Item 1. Business.

Nasdaq Overview

        Nasdaq operates The Nasdaq Stock Market®, the world's largest electronic screen-based equity securities market and the world's largest equity securities market based on share volume. Since its inception in 1971, Nasdaq has been a leader in utilizing technology to democratize and extend the reach of the securities markets.

        Nasdaq provides products and services in the following three principal categories:

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Transaction Services include collecting, processing, and disseminating price quotes of Nasdaq-listed securities, the routing and execution of buy and sell orders for Nasdaq-listed securities, and transaction reporting services. Market participants in The Nasdaq Stock Market, consisting of market makers, electronic communication networks ("ECNs"), registered stock exchanges and order entry firms, each of which is described below, are the users of Nasdaq's Transaction Services. For the year ended December 31, 2002, Transaction Services accounted for revenue of $380.7 million, which represented approximately 47.6% of Nasdaq's total revenue. See "—Products and Services—Transaction Services" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."



•

Market Information Services provide varying levels of quote and trade information to data vendors, who in turn sell the information to the public. For the year ended December 31, 2002, Market Information Services accounted for revenue of $202.4 million, which represented approximately 25.3% of Nasdaq's total revenue. See "—Products and Services—Market Information Services" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."



•

Corporate Client Group provides customer services and information products to Nasdaq-listed companies and is responsible for obtaining new listings on The Nasdaq Stock Market. For the year ended December 31, 2002, the Corporate Client Group accounted for revenue of $176.7 million, which represented approximately 22.1% of Nasdaq's total revenue. See "—Products and Services—Corporate Client Group" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."

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        Nasdaq's market model is one of "open architecture." As a fully electronic market, The Nasdaq Stock Market does not have a central trading floor. Participation in the trading activities on The Nasdaq Stock Market is not limited to any fixed number of market participants. This allows a large number of broker-dealers with widely different business models and trading technologies to participate in the Nasdaq network and compete with one another. The Nasdaq network, called the "Enterprise Wide Network II," is a telecommunications network that Nasdaq uses to deliver transaction and market information services to its market participants. See "—Products and Services—Transaction Services." Market participants can access the Nasdaq network via the Nasdaq Workstation II, Nasdaq's proprietary operating system for the Nasdaq network, or through other customized operating systems. See "—Products and Services—Transaction Services—Access Services." Nasdaq market participants include market makers, ECNs, registered stock exchanges and order entry firms.

        Market makers, also known as dealers, provide liquidity (the ability of a security to absorb a large amount of buying and selling without substantial movement in price) by standing ready to buy or sell securities at all times at publicly-quoted prices for their own account and by maintaining an inventory of securities for their customers. Market makers in a particular security are required at all times to post their bid and offer prices (i.e., price at which they will buy and sell) into the Nasdaq network where they can be viewed and accessed by all market participants. Approximately 375 market makers participate in The Nasdaq Stock Market. On average, securities listed on The Nasdaq Stock Market have 15 market makers. The minimum number of market makers for any Nasdaq-listed stock is two and some securities have over 100 market makers.

        In addition to traditional market makers, the Nasdaq network also includes other broker-dealers operating as ECNs. ECNs provide electronic facilities for investors to trade directly with one another without going through a market maker. ECNs operate as order-matching and order-routing mechanisms and do not maintain inventories of securities themselves. The flexibility of the Nasdaq network means that innovators with new trading technologies or strategies have an opportunity to implement them quickly in The Nasdaq Stock Market.

        An order entry firm is a broker-dealer, but not a market maker or an ECN. An order entry firm can use Nasdaq services to view price quotations and enter marketable orders for execution against the posted quotations of market makers and ECNs. As a result of a rule change by the U.S. Securities and Exchange Commission (the "SEC") on February 10, 2003, order entry firms are allowed to enter non-marketable orders into SuperMontage ^SM (Nasdaq's primary order execution system for Nasdaq-listed securities) for anonymous display. The objective of this rule change is to remove a barrier to full participation in SuperMontage and thereby deepen liquidity and enhance Nasdaq's competitive position.

        Nasdaq's electronic systems centralize the price quotations from all market participants in a given Nasdaq-listed stock to help them compete and allow them to choose with whom they are going to trade. Nasdaq also gathers the trade and quote information from all of these market participants and passes it on to data vendors who sell this information to the investment community and the general public.

        Nasdaq's total revenue for the year ended December 31, 2002 was $799.2 million, a 6.8% decrease from $857.2 million during 2001. Nasdaq's net income increased 6.4% for the year ended December 31, 2002 to $43.1 million from $40.5 million during 2001. Total revenue and net income numbers reflect a change in accounting principle adopted as of January 1, 2000 ("Change in Accounting Principle"). See "Item 6. Selected Consolidated Financial Data," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Consolidated Financial Statements—Note 4." Nasdaq's growth and operating results are directly affected by the trading volume of Nasdaq-listed

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securities and the number of companies listed on The Nasdaq Stock Market. The following table provides statistics about The Nasdaq Stock Market in these areas:

*

Aggregate numbers for each tier of The Nasdaq Stock Market may not match total number due to rounding of numbers in chart.

        As of December 31, 2002, there were 3,659 companies listed on The Nasdaq Stock Market, consisting of 2,824 companies listed on The Nasdaq National Market tier and 835 on The Nasdaq SmallCap Market tier. As of December 31, 2002, The Nasdaq Stock Market was home to the highest percentage of publicly-traded technology and service companies in the U.S., including approximately 80% of computer hardware and peripherals companies, 92% of computer networking companies, 90% of computer software and data processing companies, 87% of semiconductor companies, 60% of telecommunications companies, and 80% of biotechnology and health care companies. In addition, as of December 31, 2002, there were 378 foreign companies listed on The Nasdaq Stock Market, consisting of 274 foreign companies listed on The Nasdaq National Market tier and 104 on The Nasdaq SmallCap Market tier. See "—Products and Services—Corporate Client Group."

Nasdaq's History and Structure

        Founded in 1971, Nasdaq was a wholly-owned subsidiary of the National Association of Securities Dealers, Inc. (the "NASD") until June 2000. The NASD, which operates subject to the oversight of the SEC, is the largest self-regulatory organization ("SRO") in the U.S. with a membership that includes virtually every broker-dealer that engages in the securities business with the U.S. public. The NASD must retain voting control over Nasdaq until such time as Nasdaq may be approved by the SEC for registration as a national securities exchange ("Exchange Registration"), as discussed below.

        In 2000, the NASD implemented a separation of Nasdaq from the NASD by restructuring and broadening the ownership in Nasdaq (the "Restructuring") through a two-phase private placement of securities commencing in June 2000. The principal goals of the Restructuring, among others, were to (i) raise proceeds to create a financially stronger Nasdaq better able to invest in new technologies and address competitive challenges and global opportunities, (ii) raise proceeds to support the operations of the NASD, which would remain the principal SRO responsible for the securities markets, and (iii) realign strategically the ownership of Nasdaq by enlisting a broad class of strategic investors interested in Nasdaq's long-term success. In the private placements, (i) the NASD sold (A) an

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aggregate of 10,806,494 warrants to purchase an aggregate amount of 43,225,976 shares of outstanding common stock of Nasdaq (the "Common Stock") and (B) 4,543,591 shares of outstanding Common Stock and (ii) Nasdaq sold an aggregate of 28,692,543 newly-issued shares of Common Stock to investors. Securities in the private placements were offered to all NASD members, certain issuers listed on The Nasdaq Stock Market, and certain investment companies. Each warrant issued by the NASD entitles the holder to purchase one share in each of four one-year exercise periods. The first exercise period commenced after June 28, 2002 and will expire on June 28, 2003. As a result of the private placements of its Common Stock, Nasdaq became a reporting company pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), on June 29, 2001, and became subject to the reporting requirements under Sections 13, 14 and 16 of the Exchange Act.

        Trading in the Common Stock commenced on July 1, 2002 on the Over-the-Counter Bulletin Board Service® ("OTC Bulletin Board") under the symbol "NDAQ" upon expiration of contractual restrictions on shares of Common Stock sold in the private placement. During 2002, trading activity in Common Stock has been limited with average daily trading volume of approximately 14,000 shares during the period from July through December 2002. See "—Risk Factors—There currently is a limited trading market for the Common Stock."

        As part of the Restructuring, Nasdaq repurchased 18,461,538 shares of Common Stock from the NASD on May 3, 2001, for an aggregate purchase price of $240.0 million. On March 8, 2002, Nasdaq completed a two stage repurchase of an additional 33,768,895 shares of Common Stock owned by the NASD, which represented all of the outstanding shares of Common Stock owned by the NASD, except for the 43,225,976 shares of Common Stock underlying the warrants issued by the NASD in the private placements. Nasdaq purchased these shares of Common Stock for $305.2 million in aggregate cash consideration, 1,338,402 shares of Nasdaq's Series A Cumulative Preferred Stock and one share of Nasdaq's Series B Preferred Stock (the "Repurchase"). The NASD owns all of the outstanding shares of the Series A and Series B Preferred Stock. All of the shares of Common Stock repurchased by Nasdaq from the NASD have been placed in Common Stock in treasury.

        In May 2001, Nasdaq sold $240.0 million of 4.0% convertible subordinated notes due 2006 (the "Subordinated Notes") to Hellman & Friedman Capital Partners IV, L.P. and certain of its affiliated limited partnerships (collectively, "Hellman & Friedman"). Nasdaq used the proceeds from the sale of the Subordinated Notes to repurchase shares of Common Stock from the NASD, as discussed above. At Nasdaq's 2002 Annual Meeting of Stockholders, stockholders approved an amendment to Nasdaq's Restated Certificate of Incorporation ("Certificate of Incorporation") granting holders of the Subordinated Notes the right to vote with the holders of Common Stock and Series B Stock on matters submitted to a vote of stockholders. The holders of the Subordinated Notes are entitled to the number of votes equal to the number of shares of Common Stock into which the Subordinated Notes could be converted, subject to the 5% voting limitation contained in the Certificate of Incorporation.

