Nasdaq Reports Third Quarter 2002 Results

Nasdaq's launch of SuperMontage on October 14, 2002 and the recent introduction of a series of complimentary products demonstrate the Company's fulfillment of a key strategic initiative aimed at improving investor confidence and trading effectiveness. Nasdaq's set of advanced trading solutions and tools includes:

Price discovery and execution products designed to improve speed and efficiency for investors:

• SuperMontage - Launched October 14, 2002 is the next generation order display and execution system enabling sell-side firms to list multiple quotes/orders for the same security and the creation of a central trading book for Nasdaq securities.
• Primex^TM - An electronic auction system designed to increase price improvement and interaction among market participants. The functionality of Primex is planned to expand to take full advantage of Nasdaq's new SuperMontage trading platform.
• Liquidity Tracker^SM - An automated intelligent order routing system, which directs orders to market makers whose recent trading activity suggests a willingness to fill new orders, is scheduled to launch in the fourth quarter.

• DepthView^SM - Provides the aggregate size of all quotes and orders at each of the top five price levels in SuperMontage, providing users the ability to analyze liquidity trends within Nasdaq securities.
• PowerView^SM - Combines the current Level 2 Service, which provides the best bid and ask price from each Nasdaq market participant, and DepthView enabling users to see all of the interest within a security as well as unprecedented market depth
• TotalView^SM - Includes the features of PowerView as well as the detailed, attributed quote and order data that comprises DepthView, providing users the ability to track order flow, pockets of liquidity and analyze trends in liquidity to the participant level.

Transaction Services

Transaction services revenue was $93.9 million in the third quarter versus $86.2 million for the same period a year ago, an increase of 8.9%.

• Execution services revenue increased 51.2% to $37.8 million due to revised pricing for SuperSoesSM, including the introduction of new, incremental fees associated with quote updates in Nasdaq systems.
• Trade reporting revenue increased 7.0% to $19.9 million primarily due to increased trading volumes associated with a major issuer that was subsequently de-listed from The Nasdaq Stock Market®.
• Access services revenue decreased 15.4% to $34.6 million primarily due to cost saving initiatives among Nasdaq's market participants and the consolidation of major trading firms, which resulted in fewer subscriber log-ons to Nasdaq systems.

• Average daily share volume in Nasdaq-traded securities increased 5.3% to 1.7 billion shares versus third quarter 2001.
• Average daily trade volume increased 13.5% to 2.3 million trades versus the comparable period a year ago.
• Nasdaq's share of trades executed in its systems fell to 28.6% from 39.3% in the third quarter of 2002 and to 32.6% from 39.0% in the nine-months year-to-date compared with the same period in 2001.
• Nasdaq's share of volume executed in its systems fell to 23.17% from 29.24% in the third quarter of 2002 and to 27.89% from 28.01% in the nine-months year-to-date compared with the same period in 2001.

• SuperMontage began trading 32 test securities on July 29, 2002.
• The Securities and Exchange Commission, on August 28, 2002, granted Nasdaq unconditional approval to begin live trading on the new platform.
• On October 14, 2002, to ensure all market participants were prepared for the implementation, Nasdaq successfully introduced five securities into the SuperMontage trading environment.
• Nasdaq plans to have all Nasdaq-listed securities in SuperMontage by year-end.
• Currently, there are 104 Nasdaq-listed securities trading in SuperMontage.

"We are proud of our ability to conceive, develop and deliver new innovative products to traders and investors. Although too early to assess its long-term impact, we are pleased with the early successes of SuperMontage and the opportunity that it offers participants in the equity markets," said Rick Ketchum, deputy chairman and president. "We will continue to work closely with our customers to ensure the successful rollout of all Nasdaq-listed securities in the trading platform and will explore new ways in which to serve the investment community."

Nasdaq Transaction Services derives revenue primarily from transactions associated with SuperSoes, SelectNetSM, SOES^SM, trade reporting fees associated with ACT, and system access fees.

