |            |       |            |  |               |           |          |   |               |         |              |   |               |          |          |   |   |        |        |   |   |        |        |  |   |         |        |   |   |           |         
|BALANCE AT DECEMBER 31, 2001 |                                                              |           | 248,351 |         |   | $          | 2,483 |            |  | $             | 1,396,551 |          |   | $             |        |              |   | $             | 74,116   |          |   | $ |       |        |   | $ | (726   | )      |  | $ | (9,915  | )      |   | $ | 1,462,509 |         
|                             | Net loss                                                     |           |         |        |   |            |       |           |  |               |           |         |   |               |         |             |   |               |          | (735,230 | ) |   |        |       |   |   |        |       |  |   |         |       |   |   |           | (735,230 | )
|                             | Issuance of common stock for acquisition                     |           |         | 81,046  |   |            |       | 811        |  |               |           | 495,878  |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         |       |   |   |           | 496,689  |  
|                             | Conversion of stock based plans                              |           |         |        |   |            |       |           |  |               |           | 21,583   |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         | (1,442 | ) |   |           | 20,141   |  
|                             | Stock options granted                                        |           |         |        |   |            |       |           |  |               |           | 20       |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         | (20    | ) |   |           |         |  
|                             | Stock options exercised                                      |           |         | 1,523   |   |            |       | 15         |  |               |           | 1,372    |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         |       |   |   |           | 1,387    |  
|                             | Tax benefit for options exercised                            |           |         |        |   |            |       |           |  |               |           | 69       |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         |       |   |   |           | 69       |  
|                             | Stock options forfeited                                      |           |         |        |   |            |       |           |  |               |           | (5,616   | ) |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         | 5,616  |   |   |           |         |  
|                             | Amortization of stock based plans                            |           |         |        |   |            |       |           |  |               |           |         |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         | 4,017  |   |   |           | 4,017    |  
|                             | Purchase of treasury stock                                   |           |         | (245    | ) |            |       |           |  |               |           |         |   |               |         |             |   |               |          |         |   |   |        | (1,532 | ) |   |        |       |  |   |         |       |   |   |           | (1,532   | )
|                             | Treasury stock reissued                                      |           |         | 39      |   |            |       |           |  |               |           |         |   |               |         |             |   |               |          |         |   |   |        | 262    |   |   |        |       |  |   |         |       |   |   |           | 262      |  
|                             | Dividend paid                                                |           |         |        |   |            |       |           |  |               |           | (248,739 | ) |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         |       |   |   |           | (248,739 | )
|                             | Currency translation adjustment                              |           |         |        |   |            |       |           |  |               |           |         |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        | 23,961 |  |   |         |       |   |   |           | 23,961   |  
|                             |                                                              |           |         |         |   |            |       |            |  |               |           |          |   |               |         |              |   |               |          |          |   |   |        |        |   |   |        |        |  |   |         |        |   |   |           |         
|BALANCE AT DECEMBER 31, 2002 |                                                              |           | 330,714 |         |   | $          | 3,309 |            |  | $             | 1,661,118 |          |   | $             |        |              |   | $             | (661,114 | )        |   | $ | (1,270 | )      |   | $ | 23,235 |        |  | $ | (1,744  | )      |   | $ | 1,023,534 |         
|                             | Net loss                                                     |           |         |        |   |            |       |           |  |               |           |         |   |               |         |             |   |               |          | (73,808  | ) |   |        |       |   |   |        |       |  |   |         |       |   |   |           | (73,808  | )
|                             | Stock options exercised                                      |           |         | 112     |   |            |       | 1          |  |               |           | 240      |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         |       |   |   |           | 241      |  
|                             | Tax benefit for options exercised                            |           |         |        |   |            |       |           |  |               |           | 118      |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         |       |   |   |           | 118      |  
|                             | Amortization of stock based plans                            |           |         |        |   |            |       |           |  |               |           |         |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        |       |  |   |         | 1,402  |   |   |           | 1,402    |  
|                             | Purchase of treasury stock                                   |           |         | (21     | ) |            |       |           |  |               |           |         |   |               |         |             |   |               |          |         |   |   |        | (75    | ) |   |        |       |  |   |         |       |   |   |           | (75      | )
|                             | Treasury stock reissued                                      |           |         | 186     |   |            |       |           |  |               |           |         |   |               |         |             |   |               |          |         |   |   |        | 1,267  |   |   |        |       |  |   |         |       |   |   |           | 1,267    |  
|                             | Currency translation adjustment                              |           |         |        |   |            |       |           |  |               |           |         |   |               |         |             |   |               |          |         |   |   |        |       |   |   |        | 18,104 |  |   |         |       |   |   |           | 18,104   |  
|                             |                                                              |           |         |         |   |            |       |            |  |               |           |          |   |               |         |              |   |               |          |          |   |   |        |        |   |   |        |        |  |   |         |        |   |   |           |         
|BALANCE AT DECEMBER 31, 2003 |                                                              |           | 330,991 |         |   | $          | 3,310 |            |  | $             | 1,661,476 |          |   | $             |        |              |   | $             | (734,922 | )        |   | $ | (78    | )      |   | $ | 41,339 |        |  | $ | (342    | )      |   | $ | 970,783   |         
|                             |                                                              |           |         |         |   |            |       |            |  |               |           |          |   |               |         |              |   |               |          |          |   |   |        |        |   |   |        |        |  |   |         |        |   |   |           |         

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


88



---



##### 



INSTINET GROUP INCORPORATED

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                                                                                                                                         |                                                                                |                                                         |         |         |         |      |          |          |          |   |         |          |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------ | ------------------------------------------------------- | ------- | ------- | ------- | ---- | -------- | -------- | -------- | - | ------- | -------- | -------- | -
|                                                                                                                                                                         |                                                                                |                                                        
|                                                                                                                                                                         |                                                                                | Year Ended December 31,                                
|                                                                                                                                                                         |                                                                                |                                                        
|                                                                                                                                                                         |                                                                                | 2003                                                    |         | 2002    |         | 2001
|                                                                                                                                                                         |                                                                                |                                                         |         |         |         |     
|Cash flows from operating activities                                                                                                                                     |                                                                                |                                                         |         |         |         |      |          |          |          |   |         |         
|Net income (loss)                                                                                                                                                        |                                                                                | $                                                       | (73,808 | )       |         | $    | (735,230 | )        |          | $ | 144,767 |         
|Adjustments to reconcile net income
    (loss) to cash provided by (used in) operating activities:                                                                       |                                                                                |                                                         |         |         |         |      |          |          |          |   |         |         
|                                                                                                                                                                         | Unrealized loss on investments                                                 |                                                         |         | 7,777   |         |      |          | 54,062   |          |   |         | 1,628    |         
|                                                                                                                                                                         | Write off of fixed assets and leasehold
    improvements                       |                                                         |         | 8,430   |         |      |          | 21,869   |          |   |         |         |         
|                                                                                                                                                                         | Loss of fixed assets at the World Trade Center
    (WTC)                     |                                                         |         |        |         |      |          |         |          |   |         | 20,346   |         
|                                                                                                                                                                         | Insurance recovery of fixed assets lost at the WTC                             |                                                         |         | (10,481 | )       |      |          |         |          |   |         | (21,000  | )       
|                                                                                                                                                                         | Goodwill and intangible asset impairment                                       |                                                         |         | 21,668  |         |      |          | 571,037  |          |   |         |         |         
|                                                                                                                                                                         | Depreciation and amortization                                                  |                                                         |         | 88,516  |         |      |          | 78,424   |          |   |         | 84,088   |         
|                                                                                                                                                                         | Deferred tax asset, net                                                        |                                                         |         | (3,435  | )       |      |          | (49,203  | )        |   |         | 24,752   |         
|                                                                                                                                                                         | Stock based compensation                                                       |                                                         |         | 2,594   |         |      |          | 4,086    |          |   |         | 9,055    |         
|Changes in operating assets and liabilities;                                                                                                                             |                                                                                |                                                         |         |         |         |      |          |          |          |   |         |         
|                                                                                                                                                                         | Cash and securities segregated under federal
    regulation                    |                                                         |         | 74,375  |         |      |          | 58,917   |          |   |         | (240,692 | )       
|                                                                                                                                                                         | Securities borrowed, net of securities loaned                                  |                                                         |         | 48,576  |         |      |          | 43,698   |          |   |         | 46,911   |         
|                                                                                                                                                                         | Net receivable/payable from/to broker-dealers                                  |                                                         |         | (2,055  | )       |      |          | 7,249    |          |   |         | 66,209   |         
|                                                                                                                                                                         | Net receivable/payable from/to customers                                       |                                                         |         | (22,349 | )       |      |          | (99,211  | )        |   |         | 123,737  |         
|                                                                                                                                                                         | Net receivable/payable from/to affiliates                                      |                                                         |         | 3,108   |         |      |          | (15,923  | )        |   |         | 26,974   |         
|                                                                                                                                                                         | Receivables and other assets                                                   |                                                         |         | (3,526  | )       |      |          | 115,311  |          |   |         | 21,285   |         
|                                                                                                                                                                         | Payables and other liabilities                                                 |                                                         |         | 20,175  |         |      |          | (82,295  | )        |   |         | (43,296  | )       
|                                                                                                                                                                         |                                                                                |                                                         |         |         |         |      |          |          |          |   |         |         
|                                                                                                                                                                         |                                                                                | Net cash provided by (used in) operating
    activities |         |         | 159,565 |      |          |          | (27,209  | ) |         |          | 264,764  |  
|                                                                                                                                                                         |                                                                                |                                                         |         |         |         |      |          |          |          |   |         |         
|Cash flows from investing activities                                                                                                                                     |                                                                                |                                                         |         |         |         |      |          |          |          |   |         |         
|                                                                                                                                                                         | Securities sold (purchased), net                                               |                                                         |         | 86,499  |         |      |          | (112,044 | )        |   |         | (50,886  | )       
|                                                                                                                                                                         | Purchase of fixed assets and leasehold
    improvements                        |                                                         |         | (15,178 | )       |      |          | (43,597  | )        |   |         | (113,691 | )       
|                                                                                                                                                                         | Sale (purchase) of investments, net                                            |                                                         |         | 4,561   |         |      |          | (4,000   | )        |   |         | (9,726   | )       
|                                                                                                                                                                         | Proceeds from sale of fixed assets to affiliate                                |                                                         |         |        |         |      |          |         |          |   |         | 7,867    |         
|                                                                                                                                                                         | Proceeds from insurance recovery of fixed assets
    lost at the WTC           |                                                         |         | 10,481  |         |      |          |         |          |   |         | 21,000   |         
|                                                                                                                                                                         | Acquisitions of businesses, net of assets
    acquired and liabilities assumed |                                                         |         | 316     |         |      |          | 25,952   |          |   |         | (71,157  | )       
|                                                                                                                                                                         |                                                                                |                                                         |         |         |         |      |          |          |          |   |         |         
|                                                                                                                                                                         |                                                                                | Net cash provided by (used in) investing
    activities |         |         | 86,679  |      |          |          | (133,689 | ) |         |          | (216,593 | )
|                                                                                                                                                                         |                                                                                |                                                         |         |         |         |      |          |          |          |   |         |         
|Cash flows from financing activities                                                                                                                                     |                                                                                |                                                         |         |         |         |      |          |          |          |   |         |         
|                                                                                                                                                                         | Short-term borrowings, net                                                     |                                                         |         | (5,907  | )       |      |          | (42,020  | )        |   |         | (47,773  | )       
|                                                                                                                                                                         | Dividends paid                                                                 |                                                         |         |        |         |      |          | (248,739 | )        |   |         |         |         
|                                                                                                                                                                         | Purchase of treasury stock                                                     |                                                         |         | (75     | )       |      |          | (1,532   | )        |   |         |         |         
|                                                                                                                                                                         | Issuance of common stock                                                       |                                                         |         | 359     |         |      |          | 1,387    |          |   |         | 279      |         
|                                                                                                                                                                         | Repayment of subordinated debt to affiliate                                    |                                                         |         |        |         |      |          |         |          |   |         | (50,417  | )       
|                                                                                                                                                                         | Proceeds from loan from Parent, net of repayment                               |                                                         |         |        |         |      |          |         |          |   |         |         |         
|                                                                                                                                                                         | Capital distribution to Parent                                                 |                                                         |         |        |         |      |          |         |          |   |         | (150,000 | )       
|                                                                                                                                                                         | Net proceeds from initial public offering                                      |                                                         |         |        |         |      |          |         |          |   |         | 486,916  |         
|                                                                                                                                                                         |                                                                                |                                                         |         |         |         |      |          |          |          |   |         |         
|                                                                                                                                                                         |                                                                                | Net cash provided by (used in) financing
    activities |         |         | (5,623  | )    |          |          | (290,904 | ) |         |          | 239,005  |  
|                                                                                                                                                                         |                                                                                |                                                         |         |         |         |      |          |          |          |   |         |         
|Effect of exchange rate differences                                                                                                                                      |                                                                                |                                                         | 18,104  |         |         |      | 23,961   |          |          |   | 1,303   |         
|                                                                                                                                                                         |                                                                                |                                                         |         |         |         |      |          |          |          |   |         |         
|Increase (decrease) in cash and cash
    equivalents                                                                                                                     |                                                                                |                                                         | 258,725 |         |         |      | (427,841 | )        |          |   | 288,479 |         
|Cash and cash equivalents, beginning of period                                                                                                                           |                                                                                |                                                         | 275,837 |         |         |      | 703,678  |          |          |   | 415,199 |         
|                                                                                                                                                                         |                                                                                |                                                         |         |         |         |      |          |          |          |   |         |         
|Cash and cash equivalents, end of period                                                                                                                                 |                                                                                | $                                                       | 534,562 |         |         | $    | 275,837  |          |          | $ | 703,678 |         
|                                                                                                                                                                         |                                                                                |                                                         |         |         |         |      |          |          |          |   |         |         
|Supplemental disclosures of cash flow
    information:                                                                                                                   |                                                                                |                                                         |         |         |         |      |          |          |          |   |         |         
|                                                                                                                                                                         | Cash paid for interest                                                         |                                                         | $       | 9,349   |         |      | $        | 12,743   |          |   | $       | 7,042    |         
|                                                                                                                                                                         | Cash paid (refunded) for taxes                                                 |                                                         | $       | (51,988 | )       |      | $        | 9,044    |          |   | $       | 139,403  |         
|Non-cash activities:                                                                                                                                                     |                                                                                |                                                         |         |         |         |      |          |          |          |   |         |         
|The value of common stock issued in connection
    with business combinations was $512,967 and $50,000 for the
    years ended December 31, 2002 and 2001, respectively.

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

89



---



##### 



INSTINET GROUP INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(In thousands, except per share
amounts)


Note
1.     Organization and Description of
Business

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

Since the fourth quarter of 2003, we have been
implementing a business restructuring plan to establish two
distinct business lines:



| |   |                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Instinet, the Institutional Broker, which
    services our non-broker-dealer institutional customers as well
    as customers of Lynch, Jones & Ryan, our commission
    recapture subsidiary.                                                                                                                                       
|
| |  | INET (formerly known as The Island ECN, Inc.),
    our alternative trading system (ATS) and ECN that
    combines the U.S. broker-dealer order flow of the Instinet ECN
    and the Island ECN and includes their clearing broker, Instinet
    Clearing Services, Inc. (ICS), and services our U.S.
    broker-dealer customers.

This reorganization was substantially completed
in February 2004.

Note 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.



| |                 
| | ----------------
| | 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 the
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.



| |                                                     
| | ----------------------------------------------------
| | Concentrations of Credit, Market and Other
    Risks

The Company is exposed to substantial credit risk
from both parties to a securities transaction during the period
between the transaction date and the settlement date. This
period is generally three business days in the U.S. equities
markets and can be as much as 30 days in some international
markets. In addition, the Company may have credit exposure that
extends beyond the settlement date in the case of a party that
does not settle in a timely manner by failing either to make
payment or to deliver securities. We hold the securities that
are the subject of the transaction as collateral for our
customer receivables. Adverse movements in the prices of these
securities can increase our credit risk. The majority of the
Companys transactions and, consequently, the concentration
of its credit exposure are with broker-dealers and other
financial institutions, primarily located in the United States
and the United Kingdom. The Company seeks to control its credit
risk through a variety of reporting and control procedures,
including establishing credit limits and enforcing credit
standards based upon a review of the counter-parties
financial condition and credit ratings. The Company monitors
trading activity and collateral levels on a daily basis for
compliance with regulatory and internal guidelines and obtains
additional collateral, if appropriate. For the years ended
December 31, 2003, 2002 and 2001, losses from transactions
in which a party refused or was unable to settle have been
immaterial.

90



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


The Company uses securities borrowed and loaned
transactions to facilitate the settlement process to meet its
customers needs. Under these transactions, the Company
either receives or provides collateral, generally cash or
securities. In the event the counterparty is unable to meet its
contractual obligations to return the pledged collateral, the
Company may be exposed to the market risk of acquiring the
collateral at prevailing market prices.

The Company is subject to operational,
technological and settlement risks. These include the risk of
potential financial loss attributable to operational factors
such as untimely or inaccurate trade execution, clearance or
settlement or the inability to process large volumes or
transactions. The Company is also subject to risk of loss
attributable to technological limitations or computer failures
that may constrain the Companys ability to gather, process
and communicate information efficiently, securely and without
interruption.



| |                 
| | ----------------
| | Transaction Fees

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



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost, net of
accumulated amortization. Depreciation is computed primarily
using the straight-line method over the following estimated
useful lives:

|                               |  |              
|------------------------------ |  | -------------
|Leasehold improvements         |  | life of lease
|Furniture and office equipment |  | 3-10 years   
|Capitalized software costs     |  | 3 years      
|Computer equipment             |  | 3-5 years    



| |                          
| | -------------------------
| | 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 Statement of Financial
Accounting Standard (SFAS) No. 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 Statements
of Operations, Changes in Stockholders Equity and Cash
Flows of acquired companies and businesses are included only for
those periods following the date of their acquisition.



| |               
| | --------------
| | 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

91



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


Statement SOP 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal
Use. Capitalized software costs, which are reflected as
fixed assets on the Consolidated Statements of Financial
Condition, were $4,642 and $1,126 at December 31, 2003 and
2002. Amortization expense was $3,455, $3,373, and $5,136 for
the years ended December 31, 2003, 2002, 2001, respectively.



| |             
| | ------------
| | Income Taxes

The Company files a consolidated income tax
return in the U.S. and combined U.S. state and local income tax
returns, where applicable.

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.



| |                              
| | -----------------------------
| | Earnings (Loss) Per
    Share

Basic earnings (loss) per share
(EPS) is calculated by dividing net earnings by the
weighted average number of common shares outstanding. Common
shares outstanding include common stock and treasury stock for
which no future service is required as a condition to the
delivery of the underlying common stock. Diluted EPS includes
the determinants of basic EPS and, in addition, reflects the
dilutive effect of the common stock deliverable pursuant to
stock options and to treasury stock for which future service is
required as a condition to the delivery of the underlying common
stock. The dilutive effect is included in the calculation of
weighted average shares for the year ended that the Company has
net income.