        In connection with the Restructuring, Nasdaq filed an application with the SEC for Exchange Registration on November 9, 2000. In general, Exchange Registration is a change in legal status for Nasdaq as opposed to a change in the way Nasdaq operates. Nasdaq's application for Exchange Registration was published by the SEC for public comment in 2001. Information relating to Nasdaq's application can be found at the SEC's web site at http://www.sec.gov/rules/other/34-44396.htm . In November 2001, Nasdaq agreed to the SEC's request for an indefinite extension of the date by which the SEC must approve Nasdaq's application or begin proceedings to determine whether the application should be denied. Nasdaq continues to work with the SEC to address outstanding issues. While Nasdaq believes that the SEC will ultimately grant its application for Exchange Registration, there is no assurance that Nasdaq's application for Exchange Registration will be granted or, if granted, the timing of such approval and what restrictions or changes the SEC will require in Nasdaq's operations or corporate structure. See "—Risk Factors—The SEC may challenge or not approve Nasdaq's plan to

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become a national securities exchange or it may require changes in the manner Nasdaq conducts its business before granting this approval."

        In connection with Exchange Registration, the SEC is conducting a review of Nasdaq's current rules and operations. As part of this review, the SEC required as a condition for its approval of Exchange Registration and SuperMontage that the NASD develop and operate an alternative display facility ("ADF") for NASD members to assist in the quotation and transaction reporting of exchange-listed securities. The SEC approved the NASD's proposals for the ADF on a pilot basis on July 24, 2002 and the ADF became operational in October 2002 at the same time as SuperMontage. See "—Risk Factors—Competition by regional exchanges and the ADF may reduce Nasdaq's transactions, trade reporting and market information revenue and impact the ability of SuperMontage to increase Nasdaq's market share of transactions in Nasdaq-listed securities."

        Until such time as Nasdaq may obtain Exchange Registration, Nasdaq's legal authority to operate as a stock market is delegated to it by the NASD under a plan approved by the SEC (the "Delegation Plan"). Although Nasdaq exercises primary responsibility for market-related functions, including market-related rulemaking, all actions taken by Nasdaq pursuant to its delegated authority are subject to review, ratification or rejection by the NASD. In addition, the Delegation Plan requires that the NASD retain greater than 50% of the voting control over Nasdaq. The share of Series B Preferred Stock issued to the NASD in the Repurchase will ensure that the NASD maintains voting control until Exchange Registration. The voting power of the share of Series B Preferred Stock is recalculated for each matter presented to stockholders as of the record date for the determination of the stockholders entitled to vote on the matter. The NASD, as holder of the share of Series B Preferred Stock, will be entitled to cast the number of votes that, together with all other votes that the NASD is entitled to vote by virtue of ownership, proxies or voting trusts, enables the NASD to cast one vote more than one-half of all votes entitled to be cast by stockholders. In addition, the shares of Common Stock underlying unexercised and unexpired warrants as well as shares of Common Stock purchased through the valid exercise of warrants, will be voted by a trustee at the direction of the NASD until Exchange Registration. Shares of Series A Preferred Stock do not have voting rights, except for the right as a class to elect two new directors to the Board of Directors at any time distributions on the Series A Preferred Stock are in arrears for four consecutive quarters and as otherwise required by Delaware law. If Nasdaq obtains Exchange Registration, the share of Series B Preferred Stock will lose its voting rights and will be redeemed by Nasdaq. Nasdaq may redeem the shares of Series A Preferred Stock at any time after Exchange Registration and is required to use the net proceeds from an initial public offering ("IPO"), and upon the occurrence of certain other events, to redeem all or a portion of the Series A Preferred Stock.

        If Nasdaq obtains Exchange Registration it will receive its own SRO status, separate from that of the NASD. Pursuant to the Exchange Act, SROs include any registered national securities exchange, registered securities association (of which the NASD is currently the only one), or registered clearing agency, or, for certain purposes, the Municipal Securities Rulemaking Board. In general, an SRO is responsible for regulating its members through the adoption and enforcement of rules and regulations governing the business conduct of its members. As an SRO, Nasdaq will have its own rules pertaining to its members and listed companies regarding listing, membership, and trading that are distinct and separate from those rules applicable generally to broker-dealers as administered by the NASD. Broker-dealers will be able to choose to become members of Nasdaq, in addition to their other SRO memberships, including membership in the NASD.

        Whether or not Nasdaq is granted Exchange Registration is not expected to have a financial impact on Nasdaq in the short-term. In the long-term, however, Exchange Registration is expected to improve the competitive position of Nasdaq. As an exchange, Nasdaq will no longer have to share revenue from certain proprietary products with certain other exchanges. An independent Nasdaq will have greater access to the capital markets in order to raise funds for service enhancements and

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increased flexibility to use its Common Stock in connection with acquisitions or other strategic partnerships.

Industry Overview

        The securities market industry historically has included The Nasdaq Stock Market, the national stock exchanges, such as the New York Stock Exchange ("NYSE") and the American Stock Exchange ("Amex"), and a number of regional exchanges. Some of these regional exchanges have a few exclusive "local" securities, but most compete in the business of trading the more active NYSE-, Nasdaq-, and Amex-listed securities. The regional exchanges include the Boston, Chicago, Cincinnati, Pacific (which includes the Archipelago Exchange) and Philadelphia exchanges.

        Regulatory and technological developments have led to gradual changes in the industry and have resulted in greater competition in the trading of securities. The emergence of alternative trading systems—a term that refers generally to internal trading systems that are designed to match buyers and sellers of securities on an agency basis and includes ECNs—has provided an additional venue for investors to transact certain trades. Nasdaq encourages the use of internal or alternative systems to trade securities and considers these systems an important component of The Nasdaq Stock Market to the extent that they report trades through The Nasdaq Stock Market, display their best bid and offer on the market, and transact on The Nasdaq Stock Market.

        The following table sets forth information comparing the primary U.S. markets for 2002 and 2001:

National Market System

        In the 1970s, Congress passed legislation and the SEC adopted rules to create a national market system to disseminate market information. As a result, participants in U.S. securities markets have access to a consolidated stream of quotation and transaction information from all the exchanges and The Nasdaq Stock Market (acting under the Delegation Plan) for most equity securities. The exchanges and The Nasdaq Stock Market act jointly to collect and disseminate this information under national market system plans approved by the SEC. The price and transaction information collected under these national market system plans is sold for a fee to data vendors, who in turn sell the information to the public. These fees are referred to as "Tape Fees." After costs are deducted, the Tape Fees are distributed among the participants in each of the national market system plans based on their transaction volume. The national market system plans include:

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The Nasdaq Unlisted Trading Privileges Plan ("UTP Plan"), which collects and disseminates price and transaction information for securities listed on The Nasdaq Stock Market. Members of the plan are the NASD and certain regional exchanges.



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The Consolidated Quotation Plan, which collects and disseminates quotation information for securities listed on the NYSE and Amex. All of the exchanges and the NASD are members of this plan.

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•

The Consolidated Tape Association Plan, which collects and disseminates transaction information for NYSE and Amex securities. All of the exchanges and the NASD are members of this plan.



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The Intermarket Trading System, which is a communications system that allows orders to be sent to the exchange or market quoting the best price. All of the exchanges and the NASD are members of the Intermarket Trading System Plan.

        Nasdaq, operating under the Delegation Plan, currently acts on behalf of the NASD in each of these plans and intends to become a member in its own right of each of these plans when and if it becomes an exchange.

Products and Services

        Nasdaq's products and services fall into three principal categories:

(1)

Transaction Services;



(2)

Market Information Services; and



(3)

Corporate Client Group.

        Transaction Services.     Transaction Services are the core set of products designed to provide market participants with access to The Nasdaq Stock Market, execution services that provide quoting and trading capabilities, and reporting services such as trade reporting and risk management. In addition, Nasdaq provides transaction services for securities authorized for trading on the OTC Bulletin Board as well as exchange-listed securities that are traded in the over-the-counter market by NASD members. See "—Other Products and Markets—Nasdaq InterMarket" and "—OTC Bulletin Board."

        All of Nasdaq's market participants are connected over an Enterprise Wide Network II jointly designed and managed by Nasdaq and WorldCom, Inc. ("WorldCom"). Nasdaq entered into a contract with WorldCom in 1997 to design and support the network. That contract, as amended in June 2002, continues for three years from the date of the amendment. Pursuant to the agreement, however, Nasdaq has the right to terminate the contract in certain circumstances after the second year. WorldCom charges Nasdaq monthly for use of the network. The network is scalable and reliable, supporting trading volume of up to eight billion shares per day. Each market participant is connected to The Nasdaq Stock Market through paired connections with two lines to greatly reduce the risk of connection failure. Although WorldCom declared bankruptcy in July 2002, Nasdaq does not foresee any interruption in service under the contract. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results Operations—Contractual Obligations and Contingent Commitments" and "Consolidated Financial Statements, Note 17."

        Access Services.     Nasdaq provides access to its execution and trade reporting systems through four products: Nasdaq Workstation II; the Application Program Interface that allows firms to create their own interface to The Nasdaq Stock Market; a Computer-to-Computer Interface ("CTCI") that provides for automated order entry, trade reporting and routing; and the Nasdaq Workstation WebLink system that provides browser-based access to The Nasdaq Stock Market via the Internet.

        Nasdaq Workstation II, introduced in 1995, is a software product that is installed on approximately 4,300 computer desktops to provide market participants with access to Nasdaq transaction services. Nasdaq Workstation II is designed to provide a fast, flexible, reliable, and convenient trading environment capable of running on a variety of computers. In addition to the Nasdaq Workstation II, the Application Program Interface allows approximately 2,770 users to access The Nasdaq Stock Market over customized interfaces developed by market participants. Using the Application Program Interface, a firm can connect its internal systems to The Nasdaq Stock Market for order and position management. Access to The Nasdaq Stock Market via the Application Program Interface instead of Nasdaq Workstation II represents a growing trend among Nasdaq market participants.

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        For the years ended December 31, 2002, 2001 and 2000, Nasdaq's total revenue from Nasdaq Workstation II and the Application Program Interface was $118.4 million, $142.9 million and $118.2 million, respectively. Nasdaq Workstation II and Application Program Interface fees accounted for approximately 14.8% of Nasdaq's total revenue for the year ended December 31, 2002.