Market Information Services

Market Information Services revenue declined 15.6% to $49.1 million during the quarter from $58.2 million in the same period last year.

• Nasdaq's Level 1 revenue decreased 10.6% to $34.4 million. Nasdaq Quotation Dissemination Service (NQDS) revenue decreased 19.8% to $8.5 million. These decreases are primarily due to declines in professional and non-professional subscriptions.
• Nasdaq shared with its participants a larger portion of revenue Nasdaq receives as part of the Unlisted Trading Privileges Plan. This increase in revenue sharing is primarily due to trade reporting activity by a regional exchange, which became an active participant in the first quarter, 2002.
• Nasdaq InterMarket Tape revenue increased 27.3% to $8.4 million primarily due to an increase in the total InterMarket transactions reported in exchange listed securities.

Market Information Services derives revenue primarily from Level 1 and Nasdaq Quotation Dissemination Service (NQDS) data, and receipt of CQA/CTA tape revenue for trades processed through the Nasdaq InterMarket.

Corporate Client Group Services

Corporate Client Group services revenue increased 12.2% to $44.2 million for the third quarter, from $39.4 million in the third quarter of 2001.

• Annual renewal fee revenue increased 24.5% to $25.9 million in the quarter primarily due to a fee increase implemented at the beginning of 2002.
• Listing of additional shares revenue increased 5.6% to $9.4 million. There were 15 secondary offerings in the quarter as compared to 32 in the third quarter of 2001. Year-to-date secondary offerings were relatively flat compared to year-ago levels, totaling 116.
• Initial listing revenue declined 12.5% to $8.4 million reflecting continued weakness in the IPO market. During the third quarter, there were six initial public offerings on Nasdaq versus 11 in the same period last year. Year-to-date, initial public offerings total 35, relatively flat with prior year and below historical averages.

Corporate Client Group services revenue is primarily earned through initial listing fees, fees associated with the listing of additional shares, and annual renewal fees for companies listed on Nasdaq. Initial listing fees and fees associated with the listing of additional shares are amortized over six-year and four-year periods, respectively, in accordance with the adoption of SEC Staff Accounting Bulletin 101, applied retroactively as of January 1, 2000.

Other

Other revenue was $11.9 million for the third quarter versus $13.9 million a year ago, a decrease of 14.4%. The decrease is primarily due to the decline in trademark licensing revenue related to the Nasdaq-100 Trust occurring outside the Nasdaq InterMarket. The decline in trademark revenue is effectively offset by higher tape revenue received by Nasdaq InterMarket, reflected in Market Information Services, as a result of its increased market share.

Nasdaq generates revenue related to the licensing of the Nasdaq-100 IndexÒ for financial products such as the exchange-traded fund, QQQ. The Index, launched in 1985, includes the 100 largest non-financial stocks traded on The Nasdaq Stock Market. The Nasdaq-100 Index has become the basis for a wide variety of financial instruments, including futures contracts, mutual funds, index options, structured products and an exchange traded fund (QQQ). Nasdaq also generates revenue from Nasdaq.com and advertising revenue from the MarketSite tower.

Expenses

Total expenses were $173.6 million in the third quarter versus $190.9 million a year ago, an improvement of 9.1%. Nasdaq continues to target cost control while advancing its separation from the NASD. The operational and administrative separation of Nasdaq from the NASD is scheduled to be substantially complete in the fourth quarter of 2002.

Direct Expenses

Direct expenses decreased 8.4% to $152.5 million in the third quarter of 2002 from $166.5 million in the third quarter of 2001.

Nasdaq continued to benefit from initiatives taken to reduce fundamental costs required to run the business, namely:

• Professional and contract services improved 24.5% to $17.3 million due to a decrease in development costs associated with SuperMontage and Primex and less reliance on outside contractors with regard to Nasdaq's self-sufficiency efforts related to the separation from the NASD partially offset by an increase in costs associated with Nasdaq's global expansion strategy.
• Computer operations and telecommunications improved 19.6% to $35.3 million due to the renegotiation of key contracts.
• Other expense improved 80.6% to $2.0 million primarily due to reduced losses from international operations.
• Continued attention to headcount, which is expected to result in further reduction in the fourth quarter.