Options and warrants to purchase 4,426 shares of
common stock were not included in the computation of diluted EPS
for the year ended December 31, 2002 as the Company
incurred losses during the period. Accordingly, the diluted EPS
computation does not include the anti-dilutive effect of these
options and warrants. Options to purchase 20,373 shares of
common stock were not included in the computation of diluted EPS
for the year ended December 31, 2001 as the exercise price
for these options 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
anti-dilutive effect of these options.

|                                                                                                                    |                |                         |         |       |   |      |          |       |   |   |         |      | 
|------------------------------------------------------------------------------------------------------------------- | -------------- | ----------------------- | ------- | ----- | - | ---- | -------- | ----- | - | - | ------- | ---- | 
|                                                                                                                    |                |                        
|                                                                                                                    |                | Year Ended December 31,
|                                                                                                                    |                |                        
|                                                                                                                    |                | 2003                    |         | 2002  |   | 2001
|                                                                                                                    |                |                         |         |       |   |     
|Numerator for basic and diluted EPS earnings
    available to common shareholders                                   |                | $                       | (73,808 | )     |   | $    | (735,230 | )     |   | $ | 144,767 |     
|Denominator for basic EPS  weighted
    average number of common shares                                            |                |                         | 330,859 |       |   |      | 271,542  |       |   |   | 230,561 |     
|Effect of dilutive securities                                                                                       |                |                         |         |       |   |      |          |       |   |   |         |     
|                                                                                                                    | Treasury stock |                         |         |      |   |      |          |      |   |   |         |     | 
|                                                                                                                    | Stock options  |                         |         |      |   |      |          |      |   |   |         | 3    | 
|                                                                                                                    |                |                         |         |       |   |      |          |       |   |   |         |     
|Dilutive potential common shares                                                                                    |                |                         |        |       |   |      |         |       |   |   | 3       |     
|                                                                                                                    |                |                         |         |       |   |      |          |       |   |   |         |     
|Denominator for diluted EPS  weighted
    average number of common shares and dilutive potential common
    shares |                |                         | 330,859 |       |   |      | 271,542  |       |   |   | 230,564 |     
|                                                                                                                    |                |                         |         |       |   |      |          |       |   |   |         |     
|                                                                                                                    | Basic EPS      |                         | $       | (0.22 | ) |      | $        | (2.71 | ) |   | $       | 0.63 | 
|                                                                                                                    | Diluted EPS    |                         |         | (0.22 | ) |      |          | (2.71 | ) |   |         | 0.63 | 

92



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)




| |                                         
| | ----------------------------------------
| | Soft Dollar and Commission
    Recapture

Soft dollar and commission recapture expenses
primarily relate to the purchase of third party research
products for customers 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.



| |                      
| | ---------------------
| | Broker-Dealer Rebates

Broker-dealer rebates expense consists of
execution fees paid to subscriber customers that initiate a buy
or sell limit order transaction and of market data rebated to
subscribers. The customers are paid on a per share basis.
Rebates are recorded on a trade date basis.



| |            
| | -----------
| | Investments

Investments with no ready market 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 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 that 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, but not control over the investee. Significant
influence is deemed to exist if the Company has ownership of
between 20% and 50%.

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



| |                         
| | ------------------------
| | Stock-Based Compensation

The Company accounts for stock-based compensation
to employees and directors using the intrinsic value method of
accounting in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees. Therefore, no compensation expense was
recognized for those stock options that had no intrinsic value
on the date of grant.

93



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


Had the Company recognized compensation expense
over the relevant service period under the fair-value method of
SFAS No. 123 with respect to stock options granted, the
Companys pro forma net income (loss) and EPS would
have been as follows:

|                               |                                                                                                                                                |                         |         |         |   |      |          |          |   |   |         |         |  
|------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | ------- | ------- | - | ---- | -------- | -------- | - | - | ------- | ------- | -
|                               |                                                                                                                                                |                        
|                               |                                                                                                                                                | Year Ended December 31,
|                               |                                                                                                                                                |                        
|                               |                                                                                                                                                | 2003                    |         | 2002    |   | 2001
|                               |                                                                                                                                                |                         |         |         |   |     
|Net income (loss), as reported |                                                                                                                                                | $                       | (73,808 | )       |   | $    | (735,230 | )        |   | $ | 144,767 |        
|                               | Add: Stock based employee compensation expense
    included in net income (loss), net of related tax benefit                                   |                         |         | 1,660   |   |      |          | 2,723    |   |   |         | 3,432   |  
|                               | Deduct: Stock based employee compensation expense
    determined under fair value based methods for all awards, net of
    related tax benefit |                         |         | (26,759 | ) |      |          | (36,361  | ) |   |         | (57,022 | )
|                               |                                                                                                                                                |                         |         |         |   |      |          |          |   |   |         |        
|                               | Pro forma net income (loss)                                                                                                                    |                         | $       | (98,907 | ) |      | $        | (768,868 | ) |   | $       | 91,177  |  
|                               |                                                                                                                                                |                         |         |         |   |      |          |          |   |   |         |        
|                               | Weighted average shares outstanding 
    basic                                                                                                |                         |         | 330,859 |   |      |          | 271,542  |   |   |         | 230,561 |  
|                               | Weighted average shares outstanding 
    diluted                                                                                              |                         |         | 330,859 |   |      |          | 271,542  |   |   |         | 230,564 |  
|                               | Earnings (loss) per share, as
    reported  basic and diluted                                                                                 |                         | $       | (0.22   | ) |      | $        | (2.71    | ) |   | $       | 0.63    |  
|                               | Pro forma net income (loss) per
    share  basic and diluted                                                                                  |                         | $       | (0.30   | ) |      | $        | (2.83    | ) |   | $       | 0.40    |  



| |                          
| | -------------------------
| | Cash and Cash Equivalents

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



| |                                   
| | ----------------------------------
| | 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 is primarily
comprised of fails to deliver with broker-dealers. 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 is 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 are primarily comprised
of debit balances and payable to customers represent free credit
balances in customer accounts.



| |                                           
| | ------------------------------------------
| | Commissions and Other Receivables,
    Net

Commissions and other receivables are reported
net of an allowance for doubtful accounts of $21,670 and $22,002
as of December 31, 2003 and December 31, 2002,
respectively. The allowance for doubtful accounts is

94



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


based on our assessment of the collectibility of
customer accounts. The Company regularly reviews the allowance
by considering factors such as historical experience, credit
quality, age of the accounts receivable balances and current
economic conditions that may affect a customers ability to
pay.

As of December 31, 2003, included in
commissions and other receivables is approximately $23,566 from
Archipelago Holdings L.L.C. and REDIBook ECN L.L.C. of which
approximately $9,208 is under dispute. The Company has commenced
arbitration proceedings before the NASD and has established a
reserve against the disputed amount based upon a review of the
facts and circumstances surrounding the dispute.



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | 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 counterparties, 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 accumulated other
comprehensive income on the Consolidated Statements of Financial
Condition.



| |            
| | -----------
| | 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 they are
incurred. These activities have not resulted in a material
impact to the Companys operations to date.



| |               
| | --------------
| | 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 Consolidated Statements of Financial Condition.



| |              
| | -------------
| | Restructuring

The Company has accounted for its cost reduction
initiatives and resulting restructuring charges in accordance
with EITF 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring), SFAS No. 112, Employers
Accounting for Post Employment Benefits, and SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets and SFAS No. 146, Accounting
for Costs Associated with Exit or

95



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


Disposal Activities. SFAS No. 146,
which the Company adopted January 1, 2003, prospectively
eliminated the use of EITF 94-3 for restructuring
initiatives.



| |                  
| | -----------------
| | Reclassifications

Certain reclassifications of prior year amounts
have been made for consistent presentation.

Note 3.     Acquisitions



| |           
| | ----------
| | Harborview

On January 7, 2003, pursuant to an existing
option purchase agreement, the Company purchased Harborview LLC
(Harborview), a NYSE floor brokerage firm for $594.



| |       
| | ------
| | Island

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. The aggregate purchase price was $555,349,
consisting of $492,826 representing approximately 80,659 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.

In connection with the acquisition of Island, 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.



| |          
| | ---------
| | ProTrader

In October 2001, the Company acquired ProTrader
Securities, L.P. (ProTrader), a U.S. registered
broker-dealer, which provides direct access execution and
advanced trading technology primarily to professional and
non-institutional traders, active fund managers and hedge funds.
The Company agreed to acquire ProTrader for $100,000 in cash and
5,020 shares of Instinet Group common stock valued in
aggregate at $50,000, based on the average share price of
Instinet Group stock for the seven trading days prior to
closing. Direct capitalizable costs associated with this
transaction were $2,806. On October 1, 2001, the Company
acquired approximately 92% and acquired the remaining 8% on
January 3, 2002.

Of the consideration paid, approximately 50% of
the excess purchase price over net assets acquired was assigned
to an intangible asset, consisting of intellectual property and
the related technology of ProTrader.

During the second quarter of 2003, the Company
sold substantially all of ProTraders assets and recognized
a loss of $350.

The following unaudited supplemental pro forma
information has been prepared to give effect to the acquisition
of Island as of the beginning of the year preceding the year in
which the acquisition occurred. Pro forma consolidated results
after giving effect to the acquisition as of the beginning of
the year preceding the year in which the acquisition occurred
would not have been materially different from the reported
amounts for the Companys acquisition of ProTrader and
Harborview.

96



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


|                        |  |                         |           |      |  |   |           | 
|----------------------- |  | ----------------------- | --------- | ---- |  | - | --------- | 
|                        |  |                        
|                        |  | Year Ended December 31,
|                        |  |                        
|                        |  | 2002                    |           | 2001
|                        |  |                         |           |     
|Pro forma revenue       |  | $                       | 1,185,174 |      |  | $ | 1,656,457 | 
|Pro forma income (loss) |  |                         | (743,913  | )    |  |   | 167,885   | 



|        |                                    
|------- | -----------------------------------
|Note 4. | Cost Reductions and Special Charges

The Company has initiated several cost reduction
programs, which have resulted in restructuring charges.
Information regarding the Companys restructuring charges
follows:

In July 2001, the Company announced a review of
spending initiatives with the aim of reducing its underlying
operating cost structure. During the year ended
December 31, 2001, the Company incurred a charge of $24,400
and this restructuring was substantially completed during 2003.

In March 2002, the Company announced that it
would reduce its annualized fixed operating costs 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 year ended December 31,
2002, the Company incurred a charge of $58,395. As of
December 31, 2003, the Company carried a liability of
$2,534 associated with this restructuring on its Consolidated
Statements of Financial Condition, which is reflected as follows:

|                                |       |              |        |          |  |              |         |         |   |   |       |       | 
|------------------------------- | ----- | ------------ | ------ | -------- |  | ------------ | ------- | ------- | - | - | ----- | ----- | 
|                                |       | Balance      |        |          |  | Balance     
|                                |       | December 31, |        |          |  | December 31,
|                                |       | 2002         |        | Payments |  | 2003        
|                                |       |              |        |          |  |             
|Workforce reductions            |       | $            | 14,870 |          |  | $            | (12,336 | )       |   | $ | 2,534 |      
|Office closures/ consolidations |       |              | 14,673 |          |  |              | (14,673 | )       |   |   |      |      
|                                |       |              |        |          |  |              |         |         |   |   |       |      
|                                | Total |              | $      | 29,543   |  |              | $       | (27,009 | ) |   | $     | 2,534 | 
|                                |       |              |        |          |  |              |         |         |   |   |       |      

The Company expects this restructuring to be
substantially completed during 2004.

In December 2002, the Company announced that it
had commenced a cost-reduction plan to reduce operating costs in
order to achieve cost synergies in connection with its
acquisition of Island. This restructuring included reducing
staff levels and related occupancy costs. During the year ended
December 31, 2002, the Company incurred a charge of
$62,405. As of December 31, 2003, the Company carried a
liability of $20,489 associated with this restructuring on its
Consolidated Statements of Financial Condition, which is
reflected as follows:

|                                |       |              |        |          |  |              |         |         |   |   |        |        | 
|------------------------------- | ----- | ------------ | ------ | -------- |  | ------------ | ------- | ------- | - | - | ------ | ------ | 
|                                |       | Balance      |        |          |  | Balance     
|                                |       | December 31, |        |          |  | December 31,
|                                |       | 2002         |        | Payments |  | 2003        
|                                |       |              |        |          |  |             
|Workforce reductions            |       | $            | 19,496 |          |  | $            | (18,488 | )       |   | $ | 1,008  |       
|Office closures/ consolidations |       |              | 31,213 |          |  |              | (11,732 | )       |   |   | 19,481 |       
|                                |       |              |        |          |  |              |         |         |   |   |        |       
|                                | Total |              | $      | 50,709   |  |              | $       | (30,220 | ) |   | $      | 20,489 | 
|                                |       |              |        |          |  |              |         |         |   |   |        |       

The Company expects to pay approximately $10,000
to $12,000 of the remaining liability by December 31, 2004.

97



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


In December 2003, the Company announced a cost
restructuring plan and recorded a charge of $59,497 related to
the reduction of workforce by approximately 185 employees (or
approximately 15% of full-time employees) and the consolidation
of the companys office space. This cost-reduction is
primarily due to the strategic decisions related to the
separation of Instinet and INET, formerly the Island ECN, Inc.,
and the companys ongoing efforts to streamline its
operations. As of December 31, 2003, the Company carried a
liability of $48,402 associated with this restructuring on its
Consolidated Statements of Financial Condition, which is
reflected as follows:

|                               |       |          |        |              |  |              |         |         |   |   |        |        | 
|------------------------------ | ----- | -------- | ------ | ------------ |  | ------------ | ------- | ------- | - | - | ------ | ------ | 
|                               |       |          |        |              |  | Balance     
|                               |       | Original |        | Payments and |  | December 31,
|                               |       | Expense  |        | Write-downs  |  | 2003        
|                               |       |          |        |              |  |             
|Workforce reductions           |       | $        | 8,429  |              |  | $            | (1,051  | )       |   | $ | 7,378  |       
|Office closures/consolidations |       |          | 51,068 |              |  |              | (10,044 | )       |   |   | 41,024 |       
|                               |       |          |        |              |  |              |         |         |   |   |        |       
|                               | Total |          | $      | 59,497       |  |              | $       | (11,095 | ) |   | $      | 48,402 | 
|                               |       |          |        |              |  |              |         |         |   |   |        |       

The Company expects to pay approximately $12,000
to $15,000 of the remaining liability by December 31, 2004.

Note 5.     Securities
Owned, at Market Value

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

|                                               |       |              |         |         |  |   |         |         | 
|---------------------------------------------- | ----- | ------------ | ------- | ------- |  | - | ------- | ------- | 
|                                               |       |             
|                                               |       | December 31,
|                                               |       |             
|                                               |       | 2003         |         | 2002   
|                                               |       |              |         |        
|Municipal bonds                                |       | $            | 150,866 |         |  | $ | 157,683 |        
|Corporate bonds                                |       |              | 28,228  |         |  |   | 91,909  |        
|Foreign sovereign obligations                  |       |              | 50,018  |         |  |   | 58,146  |        
|Shares of stock exchanges                      |       |              | 32,440  |         |  |   | 29,246  |        
|U.S. government and federal agency obligations |       |              |        |         |  |   | 10,867  |        
|Other                                          |       |              |        |         |  |   | 200     |        
|                                               |       |              |         |         |  |   |         |        
|                                               | Total |              | $       | 261,552 |  |   | $       | 348,051 | 
|                                               |       |              |         |         |  |   |         |        

Note 6.     Investments

The Company makes strategic alliances with 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. The Companys Consolidated
Statements of Financial Condition include the following
investments:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Archipelago Holdings L.L.C.
    (Archipelago)  In 1999, the Company made
    an investment of £15,528, 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
    L.L.C., another ECN.
|
| |  | The NASDAQ Stock Market, Inc.
    (NASDAQ)  In 2000, the Company made an
    investment of $15,475 in NASDAQ, and acquired additional
    investments totaling $2,817 with the acquisitions of ProTrader
    and Island. Together, they represent a 1.7% interest.                                                                                                                                                                                                                              

98



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Tradeware S.A.
    (Tradeware)  In 2000, the Company made
    strategic investments of
     4,000 and
    in 2001 made additional investments of 66,925 Belgian francs and
     1,500, now
    representing a 47.9% interest in Tradeware. Tradeware is a
    European based provider of integrated order routing solutions to
    broker-dealers in Europe. The Company recorded a loan receivable
    from Tradeware in the amount of $2,045. This loan accrues
    interest at prevailing market rates and matures on
    December 31, 2004. In 2003, the Company wrote off its
    investment in Tradeware.
|
| |  | TP Group LDC (TP Group) 
    In 1999 and 2000, the Company made strategic investments and
    also sold certain portions of its investment in TP Group.
    The Companys investment represented a 13.8% interest in
    TP Group as of December 31, 2002. TP Group is a
    consortium led by the Company that owned 38.9% of virt-x, an
    electronic order driven equities market for pan-European
    securities. In March 2003, TP Group sold virt-x and
    TP Group was subsequently liquidated. The Company received
    $3,080 as part of the liquidation.                                             
|
| |  | Japan Cross Securities Co. Ltd. (Japan
    Cross)  In 2001, the Company made a series of
    strategic investments totaling $3,782, representing a 50%
    interest in Japan Cross, a joint venture which was established
    to provide a crossing service for Japanese equity securities. In
    September 2003, the Company sold its interest in Japan Cross for
    $1,481.                                                                                                                                                                                                                                  
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | 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 Nasdaq to develop
    securities electronic trading systems and tools. In 2003, the
    Company wrote off its investment in e-Xchange.                                                                                                                                                                                                                                                                            

The carrying value of the Companys
investments is as follows:

|                                |       |              |        |        |  |   |        |        | 
|------------------------------- | ----- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                                |       |             
|                                |       | December 31,
|                                |       |             
|                                |       | 2003         |        | 2002  
|                                |       |              |        |       
|Archipelago Holdings L.L.C.     |       | $            | 20,000 |        |  | $ | 15,000 |       
|The Nasdaq Stock Market, Inc.   |       |              | 7,499  |        |  |   | 14,792 |       
|Tradeware S.A.                  |       |              |       |        |  |   | 3,254  |       
|TP Group LDC                    |       |              |       |        |  |   | 2,695  |       
|Japan Cross Securities Co. Ltd. |       |              |       |        |  |   | 2,096  |       
|Starmine Corporation            |       |              | 2,000  |        |  |   | 2,000  |       
|e-Xchange Advantage Corporation |       |              |       |        |  |   | 2,000  |       
|                                |       |              |        |        |  |   |        |       
|                                | Total |              | $      | 29,499 |  |   | $      | 41,837 | 
|                                |       |              |        |        |  |   |        |       

99



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


Note 7.     Fixed
Assets and Leasehold Improvements, Net

Fixed assets and leasehold improvements, net
consist of the following:

|                         |       |              |          |         |  |   |          |         | 
|------------------------ | ----- | ------------ | -------- | ------- |  | - | -------- | ------- | 
|                         |       |             
|                         |       | December 31,
|                         |       |             
|                         |       | 2003         |          | 2002   
|                         |       |              |          |        
|Leasehold improvements   |       | $            | 150,041  |         |  | $ | 141,248  |        
|Office equipment         |       |              | 120,100  |         |  |   | 116,449  |        
|Computer equipment       |       |              | 174,406  |         |  |   | 190,671  |        
|Software costs           |       |              | 26,996   |         |  |   | 23,505   |        
|                         |       |              |          |         |  |   |          |        
|                         |       |              | 471,543  |         |  |   | 471,873  |        
|Accumulated depreciation |       |              | (352,492 | )       |  |   | (295,098 | )      
|                         |       |              |          |         |  |   |          |        
|                         | Total |              | $        | 119,051 |  |   | $        | 176,775 | 
|                         |       |              |          |         |  |   |          |        

In connection with the cost reduction and
restructuring plan, the Company wrote-off a net book value of
$8,430 for fixed assets during the year ended December 31,
2003.

Note 8.     Intangible
Assets, Net



| |                  
| | -----------------
| | Intangible Assets

Information regarding the Companys
identifiable intangible assets is as follows:

|                       |       |           |     |                   |  |                   |         |         |  |       |         |              |   |     |        |        |  |   |         |         |  |   |         |         |   |   |         |         | 
|---------------------- | ----- | --------- | --- | ----------------- |  | ----------------- | ------- | ------- |  | ----- | ------- | ------------ | - | --- | ------ | ------ |  | - | ------- | ------- |  | - | ------- | ------- | - | - | ------- | ------- | 
|                       |       |           |     |                   |  |                  
|                       |       |           |     | December 31, 2003 |  | December 31, 2002
|                       |       | Estimated |     |                   |  |                  
|                       |       | Life      |     |                   |  | Accumulated       |         |         |  |       |         | Accumulated  |   |    
|                       |       | (Years)   |     | Gross             |  | Amortization      |         | Net     |  | Gross |         | Amortization |   | Net
|                       |       |           |     |                   |  |                   |         |         |  |       |         |              |   |    
|Technology             |       |           | 7.0 |                   |  | $                 | 102,916 |         |  | $     | (32,260 | )            |   | $   | 70,656 |        |  | $ | 122,984 |         |  | $ | (14,691 | )       |   | $ | 108,293 |        
|Customer relationships |       |           | 4.0 |                   |  |                   | 15,500  |         |  |       | (3,875  | )            |   |     | 11,625 |        |  |   | 15,500  |         |  |   | (775    | )       |   |   | 14,725  |        
|Tradename              |       |           | 1.5 |                   |  |                   |        |         |  |       |        |              |   |     |       |        |  |   | 4,800   |         |  |   | (800    | )       |   |   | 4,000   |        
|Non-compete agreements |       |           | 1.0 |                   |  |                   | 1,300   |         |  |       | (1,300  | )            |   |     |       |        |  |   | 1,300   |         |  |   | (325    | )       |   |   | 975     |        
|                       |       |           |     |                   |  |                   |         |         |  |       |         |              |   |     |        |        |  |   |         |         |  |   |         |         |   |   |         |        
|                       | Total |           |     |                   |  |                   | $       | 119,716 |  |       | $       | (37,435      | ) |     | $      | 82,281 |  |   | $       | 144,584 |  |   | $       | (16,591 | ) |   | $       | 127,993 | 
|                       |       |           |     |                   |  |                   |         |         |  |       |         |              |   |     |        |        |  |   |         |         |  |   |         |         |   |   |         |        

Intangible assets arose in connection with the
Companys acquisitions of ProTrader in October 2001 and
Island in September 2002 (see Note 3). The intangible
assets are amortized on a straight-line basis over their
respective estimated useful lives.