        Nasdaq also provides CTCI for users to report trades, enter orders into, and receive execution messages through, SuperMontage. The CTCI links The Nasdaq Stock Market to automated firm systems. This interface was upgraded in 2002 to a new protocol and delivers increased line speed. CTCI revenue accounted for approximately 2.1% of Nasdaq's total revenue for the year ended December 31, 2002.

        Nasdaq's Workstation WebLink, an Internet browser-based system for small order-entry and market making firms, provides small firms with a low-cost option for performing basic trade reporting and risk management functions as well as order routing. Workstation WebLink accounted for less than 1% of Nasdaq's total revenue for the year ended December 31, 2002.

        Execution Services.     As part of its price discovery function, Nasdaq provides collection, processing, and dissemination of price quotations of Nasdaq-listed securities to its market participants. Price quotations are made up of two parts—the bid and the offer. The bid is the displayed price at which the quoting market maker or ECN is prepared to buy the security from any seller in the marketplace. The offer is the displayed price at which the quoting market maker or ECN is prepared to sell the security to any buyer in the marketplace. Since market makers and ECNs may wish to pay differing amounts to buy or sell a particular security, Nasdaq looks at all the price quotations of the market makers and participating ECNs in that security and independently ranks the bids and offers so that one can easily determine the Nasdaq participant who is willing to sell the security for the lowest price and the one who is willing to buy the security at the highest price. This combination of the best bid and the best offer is referred to as the "Nasdaq inside."

        Once price quotations have been entered into the Nasdaq system, Nasdaq processes the price quotations by updating the posted price and size (i.e., number of shares the posting party will buy or sell at that price) in response to messages received from the party posting the price quotation. Only registered market makers, ECNs and UTP Plan participants have the ability to post and adjust quotations in the Nasdaq system. However, a recent rule change in 2003 permits order entry firms to enter non-marketable orders into SuperMontage for anonymous display.

        Nasdaq provides electronic routing of buy and sell orders for Nasdaq-listed securities to and from a market maker, order entry firm or ECN and the execution of those orders through the use of automated systems. Order routing and execution are the terms generally used to describe how orders to buy and sell securities are directed to market participants as well as how these orders are handled once they reach their destination. Order routing refers to the act of transmitting orders to another market participant for action. Order execution is a legally binding step in which orders are executed, or responded to, once received by a market participant. During the fourth quarter of 2002, approximately 20.1% of Nasdaq's share volume (based on the aggregate number of shares traded) came from orders routed and executed using a Nasdaq system, with the remainder coming from regional exchanges, the ADF and market participants' internal or alternative trading systems. ^*

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In order to use data more consistent with the separation of the Securities Information Processor "SIP" function from The Nasdaq Stock Market that began in July 2002 (see "—Market Information Services"), the methodology for calculating systems market share of volume was adjusted. As a result, information on share volume market share may not be comparable to any similar data previously provided by Nasdaq for prior periods based on the old methodology.

        Nasdaq's primary execution system is now SuperMontage, which began its rollout on October 14, 2002, and was successfully extended to all securities trading on The Nasdaq Stock Market on December 2, 2002. SuperMontage represents a major improvement in the ability of market participants to access, process, display and integrate orders and quotes in The Nasdaq Stock Market. SuperMontage

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has several strategic implications. It is intended to attract more orders to The Nasdaq Stock Market by providing a comprehensive display of the interest at the Nasdaq inside and four price levels away, thus increasing competition and market transparency. SuperMontage also provides pre-trade anonymity to market participants using a Nasdaq system, i.e., prior to execution no one will know the identity of the firm displaying the order unless such firm chooses to reveal its identity. Anonymous trading can contribute to improved pricing for securities by reducing the potential market impact of large transactions and transactions by certain investors whose trading activity, if known, may be more likely to influence others.

        By allowing (but not requiring) market participants to give the Nasdaq system multiple orders at a single price level as well as at multiple price levels, SuperMontage assists market participants with the management of their back book, i.e., orders that are not at the best price. This functionality also assists market participants in complying with the SEC's order handling rules. These rules, among other things, require the display of customer limit orders priced better than a Nasdaq market maker's or a designated dealer's quote or that are for a larger number of shares at the same price. Other system enhancements make it easier for participants to access ECNs via Nasdaq systems. Nasdaq is currently reviewing the functionality of SuperMontage and is considering certain additional modifications to the system requested by market participants. Nasdaq's goal is to build market share growth in 2003 by encouraging user acceptance of SuperMontage and Nasdaq will continue to use competitive pricing to bring more order flow to SuperMontage.

        The primary fee for SuperMontage is a transaction execution charge, assessed on a per share basis to the party that accesses the liquidity provided by another market participant. In certain circumstances, Nasdaq credits a portion of the per share execution charge to the market participant that provides the liquidity. In addition, certain types of SuperMontage orders are subject to order entry and order cancellation charges. In February 2003, Nasdaq eliminated a fee that it had formerly charged when a market participant updated a quotation or non-marketable limit order that it had posted in SuperMontage. SuperMontage generated revenue of $11.0 million for the year ended December 31, 2002.

        Upon complete implementation of SuperMontage in December 2002, Nasdaq retired several order routing and execution systems that had previously been used by The Nasdaq Stock Market. These systems include:

•

The Nasdaq National Market Execution System (also known as "SuperSoes ^SM "), which was fully implemented on July 30, 2001 and functioned as the primary system for transactions in securities listed on The Nasdaq National Market. For the years ended December 31, 2002 and 2001, Nasdaq's total revenue from SuperSoes was $109.7 million and $32.3 million, respectively. SuperSoes accounted for approximately 13.7% of Nasdaq's total revenue for the year ended December 31, 2002.



•

SelectNet, which functioned as an automated Nasdaq service to facilitate order execution by linking all market participants that trade Nasdaq-listed securities. Prior to the implementation of SuperSoes in July 2001, SelectNet was the primary system that market makers used to trade with one another. Since July 2001, SelectNet served primarily as a means for participants to reach ECN quotes on The Nasdaq Stock Market and was also a tool for market makers seeking to negotiate trades with a particular counter-party or to broadcast such an order to all market participants. Certain features of SelectNet have been incorporated into SuperMontage. For the years ended December 31, 2002, 2001 and 2000, Nasdaq's total revenue from SelectNet was $28.7 million, $87.1 million and $113.5 million, respectively. SelectNet accounted for approximately 3.6% of Nasdaq's total revenue for the year ended December 31, 2002.



•

SOES, which routed and executed small orders of public customers seeking to trade securities listed on The Nasdaq SmallCap Market. Such transactions are now also processed through

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SuperMontage. SOES accounted for less than 1% of Nasdaq's total revenue for the year ended December 31, 2002. For the years ended December 31, 2001 and 2000, Nasdaq's total revenue from SOES was $26.1 million and $32.2 million, respectively. During 2000 and 2001, until the introduction of SuperSoes, SOES also executed orders for securities listed on The Nasdaq National Market.

        In addition to SuperMontage, Nasdaq continues to offer several specialized transaction services including:

•

Advanced Computerized Execution System ("ACES"), an order routing service that can be used by any Nasdaq market participant. Order entry firms that use ACES generally route buy and sell orders to market makers after establishing a trading relationship. Market makers in turn leverage their internal systems to fill orders at the best price displayed in the market. ACES participants can route orders directly to other participants through Nasdaq Workstation II, Nasdaq Workstation Weblink or their own proprietary systems. These orders are executed within the participant's internal trading system and execution reports are routed back to the entering firm. ACES is often used to automate order routing and to connect order entry firms whose execution volume is too low to justify the fixed costs of establishing a proprietary order management system. ACES fees are charged to the receiving firm only, and consist of graduated activity fees per execution that decrease as the market maker's number of executions per month increases. ACES accounted for less than 1% of Nasdaq's total revenue for the year ended December 31, 2002.



•

Computer Assisted Execution System ^SM ("CAES ^SM "), the transaction service system for Nasdaq InterMarket, which is an electronic marketplace where NASD members can trade securities listed on the NYSE or Amex. CAES allows users to direct orders in exchange-listed securities to other Nasdaq InterMarket market makers for automated response and execution, and also provides access to the Intermarket Trading System. The Intermarket Trading System is a communications system that allows exchange-designated dealers, exchange floor brokers, and NASD members to send orders for execution to the market quoting the best price. Nasdaq charges Nasdaq InterMarket participants a monthly fee per terminal to access to both systems (CAES/Intermarket Trading System). In addition, a per transaction fee is charged to the originating party (i.e., the sender). CAES and Intermarket Trading System fees accounted for less than 1% of Nasdaq's total revenue for the year ended December 31, 2002.



•

Primex Auction System™ ("Primex"), which provides investors and participating market makers with an electronic, auction trading platform. Primex allows users to seek price improvement opportunities by electronically exposing orders to market participants who compete for the orders at prices at, and within, the prevailing national best bid or offer. Primex is operated pursuant to an agreement between Nasdaq and Primex Trading N.A., LLC, and began operation on December 17, 2001. Nasdaq imposes a monthly fee to access Primex, which will vary based on the method used to access the system. Nasdaq charges execution fees to parties executing trades on shares available in the system. No execution fees are charged for submitting orders that provide liquidity to the system. Nasdaq began charging access and execution fees for Primex on August 1, 2002. Primex accounted for less than 1% of Nasdaq's total revenue for the year ended December 31, 2002.

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         Trade Reporting Services—Automated Confirmation Transaction Service ^sm ("ACT ^SM "). U.S. securities laws require that all registered stock exchanges and securities associations establish a transaction reporting plan for the central collection of price and volume information concerning trades executed in those markets. Transactions in Nasdaq-listed securities, exchange-listed securities traded over-the-counter, and other equity securities traded over-the-counter have traditionally been reported to the ACT system, Nasdaq's automated trade reporting and reconciliation service that electronically facilitates the post-execution steps of price and volume reporting, comparison, and clearing of trades. A protocol establishes which of the two parties to the trade is responsible for trade reporting, and NASD rules govern the timeliness of trade submission and the information required on each trade report.