• Compensation and benefits increased 13.2% to $51.3 million reflecting increased headcount related to self-sufficiency as well as additional benefit obligations.
• Depreciation and amortization increased 9.6% to $25.1 million due to capacity and technology infrastructure improvements required to support market activity and new initiatives.
• Occupancy increased 17.2% to $7.5 million as part of Nasdaq's separation from the NASD, previously recorded in Support Costs from Related Parties.

Support Costs from Related Parties decreased 13.5% to $21.1 million from $24.4 million. Two factors contribute to Nasdaq's support costs:

• The first is related to the regulatory role that NASD performs in The Nasdaq Stock Market, Inc.
• The second is related to the support functions that the NASD has traditionally provided Nasdaq.

"Nasdaq continues to take aggressive action to control the fundamental costs to run the business," said David Warren, chief financial officer. "We continue to explore new initiatives designed to drive additional cost out of our business and create greater operating leverage."

Net Income and Earnings Per Share

Net income for the quarter was $12.7 million versus $7.9 million a year ago, an increase of 60.8%.

Basic and diluted earnings per share were $0.13 versus $0.07 in the third quarter 2001, an increase of 86% reflecting higher net income as well as the accretive impact of the repurchase of 33.8 million shares from the NASD in the first quarter of 2002.

Conclusion

"While Nasdaq continues to identify ways to operate more efficiently as an independent company, the focus of our efforts is on the evolution of the equity markets and the needs of investors," noted Mr. Simmons. "Investors are now able to benefit from a variety of Nasdaq solutions and tools designed to provide them with better executions and increased market transparency. The combination of Primex with SuperMontage and Liquidity Tracker gives investors superior price discovery, order routing and execution capabilities. The ViewSuite of data products provides investors with more powerful tools for making better, more informed, trading decisions. These initiatives are not only the future of Nasdaq's business, but are the future expectations of all investors in an open equity marketplace and we want to be there first."

Year-to-Date Financial Summary

Revenue for the nine-month period ending September 30, 2002 was $615.6 million, down 4.1% from $641.8 million for the comparable period in 2001. Total expenses declined 4.2% to $536.5 million from $560.2 million. Net income declined to $42.8 million, or 20.3%, from $53.7 million for the first nine-month period versus prior year. Basic earnings per share was $0.42 and diluted earnings per share was $0.40. This compares to both basic and diluted earnings per share for the same comparable period a year ago of $0.45 and $0.44, respectively. Nasdaq is the world's largest electronic stock market. With approximately 4,000 companies, Nasdaq lists more companies and, on average, trades more shares per day than any other U.S. market. Over the past five years, Nasdaq has outpaced all other U.S. markets in totals of listing IPOs. It is also home to category-defining companies that are leaders across all areas of business including technology, retail, communications, financial services, media and biotechnology industries. Nasdaq is a key driver of capital formation.

For more information about Nasdaq, visit the Nasdaq Web site at www.nasdaq.com or the Nasdaq NewsroomSM at www.nasdaqnews.com.

Cautionary Note Regarding Forward-Looking Statements

The matters described herein may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks, uncertainties or other factors beyond the control of The Nasdaq Stock Market, Inc. (the "Company"), which could cause actual results to differ materially from historical results, performance or other expectations and from any opinions or statements expressed or implied with respect to future periods. These factors include, but are not limited to, the Company's ability to implement its strategic initiatives, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, U.S. and global competition, and other factors detailed in the Company's annual report on Form 10-K, as amended, and periodic reports filed with the U.S. Securities and Exchange Commission. We undertake no obligation to release any revisions to any forward-looking statements.

¹EBITDA throughout this release is defined as earnings before interest, taxes, depreciation, amortization and minority interests.

Click here to view the condensed consolidated statements of income.