During the fourth quarter of 2003, the Company
wrote off a net book value of $21,668 for the impairment of
intangible assets. The write off consisted of $20,668 in
technology and $1,600 in tradename. The impairment charge was
based on the application of annual impairment tests prescribed
by current accounting standards.

100



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


Amortization expense was $24,044, $14,232 and
$2,358 for the years ended December 31, 2003, 2002 and
2001, respectively. Estimated amortization expense for each of
the next 5 years is as follows:

|                              |  |   |        | 
|----------------------------- |  | - | ------ | 
|Year ending December 31, 2004 |  | $ | 17,134 | 
|Year ending December 31, 2005 |  | $ | 17,134 | 
|Year ending December 31, 2006 |  | $ | 17,134 | 
|Year ending December 31, 2007 |  | $ | 16,359 | 
|Year ending December 31, 2008 |  | $ | 11,524 | 



| |         
| | --------
| | Goodwill

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

|                             |                                     |                         |         |          |   |   |         |        | 
|---------------------------- | ----------------------------------- | ----------------------- | ------- | -------- | - | - | ------- | ------ | 
|                             |                                     |                        
|                             |                                     | Year Ended December 31,
|                             |                                     |                        
|                             |                                     | 2002                    |         | 2001    
|                             |                                     |                         |         |         
|Balance, beginning of period |                                     | $                       | 145,066 |          |   | $ | 81,830  |       
|                             | Goodwill acquired during the period |                         |         | 425,971  |   |   |         | 63,236 | 
|                             | Goodwill impairment                 |                         |         | (571,037 | ) |   |         |       | 
|                             |                                     |                         |         |          |   |   |         |       
|Balance, end of period       |                                     | $                       |        |          |   | $ | 145,066 |       
|                             |                                     |                         |         |          |   |   |         |       

Pursuant to SFAS No. 142, the Company
changed its accounting policy related to goodwill effective
January 1, 2002. SFAS No. 142 requires that goodwill
no longer be amortized to earnings, but instead be reviewed for
impairment at least annually. Under SFAS No. 142,
impairment is deemed to exist when the carrying value of
goodwill is greater than its implied fair value. The following
table reflects the Companys results adjusted as though the
Company had adopted SFAS No. 142 on January 1, 2001:

|                        |                                                   |                   |         |       | 
|----------------------- | ------------------------------------------------- | ----------------- | ------- | ----- | 
|                        |                                                   | Year Ended       
|                        |                                                   | December 31, 2001
|                        |                                                   |                  
|Net income, as reported |                                                   | $                 | 144,767 |      
|                        | Goodwill amortization, net of tax effect          |                   |         | 6,622 | 
|                        |                                                   |                   |         |      
|Net income, as adjusted |                                                   | $                 | 151,389 |      
|                        |                                                   |                   |         |      
|                        | Basic and diluted earnings per share, as reported |                   | $       | 0.63  | 
|                        | Basic and diluted earnings per share, as adjusted |                   | $       | 0.66  | 

During the third quarter of 2002, annual
impairment tests showed the Companys book value exceeded
its fair market value. In accordance with SFAS No. 142
Goodwill and Other Intangible Assets, based on the
results of a valuation analysis prepared by an independent
specialist, the Company determined that existing goodwill had
been completely impaired and as a result recorded a pre-tax
goodwill impairment loss of $551,991, the remaining carrying
value of our goodwill.



| |                                                        
| | -------------------------------------------------------
| | Cumulative Effect of Change in Accounting
    Principle

During the first quarter of 2002, the Company
identified indicators of possible impairment of its recorded
goodwill related to its ProTrader and Montag Pöpper &
Partner GmbH (Montag) acquisitions. For ProTrader,
such indicators were an overall decrease in customer transaction
volumes, which primarily led to operating losses. As a result,
the Company closed several trading offices and restructured its
operations. Based on the results of a discounted cash flow
analysis, the Company calculated a level of goodwill impairment
of $15,750, which was represented by the shortfall of the
discounted cash flows versus the carrying amount of goodwill.

101



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


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. Therefore, the Companys goodwill related to its
acquisition of Montag, a fixed income broker-dealer, was
impaired and the Company recorded an impairment loss of $3,296,
the remaining carrying value of its goodwill.

The Company recorded goodwill impairment, net of
taxes, of $18,642 or $0.07 a share, for the year ended
December 31, 2002 as a change in accounting principle.

Note 9.     Short-Term
Borrowings

Short-term borrowings represent amounts borrowed
on uncommitted bank lines of credit, which provide for
borrowings for operational and general corporate purposes which
generally bear interest rates that approximate the Federal Funds
rate in the U.S. and euro or pound sterling LIBOR rates in
Europe. The following is a summary of short-term borrowing
information:

|                                               |                             |                         |   |        |         |      |   |         |         |  |   |         |         | 
|---------------------------------------------- | --------------------------- | ----------------------- | - | ------ | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                               |                             |                        
|                                               |                             | Year Ended December 31,
|                                               |                             |                        
|                                               |                             | 2003                    |   | 2002   |         | 2001
|                                               |                             |                         |   |        |         |     
|Average amount outstanding during each period: |                             |                         |   |        |         |      |   |         |         |  |   |        
|                                               | U.S. dollar denominated     |                         | $ | 1,065  |         |      | $ | 2,259   |         |  | $ | 15,390  |        
|                                               | Non-U.S. dollar denominated |                         |   | 9,615  |         |      |   | 37,700  |         |  |   | 65,055  |        
|                                               |                             |                         |   |        |         |      |   |         |         |  |   |        
|                                               |                             | Total                   |   | $      | 10,680  |      |   | $       | 39,959  |  |   | $       | 80,445  | 
|                                               |                             |                         |   |        |         |      |   |         |         |  |   |        
|Maximum amount outstanding during each period: |                             |                         |   |        |         |      |   |         |         |  |   |        
|                                               | U.S. dollar denominated     |                         | $ | 47,512 |         |      | $ | 40,002  |         |  | $ | 90,714  |        
|                                               | Non-U.S. dollar denominated |                         |   | 55,297 |         |      |   | 134,362 |         |  |   | 145,614 |        
|                                               |                             |                         |   |        |         |      |   |         |         |  |   |        
|                                               |                             | Total                   |   | $      | 102,809 |      |   | $       | 174,364 |  |   | $       | 236,328 | 
|                                               |                             |                         |   |        |         |      |   |         |         |  |   |        

Weighted average interest rates for
U.S. dollar and non-U.S. dollar denominated
obligations are as follows:

|                             |                                                   |                         |  |       |  |      |  |       |  |  |  |       | 
|---------------------------- | ------------------------------------------------- | ----------------------- |  | ----- |  | ---- |  | ----- |  |  |  | ----- | 
|                             |                                                   |                        
|                             |                                                   | Year Ended December 31,
|                             |                                                   |                        
|                             |                                                   | 2003                    |  | 2002  |  | 2001
|                             |                                                   |                         |  |       |  |     
|U.S. Dollar Denominated:     |                                                   |                         |  |       |  |      |  |       |  |  |  |      
|                             | Weighted average interest rate during each period |                         |  | 2.03% |  |      |  | 2.66% |  |  |  | 5.34% | 
|                             | Weighted average interest rate at each period end |                         |  | 2.03% |  |      |  | 2.50% |  |  |  | 5.02% | 
|Non-U.S. Dollar Denominated: |                                                   |                         |  |       |  |      |  |       |  |  |  |      
|                             | Weighted average interest rate during each period |                         |  | 2.93% |  |      |  | 3.64% |  |  |  | 3.75% | 
|                             | Weighted average interest rate at each period end |                         |  | 3.42% |  |      |  | 4.29% |  |  |  | 4.65% | 

102



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


Note 10.     Accounts
Payable, Accrued Expenses and Other Liabilities

Accounts payable, accrued expenses and other
liabilities consist of the following:

|                                      |       |              |         |         |  |   |         |         | 
|------------------------------------- | ----- | ------------ | ------- | ------- |  | - | ------- | ------- | 
|                                      |       |             
|                                      |       | December 31,
|                                      |       |             
|                                      |       | 2003         |         | 2002   
|                                      |       |              |         |        
|Accounts payable and accrued expenses |       | $            | 216,343 |         |  | $ | 190,690 |        
|Accrued restructuring                 |       |              | 73,342  |         |  |   | 82,169  |        
|Accrued compensation                  |       |              | 49,231  |         |  |   | 90,279  |        
|Payable to Reuters                    |       |              | 5,981   |         |  |   | 1,616   |        
|                                      |       |              |         |         |  |   |         |        
|                                      | Total |              | $       | 344,897 |  |   | $       | 364,754 | 
|                                      |       |              |         |         |  |   |         |        

Note 11.     Stockholders
Equity



| |                        
| | -----------------------
| | Initial Public Offering

On May 23, 2001, the Company completed its
initial public offering. In that offering, the Company sold
36,800 shares of common stock and received net proceeds of
approximately $486,916 after deducting offering expenses and a
repayment of a loan $150,000 to Reuters.

In connection with the Companys initial
public offering, the Company converted from a limited liability
company to a corporation in the state of Delaware.



| |                            
| | ---------------------------
| | Comprehensive Income (Loss)

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

|                                    |                                               |                         |         |         |   |      |          |          |   |   |         |         | 
|----------------------------------- | --------------------------------------------- | ----------------------- | ------- | ------- | - | ---- | -------- | -------- | - | - | ------- | ------- | 
|                                    |                                               |                        
|                                    |                                               | Year Ended December 31,
|                                    |                                               |                        
|                                    |                                               | 2003                    |         | 2002    |   | 2001
|                                    |                                               |                         |         |         |   |     
|Net income (loss)                   |                                               | $                       | (73,808 | )       |   | $    | (735,230 | )        |   | $ | 144,767 |        
|Changes in other comprehensive loss |                                               |                         |         |         |   |      |          |          |   |   |         |        
|                                    | Foreign currency translation adjustment       |                         |         | 18,104  |   |      |          | 23,961   |   |   |         | 1,303   | 
|                                    |                                               |                         |         |         |   |      |          |          |   |   |         |        
|                                    | Total comprehensive income (loss), net of tax |                         | $       | (55,704 | ) |      | $        | (711,269 | ) |   | $       | 146,070 | 
|                                    |                                               |                         |         |         |   |      |          |          |   |   |         |        

Note 12.     Employee
Benefit Plans



| |                     
| | --------------------
| | Employee 401(k) Plan

Employees of the Company are eligible to
participate in the Instinet Group 401(k) plan (Instinet
Group Plan), which was formed on January 1, 2003. For
2003, the Company matched 25% of employees pre-tax
contributions. To be eligible for a matching contribution,
employees need to have been an active employee at
December 31 with at least three months of service.
Effective January 1, 2003 the Company terminated its
participation in the Reuters 401(k) plan replacing it with the
Instinet Group Plan. Under the Reuters 401(k) plan the Company
matched a specified percentage of eligible employees
salaries. Also during 2003, the Company terminated the Island
401(k) plan and transferred the Island employees to the Instinet
Group Plan.

Substantially all employees of the Company are
eligible to participate in Reuters employee stock purchase plan
(ESP Plan) where employees can contribute up to a
predetermined limit of their salary

103



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


towards the purchase of Reuters ordinary shares
for non-U.S. employees or American Depository Shares
(ADS) for U.S. employees. The Company may
contribute 20% of the employees contribution to the plan.

Reuters also provides certain employees of the
Company with post retirement benefits such as healthcare and
life insurance. Eligible employees are those who retire from the
Company at normal retirement age. In 2002, Reuters modified its
post retirement benefits and a majority of accrued costs related
to the post retirement plans will be reversed over the next
19 years in accordance with generally accepted accounting
principles.

Outside the U.S. the Company participates in
various Reuters pension plans. The majority of
non-U.S. employees who joined the Company prior to April
1999 were eligible to participate in Reuters Pension Fund and
most new employees were eligible to participate in the Reuters
Retirement Plan. These plans allow for contributions up to
limits imposed by local taxing authorities. Funding is provided
by voluntary contributions from members of the plans and
contributions from the Company.

The Company terminated the following benefit and
compensation plans at the end of 2002.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Certain employees of the Company also
    participated in a long-term performance-based incentive
    compensation plan (Long Term Plan). Under the Long
    Term Plan, a portion of the operating earnings of the Company
    exceeding certain predetermined targets aggregated over a
    four-year period were distributed to participants.                                                                                                                           
|
| |  | Certain employees of the Company were eligible to
    participate in the Instinet Management Deferral Plan (the
    Deferral Plan). Under the Deferral Plan, employees
    could voluntarily defer a portion of their compensation for a
    period of five years by investing in certain employer provided
    investment options administered by ICS, a subsidiary of the
    Company. The participating employees bore the entire risk of
    each investment election.

The Companys expenses related to the
employee benefit plans referred to above are as follows:

|                         |  |                         |       |      |  |      |       |  |  |  |        | 
|------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ----- |  |  |  | ------ | 
|                         |  |                        
|                         |  | Year Ended December 31,
|                         |  |                        
|                         |  | 2003                    |       | 2002 |  | 2001
|                         |  |                         |       |      |  |     
|Pension plans            |  |                         | 3,311 |      |  |      | 9,513 |  |  |  | 12,937 | 
|Long term plan           |  |                         |      |      |  |      | 47    |  |  |  | 9,405  | 
|ESP plan                 |  |                         |      |      |  |      |      |  |  |  | 206    | 
|Post retirement benefits |  |                         |      |      |  |      | 733   |  |  |  | 1,358  | 
|Deferred compensation    |  |                         |      |      |  |      |      |  |  |  | 15,750 | 



| |                       
| | ----------------------
| | Restricted Stock Units

In 2002, the Company granted Restricted Stock
Units (RSU) to certain members of senior management
in lieu of cash for a portion of each members calendar
year 2001 bonus. The Company also granted RSU to the newly
appointed Chief Executive Officer for a portion of the
executives 2002 bonus. In 2003, the Company granted RSU to
a board member as director fees.

The RSU are convertible into an equal number of
shares of the Companys common stock and generally vest
either 1 or 2 years from the date of grant. As of December 31,
2003 and 2002, the Company had 41 RSU and 206 RSU outstanding.



| |              
| | -------------
| | Stock Options

Instinet Plan

Substantially all employees and certain directors
of the Company and certain employees of Radianz who were
previously employees of the Company (see Note 17)
participate in the Companys stock option plan

104



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


(Instinet Option Plan), which was
adopted in February 2000. Under the Instinet Option Plan,
options on the Companys common shares are issued for terms
of 7 years and generally vest over 4 years. Primarily
all options granted in 2002 were 100% vested after 1 year. In
2003, primarily all options granted vested 50% after 1 year and
on a pro rata basis over the next 36 months. The options are
exercisable at the estimated fair market value of the shares on
the date the options were issued. The terms for options granted
to employees and non-employees are the same. The Company has
authorized the issuance of a maximum of 34,118 options
under the Instinet Option Plan. Options expire on dates ranging
from March 2003 to December 2011.

In May 2001, the Company adjusted the shares and
exercise price of its existing options as a result of its
conversion from a limited liability company to a corporation in
connection with its initial public offering, at a conversion
rate of 1.033209. There was no change in the economic value per
each option granted.

Under the terms of the merger agreement with
Island (see Note 3), the Company converted and issued
2,942 options to holders of Island options as substitutions
for Island options outstanding at September 20, 2002. These
converted options are subject to the provisions of the Island
Stock Option plan, which vest over 3 or 4 years, have
terms of 5 to 10 years and carry exercise prices
ranging from $0.91 to $9.23.

In October 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 per option. The $0.98 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.

The activity related to Instinet Option Plan is
as follows:

|                               |           |             |        |          |   |              |       |       |  |  |     |  | 
|------------------------------ | --------- | ----------- | ------ | -------- | - | ------------ | ----- | ----- |  |  | --- |  | 
|                               |           |             |        | Weighted |   | Weighted    
|                               |           |             |        | Average  |   | Average     
|                               |           | Options     |        | Exercise |   | Remaining   
|                               |           | Outstanding |        | Price    |   | Life (Years)
|                               |           |             |        |          |   |             
|Outstanding, December 31, 2000 |           |             | 7,004  |          |   |              | 14.86 |       |  |  | 5.8 | 
|                               | Granted   |             |        | 17,056   |   |              |       | 16.51 |  |  |     |  | 
|                               | Forfeited |             |        | (2,937   | ) |              |       | 17.16 |  |  |     |  | 
|                               | Exercised |             |        | (19      | ) |              |       | 14.52 |  |  |     |  | 
|                               |           |             |        |          |   |              |       |       |  |  |     | 
|Outstanding, December 31, 2001 |           |             | 21,104 |          |   |              | 16.03 |       |  |  | 6.1 | 
|                               |           |             |        |          |   |              |       |       |  |  |     | 
|                               | Granted   |             |        | 11,585   |   |              |       | 5.07  |  |  |     |  | 
|                               | Forfeited |             |        | (7,260   | ) |              |       | 13.88 |  |  |     |  | 
|                               | Exercised |             |        | (1,523   | ) |              |       | 0.91  |  |  |     |  | 
|                               |           |             |        |          |   |              |       |       |  |  |     | 
|Outstanding, December 31, 2002 |           |             | 23,906 |          |   |              | 11.48 |       |  |  | 5.6 | 
|                               |           |             |        |          |   |              |       |       |  |  |     | 
|                               | Granted   |             |        | 10,409   |   |              |       | 3.26  |  |  |     |  | 
|                               | Forfeited |             |        | (6,171   | ) |              |       | 12.01 |  |  |     |  | 
|                               | Exercised |             |        | (112     | ) |              |       | 2.15  |  |  |     |  | 
|                               |           |             |        |          |   |              |       |       |  |  |     | 
|Outstanding, December 31, 2003 |           |             | 28,032 |          |   |              | 8.34  |       |  |  | 5.3 | 
|                               |           |             |        |          |   |              |       |       |  |  |     | 
|Exercisable, December 31, 2001 |           |             | 2,549  |          |   |              | 14.82 |       |  |  |     | 
|Exercisable, December 31, 2002 |           |             | 8,304  |          |   |              | 15.40 |       |  |  |     | 
|Exercisable, December 31, 2003 |           |             | 12,512 |          |   |              | 10.18 |       |  |  |     | 

105



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


The options outstanding as of December 31,
2003 are as follows:

|                               |  |             |        |          |  |              |       |  |  |  |     | 
|------------------------------ |  | ----------- | ------ | -------- |  | ------------ | ----- |  |  |  | --- | 
|                               |  |             |        | Weighted |  | Weighted    
|                               |  |             |        | Average  |  | Average     
|                               |  | Options     |        | Exercise |  | Remaining   
|Exercise Price                 |  | Outstanding |        | Price    |  | Life (Years)
|                               |  |             |        |          |  |             
|$ 0.91 - $ 1.22                |  |             | 322    |          |  |              | 1.03  |  |  |  | 6.6 | 
|$ 3.25 - $ 3.48                |  |             | 11,074 |          |  |              | 3.27  |  |  |  | 6.2 | 
|$ 6.00 - $ 6.53                |  |             | 5,584  |          |  |              | 6.03  |  |  |  | 5.3 | 
|$ 8.48 - $ 9.97                |  |             | 859    |          |  |              | 8.72  |  |  |  | 7.2 | 
|$13.52 - $14.80                |  |             | 5,990  |          |  |              | 13.59 |  |  |  | 3.9 | 
|$17.77 - $18.70                |  |             | 4,203  |          |  |              | 17.79 |  |  |  | 4.2 | 
|                               |  |             |        |          |  |              |       |  |  |  |     | 
|Outstanding, December 31, 2003 |  |             | 28,032 |          |  |              |       |  |  |  |     | 
|                               |  |             |        |          |  |              |       |  |  |  |     | 

The weighted average fair value of options
granted during the year ended December 31, 2003, 2002 and
2001 was $2.66 per option, $4.42 per option and $4.80 per
option, respectively. The fair value of each option is
estimated, as of its respective grant dates, using the
Black-Scholes option pricing model with the following weighted
average assumptions:

|                        |  |                         |         |      |  |      |         |   |  |  |         |  
|----------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                        |  |                        
|                        |  | Year Ended December 31,
|                        |  |                        
|                        |  | 2003                    |         | 2002 |  | 2001
|                        |  |                         |         |      |  |     
|Risk-free interest rate |  |                         | 3.75    | %    |  |      | 4.38    | % |  |  | 6.54    | %
|Expected volatility     |  |                         | 56.11   | %    |  |      | 87.39   | % |  |  | 68.48   | %
|Dividend yield          |  |                         | 0       | %    |  |      | 0       | % |  |  | 0       | %
|Expected life           |  |                         | 7 years |      |  |      | 7 years |   |  |  | 7 years |  

Reuters Plans

Certain members of the Company participate in the
following Reuters stock option plans (collectively, the
Reuters Plans).