        ACT provides three primary revenue-generating services: trade reporting, trade comparison, and risk management. The majority of trades reported to Nasdaq are locked-in externally from the ACT system, and are submitted for reporting purposes only. These transaction reports are assessed a nominal reporting fee. Trades that require ACT to match and lock-in the two parties to the trade generally are assessed a higher fee based upon the number of shares traded. A fee for the ACT risk management service is also applied to some of the transactions reported to ACT. This fee is assessed to the firms that clear for each of the parties to the trade, provided that the trading parties are not designated as self-clearing firms. A cap on ACT risk management fees was introduced in April 2000, limiting a clearing firm's monthly payment for each of its trading firms (correspondents) to $10,000 which, together with an increase in self-clearing activity by member firms, resulted in a decline in risk management revenue in 2002 and 2001 versus 2000.

        Shortly after launching SuperMontage, Nasdaq launched Liquidity Tracker, an order routing system integrated with SuperMontage. Liquidity Tracker serves as a routing mechanism for securities listed on The Nasdaq Stock Market. It is intended primarily to attract large-sized orders, and affords the user an opportunity to gain access to the liquidity pool for a security without incurring significant market impact. The order routing algorithm for Liquidity Tracker is based on current trade information within ACT. Liquidity Tracker scans trading information from ACT to determine the best market participant to receive the order, and anonymously routes the order to that participant. Liquidity Tracker declines the order if there is not a qualifying market participant available. Liquidity Tracker launched on December 4, 2002 as a pilot and Nasdaq did not charge for the system until January 6, 2003. Nasdaq also launched several new data products in connection with the launch of SuperMontage, which are discussed in "—Market Information Services."

        For the years ended December 31, 2002, 2001 and 2000, Nasdaq's total revenue from ACT was $78.6 million, $87.3 million and $100.0 million, respectively. ACT fees accounted for approximately 9.8% of Nasdaq's total revenue for the year ended December 31, 2002.

        For the years ended December 31, 2002, 2001 and 2000, Nasdaq's total revenue from Transaction Services was $380.7 million, $412.1 million and $398.5 million, respectively. Transaction Services accounted for approximately 47.6% of Nasdaq's total revenue for the year ended December 31, 2002.

        Market Information Services.     Nasdaq collects and disseminates price quotations and information regarding price and volume of executed trades. Market participants in The Nasdaq Stock Market have real-time access to quote and trade data. Interested parties that are not direct market participants in The Nasdaq Stock Market also can receive real-time information through a number of Market Information Services products.

        Nasdaq collects information, distributes it, and earns revenue in two roles. First, Nasdaq operates the exclusive Securities Information Process, or "SIP," for the collection and dissemination of best bid and offer (the "BBO") and last transaction information from all of the exchanges and markets that quote and trade in Nasdaq-listed securities (all are members of the UTP Plan). Second, in its role as a market, Nasdaq provides proprietary data products.

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        In its role as the SIP, Nasdaq collects and disseminates quotation and last sale information for all transactions in securities listed on The Nasdaq Stock Market. In creating the national market system, Congress intended for participants in U.S. securities markets to have access to a consolidated stream of quotation and transaction information for the exchanges and The Nasdaq Stock Market. To accomplish this objective, the SIP consolidates information with respect to quotations and transactions in order to increase information availability and thus create the opportunity for a more transparent and effective market.

        Nasdaq is currently the exclusive SIP pursuant to the UTP Plan. Under the UTP Plan, each participant can quote and trade any security listed on The Nasdaq Stock Market. Nasdaq collects quotation and last sale information from competing exchanges (currently the Amex, the Chicago Stock Exchange, the Cincinnati Stock Exchange, the NASD's ADF and the Pacific Stock Exchange) and consolidates such information with the information for all the securities listed on The Nasdaq Stock Market.

        As the SIP, Nasdaq sells this information to vendors in exchange for Tape Fees, and the data vendors in turn sell the last sale and quotation data publicly. Under the revenue sharing provision of the UTP Plan, Nasdaq is permitted to deduct certain costs associated with acting as an exclusive SIP from the total amount of Tape Fees collected. After these costs are deducted from the Tape Fees, Nasdaq distributes to the respective UTP Plan participants, including Nasdaq, their share of Tape Fees based on a combination of their respective trade volume and share volume.

        Currently, the NASD is the official participant of record in the UTP Plan; however, the NASD has delegated voting authority to Nasdaq pursuant to the Delegation Plan for all UTP Plan matters. In anticipation of Exchange Registration, UTP Plan participants have submitted to the SEC an amendment to the UTP Plan that would, among other things, make Nasdaq a direct participant in the UTP Plan.

        While Nasdaq is currently the exclusive SIP for the UTP Plan, it is engaged with the other UTP Plan participants in selecting a new SIP. This process is the result of the SEC's conditions for extending the UTP Plan beyond its March 2001 termination date. Nasdaq does not expect its net operating income to be affected if it no longer serves as a SIP because all SIP revenues are passed on to UTP Plan participants based on a combination of their trade volume and share volume (after deducting operating expenses). Any reduction in Nasdaq's total revenue since it will no longer be reimbursed for operating expenses is expected to be largely offset by a reduction in Nasdaq's actual expenses since it will no longer operate the UTP Plan.

        The SEC has required that there be good faith negotiations among the UTP Plan participants on a revised UTP Plan that provides for either (i) a fully viable alternative exclusive SIP for all securities listed on The Nasdaq National Market, or (ii) a fully viable alternative non-exclusive SIP. To avoid conflicts of interest, the SEC cautioned that, in the event the revised UTP Plan provides for an exclusive SIP, a UTP Plan participant—particularly Nasdaq—should not operate as the exclusive SIP unless (i) the SIP is chosen on the basis of bona fide competitive bidding and the participant submits the successful bid, and (ii) any decision to award a contract to a UTP Plan participant, and any ensuing renewal of such contract, is made without that UTP Plan participant's direct or indirect voting participation. The UTP Plan participants unanimously approved the Request-for-Proposal on November 7, 2001. The Request-for-Proposal was mailed to prospective bidders, and eight bidders submitted proposals. Nasdaq did not submit a bid proposal. The UTP Plan participants have selected the proposal of the Cicada Corporation, in conjunction with the Sprint Corporation, as the leading candidate. The UTP Plan Participants are currently negotiating with Cicada to enter into an agreement for Cicada to succeed Nasdaq as the exclusive SIP to the Nasdaq UTP Plan.

        Nasdaq and the other UTP Plan participants earn revenue from two SIP market information products. These products are designed to provide the varying levels of detail desired by different

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broker-dealers and their customers. The first product is known as Level 1. This product provides subscribers with the current national BBO and most recent price at which the last sale or purchase was transacted for a specific security as well as the BBO from each exchange or market trading stocks listed on The Nasdaq Stock Market. Professional subscribers (e.g., broker-dealers and other employees of broker-dealers) to this product pay a monthly fee per terminal for the service, which is typically delivered to the subscriber through a third-party data vendor. A vendor or a broker-dealer can provide non-professional customers (such as individual investors), with Level 1 information at a reduced fee calculated on a per query basis or a flat monthly fee per user. Weaker economic and market conditions in the last two years caused a substantial reduction in Level 1 revenue due to a decrease in demand for professional and non-professional per query service. The termination of Nasdaq's role as SIP will not affect Nasdaq's share of Level 1 revenue.

        For the years ended December 31, 2002, 2001 and 2000, Nasdaq's revenue from Level 1 fees was $142.3 million, $161.8 million and $190.5 million, respectively. Nasdaq's Level 1 fees accounted for approximately 17.8% of Nasdaq's total revenue for the year ended December 31, 2002.

        Currently, the second SIP market information product, the Nasdaq Quotation Dissemination Service ("NQDS"), provides subscribers with the BBO from each individual Nasdaq market maker and ECN and, through March 2003, also includes the BBO from each of the UTP Plan exchanges and markets trading Nasdaq-listed securities. All NQDS subscribers also subscribe to Level 1 to obtain consolidated UTP Plan and Nasdaq inside quotes and last transaction information. The fee for this service is priced on a per- terminal per month basis, with professional subscribers paying a higher monthly per terminal fee than non-professional customers. Weaker economic and market conditions and cost cutting by market participants caused a decline in NQDS professional subscriptions partially offset by growth in non-professional subscriptions in the fourth quarter of 2002.

        Nasdaq intends to remove other UTP Plan exchanges from the NQDS data product in March 2003 and, upon Exchange Registration, NQDS will become a proprietary Nasdaq data product. Also upon Exchange Registration, the SIP will no longer administer NQDS and Nasdaq will no longer share related revenue with UTP Plan participants.

        For the years ended December 31, 2002, 2001 and 2000, Nasdaq's revenue from NQDS fees was $37.5 million, $43.4 million and $47.3 million, respectively. NQDS fees accounted for approximately 4.7% of Nasdaq's total revenue for the year ended December 31, 2002.

        Nasdaq, in its role as a stock market, has launched three new proprietary data products in conjunction with the launch of SuperMontage. SuperMontage has expanded Nasdaq's ability to offer market data to market participants that choose to display trading interest on Nasdaq that goes beyond the BBO. These new data products: Nasdaq DepthView, ^SM PowerView, ^SM and TotalView ^SM (collectively referred to as the "ViewSuite" products), offer a wide array of quotation information to market data vendors and broker-dealer distributors. DepthView shows the aggregate size, by price level, of all Nasdaq market participants' quotations/orders that are in the top five price levels in SuperMontage. PowerView bundles NQDS and DepthView. TotalView offers the PowerView services and shows all Nasdaq market participants' quotations/orders that are in the top five price levels in SuperMontage, in addition to the aggregate size of all unattributed (i.e., providing pre-trade anonymity) quotes/orders at each of the top five price levels.

        Each of DepthView, PowerView and TotalView is offered through distributors to professional subscribers for a monthly fee per terminal and DepthView and PowerView are offered to non-professional subscribers for a lower monthly fee per terminal. In addition, Nasdaq charges the distributor a monthly fee for each ViewSuite product. During 2003, Nasdaq is offering nine-month ViewSuite incentive pricing plans to promote widespread distribution of the new data products. Subscribers to this offer will be able to provide DepthView, PowerView, and/or TotalView to their entire Level-1 or NQDS populations for a reduced, fixed monthly fee.