Save As You Earn Plan (SAYE Plan)
 Reuters introduced a new SAYE Plan each year beginning in
1996 to 2001. SAYE Plan options were issued for terms of 3 or 5
year period and were exercisable at the market price of Reuters
ADS or ordinary shares on the date of grant. The Company
contributed 20% of the exchange price of the option to
U.S.-based employees when exercised. For non-U.S.-based
employees, options were issued with an exercise price 20% less
than the market price of the ordinary shares on the date of
grant. Accordingly, the Company recorded as deferred
compensation the intrinsic value of the stock options awarded
which is recognized over the vesting period.

Reuters ADS option activity under the SAYE Plan
is as follows:

106



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##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


|                               |           |             |    |          |   |              |       |       |  |  |     |  | 
|------------------------------ | --------- | ----------- | -- | -------- | - | ------------ | ----- | ----- |  |  | --- |  | 
|                               |           |             |    | Weighted |   | Weighted    
|                               |           |             |    | Average  |   | Average     
|                               |           | Options     |    | Exercise |   | Remaining   
|                               |           | Outstanding |    | Price    |   | Life (Years)
|                               |           |             |    |          |   |             
|Outstanding, December 31, 2000 |           |             | 34 |          |   |              | 65.89 |       |  |  | 2.7 | 
|                               | Forfeited |             |    | (1       | ) |              |       | 58.88 |  |  |     |  | 
|                               | Exercised |             |    | (13      | ) |              |       | 58.88 |  |  |     |  | 
|                               |           |             |    |          |   |              |       |       |  |  |     | 
|Outstanding, December 31, 2001 |           |             | 20 |          |   |              | 70.48 |       |  |  | 1.7 | 
|                               |           |             |    |          |   |              |       |       |  |  |     | 
|                               | Forfeited |             |    | (16      | ) |              |       | 63.76 |  |  |     |  | 
|                               |           |             |    |          |   |              |       |       |  |  |     | 
|Outstanding, December 31, 2002 |           |             | 4  |          |   |              | 82.06 |       |  |  | 1.8 | 
|                               |           |             |    |          |   |              |       |       |  |  |     | 
|                               | Forfeited |             |    | (4       | ) |              |       | 82.06 |  |  |     |  | 
|                               |           |             |    |          |   |              |       |       |  |  |     | 
|Outstanding, December 31, 2003 |           |             |   |          |   |              |      |       |  |  |    | 
|                               |           |             |    |          |   |              |       |       |  |  |     | 

Reuters ordinary shares options activity under
SAYE Plan is as follows:

|                               |           |             |     |          |   |              |       |       |  |  |     |  | 
|------------------------------ | --------- | ----------- | --- | -------- | - | ------------ | ----- | ----- |  |  | --- |  | 
|                               |           |             |     | Weighted |   | Weighted    
|                               |           |             |     | Average  |   | Average     
|                               |           | Options     |     | Exercise |   | Remaining   
|                               |           | Outstanding |     | Price    |   | Life (Years)
|                               |           |             |     |          |   |             
|Outstanding, December 31, 2000 |           |             | 243 |          |   |              | 12.66 |       |  |  | 2.1 | 
|                               | Granted   |             |     | 39       |   |              |       | 17.66 |  |  |     |  | 
|                               | Forfeited |             |     | (6       | ) |              |       | 10.54 |  |  |     |  | 
|                               | Exercised |             |     | (29      | ) |              |       | 8.82  |  |  |     |  | 
|                               |           |             |     |          |   |              |       |       |  |  |     | 
|Outstanding, December 31, 2001 |           |             | 247 |          |   |              | 13.95 |       |  |  | 1.3 | 
|                               |           |             |     |          |   |              |       |       |  |  |     | 
|                               | Forfeited |             |     | (120     | ) |              |       | 15.01 |  |  |     |  | 
|                               |           |             |     |          |   |              |       |       |  |  |     | 
|Outstanding, December 31, 2002 |           |             | 127 |          |   |              | 12.94 |       |  |  | 0.4 | 
|                               |           |             |     |          |   |              |       |       |  |  |     | 
|                               | Forfeited |             |     | (112     | ) |              |       | 12.79 |  |  |     |  | 
|                               |           |             |     |          |   |              |       |       |  |  |     | 
|Outstanding, December 31, 2003 |           |             | 15  |          |   |              | 14.10 |       |  |  | 0.7 | 
|                               |           |             |     |          |   |              |       |       |  |  |     | 

Plan 2000  Reuters introduced the Plan 2000
option plan in 1998, under which employees may be entitled to a
single option award to acquire 2000 shares of Reuters ordinary
shares. Options are issued for terms of 4 years, vest after a
3-year period and are exercisable at the market price of the
ordinary share on the date of grant.

Reuters ordinary shares options activity under
Plan 2000 is as follows:

|                               |           |             |       |          |   |              |       |       |  |  |     |  | 
|------------------------------ | --------- | ----------- | ----- | -------- | - | ------------ | ----- | ----- |  |  | --- |  | 
|                               |           |             |       | Weighted |   | Weighted    
|                               |           |             |       | Average  |   | Average     
|                               |           | Options     |       | Exercise |   | Remaining   
|                               |           | Outstanding |       | Price    |   | Life (Years)
|                               |           |             |       |          |   |             
|Outstanding, December 31, 2000 |           |             | 1,712 |          |   |              | 10.71 |       |  |  | 4.9 | 
|                               | Forfeited |             |       | (4       | ) |              |       | 9.79  |  |  |     |  | 
|                               | Exercised |             |       | (16      | ) |              |       | 10.38 |  |  |     |  | 
|                               |           |             |       |          |   |              |       |       |  |  |     | 
|Outstanding, December 31, 2001 |           |             | 1,692 |          |   |              | 10.71 |       |  |  | 3.9 | 
|                               |           |             |       |          |   |              |       |       |  |  |     | 
|                               | Forfeited |             |       | (1,136   | ) |              |       | 10.91 |  |  |     |  | 
|                               | Exercised |             |       | (8       | ) |              |       | 9.79  |  |  |     |  | 
|                               |           |             |       |          |   |              |       |       |  |  |     | 
|Outstanding, December 31, 2002 |           |             | 548   |          |   |              | 10.32 |       |  |  | 2.9 | 
|                               |           |             |       |          |   |              |       |       |  |  |     | 
|                               | Forfeited |             |       | (14      | ) |              |       | 12.48 |  |  |     |  | 
|                               |           |             |       |          |   |              |       |       |  |  |     | 
|Outstanding, December 31, 2003 |           |             | 534   |          |   |              | 10.27 |       |  |  | 1.9 | 
|                               |           |             |       |          |   |              |       |       |  |  |     | 

107



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


There were no exercisable options in the Reuters
Plans as of December 31, 2003, 2002 and 2001.

The weighted average of Reuters Plans options
granted during the year ended December 31, 2001 was $8.58 per
option. The fair value of each option is estimated, as of its
respective grant date, using the Black-Scholes option pricing
model with the following weighted average assumptions:

|                        |  |              |           |  
|----------------------- |  | ------------ | --------- | -
|                        |  | December 31,
|                        |  | 2001        
|                        |  |             
|Risk-free interest rate |  |              | 6.77      | %
|Expected volatility     |  |              | 48.84     | %
|Dividend yield          |  |              | 1.33      | %
|Expected life           |  |              | 3.4 years |  

Note 13.     Income
Taxes

The provision (benefit) for income taxes
consisted of the following:

|          |                                   |                                            |   |         |         |      |   |         |         |   |   |        |         | 
|--------- | --------------------------------- | ------------------------------------------ | - | ------- | ------- | ---- | - | ------- | ------- | - | - | ------ | ------- | 
|          |                                   |                                           
|          |                                   | Year Ended December 31,                   
|          |                                   |                                           
|          |                                   | 2003                                       |   | 2002    |         | 2001
|          |                                   |                                            |   |         |         |     
|Current:  |                                   |                                            |   |         |         |      |   |         |         |   |   |       
|          | Federal                           |                                            | $ | (7,813  | )       |      | $ | (30,911 | )       |   | $ | 61,751 |        
|          | State                             |                                            |   | 6,561   |         |      |   | 6,456   |         |   |   | 19,463 |        
|          | Foreign                           |                                            |   | 1,122   |         |      |   | 5,292   |         |   |   | 1,187  |        
|          |                                   |                                            |   |         |         |      |   |         |         |   |   |       
|          |                                   | Total current                              |   |         | (130    | )    |   |         | (19,163 | ) |   |        | 82,401  | 
|          |                                   |                                            |   |         |         |      |   |         |         |   |   |       
|Deferred: |                                   |                                            |   |         |         |      |   |         |         |   |   |       
|          | Federal                           |                                            |   | (16,654 | )       |      |   | (28,323 | )       |   |   | 14,113 |        
|          | State                             |                                            |   | (5,143  | )       |      |   | (6,629  | )       |   |   | 3,726  |        
|          | State operating loss carryforward |                                            |   | (685    | )       |      |   | (11,982 | )       |   |   |       |        
|          | Foreign                           |                                            |   | 158     |         |      |   | 1,583   |         |   |   | 7,201  |        
|          |                                   |                                            |   |         |         |      |   |         |         |   |   |       
|          |                                   | Total deferred                             |   |         | (22,324 | )    |   |         | (45,351 | ) |   |        | 25,040  | 
|          |                                   |                                            |   |         |         |      |   |         |         |   |   |       
|          |                                   | Total provision (benefit) for income taxes |   | $       | (22,454 | )    |   | $       | (64,514 | ) |   | $      | 107,441 | 
|          |                                   |                                            |   |         |         |      |   |         |         |   |   |       

108



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##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


The temporary differences, which have created
deferred tax assets and liabilities, are detailed below:

|                          |                                       |                                |         |         |         |   |         |         |         |  
|------------------------- | ------------------------------------- | ------------------------------ | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                          |                                       |                               
|                          |                                       | December 31,                  
|                          |                                       |                               
|                          |                                       | 2003                           |         | 2002   
|                          |                                       |                                |         |        
|Deferred tax assets:      |                                       |                                |         |         |         |   |         |        
|                          | Depreciation and amortization         |                                | $       | 8,729   |         |   | $       | 6,838   |        
|                          | Deferred compensation                 |                                |         |        |         |   |         | 13,516  |        
|                          | Foreign tax credits                   |                                |         |        |         |   |         | 1,322   |        
|                          | Net operating losses                  |                                |         | 42,395  |         |   |         | 29,815  |        
|                          | Accruals and allowances               |                                |         | 58,130  |         |   |         | 59,582  |        
|                          | Goodwill                              |                                |         | 22,381  |         |   |         | 23,997  |        
|                          | Unrealized losses on securities owned |                                |         | 23,469  |         |   |         | 21,749  |        
|                          |                                       |                                |         |         |         |   |         |        
|                          |                                       | Total deferred tax assets      |         |         | 155,104 |   |         |         | 156,819 |  
|                          |                                       |                                |         |         |         |   |         |        
|Deferred tax liabilities: |                                       |                                |         |         |         |   |         |        
|                          | Depreciation and amortization         |                                |         |        |         |   |         | (22,015 | )      
|                          | Unrealized gains on securities owned  |                                |         | (11,061 | )       |   |         | (9,572  | )      
|                          |                                       |                                |         |         |         |   |         |        
|                          |                                       | Total deferred tax liabilities |         |         | (11,061 | ) |         |         | (31,587 | )
|                          |                                       |                                |         |         |         |   |         |        
|Valuation allowance       |                                       |                                | (70,385 | )       |         |   | (55,009 | )      
|                          |                                       |                                |         |         |         |   |         |        
|                          |                                       | Deferred tax asset, net        |         | $       | 73,658  |   |         | $       | 70,223  |  
|                          |                                       |                                |         |         |         |   |         |        

Management believes that it is more likely than
not that the Companys tax assets, net of the valuation
allowance, will be realized. The valuation allowance relates to
operating losses in certain non-U.S. subsidiaries, certain
state operating losses in the U.S., unrealized losses on
securities owned, and accruals and allowances in certain
non-U.S. subsidiaries that may not be realized in the
future.

The following is a reconciliation of the
provision for income taxes and the amount computed by applying
the U.S. Federal statutory rate to income (loss) before
income taxes.

|                                                                  |       |              |      |      |   |      |       |     |   |  |      |      |  
|----------------------------------------------------------------- | ----- | ------------ | ---- | ---- | - | ---- | ----- | --- | - |  | ---- | ---- | -
|                                                                  |       |             
|                                                                  |       | Year Ended  
|                                                                  |       | December 31,
|                                                                  |       |             
|                                                                  |       | 2003         |      | 2002 |   | 2001
|                                                                  |       |              |      |      |   |     
|U.S. federal income tax rate                                      |       |              | 35.0 | %    |   |      | 35.0  | %   |   |  | 35.0 | %   
|State and local income tax, net of federal income
    tax benefit |       |              | 1.5  |      |   |      | 0.8   |     |   |  | 5.2  |     
|Foreign income taxes                                              |       |              | (5.5 | )    |   |      | (2.4  | )   |   |  | 1.8  |     
|Permanent differences                                             |       |              | (0.2 | )    |   |      | (22.2 | )   |   |  | 1.3  |     
|Valuation allowance                                               |       |              | (5.5 | )    |   |      | (2.9  | )   |   |  |     |     
|Miscellaneous                                                     |       |              | (2.0 | )    |   |      | (0.2  | )   |   |  | (0.7 | )   
|                                                                  |       |              |      |      |   |      |       |     |   |  |      |     
|                                                                  | Total |              |      | 23.3 | % |      |       | 8.1 | % |  |      | 42.6 | %
|                                                                  |       |              |      |      |   |      |       |     |   |  |      |     

Note 14.     Commitments
and Contingencies



| |           
| | ----------
| | Litigation

From time to time, the Company is involved in
various legal proceedings arising in the ordinary course of
business. The Company is also subject to periodic regulatory
audits and inspections. While any litigation

109



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##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


contains an element of uncertainty, management
believes after consultation with counsel that the outcomes of
such proceedings or claims are unlikely to have a material
adverse effect on the Company.



| |       
| | ------
| | Leases

The Company leases office space and equipment
under non-cancelable operating leases with third parties and
Reuters extending for periods in excess of one year. Certain
leases contain renewal options and escalation clauses. As of
December 31, 2003, future minimum rental commitments under
non-cancelable operating leases (net of sublease proceeds) for
future fiscal years are as follows:

|                              |       |              |         |          |  |             |        |         |  |   |         |         | 
|----------------------------- | ----- | ------------ | ------- | -------- |  | ----------- | ------ | ------- |  | - | ------- | ------- | 
|                              |       | Gross Rental |         | Sublease |  | Net Rental 
|                              |       | Commitments  |         | Income   |  | Commitments
|                              |       |              |         |          |  |            
|Year ending December 31, 2004 |       | $            | 42,078  |          |  | $           | 7,159  |         |  | $ | 34,919  |        
|Year ending December 31, 2005 |       |              | 39,835  |          |  |             | 9,227  |         |  |   | 30,608  |        
|Year ending December 31, 2006 |       |              | 37,827  |          |  |             | 8,766  |         |  |   | 29,061  |        
|Year ending December 31, 2007 |       |              | 36,120  |          |  |             | 8,552  |         |  |   | 27,568  |        
|Year ending December 31, 2008 |       |              | 35,030  |          |  |             | 8,392  |         |  |   | 26,638  |        
|Thereafter                    |       |              | 224,577 |          |  |             | 73,166 |         |  |   | 151,411 |        
|                              |       |              |         |          |  |             |        |         |  |   |         |        
|                              | Total |              | $       | 415,467  |  |             | $      | 115,262 |  |   | $       | 300,205 | 
|                              |       |              |         |          |  |             |        |         |  |   |         |        

Rental expense amounted to $25,965, $26,818, and
$32,299 for the years ended December 31, 2003, 2002 and
2001, respectively.

The Company also has capital lease obligations of
$1,791, $1,432 and $938 for the years ending December 31,
2004, 2005 and 2006, respectively.



| |      
| | -----
| | Other

The Company has letter of credit agreements and
guarantees totaling $250,104 and $262,486 as of
December 31, 2003 and 2002 issued by commercial banking
institutions on the Companys behalf to various non-U.S.
securities clearing and regulatory agencies, as well as other
corporate services and obligations. The Company pays an annual
fee up to one percent of the value of the agreement.

As of December 31, 2003 and 2002, the
Company had access to $200,000 and $201,000 of uncommitted
credit lines, respectively, from commercial banking institutions
to meet the funding needs of our U.S. operations. These
credit lines were collateralized by a combination of customer
securities and our marketable securities. As of
December 31, 2003 and 2002, there were no borrowings
outstanding under these credit lines. The Company paid no annual
fees to maintain these facilities. In addition, as of
December 31, 2003 and 2002, the Company had access to
$95,600 and $197,712, respectively, of uncommitted credit lines
from commercial banking institutions to meet the funding needs
of the Companys European and Asian subsidiaries.

Note 15.     Collateral
Arrangements

As of December 31, 2003 and
December 31, 2002, the fair value of collateral held by the
Company that could be sold or repledged totaled $456,366 and
$777,286, respectively. Such collateral is generally obtained
under resale and securities borrowing agreements. Of this
collateral, $448,662 and $699,037 had been sold or repledged as
of December 31, 2003 and December 31, 2002,
respectively, generally to cover short sales or effect
deliveries of securities. In addition, securities in customer
accounts with a fair value of $100,676 and

110



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


$47,549 could be sold or repledged by the Company
as of December 31, 2003 and December 31, 2002, respectively.

Note 16.     Net
Capital Requirements

The Companys broker-dealer subsidiaries are
subject to the SEC Uniform Net Capital Rule 15c3-1 under
the Securities Exchange Act of 1934 administered by the SEC, the
New York Stock Exchange (NYSE) and the National
Association of Securities Dealers, 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
$1,000 or 2% of aggregate debit items arising from customer
transactions.

The table below summarizes the minimum capital
requirements for the Companys U.S. broker-dealer
subsidiaries:

|                                               |       |                   |         |                   |  |            |       |             |  |             |         |            |  |   |         |         |  |   |       |       |  |   |         |         | 
|---------------------------------------------- | ----- | ----------------- | ------- | ----------------- |  | ---------- | ----- | ----------- |  | ----------- | ------- | ---------- |  | - | ------- | ------- |  | - | ----- | ----- |  | - | ------- | ------- | 
|                                               |       |                   |         |                  
|                                               |       | December 31, 2003 |         | December 31, 2002
|                                               |       |                   |         |                  
|                                               |       |                   |         | Net Capital       |  | Excess Net |       |             |  | Net Capital |         | Excess Net
|                                               |       | Net Capital       |         | Requirement       |  | Capital    |       | Net Capital |  | Requirement |         | Capital   
|                                               |       |                   |         |                   |  |            |       |             |  |             |         |           
|Instinet Clearing Services                     |       | $                 | 109,124 |                   |  | $          | 5,372 |             |  | $           | 103,752 |            |  | $ | 163,084 |         |  | $ | 2,905 |       |  | $ | 160,179 |        
|Instinet, LLC (formerly Instinet Corporation)  |       |                   | 133,627 |                   |  |            | 250   |             |  |             | 133,377 |            |  |   | 98,104  |         |  |   | 250   |       |  |   | 97,854  |        
|INET ATS, Inc. (formerly The Island ECN, Inc.) |       |                   | 28,112  |                   |  |            | 1,000 |             |  |             | 27,112  |            |  |   | 9,368   |         |  |   | 1,000 |       |  |   | 8,368   |        
|Lynch, Jones & Ryan, Inc.                      |       |                   | 8,602   |                   |  |            | 250   |             |  |             | 8,352   |            |  |   | 7,960   |         |  |   | 250   |       |  |   | 7,710   |        
|Island Execution Services, LLC                 |       |                   | 2,360   |                   |  |            | 1,000 |             |  |             | 1,360   |            |  |   | 1,877   |         |  |   | 1,000 |       |  |   | 877     |        
|Harborview, LLC                                |       |                   | 785     |                   |  |            | 250   |             |  |             | 535     |            |  |   |        |         |  |   |      |       |  |   |        |        
|                                               |       |                   |         |                   |  |            |       |             |  |             |         |            |  |   |         |         |  |   |       |       |  |   |         |        
|                                               | Total |                   | $       | 282,610           |  |            | $     | 8,122       |  |             | $       | 274,488    |  |   | $       | 280,393 |  |   | $     | 5,405 |  |   | $       | 274,988 | 
|                                               |       |                   |         |                   |  |            |       |             |  |             |         |            |  |   |         |         |  |   |       |       |  |   |         |        

On January 7, 2003, pursuant to an existing
option purchase agreement, the Company purchased Harborview, a
NYSE floor brokerage firm for $594.