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        On March 18, 2002, Nasdaq began distributing Nasdaq PostData, ^SM which is a data product with several different services. Volume Post ^SM displays the daily share volume figures of subscribing market participants for each Nasdaq-listed security for the prior trading day. Monthly Volume Summaries rank the top 50 market participants by industry sector, security type, or total and block volume. Daily Issue Data provides a summary for every Nasdaq-listed security of the previous day's activity, including price, total shares outstanding and dividend data. Nasdaq distributes PostData to data distributors for a per-subscriber charge, and to direct subscribers for a set fee. PostData provided less than 1% of Nasdaq's total revenue for the year ended December 31, 2002.

        For the years ended December 31, 2002, 2001 and 2000, Nasdaq's total revenue from Market Information Services was $202.4 million, $243.9 million and $261.7 million, respectively. Market Information Services accounted for approximately 25.3% of Nasdaq's total revenue for the year ended December 31, 2002.

        Corporate Client Group.     The Corporate Client Group provides customer support services and products to Nasdaq-listed companies and is responsible for obtaining new listings on The Nasdaq Stock Market. The Nasdaq Stock Market has historically attracted traditional growth companies and, as of December 31, 2002, was home to the highest percentage of publicly-traded technology and service companies in the U.S.

        On December 31, 2002, there were 3,659 companies listed on The Nasdaq Stock Market. For the year ended December 31, 2002, 121 new companies listed on The Nasdaq Stock Market, 86 on The Nasdaq National Market and 35 on The Nasdaq SmallCap Market. For the year ended December 31, 2001, 145 new companies listed on The Nasdaq Stock Market, 116 on The Nasdaq National Market, and 29 on The Nasdaq SmallCap Market.

        During 2002, 51 IPOs, approximately 56.7% of all IPOs on primary U.S. markets during this period, listed on The Nasdaq Stock Market. These IPOs raised over $4.5 billion, approximately 16.4% of the total dollar value raised in U.S. IPOs during this period. Of all U.S. IPOs during the year ended December 31, 2001, 63 companies, approximately 62% of U.S. IPOs during this period, listed on The Nasdaq Stock Market. The reduction in The Nasdaq Stock Market's percentage of U.S. IPOs during 2002 reflects a continued decline in general market and economic conditions, which has impacted the ability of traditional growth companies to access the public equity markets over the last few years. In addition, 2002 continued a trend from the prior year in which increasing numbers of IPOs are of companies being spun-off from public companies that, in general, have not operated in traditional growth industries. Of the 14 spin-offs of public companies during 2002, 12 of the spin-offs were subsidiaries of NYSE-listed companies, 10 of which also listed on the NYSE. These 14 spin-offs accounted for approximately 15.6% of all U.S. IPOs and approximately 44.2% of the total dollar value raised in U.S. IPOs during this period. While these figures were generally comparable to spin offs in 2001, the number of IPO spin-offs from public companies in 2000 accounted for only 5% of U.S. IPOs and approximately 13% of the total dollar value raised in U.S. IPOs during that period. Forty-seven of the 51 IPOs that listed on The Nasdaq Stock Market during 2002 have listed on The Nasdaq National Market and four companies have listed on The Nasdaq SmallCap Market.

        Companies cease being listed on The Nasdaq Stock Market for three primary reasons: (i) the failure to meet The Nasdaq Stock Market's listing standards; (ii) the consolidation of listings due to merger and acquisition activity; and (iii) Nasdaq-listed companies switching their listing to another stock market. See "—Competition—Corporate Client Group."

        For the year ended December 31, 2002, 379 issuers ceased being listed on The Nasdaq National Market and 192 issuers ceased being listed on The Nasdaq SmallCap Market. By comparison, 537 issuers ceased being listed on The Nasdaq National Market and 233 issuers ceased being listed on The Nasdaq SmallCap Market for the year ended December 31, 2001. Delistings in 2001 would have been higher but for a suspension by Nasdaq of the minimum bid price and market value of public float

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listing requirement during the period September 26, 2001 until December 31, 2001. This suspension was in response to market uncertainty in the wake of the September 11, 2001 terrorist attacks. On January 2, 2002, the minimum bid price and market value of public float requirements were reinstated. The time periods for review of non-compliance, which are discussed below, began on January 2, 2002 for all issuers, including those that were not in compliance with the requirements as of September 26, 2001.

        For the year ended December 31, 2002, 139 issuers on The Nasdaq National Market and 141 issuers on The Nasdaq SmallCap Market were delisted by Nasdaq for failure to satisfy listing standards; 42 issuers on The Nasdaq National Market and four issuers on The Nasdaq SmallCap Market were delisted as a result of switches to a competing market; and 198 issuers on The Nasdaq National Market and 47 issuers on The Nasdaq SmallCap Market ceased being listed for other reasons, including mergers and acquisitions. An additional 229 issuers transferred from one tier of The Nasdaq Stock Market to the other tier. The large majority of these transfers between tiers were companies moving from The Nasdaq National Market to The Nasdaq SmallCap Market due to a change in Nasdaq's listing standards permitting issuers that no longer meet the requirements of The Nasdaq National Market to phase down to The Nasdaq SmallCap Market, as discussed in more detail below.

        The rules concerning the delisting of issuers from The Nasdaq Stock Market for failure to satisfy the minimum bid price requirement were amended in March 2003. An issuer is subject to delisting if its security falls below the minimum bid price requirement for 30 business days. Under a pilot program scheduled to expire on January 1, 2005, issuers listed on The Nasdaq National Market have 180 days to regain compliance with the minimum bid price requirement and are thereafter permitted to phase-down to The Nasdaq SmallCap Market. The pilot program also provides issuers listed on The Nasdaq SmallCap Market with 180 days to regain compliance, which may be extended for up to 270 days if the issuer complies with certain other initial listing requirements for The Nasdaq SmallCap Market. In addition to the pilot program, Nasdaq permanently changed the minimum continued listing bid price requirement for issuers listed on The Nasdaq National Market from $3 to $1 if the issuers meet certain qualifications for continued listing on the National Market.

        Nasdaq charges issuers an initial listing fee, a listing of additional shares ("LAS") fee, and an annual fee. The initial listing fee for securities listed on The Nasdaq Stock Market includes a listing application fee and a total shares outstanding fee. The estimated service period for initial listing fees is six years. For the years ended December 31, 2002, 2001 and 2000, Nasdaq's revenue from initial listing fees was $33.6 million, $35.7 million and $33.9 million, respectively. Nasdaq's initial listing fee revenue accounted for approximately 4.2% of Nasdaq's total revenue for the year ended December 31, 2002.

        The fee for LAS is based on the total shares outstanding, which Nasdaq reviews quarterly. The estimated service period for LAS fees is four years. For the years ended December 31, 2002, 2001 and 2000, Nasdaq's revenue from LAS fees was $37.5 million, $35.9 million and $33.6 million, respectively. Nasdaq's LAS fee revenue accounted for approximately 4.7% of Nasdaq's total revenue for the year ended December 31, 2002.

        Annual fees for securities listed on The Nasdaq Stock Market are based on total shares outstanding. For the years ended December 31, 2002, 2001 and 2000, Nasdaq's revenue from annual listing fees was $102.8 million, $83.1 million and $81.1 million, respectively. Nasdaq's annual listing fees accounted for approximately 12.9% of Nasdaq's total revenue for the year ended December 31, 2002.

        Nasdaq has instituted a new fee structure that increased initial and annual listing fees for companies on The Nasdaq National Market (effective January 1, 2002) and The Nasdaq SmallCap Market (effective January 1, 2002 and revised January 1, 2003). The revenue generated from the fee increases has been used in part to fund enhancements to the services offered to Nasdaq-listed companies, including the establishment of a Market Intelligence Desk. ^SM

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        Following the initial listing, Nasdaq provides customer support services, products, and programs to Nasdaq-listed companies. In 2002, Nasdaq created the Market Intelligence Desk, a "one-stop-shop" for information that provides rapid response to corporate client queries from a centralized location. The Market Intelligence Desk personnel use computer-aided telephony and proprietary and non-proprietary information services to provide support to senior executives and board members of Nasdaq-listed companies. Each Nasdaq-listed company has a private toll-free line to access the Market Intelligence Desk. Executives of Nasdaq-listed companies also are invited to participate in a variety of programs on a wide range of topics, such as industry sector-specific seminars and investor relation forums. These executives also have access to Nasdaq Online, ^SM a strategic planning tool provided free of charge to Nasdaq-listed companies that was rated number one in a recent survey of the top 10 favorite investor relations web sites by the National Investor Relations Institute. Nasdaq Online presents market data on all U.S. traded companies and real-time quotes for Nasdaq-listed securities, as well as information on institutional ownership, research coverage and performance ratios. This combination of on-line real time data and analytical information, along with a series of other seminars and programs, is designed to help management of listed companies make better equity management decisions. A product group has been established to begin the development and commercialization of new products and services focused on the corporate market, as well as increased financial newsmedia coverage of Nasdaq-listed companies.

        Each Nasdaq-listed company is assigned a Corporate Client Group director who oversees the listed company's relationship with Nasdaq. A schedule of calls and visits along with invitations to various industry and market forums are used to enhance customer satisfaction, keep companies informed of new developments at Nasdaq and discuss the benefits of a listing on The Nasdaq Stock Market. Nasdaq also has created a program to educate investment bankers, capital market dealers, institutional investors and other constituencies that influence listing decisions.

        For the years ended December 31, 2002, 2001 and 2000, Nasdaq's total revenue from the Corporate Client Group was $176.7 million, $156.1 million and $149.3 million, respectively. The Corporate Client Group accounted for approximately 22.1% of Nasdaq's total revenue for the year ended December 31, 2002.

Other Products and Markets

        Nasdaq Financial Products.     Nasdaq Financial Products is responsible for introducing products that extend and enhance the Nasdaq brand. The department oversees the development and marketing of new Nasdaq financial products and associated derivatives, the licensing and listing of third-party structured products and the listing of third-party-sponsored exchange traded funds ("ETF"s). These products increase investments in companies listed on The Nasdaq Stock Market and this can contribute to revenue for Nasdaq's Transaction Services, Market Information Services and Corporate Client Group LAS revenues.

        Launched in January 1985, the Nasdaq-100 Index® includes the largest, top 100 non-financial companies listed on The Nasdaq Stock Market. It is the benchmark for about 30 domestic and international mutual funds and more than 120 structured investment products in 28 countries. A structured product is a specialized security designed to respond to specific investment objectives, such as risk reduction, leverage or diversification of current investments or tax management.

        The Nasdaq-100 Index Tracking Stock ^SM ("QQQ" ^SM ), the ETF based on the Nasdaq-100 Index, began trading in 1999 under the symbol QQQ. An ETF is an investment company organized to track an index and to allow for secondary market trading. For the year ended December 31, 2002, QQQ's average daily share volume was 88.7 million and its average daily dollar volume was approximately $2.6 billion. QQQ is the most actively traded ETF in the world and the most heavily traded stock in the U.S. in terms of dollar volume. As of December 31, 2002, the QQQ Trust had issued approximately

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696 million shares and the assets under management had reached $17 billion. QQQ's equity options were also among the most heavily traded options in the U.S. in 2002.

        Major stock markets in the U.S., including the NYSE, Amex, Boston Stock Exchange, Chicago Stock Exchange, Cincinnati Stock Exchange and the Philadelphia Stock Exchange, have been licensed by Nasdaq to use Nasdaq trademarks in connection with trading QQQ under the UTP Plan. Every major options market in the U.S. has also been licensed by Nasdaq to use Nasdaq trademarks to trade the equity options on QQQ. Nasdaq receives license fees for its trademark licenses that vary by product based on assets under management or number of contracts issued. In addition to license fees, Nasdaq is entitled to reimbursement from the QQQ Trust for marketing activities designed to promote the Trust.

        In November 2002, Nasdaq Europe S.A./N.V. listed and began trading the Nasdaq-100 European Tracker ^SM ("EQQQ" ^SM )—a product based on the same stocks that are included in the QQQ. EQQQ is managed by Nasdaq Financial Product Services (Ireland), Limited, administered by AIB/BNY Fund Management (Ireland), Ltd., with AIB/BNY Trust Company, Ltd. as its Custodian. As of December 2002, EQQQ was registered in the United Kingdom, Germany, Belgium, and Ireland with anticipated registrations in Italy and Switzerland.

        Also in November 2002, BLDRS ^SM , a new family of ETFs based on The Bank of New York ADR Indexes, ^SM were listed on The Nasdaq Stock Market. The BLDRS Funds were the first ETFs listed on The Nasdaq Stock Market and the first ETFs based on American Depositary Receipts ("ADRs"). The Bank of New York serves as trustee and index provider of these Funds.

        For the years ended December 31, 2002, 2001 and 2000 Nasdaq's total revenue from Nasdaq Financial Products was $28.1 million, $30.6 million and $11.7 million, respectively. Nasdaq Financial Products accounted for approximately 3.5% of Nasdaq's total revenue for the period ended December 31, 2002.

        Nasdaq InterMarket.     The Nasdaq InterMarket is an electronic marketplace composed of NASD members that quote and trade securities listed on the NYSE and Amex. Users can trade on Nasdaq InterMarket among themselves using Nasdaq's CAES order delivery system, or with another participating stock exchange through the Intermarket Trading System. CAES, a trading system that is very similar to Nasdaq's former SuperSoes trading system, allows broker-dealers to enter and execute trades via the Nasdaq Workstation II, an application programming interface or CTCI. Market makers and order entry firms can use CAES to enter marketable limit orders and market orders for automatic response and automatic execution. The Intermarket Trading System allows market markers to trade with exchange specialists. Users may also internalize orders within their own systems and report that trade to Nasdaq InterMarket.

        For the years ended December 31, 2002, 2001 and 2000, Nasdaq's total revenue from Nasdaq InterMarket was $38.6 million, $32.5 million and $21.9 million, respectively. Nasdaq InterMarket revenue accounted for approximately 4.8% of Nasdaq's total revenue for the year ended December 31, 2002. Approximately 94.6% of the revenue generated from the Nasdaq InterMarket is derived from the sale of data and is included in Market Information Services revenue, and the remaining revenue is derived from transaction service fees for CAES and Intermarket Trading System transactions and included in Transaction Services revenue.

        All Nasdaq InterMarket trades are reported and disseminated in real-time to the Consolidated Tape Association, and as such, Nasdaq shares in the Tape Fees generated by the Consolidated Tape Association. Two NASD members that are major market makers and one ECN report the majority of trades. Other ECNs report trades through Nasdaq systems to the Consolidated Tape Association or to other Intermarket Trading System participants, such as regional exchanges. NASD members who trade exchange-listed securities away from the exchanges account for a significant amount of Nasdaq

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InterMarket trading activity. Nasdaq shares a portion of the Tape Fees received for Nasdaq InterMarket transactions with InterMarket participants.

        In anticipation of Exchange Registration, Nasdaq has been negotiating with participants in the Consolidated Tape Association and the Intermarket Trading System for admission into those plans as a separate SRO. Nasdaq may be required to pay a fee, which has yet to be determined, for admission into the Consolidated Tape Association. After Exchange Registration, Nasdaq InterMarket will likely continue to trade securities listed on the NYSE and Amex in much the same manner as it does today with the exception that it may no longer be permitted to accept trade reports that are at an inferior price to the quotations of other market centers. Nasdaq's inability to accept such trade reports may decrease Nasdaq's percentage of trades and volume in these securities, reducing Nasdaq's revenues.

        Nasdaq Europe S.A./N.V.     In March 2001, Nasdaq acquired an approximate 68.2% ownership interest in the European Association of Securities Dealers S.A./N.V. ("EASDAQ"), a pan-European stock market headquartered in Brussels. Nasdaq has since diluted its interest through the introduction of other strategic partners as shareholders. In connection with this investment, Nasdaq renamed EASDAQ as Nasdaq Europe S.A./N.V. ("Nasdaq Europe") as part of a plan to restructure it into a globally-linked pan-European market. As of December 31, 2002, Nasdaq owned approximately a 59.4% interest in Nasdaq Europe. As of December 31, 2002, 40 companies were listed on Nasdaq Europe and eight companies were admitted for trading. The average monthly turnover volume on Nasdaq Europe during 2002 was €26.2 million. In October 2002, Nasdaq Europe successfully launched SuperMontage Europe, that is based on the same principles as SuperMontage in the U.S., customized to European trading practices.

        Nasdaq Europe is investigating strategic partnership opportunities with foreign securities exchanges and other market participants to expand its leadership in technology-driven price discovery systems and to utilize its brand recognition. On October 30, 2002, Nasdaq Europe, and the Berlin and Bremen Stock Exchanges, as well as comdirekt bank, Commerzbank and Dresdner Bank, signed definitive agreements to recapitalize Bremen Wertpapierbörse AG ("BWB AG"), a German stock exchange, that will be rebranded as "Nasdaq Deutschland AG" and that will be marketed under the Nasdaq brand. Nasdaq Deutschland began trading in German and international blue chip and growth stocks on March 21, 2003. Nasdaq Europe will initially hold a 50% equity stake, Dresdner Bank will hold a 15% equity stake, comdirekt bank and Commerzbank will each hold a 7.5% equity stake, and the Berlin and Bremen Stock Exchanges will each hold a 10% equity stake. See also "Consolidated Financial Statements—Notes 2 and 17." Nasdaq anticipates that discussions with other foreign institutions will continue, but cannot predict the results of any such discussions.

        Nasdaq Europe is still in its nascent stages and has generated only operating losses since the acquisition by Nasdaq. Nasdaq Europe's future growth is dependent on such things as firms connecting to Nasdaq Europe's trading platform and using its trading facilities, as well as a reversal of the current weakness in European equity markets. Nasdaq Europe's main competitors for listings and trading include the three primary exchanges in Europe: Deutsche Börse AG, Euronext N.V. and the London Stock Exchange. See "—Risk Factors—Nasdaq may not be successful in executing its international strategy."

        Nasdaq Japan.     In 1999, the NASD and SOFTBANK Corp. of Japan entered into a joint venture, subsequently named Nasdaq Japan, to develop an electronic stock market in Japan. The NASD later transferred its interest in Nasdaq Japan to Nasdaq Global Holdings, a wholly-owned subsidiary of Nasdaq, which operated the market as a new market section of the Osaka Securities Exchange (the "OSE"). On August 16, 2002, the Board of Directors of Nasdaq Japan voted to take the company to dormant status, effectively ceasing operations. Shareholders of Nasdaq Japan subsequently ratified this decision. Nasdaq Japan currently is in liquidation and is expected to be completely dissolved in the second quarter of 2003. Companies listed on the Nasdaq Japan Market retained their listing on the

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OSE and experienced no disruption to trading. See "Consolidated Financial Statements—Notes 2 and 8."

        Nasdaq Liffe Markets, LLC.     On June 1, 2001, Nasdaq and the London International Financial Futures and Options Exchange ("LIFFE"), a member of the Euronext (N.V.) Group, formed Nasdaq Liffe Markets, LLC ("NQLX"), a U.S. joint venture company in which Nasdaq owns a 50% interest. On November 8, 2002, NQLX began listing futures contracts on individual equity securities with 43 members. As of December 31, 2002, NQLX had traded in total approximately 125,000 contracts on 24 security futures products, 20 individual equity securities and four exchange traded funds. Through the end of 2002, NQLX operated under a fee holiday during which NQLX had no revenue. This fee holiday ended on March 1, 2003. Nasdaq accounts for its investment in NQLX under the equity method of accounting.

        Nasdaq Insurance Agency, LLC.     On December 31, 2002, Nasdaq purchased the NASD's 50% interest in The NASD Insurance Agency, LLC, subsequently renamed The Nasdaq Insurance Agency, LLC ("NIA"). AIG NJV, Inc., a wholly-owned subsidiary of American International Group, Inc., owns the other 50% interest in NIA. NIA provides insurance brokerage services and specializes in the directors and officers liability insurance market. Nasdaq accounts for its investment in NIA under the equity method of accounting.