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 December 31, 2003 and 2002, these
subsidiaries had met their local capital adequacy requirements.

Note 17.     Related
Party Transactions

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 affiliates and the Parent are generally settled on
a quarterly basis. A description of these transactions and
relationships is set forth below:

The Company received Reuters data
consisting of news and information which is used by the Company
as well as distributed to its customers. For the years ended
December 31, 2003, 2002 and 2001, the Company recorded
expense of $13,300, $11,814 and $13,849, respectively, related
to these services.

Reuters provided certain operational and
administrative support and other general corporate services to
the Company. For the years ended December 31, 2003, 2002
and 2001, the Company recorded expense of $13,680, $28,864 and
$31,228, respectively, related to these services.

111



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


In 2002, the Company entered into agreements with
Bridge Trading, a wholly owned subsidiary of Reuters, under
which the Company pays fees for accounts or orders introduced by
Bridge Trading to the Company. Payments under these agreements
amounted to $273 and $415 for the years ended December 31,
2003 and 2002, respectively.

In 2001, the Company leased office space for its
corporate headquarters in New York City from 3 Times Square
Associates LLC, a joint venture between Reuters and an
independent third party. The lease expires in 2021 with a
one-time right to cancel the lease after 10 years. The
Company made payments related to this lease agreement of
$15,519, $14,569 and $8,563 for the years ended
December 31, 2003, 2002 and 2001, respectively.

Effective September 2001, the Company sold at
book value its Research and Analytical Product
(R&A) to Reuters in order to allow Instinet
R&A users to leverage Reuters investment in Bridge Trading
by allowing them to participate in a much broader service, while
still benefiting from the information currently available
through R&A. Under the agreement, the Company sold to
Reuters all the assets, rights, claims, contracts, licenses,
trade secrets and confidential and proprietary business
information, and substantially all of the R&A employees used
by it in the R&A product platform. In turn, Reuters agreed
to assume certain liabilities and obligations of the R&A
business. The net book value of the assets sold, which consisted
of computer hardware, machinery and equipment, was $7,868. The
Company entered into a mutual services agreement with Reuters
under which the Company will continue to assist Reuters in
supporting the R&A business for up to 18 months. In
addition, the Company and Reuters have agreed to allow customers
of the Company who have been using the R&A product to
continue to receive service and support from Reuters. For the
years ended December 31, 2003, 2002 and 2001, the Company
recorded $2,145, $5,582 and $1,757, respectively, as expense to
Reuters for continuing to provide this service.

In June 2000, the Company sold at book value all
of its equipment related to its telecommunications network and
transferred certain employees to Radianz, a joint venture
between Reuters and Equant Finance B.V. (Equant),
which was created to provide internet protocol networks to the
financial services industry. Equant is a provider of voice, data
and internet services. Since June 2000, Radianz has provided
services related to the Companys core communications
network that prior to the sale would have been provided by the
Company. The Company, by the nature of a master agreement
between Reuters and Radianz, is subject to fee arrangements
negotiated by Reuters. For the years ended December 31,
2003, 2002 and 2001, the Company incurred expenses of $25,477,
$30,042 and $58,686, respectively, related to the Radianz
agreement.

In February 2000, Reuters provided a subordinated
loan to the Company of $49,000 to fund the Companys
purchase of LJR. This subordinated loan bore an interest rate
based on six-month LIBOR plus 1.25% and was repaid in June 2001.
For the year ended December 31, 2001, the Company recorded
interest expense related to this loan of $1,640.

112



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


Note 18.     Geographical
Data

The Companys activities as a provider of
agency brokerage services constitute a single business segment
pursuant to SFAS No. 131, Disclosures about Segment
of an Enterprise and Related Information. The accompanying
table summarized select data about the Companys domestic
and international operations. However, due to 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 the results by
geographic regions are not necessarily meaningful in
understanding the Companys business.

|                                  |               |                         |   |         |           |      |   |          |           |   |   |           |           | 
|--------------------------------- | ------------- | ----------------------- | - | ------- | --------- | ---- | - | -------- | --------- | - | - | --------- | --------- | 
|                                  |               |                        
|                                  |               | Year Ended December 31,
|                                  |               |                        
|                                  |               | 2003                    |   | 2002    |           | 2001
|                                  |               |                         |   |         |           |     
|Revenues                          |               |                         |   |         |           |      |   |          |           |   |   |          
|                                  | Domestic      |                         | $ | 926,219 |           |      | $ | 843,384  |           |   | $ | 1,130,940 |          
|                                  | International |                         |   | 167,424 |           |      |   | 215,816  |           |   |   | 360,087   |          
|                                  |               |                         |   |         |           |      |   |          |           |   |   |          
|                                  |               | Total                   |   | $       | 1,093,643 |      |   | $        | 1,059,200 |   |   | $         | 1,491,027 | 
|                                  |               |                         |   |         |           |      |   |          |           |   |   |          
|Income (loss) before income taxes |               |                         |   |         |           |      |   |          |           |   |   |          
|                                  | Domestic      |                         | $ | (83,007 | )         |      | $ | (779,844 | )         |   | $ | 180,437   |          
|                                  | International |                         |   | (13,255 | )         |      |   | 32,914   |           |   |   | 110,904   |          
|                                  |               |                         |   |         |           |      |   |          |           |   |   |          
|                                  |               | Total                   |   | $       | (96,262   | )    |   | $        | (746,930  | ) |   | $         | 291,341   | 
|                                  |               |                         |   |         |           |      |   |          |           |   |   |          

|             |               |              |   |           |           |  |   |           |           |  |  |  |  | 
|------------ | ------------- | ------------ | - | --------- | --------- |  | - | --------- | --------- |  |  |  |  | 
|             |               |              |   |          
|             |               | December 31, |   |          
|             |               |              |   |          
|             |               | 2003         |   | 2002      |           | 
|             |               |              |   |           |           | 
|Total Assets |               |              |   |           |           |  |   |           |           |  |  | 
|             | Domestic      |              | $ | 1,671,011 |           |  | $ | 1,905,418 |           |  |  |  | 
|             | International |              |   | 395,628   |           |  |   | 377,477   |           |  |  |  | 
|             |               |              |   |           |           |  |   |           |           |  |  | 
|             |               | Total        |   | $         | 2,066,639 |  |   | $         | 2,282,895 |  |  |  |  | 
|             |               |              |   |           |           |  |   |           |           |  |  | 

113



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


Note 19.     Discontinued
Operations

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:

|                                   |                                              |                                       |   |         |         |   |   |         |         |  
|---------------------------------- | -------------------------------------------- | ------------------------------------- | - | ------- | ------- | - | - | ------- | ------- | -
|                                   |                                              |                                      
|                                   |                                              | Year Ended December 31,              
|                                   |                                              |                                      
|                                   |                                              | 2002                                  |   | 2001   
|                                   |                                              |                                       |   |        
|Loss from discontinued operations: |                                              |                                       |   |         |         |   |   |        
|                                   | Loss from operation of fixed income business |                                       | $ | (33,768 | )       |   | $ | (39,133 | )      
|                                   | Income tax benefit                           |                                       |   | 11,022  |         |   |   | 14,769  |        
|                                   |                                              |                                       |   |         |         |   |   |        
|                                   |                                              | Net loss from discontinued operations |   | $       | (22,746 | ) |   | $       | (24,364 | )
|                                   |                                              |                                       |   |         |         |   |   |        
|Loss per share  basic and diluted |                                              |                                       |   |         |         |   |   |        
|                                   | Loss from operation of fixed income business |                                       | $ | (0.12   | )       |   | $ | (0.17   | )      
|                                   | Income tax benefit                           |                                       |   | 0.04    |         |   |   | 0.06    |        
|                                   |                                              |                                       |   |         |         |   |   |        
|                                   |                                              | Net loss from discontinued operations |   | $       | (0.08   | ) |   | $       | (0.11   | )
|                                   |                                              |                                       |   |         |         |   |   |        

The Company recorded a restructuring charge of
$22,514 related to the closure of its fixed income platform for
the year ended December 31, 2002. The Company has
substantially paid this liability.

Note 20.     Fair
Value of Financial Instruments

SFAS No. 107, Disclosure about Fair
Value of Financial Instruments, requires the disclosure of
the fair value of financial instruments, including assets and
liabilities recognized on the Consolidated Statements of
Financial Condition. Management estimates that the aggregate
fair value of all financial instruments recognized on the
Consolidated Statements of Financial Condition approximates
their carrying value. As such, financial instruments have been
adjusted to reflect their estimated fair value or are short term
in nature and bear interest at current market rates.

Note 21.     Quarterly
Results (Unaudited)

|                 |                |      |         |         |  |      |         |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |         |  |   |         |         |  |   |         |         | 
|---------------- | -------------- | ---- | ------- | ------- |  | ---- | ------- | ------- |  | ---- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                 |                | Q4   |         | Q3      |  | Q2   |         | Q1      |  | Q4   |         | Q3      |  | Q2   |         | Q1     
|                 |                |      |         |         |  |      |         |         |  |      |         |         |  |      |         |        
|                 |                | 2003 |         | 2003    |  | 2003 |         | 2003    |  | 2002 |         | 2002    |  | 2002 |         | 2002   
|                 |                |      |         |         |  |      |         |         |  |      |         |         |  |      |         |        
|REVENUE          |                |      |         |         |  |      |         |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |         |  |   |         |         |  |   |         |        
|Transaction fees |                | $    | 279,708 |         |  | $    | 268,210 |         |  | $    | 275,909 |         |  | $    | 255,224 |         |  | $ | 278,441 |         |  | $ | 263,917 |         |  | $ | 269,933 |         |  | $ | 265,881 |        
|Interest         |                |      | 5,899   |         |  |      | 4,931   |         |  |      | 6,651   |         |  |      | 6,347   |         |  |   | 8,546   |         |  |   | 10,699  |         |  |   | 11,958  |         |  |   | 8,934   |        
|Investments      |                |      | 10,268  |         |  |      | (667    | )       |  |      | 2,841   |         |  |      | (21,678 | )       |  |   | (19,878 | )       |  |   | (20,336 | )       |  |   | (13,181 | )       |  |   | (5,714  | )      
|                 |                |      |         |         |  |      |         |         |  |      |         |         |  |      |         |         |  |   |         |         |  |   |         |         |  |   |         |         |  |   |         |        
|                 | Total revenues |      |         | 295,875 |  |      |         | 272,474 |  |      |         | 285,401 |  |      |         | 239,893 |  |   |         | 267,109 |  |   |         | 254,280 |  |   |         | 268,710 |  |   |         | 269,101 | 

114



---



##### 



INSTINET GROUP INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In thousands, except per share
amounts)


|                                         |                                                                                                                                                       |                           |        |         |         |      |        |       |         |      |        |        |         |      |        |         |         |   |        |          |          |   |         |          |          |   |        |         |         |   |        |         |         |  
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------ | ------- | ------- | ---- | ------ | ----- | ------- | ---- | ------ | ------ | ------- | ---- | ------ | ------- | ------- | - | ------ | -------- | -------- | - | ------- | -------- | -------- | - | ------ | ------- | ------- | - | ------ | ------- | ------- | -
|                                         |                                                                                                                                                       | Q4                        |        | Q3      |         | Q2   |        | Q1    |         | Q4   |        | Q3     |         | Q2   |        | Q1     
|                                         |                                                                                                                                                       |                           |        |         |         |      |        |       |         |      |        |        |         |      |        |        
|                                         |                                                                                                                                                       | 2003                      |        | 2003    |         | 2003 |        | 2003  |         | 2002 |        | 2002   |         | 2002 |        | 2002   
|                                         |                                                                                                                                                       |                           |        |         |         |      |        |       |         |      |        |        |         |      |        |        
|EXPENSES                                 |                                                                                                                                                       |                           |        |         |         |      |        |       |         |      |        |        |         |      |        |         |         |   |        |          |          |   |         |          |          |   |        |         |         |   |        |        
|Compensation and benefits                |                                                                                                                                                       |                           | 51,079 |         |         |      | 51,450 |       |         |      | 60,749 |        |         |      | 63,984 |         |         |   | 60,745 |          |          |   | 63,809  |          |          |   | 70,989 |         |         |   | 86,218 |        
|Soft dollar and commission recapture     |                                                                                                                                                       |                           | 58,817 |         |         |      | 54,894 |       |         |      | 49,604 |        |         |      | 49,058 |         |         |   | 50,161 |          |          |   | 51,824  |          |          |   | 61,738 |         |         |   | 53,591 |        
|Broker-dealer rebates                    |                                                                                                                                                       |                           | 54,507 |         |         |      | 53,552 |       |         |      | 58,630 |        |         |      | 50,420 |         |         |   | 56,601 |          |          |   | 39,004  |          |          |   | 25,503 |         |         |   | 3,291  |        
|Brokerage, clearing and exchange fees    |                                                                                                                                                       |                           | 37,275 |         |         |      | 35,553 |       |         |      | 33,446 |        |         |      | 34,025 |         |         |   | 36,994 |          |          |   | 42,079  |          |          |   | 33,767 |         |         |   | 36,681 |        
|Communications and equipment             |                                                                                                                                                       |                           | 20,890 |         |         |      | 24,917 |       |         |      | 31,617 |        |         |      | 30,720 |         |         |   | 36,604 |          |          |   | 26,620  |          |          |   | 29,187 |         |         |   | 33,309 |        
|Depreciation and amortization            |                                                                                                                                                       |                           | 18,500 |         |         |      | 22,408 |       |         |      | 23,534 |        |         |      | 24,074 |         |         |   | 24,659 |          |          |   | 16,712  |          |          |   | 17,930 |         |         |   | 19,123 |        
|Occupancy                                |                                                                                                                                                       |                           | 12,122 |         |         |      | 12,567 |       |         |      | 13,175 |        |         |      | 16,458 |         |         |   | 16,158 |          |          |   | 12,223  |          |          |   | 13,595 |         |         |   | 13,552 |        
|Professional fees                        |                                                                                                                                                       |                           | 8,611  |         |         |      | 5,739  |       |         |      | 7,228  |        |         |      | 6,338  |         |         |   | 7,820  |          |          |   | 5,110   |          |          |   | 6,646  |         |         |   | 5,018  |        
|Marketing and business development       |                                                                                                                                                       |                           | 7,483  |         |         |      | 2,958  |       |         |      | 3,480  |        |         |      | 2,781  |         |         |   | 3,756  |          |          |   | 2,451   |          |          |   | 7,480  |         |         |   | 3,407  |        
|Other                                    |                                                                                                                                                       |                           | 4,583  |         |         |      | 5,728  |       |         |      | 8,407  |        |         |      | 7,860  |         |         |   | 16,559 |          |          |   | 9,899   |          |          |   | 16,852 |         |         |   | 15,674 |        
|Restructuring                            |                                                                                                                                                       |                           | 59,497 |         |         |      |       |       |         |      |       |        |         |      |       |         |         |   | 62,405 |          |          |   | 955     |          |          |   | 42,410 |         |         |   | 15,030 |        
|Goodwill and intangible asset impairment |                                                                                                                                                       |                           | 21,668 |         |         |      |       |       |         |      |       |        |         |      |       |         |         |   |       |          |          |   | 551,991 |          |          |   |       |         |         |   |       |        
|Insurance recovery of fixed assets lost  |                                                                                                                                                       |                           | (2,492 | )       |         |      | (2,989 | )     |         |      |       |        |         |      | (5,000 | )       |         |   |       |          |          |   |        |          |          |   |       |         |         |   |       |        
|                                         |                                                                                                                                                       |                           |        |         |         |      |        |       |         |      |        |        |         |      |        |         |         |   |        |          |          |   |         |          |          |   |        |         |         |   |        |        
|                                         |                                                                                                                                                       | Total expenses            |        |         | 352,540 |      |        |       | 266,777 |      |        |        | 289,870 |      |        |         | 280,718 |   |        |          | 372,462  |   |         |          | 822,677  |   |        |         | 326,097 |   |        |         | 284,894 |  
|                                         |                                                                                                                                                       |                           |        |         |         |      |        |       |         |      |        |        |         |      |        |         |         |   |        |          |          |   |         |          |          |   |        |         |         |   |        |        
|                                         | Income (loss) from continuing operations before
    income taxes, discontinued operations and cumulative effect of
    change in accounting principle |                           |        | (56,665 | )       |      |        | 5,697 |         |      |        | (4,469 | )       |      |        | (40,825 | )       |   |        | (105,353 | )        |   |         | (568,397 | )        |   |        | (57,387 | )       |   |        | (15,793 | )      
|                                         | Income tax provision (benefit)                                                                                                                        |                           |        | (18,331 | )       |      |        | 1,652 |         |      |        | 732    |         |      |        | (6,507  | )       |   |        | 6,690    |          |   |         | (39,958  | )        |   |        | (14,117 | )       |   |        | (5,703  | )      
|                                         |                                                                                                                                                       |                           |        |         |         |      |        |       |         |      |        |        |         |      |        |         |         |   |        |          |          |   |         |          |          |   |        |         |         |   |        |        
|                                         | Income (loss) from continuing operations before
    discontinued operations and cumulative effect of change in
    accounting principle               |                           |        | (38,334 | )       |      |        | 4,045 |         |      |        | (5,201 | )       |      |        | (34,318 | )       |   |        | (112,043 | )        |   |         | (528,439 | )        |   |        | (43,270 | )       |   |        | (10,090 | )      
|Discontinued operations:                 |                                                                                                                                                       |                           |        |         |         |      |        |       |         |      |        |        |         |      |        |         |         |   |        |          |          |   |         |          |          |   |        |         |         |   |        |        
|                                         | Loss from operations of fixed income business                                                                                                         |                           |        |        |         |      |        |      |         |      |        |       |         |      |        |        |         |   |        | (412     | )        |   |         |         |          |   |        | (23,581 | )       |   |        | (9,775  | )      
|                                         | Income tax benefit                                                                                                                                    |                           |        |        |         |      |        |      |         |      |        |       |         |      |        |        |         |   |        | 252      |          |   |         |         |          |   |        | 6,946   |         |   |        | 3,824   |        
|                                         |                                                                                                                                                       |                           |        |         |         |      |        |       |         |      |        |        |         |      |        |         |         |   |        |          |          |   |         |          |          |   |        |         |         |   |        |        
|                                         | Income (loss) before cumulative effect of change
    in accounting principle                                                                          |                           |        | (38,334 | )       |      |        | 4,045 |         |      |        | (5,201 | )       |      |        | (34,318 | )       |   |        | (112,203 | )        |   |         | (528,439 | )        |   |        | (59,905 | )       |   |        | (16,041 | )      
|                                         | Cumulative effect of change in accounting
    principle, net of tax                                                                                   |                           |        |        |         |      |        |      |         |      |        |       |         |      |        |        |         |   |        |         |          |   |         |         |          |   |        |        |         |   |        | (18,642 | )      
|                                         |                                                                                                                                                       |                           |        |         |         |      |        |       |         |      |        |        |         |      |        |         |         |   |        |          |          |   |         |          |          |   |        |         |         |   |        |        
|                                         |                                                                                                                                                       | Net income (loss)         |        | $       | (38,334 | )    |        | $     | 4,045   |      |        | $      | (5,201  | )    |        | $       | (34,318 | ) |        | $        | (112,203 | ) |         | $        | (528,439 | ) |        | $       | (59,905 | ) |        | $       | (34,683 | )
|                                         |                                                                                                                                                       |                           |        |         |         |      |        |       |         |      |        |        |         |      |        |         |         |   |        |          |          |   |         |          |          |   |        |         |         |   |        |        
|Basic and diluted:                       |                                                                                                                                                       |                           |        |         |         |      |        |       |         |      |        |        |         |      |        |         |         |   |        |          |          |   |         |          |          |   |        |         |         |   |        |        
|                                         |                                                                                                                                                       | Earnings (loss) per share |        | $       | (0.12   | )    |        | $     | 0.01    |      |        | $      | (0.02   | )    |        | $       | (0.10   | ) |        | $        | (0.34    | ) |         | $        | (2.05    | ) |        | $       | (0.24   | ) |        | $       | (0.14   | )
|                                         |                                                                                                                                                       |                           |        |         |         |      |        |       |         |      |        |        |         |      |        |         |         |   |        |          |          |   |         |          |          |   |        |         |         |   |        |        

115



---



##### 





|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements With
    Accountants on Accounting and Financial Disclosure

None.



|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

The company has carried out an evaluation under
the supervision and with the participation of the companys
management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and
operation of the companys disclosure controls and
procedures. There are inherent limitations to the effectiveness
of any system of disclosure controls and procedures, including
the possibility of human error and the circumvention or
overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide
reasonable assurance of achieving their control objectives.
Based upon the Companys evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that, as of
December 31, 2003, the disclosure controls and procedures
are effective to provide reasonable assurance that information
required to be disclosed in the reports the company files and
submits under the Exchange Act is recorded, processed,
summarized and reported as and when required.

There has been no change in the companys
internal control over financial reporting during the
companys fiscal year ended December 31, 2003 that has
materially affected, or is reasonably likely to materially
affect, the companys internal control over financial
reporting.

During the fourth quarter of 2003, we began an
internal business restructuring, which was substantially
completed on February 9, 2004. We anticipate that in the
first quarter of 2004, we will begin providing separate
financial disclosures for our two business lines, Instinet, the
Institutional Broker and INET. As part of these restructuring
activities, we are adapting our controls and procedures to
provide for this segment reporting.

PART III



|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Company

The information about Directors and Executive
Officers required to be furnished pursuant to this item is
incorporated by reference from the General Information
Concerning the Board of Directors, Compensation of
Directors, and Compensation of Executive
Officers sections of our definitive proxy statement for
our 2004 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after December 31,
2003 (the Proxy Statement). Information about the
Audit Committee of the Board of Directors and the Audit
Committee financial expert is incorporated herein by reference
to the Audit Committee section of the Proxy
Statement. Information concerning Section 16(a) compliance
is incorporated by reference Section 16(a) Beneficial
Ownership Reporting Compliance section of the Proxy
Statement. Information about our Code of Business Conduct and
Ethics is incorporated herein by reference to the Code of
Business Conduct and Ethics section of the Proxy Statement.



|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required to be furnished pursuant
to this item is incorporated by reference from the
Compensation of Executive Officers and
Compensation of Directors sections of the Proxy
Statement. Such incorporation by reference shall not be deemed
to specifically incorporate by reference the information
referred to in Item 402(a)(8) of Regulation S-K.



|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The information required to be furnished pursuant
to this item is incorporated by reference from the
Security Ownership of Certain Beneficial Owners,
Directors, Nominees and Executive Officers and
Equity Compensation Plan Information sections of the
Proxy Statement.

116



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##### 





|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required to be furnished pursuant
to this item is incorporated by reference from the Certain
Business Relationships section of the Proxy Statement.



|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The information required to be furnished pursuant
to this item is incorporated by reference from the entitled
Audit Fees, Tax Fees, All Other
Fees and Audit Related Fees sections of the
Proxy Statement.

PART IV



|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) Exhibit List

|        |   |             |  |                                                                                                                                                                                                                                                                                                                    
|------- | - | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |            
|Number  |   | Description
|        |   |            
|        | 2 | .1          |  | Contribution Agreement between Instinet
    Corporation and Instinet Group LLC, dated July 25, 2000
    (Incorporated by reference to Exhibit 2.1 to the
    Registrants Form S-1 (Registration
    No. 333-55190)).                                                                                              
|        | 2 | .2          |  | Asset Contribution Agreement between Instinet
    Corporation and Instinet Group LLC, dated July 31, 2000
    (Incorporated by reference to Exhibit 2.2 to the
    Registrants Form S-1 (Registration
    No. 333-55190)).                                                                                        
|        | 2 | .3          |  | Subscription Agreement between Reuters Holdings
    Switzerland SA and Instinet Group LLC, dated July 31, 2000
    (Incorporated by reference to Exhibit 2.3 to the
    Registrants Form S-1 (Registration
    No. 333-55190)).                                                                                   
|        | 2 | .4          |  | Contribution Agreement between Reuters C
    Corporation and Instinet Group LLC, dated September 29,
    2000 (Incorporated by reference to Exhibit 2.4 to the
    Registrants Form S-1 (Registration
    No. 333-55190)).                                                                                        
|        | 2 | .5          |  | Contribution Agreement between Reuters Holdings
    Switzerland SA and Instinet Group LLC, dated September 29,
    2000 (Incorporated by reference to Exhibit 2.5 to the
    Registrants Form S-1 (Registration
    No. 333-55190)).                                                                              
|        | 2 | .6          |  | Contribution Agreement between Reuters Holdings
    Switzerland SA and Instinet Group LLC, dated September 29,
    2000 (Incorporated by reference to Exhibit 2.6 to the
    Registrants Form S-1 (Registration
    No. 333-55190)).                                                                              
|        | 2 | .7          |  | Agreement and Plan of Merger, dated as of
    June 9, 2002, (as amended as of August 7, 2002) among
    Instinet Group Incorporated, Instinet Merger Corporation and
    Island Holding Company, Inc. (Incorporated by reference to
    Exhibit 2.1 to the Registrants Form S-4
    (Registration No. 333-97071)).
|        | 2 | .8*         |  | Contribution and Assumption Agreement between
    Instinet Corporation and Instinet Group, LLC, dated November 24,
    2003.                                                                                                                                                                                       
|        | 2 | .9*         |  | Contribution and Assumption Agreement between
    Instinet Corporation and Instinet ATS, Inc., dated November 24,
    2003.                                                                                                                                                                                        
|        | 2 | .10*        |  | Contribution and Assumption Agreement between
    Instinet Group Incorporated and Instinet Group, LLC, dated
    November 24, 2003.                                                                                                                                                                                
|        | 2 | .11*        |  | Contribution and Assumption Agreement between
    Instinet Group Incorporated and Instinet, LLC, dated November
    24, 2003.                                                                                                                                                                                      
|        | 3 | .1          |  | Amended and Restated Certificate of Incorporation
    of Instinet Group Incorporated (Incorporated by reference to
    Exhibit 3.1 to the Registrants Current Report on
    Form 8-K as filed with the Commission on September 23,
    2002).                                                                     

117



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##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .2          |  | Amended and Restated By-Laws of Instinet Group
    Incorporated (Incorporated by reference to Exhibit 3.2 to
    the Registrants Current Report on Form 8-K as filed
    with the Commission on September 23, 2002).                                                                                                          
|        | 4  | .1          |  | Form of Common Stock Certificate (Incorporated by
    reference to Exhibit 4.1 to the Registrants
    Form S-1 (Registration No. 333-55190)).                                                                                                                                                                                 
|        | 4  | .2          |  | Rights Agreement between Instinet Group
    Incorporated and Mellon Investor Services LLC (Incorporated by
    reference to Exhibit 4.3 to the Registrants Quarterly
    Report filed on Form 10-Q (Commission file
    No. 000-32717) for the quarterly period ended June 30,
    2001).                                     
|        | 4  | .3          |  | Amendment No. 1 to the Rights Agreement
    between Instinet Group Incorporated and Mellon Investor Services
    LLC dated as of September 3, 2002 (Incorporated by
    reference to Exhibit 99.1 to the Registrants Current
    Report on Form 8-K as filed with the Commission on
    September 13, 2002).                  
|        | 10 | .1          |  | Exchange Agent Agreement, dated as of
    August 27, 2002, between Instinet Group Incorporated, and
    Mellon Investor Services LLC 2002 (Incorporated herein by
    reference to Exhibit 10.1 to Registrants Quarterly
    Report on Form 10-Q (Commission File No. 000-32717)
    for the period ended September 30, 2002).
|        | 10 | .2          |  | Ameritrade Option Exercise Agreement between
    Instinet Group Incorporated, Datek Online Holdings Corporation
    and Ameritrade Holding Corporation dated as of October 18,
    2002 (Incorporated by reference to Exhibit 10.1 to the
    Registrants Form S-3 (Registration
    No. 333-100670)).                        
|        | 10 | .3         |  | Employment Agreement between Instinet Group
    Incorporated and Andre-Francois Helier Villeneuve, dated
    September 16, 2002 (Incorporated herein by reference to
    Exhibit 10.4 to Registrants Quarterly Report on
    Form 10-Q (Commission File No. 000-32717) for the
    period ended September 30, 2002).          
|        | 10 | .4         |  | Employment Agreement between Instinet Group
    Incorporated and Edward J. Nicoll, dated September 20, 2002
    (Incorporated herein by reference to Exhibit 10.5 to
    Registrants Quarterly Report on Form 10-Q (Commission
    file No. 000-32717) for the period ended September 30,
    2002).                          
|        | 10 | .5         |  | Agreement between Instinet Group Incorporated and
    Peter Fenichel, dated October 7, 2002 (Incorporated herein
    by reference to Exhibit 10.6 to Registrants Quarterly
    Report on Form 10-Q (Commission file No. 000-32717)
    for the period ended September 30, 2002).                                              
|        | 10 | .6         |  | Non-Executive Chairman Compensation Letter
    between Instinet Group Incorporated and Ian Strachan, dated
    January 1, 2003 (Incorporated by reference to
    Exhibit 10.6 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2002).             
|        | 10 | .7         |  | Employment Agreement between Instinet Group LLC
    and Mark Nienstedt, dated January 1, 2003 (Incorporated by
    reference to Exhibit 10.8 to the Registrants Annual
    Report on Form 10-K (Commission File No. 000-32717)
    for the fiscal year ended December 31, 2002).                                              
|        | 10 | .8         |  | Employment Agreement between Instinet Group LLC
    and Paul A. Merolla, dated April 30, 2001 (Incorporated by
    reference to Exhibit 10.14 to the Registrants Annual
    Report on Form 10-K (Commission File No. 000-32717)
    for the fiscal year ended December 31, 2002).                                             
|        | 10 | .9         |  | Employment Agreement between Instinet Group
    Incorporated and Andrew R. Goldman, dated October 1, 2003
    (Incorporated herein by reference to Exhibit 10.1 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended September 30,
    2003).                        
|        | 10 | .10        |  | Employment Agreement between Instinet Group
    Incorporated and John F. Fay, dated November 1, 2003
    (Incorporated herein by reference to Exhibit 10.2 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended September 30,
    2003).                             
|        | 10 | .11        |  | Employment Agreement between Instinet Group
    Incorporated and Michael Plunkett, dated November 1, 2003
    (Incorporated herein by reference to Exhibit 10.3 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended September 30,
    2003).                        

118



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##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                 
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .12        |  | Employment Agreement between Instinet Group
    Incorporated and Natan Tiefenbrun, dated November 1, 2003
    (Incorporated herein by reference to Exhibit 10.4 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended September 30,
    2003).                                                                         
|        | 10 | .13        |  | Employment Agreement between Instinet Group
    Incorporated and Alexander Goor, dated January 1, 2003
    (Incorporated herein by reference to Exhibit 10.5 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended September 30,
    2003).                                                                            
|        | 10 | .14        |  | Employment Agreement between Instinet Group
    Incorporated and Todd Burns, dated November 1, 2003
    (Incorporated herein by reference to Exhibit 10.6 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended September 30,
    2003).                                                                               
|        | 10 | .15        |  | Termination Agreement between Instinet Group
    Incorporated and Mark Nienstedt, dated December 31, 2002
    (Incorporated by reference to Exhibit 10.15 to the
    Registrants Annual Report on Form 10-K (Commission
    File No. 000-32717) for the fiscal year ended
    December 31, 2002).                                                                              
|        | 10 | .16        |  | Settlement, Release, Covenant Not To Sue, Waiver
    and Non-Disclosure Agreement between Instinet Group Incorporated
    and Andre-Francois Helier Villeneuve, dated December 10,
    2002 (Incorporated by reference to Exhibit 10.16 to the
    Registrants Annual Report on Form 10-K (Commission
    File No. 000-32717) for the fiscal year ended
    December 31, 2002).
|        | 10 | .17        |  | Settlement, Release, Covenant Not To Sue, Waiver
    and Non-Disclosure Agreement between Instinet Corporation and
    Douglas M. Atkin, dated April 30, 2002 (Incorporated by
    reference to Exhibit 10.17 to the Registrants Annual
    Report on Form 10-K (Commission File No. 000-32717)
    for the fiscal year ended December 31, 2002).                              
|        | 10 | .18        |  | Settlement, Release, Covenant Not To Sue, Waiver
    and Non-Disclosure Agreement between Instinet Corporation and
    Michael J. Clancy, dated December 15, 2002 (Incorporated by
    reference to Exhibit 10.18 to the Registrants Annual
    Report on Form 10-K (Commission File No. 000-32717)
    for the fiscal year ended December 31, 2002).                          
|        | 10 | .19        |  | Settlement, Release, Covenant Not To Sue, Waiver
    and Non-Disclosure Agreement between Instinet Corporation and
    Michael Galano dated January 9, 2002 (Incorporated by
    reference to Exhibit 10.7 to the Registrants Annual
    Report on Form 10-K (Commission File No. 000-32717)
    for the fiscal year ended December 31, 2001).                                 
|        | 10 | .20        |  | Settlement, Release, Covenant Not To Sue, Waiver
    and Non-Disclosure Agreement between Instinet Group Incorporated
    and Jean-Marc Bouhelier dated May 30, 2003 (Incorporated
    herein by reference to Exhibit 10.2 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended June 30,
    2003).                   
|        | 10 | .21        |  | Settlement, Release, Covenant Not To Sue, Waiver
    and Non-Disclosure Agreement between Instinet Group Incorporated
    and William J. Sterling dated June 27, 2003 (Incorporated
    herein by reference to Exhibit 10.3 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended June 30,
    2003).                  
|        | 10 | .22        |  | Instinet Group Annual Bonus Plan (Incorporated by
    reference to Exhibit 10.5 to the Registrants
    Form S-1 (Registration No. 333-55190)).                                                                                                                                                                                                                                 
|        | 10 | .23        |  | Instinet 2000 Stock Option Plan (Incorporated by
    reference to Exhibit 10.7 to the Registrants
    Form S-1 (Registration No. 333-55190)).                                                                                                                                                                                                                                  
|        | 10 | .24        |  | Instinet 2000 Stock Option Plan, as amended and
    restated, April 30, 2002 (Incorporated by reference to
    Exhibit 10.23 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2002).                                                                                                               
|        | 10 | .25         |  | Transaction System Agreement, effective as of
    September 19, 2002, between Instinet Corporation and Bridge
    Trading Company (Incorporated by reference to Exhibit 10.24
    to the Registrants Annual Report on Form 10-K
    (Commission File No. 000-32717) for the fiscal year ended
    December 31, 2002).                                                          
|        | 10 | .26         |  | Transaction System Agreement dated as of
    April 20, 2003, between Instinet Corporation and Bridge
    Trading Company (Incorporated herein by reference to
    Exhibit 10.1 to the Registrants Quarterly Report on
    Form 10-Q (Commission File No. 000-32717) for the
    period ended March 31, 2003).                                                                  

119



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##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                 
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .27*        |  | Transaction System Supplemental Order Form,
    effective as of December 17, 2003, between Instinet Group
    Incorporated and Bridge Trading Company, as a supplement to the
    Transaction System Agreement, dated as of April 20, 2003,
    between Instinet Group Incorporated and Bridge Trading Company.                 
|        | 10 | .28         |  | Global Solutions Agreement, dated as of
    March 14, 2003, between Instinet Group Incorporated and
    Reuters Limited (Incorporated by reference to Exhibit 10.25
    to the Registrants Annual Report on Form 10-K
    (Commission File No. 000-32717) for the fiscal year ended
    December 31, 2002).                    
|        | 10 | .29         |  | Global Solutions Agreement dated as of effective
    March 19, 2003, between Instinet Group Inc. and Reuters
    Limited (Incorporated herein by reference to Exhibit 10.1
    to the Registrants Quarterly Report on Form 10-Q
    (Commission File No. 000-32717) for the period ended
    June 30, 2003).                   
|        | 10 | .30         |  | Commission Sharing Agreement, dated as of
    April 23, 2002, between Instinet Corporation and Bridge
    Trading Company (Incorporated herein by reference to
    Exhibit 10.8 to Registrants Quarterly Report on
    Form 10-Q (Commission File No. 000-32717) for the
    period ended June 30, 2002).                      
|        | 10 | .31         |  | Non-Exclusive Limited Patent License Agreement,
    effective as of August 2, 2002, between Instinet Group
    Incorporated and Reuters Limited (Incorporated herein by
    reference to Exhibit 10.9 to Registrants Quarterly
    Report on Form 10-Q (Commission File No. 000-32717)
    for the period ended June 30, 2002).
|        | 10 | .32         |  | Institutional Order Entry Enhancements Agreement,
    dated as of September 19, 2002, between Instinet Group
    Incorporated and Reuters SA. (Incorporated by reference to
    Exhibit 10.1 to the Registrants Current Report on
    Form 8-K as filed with the Commission on October 16,
    2002).                          
|        | 10 | .33         |  | Newport Content Services Agreement, dated as of
    September 19, 2002, between Instinet Group Incorporated and
    Reuters Limited (Incorporated by reference to Exhibit 10.2
    to the Registrants Current Report on Form 8-K as
    filed with the Commission on October 16, 2002).                                        
|        | 10 | .34         |  | Preferred Soft Dollar Agreement, dated as of
    September 19, 2002, between Instinet Group Incorporated and
    Reuters Limited (Incorporated by reference to Exhibit 10.3
    to the Registrants Current Report on Form 8-K as
    filed with the Commission on October 16, 2002).                                           
|        | 10 | .35         |  | Fixed Income Data Agreement between Reuters
    Limited and Instinet Corporation, dated October 1, 1999
    (Incorporated by reference to Exhibit 10.8 to the
    Registrants Form S-1 (Registration
    No. 333-55190)).                                                                                                      
|        | 10 | .36         |  | Letter agreement between Reuters Limited and
    Instinet Corporation, dated August 1, 2000, amending the
    Fixed Income Data Agreement (Incorporated by reference to
    Exhibit 10.10 to the Registrants Form S-1
    (Registration No. 333-55190)).                                                                       
|        | 10 | .37         |  | Global Reuters Services Contract between Reuters
    Limited and Instinet Global Holdings, Inc., dated
    December 21, 2000 (Incorporated by reference to
    Exhibit 10.9 to the Registrants Form S-1
    (Registration No. 333-55190)).                                                                                     
|        | 10 | .38*        |  | Reuters Global Routing Services Agreement, dated
    as of December 22, 2003, between Instinet Europe Limited
    and Reuters Global Routing Services Limited.                                                                                                                                                                  
|        | 10 | .39         |  | Redistribution Addendum to Reuters Global
    Agreement between Reuters Limited and Instinet Global Holding,
    Inc., dated December 21, 2000, amending the Global Reuters
    Services Contract (Incorporated by reference to
    Exhibit 10.11 to the Registrants Form S-1
    (Registration No. 333-55190)).               
|        | 10 | .40         |  | Sublease between Charles Schwab & Co., Inc.
    and Instinet Group Incorporated dated December 18, 2001
    (Incorporated by reference to Exhibit 10.36 to the
    Registrants Annual Report on Form 10-K (Commission
    File No. 000-32717) for the fiscal year ended
    December 31, 2001).                                
|        | 10 | .41         |  | First Amendment to Sublease between Charles
    Schwab & Co., Inc. and Instinet Group Incorporated dated
    June 5, 2002 (Incorporated by reference to
    Exhibit 10.43 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2002).                  