        OTC Bulletin Board.     The OTC Bulletin Board is an electronic screen-based market for equity securities that, among other things, are not listed on The Nasdaq Stock Market or any primary U.S. national securities exchange. At present, the OTC Bulletin Board is only a quotation service without any execution facilities. Companies do not list on the OTC Bulletin Board; rather, NASD members may post quotes only for companies that file periodic reports with the SEC and/or with a banking or insurance regulatory authority. In addition, these companies are required to be current with their periodic filings. Market makers are charged a fee per position and are billed based on their number of positions during a month. A position is defined as any price quotation or indication of interest entered by a market maker in a security quoted on the OTC Bulletin Board. There are no fees charged to companies whose securities are quoted on the OTC Bulletin Board. The OTC Bulletin Board revenue accounted for less than 1% of Nasdaq's total revenue for the years ended December 31, 2002, 2001 and 2000, respectively. Revenue generated from the OTC Bulletin Board is included in Transaction Services revenue.

        In conjunction with the process of seeking Exchange Registration, the Nasdaq Board of Directors and the NASD Board of Governors (collectively, the "Boards"), approved several rule changes that are designed to replace the OTC Bulletin Board with a new listed market that will be called the "BBX." First, the Boards approved a program for Nasdaq to enter into a listing agreement with future BBX issuers (which will be primarily drawn from existing OTC Bulletin Board companies) and impose listing standards to ensure the quality of these issuers. Second, both Boards approved the creation of automated order delivery and execution systems for the BBX. Finally, to accompany the new listing standards and order delivery system, the Boards approved enhanced market rules that include limit order protection, short interest reporting, and intraday trading halt authority. Nasdaq plans to submit exemption requests that would allow Nasdaq to continue to operate the OTC Bulletin Board for a limited period after Exchange Registration, with the OTC Bulletin Board to be phased out six months after the BBX is launched. The SEC has not yet approved the rules or the exemption request. Therefore, it is not certain whether Nasdaq will continue to operate the OTC Bulletin Board following Exchange Registration or will be able to launch the BBX. If the SEC does not approve the exemption request, these securities could continue to trade over the counter through a non-Nasdaq facility after Exchange Registration.

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Fee Changes

        Nasdaq may change the pricing of its products and services in response to competitive pressures or changes in market or general economic conditions. Pursuant to the requirements of the Exchange Act, Nasdaq must file all proposals for a change in its pricing structure with the SEC. Nasdaq provides updated information on the pricing of its products and services on its website at www.nasdaqtrader.com . Information on Nasdaq's website is not a part of this Form 10-K. See also "—Competition" and "—Risk Factors-Competition by regional exchanges and the ADF may reduce Nasdaq's transactions, trade reporting and market information revenue and impact the ability of SuperMontage to increase Nasdaq's market share of transactions in Nasdaq-listed securities."

Technology

        Nasdaq believes that the effective use of technology is the key to the future of financial markets. The Nasdaq Stock Market was the world's first electronic screen-based stock market and its use of state-of-the-art computer networking, telecommunications and information technologies distinguishes it from other U.S. securities markets. Using technology, Nasdaq eliminates the need for a physical trading floor and enables qualified investors across the country to compete freely with one another in an electronic screen-based environment. The Nasdaq network has handled trade volumes of over two billion shares daily and over 4,000 transactions per second and is designed to maximize transaction reliability and network security across each of the most critical system services that comprise The Nasdaq Stock Market, including quotation, order processing, trade reporting and market data dissemination. Furthermore, Nasdaq's system has substantial reserve capacity to handle far greater levels of activity and will further expand bandwidth to maximize its ability to provide an efficient, rapid, reliable trading environment for its market participants. Continual systems improvements provide cost effective and efficient access to multiple market information data and rapid market response capabilities. Nasdaq also employs technology to maximize its ability to communicate with investors, issuers, traders, the media and others.

Competition

        The securities markets are intensely competitive and they are expected to remain so. Nasdaq competes both domestically and globally and on a product and/or specific geographical basis. Nasdaq competes based on a number of factors, including the quality of its technological and regulatory infrastructure, total transaction costs, the depth and breadth of its markets, the quality of its value-added customer services (e.g., services to listed companies), reputation and price. In the U.S., Nasdaq is one of the leaders in each of its principal businesses. Nonetheless, Nasdaq expects that current or new markets and exchanges will continue to compete aggressively against Nasdaq.

        In addition, Nasdaq has formed alliances in certain key financial centers around the world as part of a strategy to build on its strong, worldwide brand name. Nevertheless, most of Nasdaq's competitors overseas are currently larger and have a longer operating history in their markets than does Nasdaq.

        In light of recent technological and regulatory changes and new product introductions, Nasdaq expects to compete with a number of different entities varying in size, business objectives, and strategy.

        Transaction Services.     Nasdaq's core trading services are designed to provide access to The Nasdaq Stock Market, execution services that are designed to provide quoting and trading capabilities and reporting services such as trade reporting and risk management. Nasdaq expects to face competition from a number of different sources in providing these services including:

•

Market participants that have been, or have announced plans to begin, reporting trades to competing regional stock exchanges and the ADF rather than to Nasdaq, thereby reducing both Transaction Services and Market Information Services revenue. See "—Risk Factors—

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Competition by regional exchanges and the ADF may reduce Nasdaq's transactions, trade reporting and market information revenue and impact the ability of SuperMontage to increase Nasdaq's market share of transactions in Nasdaq-listed securities;"

•

ECNs that have been consolidating to form larger service providers. During 2002, Island ECN ("Island") and Instinet merged to form the largest ECN and two of the largest users of ACT for trade reporting, Archipelago and RediBook, merged. Any continued consolidation that created a dominant service provider could diminish Nasdaq's competitive position;



•

ECNs that obtain registration as exchanges and compete for Transaction Services and Market Information Services, and potentially, for listings. Recently, the Pacific Stock Exchange established the Archipelago Exchange as its equities trading facility. Archipelago began quoting and reporting certain of its trades to the Archipelago Exchange in February 2003. Island, another ECN, has applied to the SEC for registration as a national securities exchange. See "—Risk Factors—Nasdaq's revenue would be adversely affected by ECNs that register as exchanges;"



•

Competing stock exchanges that are permitted by the SEC to regulate trading in their markets at a lower cost than Nasdaq. As a result they may be able to attract order flow from The Nasdaq Stock Market to the other exchanges because of such lower regulatory costs; and



•

Companies that could provide trading services for products and services, including software companies, information and media companies and other companies that are not currently in the securities business.

        To address competitive concerns, Nasdaq has looked to enhance its technology and the services it provides to its market participants and refine its pricing approach by reviewing each component of its Transaction Services, including access services, execution services and trade reporting services. For each component, Nasdaq has attempted to make pricing more attractive in order to retain usage of its services. In addition, Nasdaq has enhanced its execution services through the implementation of SuperMontage and related products.

        Market Information Services.     Nasdaq's Market Information Services revenue is under competitive threat from other securities exchanges that trade Nasdaq-listed securities, including the established regional exchanges and the ADF. Current SEC regulations permit these regional exchanges and the ADF to quote and trade certain securities that are not listed on a national securities exchange, including securities listed on The Nasdaq Stock Market, pursuant to the UTP Plan. Nasdaq's UTP Plan entitles these exchanges and the ADF to a share of UTP Plan Tape Fees, in proportion to such exchange's share of trading as measured by share volume and number of trades. Currently, the Amex, the Chicago Stock Exchange, the Cincinnati Stock Exchange, the ADF, and the Pacific Exchange quote and trade Nasdaq-listed securities pursuant to the UTP Plan. The Boston Stock Exchange and Philadelphia Stock Exchange have indicated their intent to commence trading in Nasdaq-listed securities pursuant to the UTP Plan. In the past, participants in the UTP Plan have established payment for order flow arrangements with their members and customers through sharing tape revenue.

        The net effect of these additional competitors, along with continuing advances in technology and regulatory changes may increase competitive pressure on Nasdaq. In February 2002, Island began reporting its trades to the Cincinnati Stock Exchange, a UTP Plan participant. Published reports indicate that the Cincinnati Stock Exchange gained Island's business by committing to lower trade reporting fees and share with Island a substantial portion of Tape Fees that Cincinnati earns from Island's trades. In July 2002 the SEC abrogated all member tape sharing arrangements by UTP Plan participants for securities listed on The Nasdaq Stock Market. While certain UTP Plan participants have filed revised Tape Fee sharing proposals for Nasdaq-listed securities with the SEC, no proposals have yet been approved by the SEC. Nasdaq's revenue would be further affected if UTP Plan participants obtain SEC approval to begin sharing tape revenues with their members and customers.

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        Nasdaq historically has used Tape Fees to pay market regulation expenses that help ensure the quality and fairness of The Nasdaq Stock Market and compliance with all applicable rules and regulations. Despite this imperative, Nasdaq reduced certain trade reporting fees and began sharing Tape Fees with participants during 2002. Nasdaq's Tape Fee sharing program was abrogated along with all others in July 2002. To remain competitive, Nasdaq's trade reporting fees or Tape Fee sharing may be adjusted in the future to respond to competitive pressures. See "—Risk Factors—Competition by regional exchanges and the ADF may reduce Nasdaq's transactions, trade reporting and market information revenue and impact the ability of SuperMontage to increase Nasdaq's market share of transactions in Nasdaq-listed securities" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Business Environment—2003 Outlook."

        ECNs pose an additional potential challenge to Nasdaq's Market Information Services business because they may register as securities exchanges. As noted above, the Archipelago Exchange has been established as the equities trading facility of the Pacific Exchange and Island, now merged with Instinet, has applied for exchange registration and expressed interest in becoming a UTP Plan participant. In this case, they would be eligible for a share of the UTP Plan Tape Fees generated by the sale of Nasdaq's market information products, and their use of Nasdaq's systems could diminish. See "—Risk Factors—Nasdaq's revenue would be adversely affected by ECNs that register as exchanges."