120



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##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .42         |  | Second Amendment to Sublease between Charles
    Schwab & Co., Inc. and Instinet Group Incorporated dated
    November 7, 2002 (Incorporated by reference to
    Exhibit 10.44 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2002).                                                                                                                                                                                                                                                                                  
|        | 10 | .43         |  | Sublease between Reuters C Corp. and Instinet
    Global Holdings, Inc. (Incorporated by reference to
    Exhibit 10.17 to the Registrants Quarterly Report
    filed on Form 10-Q (Commission file No. 000-32717) for
    the quarterly period ended June 30, 2001).                                                                                                                                                                                                                                                                                                                               
|        | 10 | .44         |  | Data Distribution Agreement between Instinet
    Global Holdings, Inc. and Reuters America, Inc. (Incorporated by
    reference to Exhibit 10.13 to the Registrants Quarterly
    Report filed on Form 10-Q (Commission file
    No. 000-32717) for the quarterly period ended June 30,
    2001).                                                                                                                                                                                                                                                                                                  
|        | 10 | .45         |  | U.S. Tax Sharing Agreement by and among Reuters
    America Holdings, Inc., Instinet Group Incorporated and Instinet
    Global Holdings, Inc. (Incorporated by reference to
    Exhibit 10.15 to the Registrants Quarterly Report
    filed on Form 10-Q (Commission file No. 000-32717) for
    the quarterly period ended June 30, 2001).                                                                                                                                                                                                                                                        
|        | 10 | .46         |  | U.K. Tax Sharing Agreement between Reuters Group
    PLC, Instinet Group Incorporated and Instinet Holdings Limited
    (Incorporated by reference to Exhibit 10.16 to the
    Registrants Quarterly Report filed on Form 10-Q
    (Commission file No. 000-32717) for the quarterly period
    ended June 30, 2001).                                                                                                                                                                                                                                                                               
|        | 10 | .47         |  | Corporate Services Agreement between Reuters
    Limited and Instinet Group Incorporated (Incorporated by
    reference to Exhibit 10.19 to the Registrants
    Quarterly Report on Form 10-Q (Commission file
    No. 000-32717 for the quarterly period ended June 30,
    2001)).                                                                                                                                                                                                                                                                                                                
|        | 10 | .48         |  | License Agreement between Instinet Global
    Services Limited and Reuters Limited dated May 17, 2001
    (Incorporated by reference to Exhibit 10.14 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    file No. 000-32717 for the quarterly period ended
    June 30, 2001)).                                                                                                                                                                                                                                                                                                   
|        | 10 | .49         |  | Corporate Agreement between Instinet Group
    Incorporated and Reuters Limited, dated May 17, 2001
    (Incorporated herein by reference to Exhibit 4.2 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended June 30,
    2001).                                                                                                                                                                                                                                                                                                          
|        | 10 | .50         |  | Amended and Restated Corporate Agreement between
    Instinet Group Incorporated and Reuters Limited, dated
    June 9, 2002 (Incorporated herein by reference to
    Exhibit 10.1 to the Registrants Form S-4
    (Registration No. 333-97071)).                                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .51         |  | Registration Rights Agreement, dated as of
    September 20, 2002, by and among Instinet Group
    Incorporated, Reuters Limited, Reuters C Corp., Reuters
    Holdings Switzerland SA, the other entities listed on
    Exhibit A as the Bain Entities, the Silver Lake Entities,
    the TA Entities, the Finanzas Entities, the Advent Entities,
    Ameritrade Holding Corporation and Edward J. Nicoll
    (Incorporated herein by reference to Exhibit 10.2 to
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended September 30,
    2002).
|        | 10 | .52         |  | Interest Purchase Agreement between Instinet
    Group Incorporated and David G. Jamail, David R. Burch,
    Overunder, LLC, John A. McEntire, IV, John Bunda, Laura Horne,
    Currin Van Eman and Shayne Young dated July 23, 2001
    (Incorporated by reference to Exhibit 10.29 to the
    Registrants Annual Report on Form 10-K (Commission
    File No. 000-32717) for the fiscal year ended
    December 31, 2001).                                                                                                                                                                        
|        | 10 | .53         |  | Amendment No. 1, dated as of October 1,
    2001, to the Interest Purchase Agreement between Instinet Group
    Incorporated and David G. Jamail, David R. Burch, Overunder,
    LLC, John A. McEntire, IV, John Bunda, Laura Horne, Currin
    Van Eman and Shayne Young dated July 23, 2001 (Incorporated
    by reference to Exhibit 10.30 to the Registrants
    Annual Report on Form 10-K (Commission File
    No. 000-32717) for the fiscal year ended December 31,
    2001).                                                                                                               
|        | 10 | .54         |  | Registration Rights Agreement between Instinet
    Group Incorporated and David G. Jamail, David R. Burch,
    Overunder, LLC, John A. McEntire, IV, John Bunda, Laura Horne,
    Currin Van Eman and Shayne Young, dated October 1, 2001
    (Incorporated by reference to Exhibit 10.39 to the
    Registrants Annual Report on Form 10-K (Commission
    File No. 000-32717) for the fiscal year ended
    December 31, 2001).                                                                                                                                                                   

121



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##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .55         |  | Execution Services Agreement between Instinet
    Group Incorporated and ProTrader Securities Corporation, Zone
    Trading Partners, LLC, Zone Equity Partners, LP, David G.
    Jamail, David R. Burch and Andrew Kershner dated October 1,
    2001, as amended (Incorporated by reference to
    Exhibit 10.31 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2001).
|        | 10 | .56         |  | Research and Analytics Asset Purchase Agreement
    between Instinet Group Incorporated and Reuters Group PLC
    effective as of September 28, 2001 (Incorporated by
    reference to Exhibit 10.32 to the Registrants Annual
    Report on Form 10-K (Commission File No. 000-32717)
    for the fiscal year ended December 31, 2001).                                                                                                              
|        | 10 | .57         |  | Mutual Services Agreement between Instinet Group
    Incorporated and Reuters America Inc. dated December 18,
    2001 (Incorporated by reference to Exhibit 10.33 to the
    Registrants Annual Report on Form 10-K (Commission
    File No. 000-32717) for the fiscal year ended
    December 31, 2001).                                                                                                                                            
|        | 10 | .58         |  | Software License Agreement, as amended, between
    TIBCO Finance Technology, Inc. and Instinet Corporation,
    effective September 25, 1998 (Incorporated by reference to
    Exhibit 10.34 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2001).                                                                                                                     
|        | 10 | .59         |  | Software Maintenance Agreement between TIBCO
    Finance Technology, Inc. and Instinet Corporation, effective
    September 25, 1998 (Incorporated by reference to
    Exhibit 10.35 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2001).                                                                                                                              
|        | 10 | .60         |  | Testing and Certification Agreement between
    Instinet UK Limited (now called Instinet Europe Limited) and
    Effix SA dated November 7, 2000 (Incorporated by reference
    to Exhibit 10.37 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2001).                                                                                                                  
|        | 10 | .61         |  | Vendor Interface Agreement between Instinet UK
    Limited (now called Instinet Europe Limited) and Reuters AG
    dated July 17, 2001 (Incorporated by reference to
    Exhibit 10.38 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2001).                                                                                                                            
|        | 10 | .62         |  | Facilities Management Service Agreement among
    Canon Business Services, Reuters America Inc. and Instinet
    Corporation dated July 1, 2001 (Incorporated by reference
    to Exhibit 10.40 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2001).                                                                                                                   
|        | 10 | .63         |  | Datek Stockholders Agreement, dated as of
    June 9, 2002, by and among Instinet Group Incorporated,
    Reuters Limited and Datek Online Holdings Corp. (Incorporated
    herein by reference to Exhibit 10.2 to the
    Registrants Form S-4 (Registration
    No. 333-97071)).                                                                                                                                                                    
|        | 10 | .64         |  | Stockholders Agreement, dated as of June 9,
    2002, by and among Instinet Group Incorporated, Reuters Limited,
    Reuters C Corp., Reuters Holdings Switzerland SA, the other
    entities listed on Exhibit B thereto and Edward J. Nicoll
    (Incorporated herein by reference to Exhibit 10.3 to the
    Registrants Form S-4 (Registration
    No. 333-97071)).                                                                               
|        | 10 | .65         |  | Company Voting Agreement, dated as of
    June 9, 2002, by and among Island Holding Company, Inc.,
    the stockholders of Island Holding Company, Inc., and Instinet
    Group Incorporated (Incorporated herein by reference to
    Exhibit 10.4 to the Registrants Form S-4
    (Registration No. 333-97071)).                                                                                                                                     
|        | 10 | .66         |  | Parent Voting Agreement, dated as of June 9,
    2002, by and among Reuters Limited, Reuters C Corp and Reuters
    Holdings Switzerland SA, Island Holding Company, Inc., and
    Instinet Group Incorporated (Incorporated herein by reference to
    Exhibit 10.5 to the Registrants Form S-4
    (Registration No. 333-97071)).                                                                                                                   
|        | 10 | .67         |  | Datek Voting Agreement, dated as of June 9,
    2002, by and between Datek Online Holdings Corp. and Instinet
    Group Incorporated (Incorporated herein by reference to
    Exhibit 10.6 to the Registrants Form S-4
    (Registration No. 333-97071)).                                                                                                                                                                                             

122



---



##### 



|        |     |             |  |                                                                                                                                                                                                                                                                                                                                                              
|------- | --- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|        | 10  | .68         |  | Amendment No. 1 to Company Voting Agreement,
    dated as of August 7, 2002, by and among Island Holding
    Company, Inc., the stockholders of Island Holding Company, Inc.
    and Instinet Group Incorporated (Incorporated herein by
    reference to Exhibit 10.10 to the Registrants
    Form S-4 (Registration No. 333-97071)).                      
|        | 10  | .69         |  | Amendment No. 1 to Parent Voting Agreement,
    dated as of August 7, 2002, by and among Reuters Limited,
    Reuters C Corp and Reuters Holding Switzerland SA, Island
    Holding Company, Inc., and Instinet Group Incorporated
    (Incorporated herein by reference to Exhibit 10.11 to the
    Registrants Form S-4 (Registration
    No. 333-97071)).
|        | 10  | .70         |  | Amendment No. 1 to Datek Voting Agreement,
    dated as of August 7, 2002, by and Datek Online Holdings
    Corp. and Instinet Group Incorporated (Incorporated herein by
    reference to Exhibit 10.12 to the Registrants
    Form S-4 (Registration No. 333-97071)).                                                                                     
|        | 21  | .1*         |  | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                         
|        | 24  | .1*         |  | Powers of Attorney                                                                                                                                                                                                                                                                                                                                           
|        | 31* |             |  | Certificates of Chief Executive Officer and Chief
    Financial Officer pursuant to Securities Exchange Act
    Rules 13a-15(e) and 15d-15(e) as Adopted Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002 dated
    March 12, 2004.                                                                                                             
|        | 32* |             |  | Certificate of Chief Executive Officer and Chief
    Financial Officer pursuant to 18 U.S.C. Section 1350 dated
    March 12, 2004.                                                                                                                                                                                                                          



---



|  |               
|- | --------------
|* | Filed herewith



|  |                                    
|- | -----------------------------------
| | Management Compensation Arrangement

(b) The following reports on Form 8-K
were filed for the last quarter covered by this report, and
subsequently through March 12, 2004:

|                  |  |             |  |                     
|----------------- |  | ----------- |  | --------------------
|                  |  |             |  | Financial Statements
|Date of Report    |  | Item Number |  | Required to be Filed
|                  |  |             |  |                     
|October 22, 2003  |  | Item 12     |  | No                  
|November 3, 2003  |  | Items 5 & 7 |  | No                  
|December 8, 2003  |  | Items 5 & 7 |  | No                  
|December 19, 2003 |  | Items 5 & 7 |  | No                  
|January 9, 2004   |  | Items 5 & 7 |  | No                  
|January 22, 2004  |  | Item 12     |  | No                  

123



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                            
| | ---------------------------
| | INSTINET GROUP INCORPORATED



| |     |                    
| | --- | -------------------
| | By: | /s/ PAUL A. MEROLLA

| |                
| | ---------------
| | Paul A. Merolla

March 12, 2004

Pursuant to the requirements of the Securities
Act of 1934, this report has been signed by the following
persons in the capacities and on the dates indicated.

|                  |  |                                                          |  |      |  | 
|----------------- |  | -------------------------------------------------------- |  | ---- |  | 
|                  |  |                                                          |  |     
|Signature         |  | Titles                                                   |  | Date
|                  |  |                                                          |  |     
|                 
|*Edward J. Nicoll |  | Chief Executive Officer
    and Director                 |  |     
|                 
|*John F. Fay      |  | Executive Vice President and Chief Financial
    Officer |  |     
|                 
|*Mark Nienstedt   |  | Officer and Director                                     |  |     
|                 
|*Ian Strachan     |  | Director and
    Chairman of the Board                   |  |     
|                 
|*Thomas H. Glocer |  | Senior Director                                          |  |     
|                 
|*John C. Bogle    |  | Director                                                 |  |     
|                 
|*David Grigson    |  | Director                                                 |  |     
|                 
|*Peter J. Job     |  | Director                                                 |  |     
|                 
|*John Kasich      |  | Director                                                 |  |     
|                 
|*Kay Koplovitz    |  | Director                                                 |  |     
|                 
|*Kevin Landry     |  | Director                                                 |  |     

124



---



##### 



|                  |  |                                                    |  |      |  | 
|----------------- |  | -------------------------------------------------- |  | ---- |  | 
|                  |  |                                                    |  |     
|Signature         |  | Titles                                             |  | Date
|                  |  |                                                    |  |     
|                 
|*Stephen Pagliuca |  | Director                                           |  |     
|                 
|*Devin Wenig      |  | Director                                           |  |     
|                 
|*By:              |  | /s/ PAUL A. MEROLLAPaul A. MerollaAttorney-in-Fact |  |      |  | 

125



---



##### 



EXHIBIT INDEX

|        |    |             |  |                                                                                                                                                                                                                                                                                                                                
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1          |  | Contribution Agreement between Instinet
    Corporation and Instinet Group LLC, dated July 25, 2000
    (Incorporated by reference to Exhibit 2.1 to the
    Registrants Form S-1 (Registration
    No. 333-55190)).                                                                                                          
|        | 2  | .2          |  | Asset Contribution Agreement between Instinet
    Corporation and Instinet Group LLC, dated July 31, 2000
    (Incorporated by reference to Exhibit 2.2 to the
    Registrants Form S-1 (Registration
    No. 333-55190)).                                                                                                    
|        | 2  | .3          |  | Subscription Agreement between Reuters Holdings
    Switzerland SA and Instinet Group LLC, dated July 31, 2000
    (Incorporated by reference to Exhibit 2.3 to the
    Registrants Form S-1 (Registration
    No. 333-55190)).                                                                                               
|        | 2  | .4          |  | Contribution Agreement between Reuters C
    Corporation and Instinet Group LLC, dated September 29,
    2000 (Incorporated by reference to Exhibit 2.4 to the
    Registrants Form S-1 (Registration
    No. 333-55190)).                                                                                                    
|        | 2  | .5          |  | Contribution Agreement between Reuters Holdings
    Switzerland SA and Instinet Group LLC, dated September 29,
    2000 (Incorporated by reference to Exhibit 2.5 to the
    Registrants Form S-1 (Registration
    No. 333-55190)).                                                                                          
|        | 2  | .6          |  | Contribution Agreement between Reuters Holdings
    Switzerland SA and Instinet Group LLC, dated September 29,
    2000 (Incorporated by reference to Exhibit 2.6 to the
    Registrants Form S-1 (Registration
    No. 333-55190)).                                                                                          
|        | 2  | .7          |  | Agreement and Plan of Merger, dated as of
    June 9, 2002, (as amended as of August 7, 2002) among
    Instinet Group Incorporated, Instinet Merger Corporation and
    Island Holding Company, Inc. (Incorporated by reference to
    Exhibit 2.1 to the Registrants Form S-4
    (Registration No. 333-97071)).            
|        | 2  | .8*         |  | Contribution and Assumption Agreement between
    Instinet Corporation and Instinet Group, LLC, dated November 24,
    2003.                                                                                                                                                                                                   
|        | 2  | .9*         |  | Contribution and Assumption Agreement between
    Instinet Corporation and Instinet ATS, Inc., dated November 24,
    2003.                                                                                                                                                                                                    
|        | 2  | .10*        |  | Contribution and Assumption Agreement between
    Instinet Group Incorporated and Instinet Group, LLC, dated
    November 24, 2003.                                                                                                                                                                                            
|        | 2  | .11*        |  | Contribution and Assumption Agreement between
    Instinet Group Incorporated and Instinet, LLC, dated November
    24, 2003.                                                                                                                                                                                                  
|        | 3  | .1          |  | Amended and Restated Certificate of Incorporation
    of Instinet Group Incorporated (Incorporated by reference to
    Exhibit 3.1 to the Registrants Current Report on
    Form 8-K as filed with the Commission on September 23,
    2002).                                                                                 
|        | 3  | .2          |  | Amended and Restated By-Laws of Instinet Group
    Incorporated (Incorporated by reference to Exhibit 3.2 to
    the Registrants Current Report on Form 8-K as filed
    with the Commission on September 23, 2002).                                                                                                          
|        | 4  | .1          |  | Form of Common Stock Certificate (Incorporated by
    reference to Exhibit 4.1 to the Registrants
    Form S-1 (Registration No. 333-55190)).                                                                                                                                                                                 
|        | 4  | .2          |  | Rights Agreement between Instinet Group
    Incorporated and Mellon Investor Services LLC (Incorporated by
    reference to Exhibit 4.3 to the Registrants Quarterly
    Report filed on Form 10-Q (Commission file
    No. 000-32717) for the quarterly period ended June 30,
    2001).                                     
|        | 4  | .3          |  | Amendment No. 1 to the Rights Agreement
    between Instinet Group Incorporated and Mellon Investor Services
    LLC dated as of September 3, 2002 (Incorporated by
    reference to Exhibit 99.1 to the Registrants Current
    Report on Form 8-K as filed with the Commission on
    September 13, 2002).                  
|        | 10 | .1          |  | Exchange Agent Agreement, dated as of
    August 27, 2002, between Instinet Group Incorporated, and
    Mellon Investor Services LLC 2002 (Incorporated herein by
    reference to Exhibit 10.1 to Registrants Quarterly
    Report on Form 10-Q (Commission File No. 000-32717)
    for the period ended September 30, 2002).

126



---



##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                 
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .2          |  | Ameritrade Option Exercise Agreement between
    Instinet Group Incorporated, Datek Online Holdings Corporation
    and Ameritrade Holding Corporation dated as of October 18,
    2002 (Incorporated by reference to Exhibit 10.1 to the
    Registrants Form S-3 (Registration
    No. 333-100670)).                                                                         
|        | 10 | .3         |  | Employment Agreement between Instinet Group
    Incorporated and Andre-Francois Helier Villeneuve, dated
    September 16, 2002 (Incorporated herein by reference to
    Exhibit 10.4 to Registrants Quarterly Report on
    Form 10-Q (Commission File No. 000-32717) for the
    period ended September 30, 2002).                                                           
|        | 10 | .4         |  | Employment Agreement between Instinet Group
    Incorporated and Edward J. Nicoll, dated September 20,
    2002 (Incorporated herein by reference to Exhibit 10.5 to
    Registrants Quarterly Report on Form 10-Q (Commission
    file No. 000-32717) for the period ended September 30,
    2002).                                                                           
|        | 10 | .5         |  | Agreement between Instinet Group Incorporated and
    Peter Fenichel, dated October 7, 2002 (Incorporated herein
    by reference to Exhibit 10.6 to Registrants Quarterly
    Report on Form 10-Q (Commission file No. 000-32717)
    for the period ended September 30, 2002).                                                                                               
|        | 10 | .6         |  | Non-Executive Chairman Compensation Letter
    between Instinet Group Incorporated and Ian Strachan, dated
    January 1, 2003 (Incorporated by reference to
    Exhibit 10.6 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2002).                                                              
|        | 10 | .7         |  | Employment Agreement between Instinet Group LLC
    and Mark Nienstedt, dated January 1, 2003 (Incorporated by
    reference to Exhibit 10.8 to the Registrants Annual
    Report on Form 10-K (Commission File No. 000-32717)
    for the fiscal year ended December 31, 2002).                                                                                               
|        | 10 | .8         |  | Employment Agreement between Instinet Group LLC
    and Paul A. Merolla, dated April 30, 2001
    (Incorporated by reference to Exhibit 10.14 to the
    Registrants Annual Report on Form 10-K (Commission
    File No. 000-32717) for the fiscal year ended
    December 31, 2002).                                                                                          
|        | 10 | .9         |  | Employment Agreement between Instinet Group
    Incorporated and Andrew R. Goldman, dated October 1,
    2003 (Incorporated herein by reference to Exhibit 10.1 to
    the Registrants Quarterly Report on Form 10-Q
    (Commission File No. 000-32717) for the period ended
    September 30, 2003).                                                                         
|        | 10 | .10        |  | Employment Agreement between Instinet Group
    Incorporated and John F. Fay, dated November 1, 2003
    (Incorporated herein by reference to Exhibit 10.2 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended September 30,
    2003).                                                                              
|        | 10 | .11        |  | Employment Agreement between Instinet Group
    Incorporated and Michael Plunkett, dated November 1, 2003
    (Incorporated herein by reference to Exhibit 10.3 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended September 30,
    2003).                                                                         
|        | 10 | .12        |  | Employment Agreement between Instinet Group
    Incorporated and Natan Tiefenbrun, dated November 1, 2003
    (Incorporated herein by reference to Exhibit 10.4 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended September 30,
    2003).                                                                         
|        | 10 | .13        |  | Employment Agreement between Instinet Group
    Incorporated and Alexander Goor, dated January 1, 2003
    (Incorporated herein by reference to Exhibit 10.5 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended September 30,
    2003).                                                                            
|        | 10 | .14        |  | Employment Agreement between Instinet Group
    Incorporated and Todd Burns, dated November 1, 2003
    (Incorporated herein by reference to Exhibit 10.6 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended September 30,
    2003).                                                                               
|        | 10 | .15        |  | Termination Agreement between Instinet Group
    Incorporated and Mark Nienstedt, dated December 31, 2002
    (Incorporated by reference to Exhibit 10.15 to the
    Registrants Annual Report on Form 10-K (Commission
    File No. 000-32717) for the fiscal year ended
    December 31, 2002).                                                                              
|        | 10 | .16        |  | Settlement, Release, Covenant Not To Sue, Waiver
    and Non-Disclosure Agreement between Instinet Group Incorporated
    and Andre-Francois Helier Villeneuve, dated December 10,
    2002 (Incorporated by reference to Exhibit 10.16 to the
    Registrants Annual Report on Form 10-K (Commission
    File No. 000-32717) for the fiscal year ended
    December 31, 2002).

127



---



##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                               
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .17        |  | Settlement, Release, Covenant Not To Sue, Waiver
    and Non-Disclosure Agreement between Instinet Corporation and
    Douglas M. Atkin, dated April 30, 2002 (Incorporated
    by reference to Exhibit 10.17 to the Registrants
    Annual Report on Form 10-K (Commission File
    No. 000-32717) for the fiscal year ended December 31,
    2002).        
|        | 10 | .18        |  | Settlement, Release, Covenant Not To Sue, Waiver
    and Non-Disclosure Agreement between Instinet Corporation and
    Michael J. Clancy, dated December 15, 2002
    (Incorporated by reference to Exhibit 10.18 to the
    Registrants Annual Report on Form 10-K (Commission
    File No. 000-32717) for the fiscal year ended
    December 31, 2002).    
|        | 10 | .19        |  | Settlement, Release, Covenant Not To Sue, Waiver
    and Non-Disclosure Agreement between Instinet Corporation and
    Michael Galano dated January 9, 2002 (Incorporated by
    reference to Exhibit 10.7 to the Registrants Annual
    Report on Form 10-K (Commission File No. 000-32717)
    for the fiscal year ended December 31, 2001).               
|        | 10 | .20        |  | Settlement, Release, Covenant Not To Sue, Waiver
    and Non-Disclosure Agreement between Instinet Group Incorporated
    and Jean-Marc Bouhelier dated May 30, 2003 (Incorporated
    herein by reference to Exhibit 10.2 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended June 30,
    2003). 
|        | 10 | .21        |  | Settlement, Release, Covenant Not To Sue, Waiver
    and Non-Disclosure Agreement between Instinet Group Incorporated
    and William J. Sterling dated June 27, 2003
    (Incorporated herein by reference to Exhibit 10.3 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended June 30,
    2003).
|        | 10 | .22        |  | Instinet Group Annual Bonus Plan (Incorporated by
    reference to Exhibit 10.5 to the Registrants
    Form S-1 (Registration No. 333-55190)).                                                                                                                                                                                                               
|        | 10 | .23        |  | Instinet 2000 Stock Option Plan (Incorporated by
    reference to Exhibit 10.7 to the Registrants
    Form S-1 (Registration No. 333-55190)).                                                                                                                                                                                                                
|        | 10 | .24        |  | Instinet 2000 Stock Option Plan, as amended and
    restated, April 30, 2002 (Incorporated by reference to
    Exhibit 10.23 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2002).                                                                                             
|        | 10 | .25         |  | Transaction System Agreement, effective as of
    September 19, 2002, between Instinet Corporation and Bridge
    Trading Company (Incorporated by reference to Exhibit 10.24
    to the Registrants Annual Report on Form 10-K
    (Commission File No. 000-32717) for the fiscal year ended
    December 31, 2002).                                        
|        | 10 | .26         |  | Transaction System Agreement dated as of
    April 20, 2003, between Instinet Corporation and Bridge
    Trading Company (Incorporated herein by reference to
    Exhibit 10.1 to the Registrants Quarterly Report on
    Form 10-Q (Commission File No. 000-32717) for the
    period ended March 31, 2003).                                                
|        | 10 | .27*        |  | Transaction System Supplemental Order Form,
    effective as of December 17, 2003, between Instinet Group
    Incorporated and Bridge Trading Company, as a supplement to the
    Transaction System Agreement, dated as of April 20, 2003,
    between Instinet Group Incorporated and Bridge Trading Company.                                               
|        | 10 | .28         |  | Global Solutions Agreement, dated as of
    March 14, 2003, between Instinet Group Incorporated and
    Reuters Limited (Incorporated by reference to Exhibit 10.25
    to the Registrants Annual Report on Form 10-K
    (Commission File No. 000-32717) for the fiscal year ended
    December 31, 2002).                                                  
|        | 10 | .29         |  | Global Solutions Agreement dated as of effective
    March 19, 2003, between Instinet Group Inc. and Reuters
    Limited (Incorporated herein by reference to Exhibit 10.1
    to the Registrants Quarterly Report on Form 10-Q
    (Commission File No. 000-32717) for the period ended
    June 30, 2003).                                                 
|        | 10 | .30         |  | Commission Sharing Agreement, dated as of
    April 23, 2002, between Instinet Corporation and Bridge
    Trading Company (Incorporated herein by reference to
    Exhibit 10.8 to Registrants Quarterly Report on
    Form 10-Q (Commission File No. 000-32717) for the
    period ended June 30, 2002).                                                    
|        | 10 | .31         |  | Non-Exclusive Limited Patent License Agreement,
    effective as of August 2, 2002, between Instinet Group
    Incorporated and Reuters Limited (Incorporated herein by
    reference to Exhibit 10.9 to Registrants Quarterly
    Report on Form 10-Q (Commission File No. 000-32717)
    for the period ended June 30, 2002).                              

128



---



##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                              
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .32         |  | Institutional Order Entry Enhancements Agreement,
    dated as of September 19, 2002, between Instinet Group
    Incorporated and Reuters SA. (Incorporated by reference to
    Exhibit 10.1 to the Registrants Current Report on
    Form 8-K as filed with the Commission on October 16,
    2002).                                       
|        | 10 | .33         |  | Newport Content Services Agreement, dated as of
    September 19, 2002, between Instinet Group Incorporated and
    Reuters Limited (Incorporated by reference to Exhibit 10.2
    to the Registrants Current Report on Form 8-K as
    filed with the Commission on October 16, 2002).                                                     
|        | 10 | .34         |  | Preferred Soft Dollar Agreement, dated as of
    September 19, 2002, between Instinet Group Incorporated and
    Reuters Limited (Incorporated by reference to Exhibit 10.3
    to the Registrants Current Report on Form 8-K as
    filed with the Commission on October 16, 2002).                                                        
|        | 10 | .35         |  | Fixed Income Data Agreement between Reuters
    Limited and Instinet Corporation, dated October 1, 1999
    (Incorporated by reference to Exhibit 10.8 to the
    Registrants Form S-1 (Registration
    No. 333-55190)).                                                                                                                   
|        | 10 | .36         |  | Letter agreement between Reuters Limited and
    Instinet Corporation, dated August 1, 2000, amending the
    Fixed Income Data Agreement (Incorporated by reference to
    Exhibit 10.10 to the Registrants Form S-1
    (Registration No. 333-55190)).                                                                                    
|        | 10 | .37         |  | Global Reuters Services Contract between Reuters
    Limited and Instinet Global Holdings, Inc., dated
    December 21, 2000 (Incorporated by reference to
    Exhibit 10.9 to the Registrants Form S-1
    (Registration No. 333-55190)).                                                                                                  
|        | 10 | .38*        |  | Reuters Global Routing Services Agreement, dated
    as of December 22, 2003, between Instinet Europe Limited
    and Reuters Global Routing Services Limited.                                                                                                                                                                               
|        | 10 | .39         |  | Redistribution Addendum to Reuters Global
    Agreement between Reuters Limited and Instinet Global Holding,
    Inc., dated December 21, 2000, amending the Global Reuters
    Services Contract (Incorporated by reference to
    Exhibit 10.11 to the Registrants Form S-1
    (Registration No. 333-55190)).                            
|        | 10 | .40         |  | Sublease between Charles Schwab & Co.,
    Inc. and Instinet Group Incorporated dated December 18,
    2001 (Incorporated by reference to Exhibit 10.36 to the
    Registrants Annual Report on Form 10-K (Commission
    File No. 000-32717) for the fiscal year ended
    December 31, 2001).                                             
|        | 10 | .41         |  | First Amendment to Sublease between Charles
    Schwab & Co., Inc. and Instinet Group Incorporated
    dated June 5, 2002 (Incorporated by reference to
    Exhibit 10.43 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2002).                               
|        | 10 | .42         |  | Second Amendment to Sublease between Charles
    Schwab & Co., Inc. and Instinet Group Incorporated
    dated November 7, 2002 (Incorporated by reference to
    Exhibit 10.44 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2002).                          
|        | 10 | .43         |  | Sublease between Reuters C Corp. and
    Instinet Global Holdings, Inc. (Incorporated by reference to
    Exhibit 10.17 to the Registrants Quarterly Report
    filed on Form 10-Q (Commission file No. 000-32717) for
    the quarterly period ended June 30, 2001).                                                                       
|        | 10 | .44         |  | Data Distribution Agreement between Instinet
    Global Holdings, Inc. and Reuters America, Inc. (Incorporated by
    reference to Exhibit 10.13 to the Registrants Quarterly
    Report filed on Form 10-Q (Commission file
    No. 000-32717) for the quarterly period ended June 30,
    2001).                                          
|        | 10 | .45         |  | U.S. Tax Sharing Agreement by and among
    Reuters America Holdings, Inc., Instinet Group Incorporated and
    Instinet Global Holdings, Inc. (Incorporated by reference to
    Exhibit 10.15 to the Registrants Quarterly Report
    filed on Form 10-Q (Commission file No. 000-32717) for
    the quarterly period ended June 30, 2001).
|        | 10 | .46         |  | U.K. Tax Sharing Agreement between Reuters
    Group PLC, Instinet Group Incorporated and Instinet Holdings
    Limited (Incorporated by reference to Exhibit 10.16 to the
    Registrants Quarterly Report filed on Form 10-Q
    (Commission file No. 000-32717) for the quarterly period
    ended June 30, 2001).                       
|        | 10 | .47         |  | Corporate Services Agreement between Reuters
    Limited and Instinet Group Incorporated (Incorporated by
    reference to Exhibit 10.19 to the Registrants
    Quarterly Report on Form 10-Q (Commission file
    No. 000-32717 for the quarterly period ended June 30,
    2001)).                                                        

129



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##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .48         |  | License Agreement between Instinet Global
    Services Limited and Reuters Limited dated May 17, 2001
    (Incorporated by reference to Exhibit 10.14 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    file No. 000-32717 for the quarterly period ended
    June 30, 2001)).                                                                                                                                                                                                                                                                                                   
|        | 10 | .49         |  | Corporate Agreement between Instinet Group
    Incorporated and Reuters Limited, dated May 17, 2001
    (Incorporated herein by reference to Exhibit 4.2 to the
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended June 30,
    2001).                                                                                                                                                                                                                                                                                                          
|        | 10 | .50         |  | Amended and Restated Corporate Agreement between
    Instinet Group Incorporated and Reuters Limited, dated
    June 9, 2002 (Incorporated herein by reference to
    Exhibit 10.1 to the Registrants Form S-4
    (Registration No. 333-97071)).                                                                                                                                                                                                                                                                                                                                                   
|        | 10 | .51         |  | Registration Rights Agreement, dated as of
    September 20, 2002, by and among Instinet Group
    Incorporated, Reuters Limited, Reuters C Corp., Reuters Holdings
    Switzerland SA, the other entities listed on Exhibit A as
    the Bain Entities, the Silver Lake Entities, the
    TA Entities, the Finanzas Entities, the Advent Entities,
    Ameritrade Holding Corporation and Edward J. Nicoll
    (Incorporated herein by reference to Exhibit 10.2 to
    Registrants Quarterly Report on Form 10-Q (Commission
    File No. 000-32717) for the period ended September 30,
    2002).
|        | 10 | .52         |  | Interest Purchase Agreement between Instinet
    Group Incorporated and David G. Jamail, David R.
    Burch, Overunder, LLC, John A. McEntire, IV, John
    Bunda, Laura Horne, Currin Van Eman and Shayne Young dated
    July 23, 2001 (Incorporated by reference to
    Exhibit 10.29 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2001).                                                                                                                                                                        
|        | 10 | .53         |  | Amendment No. 1, dated as of October 1,
    2001, to the Interest Purchase Agreement between Instinet Group
    Incorporated and David G. Jamail, David R. Burch, Overunder,
    LLC, John A. McEntire, IV, John Bunda, Laura Horne,
    Currin Van Eman and Shayne Young dated July 23, 2001
    (Incorporated by reference to Exhibit 10.30 to the
    Registrants Annual Report on Form 10-K (Commission
    File No. 000-32717) for the fiscal year ended
    December 31, 2001).                                                                                                               
|        | 10 | .54         |  | Registration Rights Agreement between Instinet
    Group Incorporated and David G. Jamail, David R.
    Burch, Overunder, LLC, John A. McEntire, IV, John
    Bunda, Laura Horne, Currin Van Eman and Shayne Young, dated
    October 1, 2001 (Incorporated by reference to
    Exhibit 10.39 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2001).                                                                                                                                                                   
|        | 10 | .55         |  | Execution Services Agreement between Instinet
    Group Incorporated and ProTrader Securities Corporation, Zone
    Trading Partners, LLC, Zone Equity Partners, LP, David G.
    Jamail, David R. Burch and Andrew Kershner dated
    October 1, 2001, as amended (Incorporated by reference to
    Exhibit 10.31 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2001).                                                                                                                                              
|        | 10 | .56         |  | Research and Analytics Asset Purchase Agreement
    between Instinet Group Incorporated and Reuters Group PLC
    effective as of September 28, 2001 (Incorporated by
    reference to Exhibit 10.32 to the Registrants Annual
    Report on Form 10-K (Commission File No. 000-32717)
    for the fiscal year ended December 31, 2001).                                                                                                                                                                                                                                                            
|        | 10 | .57         |  | Mutual Services Agreement between Instinet Group
    Incorporated and Reuters America Inc. dated December 18,
    2001 (Incorporated by reference to Exhibit 10.33 to the
    Registrants Annual Report on Form 10-K (Commission
    File No. 000-32717) for the fiscal year ended
    December 31, 2001).                                                                                                                                                                                                                                                                                          
|        | 10 | .58         |  | Software License Agreement, as amended, between
    TIBCO Finance Technology, Inc. and Instinet Corporation,
    effective September 25, 1998 (Incorporated by reference to
    Exhibit 10.34 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2001).                                                                                                                                                                                                                                                                   
|        | 10 | .59         |  | Software Maintenance Agreement between TIBCO
    Finance Technology, Inc. and Instinet Corporation, effective
    September 25, 1998 (Incorporated by reference to
    Exhibit 10.35 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2001).                                                                                                                                                                                                                                                                            

130



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##### 



|        |     |             |  |                                                                                                                                                                                                                                                                                                                                                                         
|------- | --- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|        | 10  | .60         |  | Testing and Certification Agreement between
    Instinet UK Limited (now called Instinet Europe Limited)
    and Effix SA dated November 7, 2000 (Incorporated by
    reference to Exhibit 10.37 to the Registrants Annual
    Report on Form 10-K (Commission File No. 000-32717)
    for the fiscal year ended December 31, 2001).                                   
|        | 10  | .61         |  | Vendor Interface Agreement between Instinet UK
    Limited (now called Instinet Europe Limited) and Reuters AG
    dated July 17, 2001 (Incorporated by reference to
    Exhibit 10.38 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2001).                                             
|        | 10  | .62         |  | Facilities Management Service Agreement among
    Canon Business Services, Reuters America Inc. and Instinet
    Corporation dated July 1, 2001 (Incorporated by reference
    to Exhibit 10.40 to the Registrants Annual Report on
    Form 10-K (Commission File No. 000-32717) for the
    fiscal year ended December 31, 2001).                                    
|        | 10  | .63         |  | Datek Stockholders Agreement, dated as of
    June 9, 2002, by and among Instinet Group Incorporated,
    Reuters Limited and Datek Online Holdings Corp. (Incorporated
    herein by reference to Exhibit 10.2 to the
    Registrants Form S-4 (Registration
    No. 333-97071)).                                                                                     
|        | 10  | .64         |  | Stockholders Agreement, dated as of June 9,
    2002, by and among Instinet Group Incorporated, Reuters Limited,
    Reuters C Corp., Reuters Holdings Switzerland SA, the other
    entities listed on Exhibit B thereto and Edward J.
    Nicoll (Incorporated herein by reference to Exhibit 10.3 to
    the Registrants Form S-4 (Registration
    No. 333-97071)).
|        | 10  | .65         |  | Company Voting Agreement, dated as of
    June 9, 2002, by and among Island Holding Company, Inc.,
    the stockholders of Island Holding Company, Inc., and Instinet
    Group Incorporated (Incorporated herein by reference to
    Exhibit 10.4 to the Registrants Form S-4
    (Registration No. 333-97071)).                                                      
|        | 10  | .66         |  | Parent Voting Agreement, dated as of June 9,
    2002, by and among Reuters Limited, Reuters C Corp and
    Reuters Holdings Switzerland SA, Island Holding Company, Inc.,
    and Instinet Group Incorporated (Incorporated herein by
    reference to Exhibit 10.5 to the Registrants
    Form S-4 (Registration No. 333-97071)).                                    
|        | 10  | .67         |  | Datek Voting Agreement, dated as of June 9,
    2002, by and between Datek Online Holdings Corp. and Instinet
    Group Incorporated (Incorporated herein by reference to
    Exhibit 10.6 to the Registrants Form S-4
    (Registration No. 333-97071)).                                                                                                              
|        | 10  | .68         |  | Amendment No. 1 to Company Voting Agreement,
    dated as of August 7, 2002, by and among Island Holding
    Company, Inc., the stockholders of Island Holding Company, Inc.
    and Instinet Group Incorporated (Incorporated herein by
    reference to Exhibit 10.10 to the Registrants
    Form S-4 (Registration No. 333-97071)).                                 
|        | 10  | .69         |  | Amendment No. 1 to Parent Voting Agreement,
    dated as of August 7, 2002, by and among Reuters Limited,
    Reuters C Corp and Reuters Holding Switzerland SA, Island
    Holding Company, Inc., and Instinet Group Incorporated
    (Incorporated herein by reference to Exhibit 10.11 to the
    Registrants Form S-4 (Registration
    No. 333-97071)).           
|        | 10  | .70         |  | Amendment No. 1 to Datek Voting Agreement,
    dated as of August 7, 2002, by and Datek Online Holdings
    Corp. and Instinet Group Incorporated (Incorporated herein by
    reference to Exhibit 10.12 to the Registrants
    Form S-4 (Registration No. 333-97071)).                                                                                                
|        | 21  | .1*         |  | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                    
|        | 24  | .1*         |  | Powers of Attorney                                                                                                                                                                                                                                                                                                                                                      
|        | 31* |             |  | Certificates of Chief Executive Officer and Chief
    Financial Officer pursuant to Securities Exchange Act
    Rules 13a-15(e) and 15d-15(e) as Adopted Pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002 dated
    March 12, 2004.                                                                                                                        
|        | 32* |             |  | Certificate of Chief Executive Officer and Chief
    Financial Officer pursuant to 18 U.S.C. Section 1350
    dated March 12, 2004.                                                                                                                                                                                                                                     



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|  |               
|- | --------------
|* | Filed herewith



|  |                                    
|- | -----------------------------------
| | Management Compensation Arrangement

131