        Nasdaq is responding aggressively to competition from existing and potential UTP Plan exchanges. Nasdaq is working to ensure that all exchanges are covered by uniform regulatory standards and bear appropriate regulatory costs. Nasdaq also regularly examines its fee structure to insure that costs are fairly distributed among participants and that fees adequately cover the cost of regulation. Nasdaq has also introduced several new data products that are designed to provide market participants with new and more extensive market information, and to provide Nasdaq with new revenue streams. See "—Market Information Services."

        Corporate Client Group.     Nasdaq's strategies for maintaining its current listings in both The Nasdaq National Market and The Nasdaq SmallCap Market and gaining new listings include building global brand identity, developing joint marketing opportunities with listed companies, communicating better with key decision makers and providing other value-added services to Nasdaq-listed companies. Nasdaq's marketing efforts have centered on creating a valuable brand—an important factor in attracting and retaining large world-class growth companies.

        In terms of obtaining new listings, Nasdaq will continue to focus its efforts primarily on growth companies. Over the last three years, general market and economic conditions have made it difficult for many companies to access the public equity markets. Nevertheless, Nasdaq believes that its market model, strong global reputation and value-added services will enable it to compete successfully for listings. Nasdaq employs a variety of initiatives and tools in its marketing efforts, including media advertising, Internet publishing (Nasdaq.com) and international road shows.

        Nasdaq competes primarily with the NYSE for larger company listings on The Nasdaq National Market. As of December 31, 2002, there were 2,824 companies listed on The Nasdaq National Market with an aggregate domestic market capitalization of $1.9 trillion compared to 2,783 companies listed on the NYSE with an aggregate domestic market capitalization of $9.0 trillion. Rule 500 of the NYSE historically has made it very difficult for companies to voluntarily delist from the NYSE. As currently written, Rule 500 allows a company to delist from the NYSE if it obtains the approval of its board of directors and its audit committee, publishes a press release announcing its proposed delisting and sends a written notice to its largest 35 stockholders of record (U.S. stockholders of record if a non-U.S. issuer) alerting them to the proposed delisting. Because of these affirmative steps imposed on an issuer's board of directors, in particular the notice requirements, Nasdaq believes that Rule 500 is anti-competitive and continues to constitute an impediment to Nasdaq's ability to compete for NYSE

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listings. During 2002, no companies transferred from the NYSE to The Nasdaq Stock Market, while 43 companies switched to the NYSE from The Nasdaq National Market.

        Nasdaq competes with Amex for listings on both The Nasdaq National Market and The Nasdaq SmallCap Market. During the year ended December 31, 2002, four companies transferred from Amex to The Nasdaq National Market. During this period, three companies switched to Amex from The Nasdaq SmallCap Market. In addition, the Pacific Stock Exchange has announced that it intends in the future to seek listings on its Archipelago Exchange. It is unclear at this time whether this type of market will become a significant competitor for Nasdaq.

        Companies also have a choice of not listing on any market. In that case, broker-dealers may still make markets for such securities and post their quotes on the OTC Bulletin Board or the Pink Sheets, owned by Pink Sheets LLC, a private company.

        Other Markets.     The Nasdaq Stock Market competes for trading volume in NYSE and Amex-listed securities by offering customers quality trade executions at a reasonable price and derives revenue from the sale of related data. A significant amount of investor self-directed, on-line trading activity in listed securities is currently executed on Nasdaq InterMarket. These orders forgo the exposure of the auction trading systems of the exchanges in favor of the execution services provided by Nasdaq InterMarket participants.

        Nasdaq InterMarket has implemented a program designed to lower costs for Nasdaq InterMarket participants executing trades through Nasdaq facilities. The program allows Nasdaq InterMarket participants to share in the Tape Fees Nasdaq receives as a participant in the Consolidated Tape Association Plan.

Employees

        As of March 1, 2003, Nasdaq had 1,290 employees. None of its employees is subject to collective bargaining agreements or is represented by a union. Nasdaq considers its relations with its employees to be good.

Nasdaq Website and Availability of SEC Filings

        Nasdaq's Internet website is www.nasdaq.com. Information on Nasdaq's website is not a part of this Form 10-K. Nasdaq will make available free of charge on its website, or provide a link to, its Forms 10-K, Forms 10-Q and Forms 8-K, and any amendments to these documents, that are filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after Nasdaq electronically files such material with, or furnishes it to the SEC. To access these filings, go to Nasdaq's website and click on "Inside NASDAQ," then click on "Investor Relations," then click on "SEC Filings." This link allows you to view Nasdaq's SEC filings.

Service, Regulatory and Technology Contractual Relationships with the NASD, NASDR and Amex

        Although it is contemplated that the NASD will eventually divest completely its ownership interest in Nasdaq, there may still exist certain contractual relationships between the parties once this happens. For example, prior to the Restructuring, Nasdaq had access to many support functions of the NASD, including certain financial services, real estate, legal, information services and corporate and administrative services. The NASD and Nasdaq entered into a Separation and Common Services Agreement, dated as of January 1, 2002 (the "New Separation Agreement"), which replaced an interim Separation and Common Services Agreement executed in 2000 (the "Interim Agreement"). The services to be provided to Nasdaq by the NASD under the New Separation Agreement are limited to certain finance, technology infrastructure, facilities sharing and legal, which is substantially more limited than what was previously provided by the NASD under the Interim Agreement. Under the New

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Separation Agreement, Nasdaq pays to the NASD the costs of the services provided, including any incidental expenses associated with such services. Nasdaq's costs for services provided by the NASD in 2002 were approximately $5.1 million. Nasdaq anticipates that the annual costs for services under the New Separation Agreement will drop in future years as Nasdaq reviews the provision of these services and continues to internalize more of these services or seeks alternative third party providers. See "—Risk Factors—Lack of operating history as for-profit entity and potential conflicts of interest with related parties," "—Risk Factors—The intercompany agreements may not be effected on terms as favorable to Nasdaq as could have been obtained from unaffiliated third parties" and "Item 13. Certain Relationships and Related Transactions."

        On June 28, 2000, Nasdaq and NASD Regulation, Inc. ("NASDR"), a wholly-owned subsidiary of the NASD, signed a Regulatory Services Agreement pursuant to which NASDR or its subsidiaries would provide regulatory services to Nasdaq and its subsidiaries commencing upon the effectiveness of Exchange Registration. As a result, no services have been performed under this agreement. Pursuant to the terms of the Regulatory Services Agreement, the services provided will be of the same type and scope as are currently provided by NASDR to Nasdaq under the Delegation Plan for a term of ten years. Each regulatory service is to be provided for a minimum of five years, after which time the parties may determine to terminate the provision by NASDR of a particular service. The termination of a particular service will generally be based upon a review of pricing and the need for such services. In 2002, Nasdaq paid NASDR approximately $76.7 million for regulatory services provided pursuant to the Delegation Plan.

        On February 6, 2002, Nasdaq, the NASD, and Amex entered into a Technology Transition Agreement to provide for the sharing of certain administrative and regulatory technologies between Nasdaq and Amex and the provision of certain technology services by Nasdaq to Amex. This agreement replaces the existing technology arrangements among the parties that resulted from the NASD's acquisition of Amex in 1998. Depending upon the applicable service or technology, the term of the agreement ranges between three months and two years while Amex reconstructs these services and technologies in-house, with an option for Amex to extend the term for certain services for up to one year. Pursuant to this agreement, Amex will pay Nasdaq the direct costs of the services provided by Nasdaq, plus certain administrative costs. In addition, this agreement establishes a fund, administered by the NASD, to pay the costs incurred by Nasdaq, the NASD and Amex in the implementation of this agreement. Nasdaq and the NASD have each agreed to contribute up to $14.5 million to this fund.

        The parties also entered into a Master Agreement on February 6, 2002 to govern certain non-technology related matters among the parties and their respective affiliates. This agreement, among other things, sets forth the terms of certain trading rights between Nasdaq and Amex. See "—Risk Factors—Lack of operating history as for-profit entity and potential conflicts of interest with related parties," "—Risk Factors—The intercompany agreements may not be effected on terms as favorable to Nasdaq as could have been obtained from unaffiliated third parties" and "Item 13. Certain Relationships and Related Transactions."

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         Hardwick Simmons , a member of the Nasdaq Board, became Chairman of the Nasdaq Board in September 2001 and has been Chief Executive Officer ("CEO") of Nasdaq since February 2001. Prior to joining Nasdaq, Mr. Simmons served from May 1991 to December 2000 as President and CEO of Prudential Securities Incorporated, the investment and brokerage firm, and Prudential Securities Group Inc., the firm's holding company. Prior to joining Prudential Securities in 1991, Mr. Simmons was President of the Private Client Group at Shearson Lehman Brothers, Inc.

         Richard G. Ketchum , a member of the Nasdaq Board, was elected to the Nasdaq Board in September 2001 and has been President of Nasdaq since July 2000 and Deputy Chairman since December 2000. Mr. Ketchum is responsible for all aspects of Nasdaq's operations, including the development and formulation of market, regulatory, and legal policies, as well as international initiatives. Prior to his current position, Mr. Ketchum served as President of the NASD since 1998, Chief Operating Officer of the NASD since 1993 and Executive Vice President of the NASD since 1991.

         Alfred R. Berkeley III became Vice Chairman of Nasdaq in July 2000 and was President of Nasdaq from June 1996 to July 2000. Mr. Berkeley was a member of the Nasdaq Board from June 1996 to May 2001. Prior to joining Nasdaq, Mr. Berkeley served for five years as Managing Director and Senior Banker of the Corporate Finance Department of Alex. Brown & Sons Incorporated, a financial services firm.

         David Weild IV became Vice Chairman of Nasdaq in October 2001 and Executive Vice President of the Corporate Client Group of Nasdaq in March 2001. Prior to his current positions, Mr. Weild held various positions with Prudential Securities Incorporated, an investment and brokerage firm, including President of Prudential Securities.Com from 2000 to 2001, Managing Director and Head of High Technology Investment Banking from 1997 to 2000, Managing Director of Investment Banking and Head of Corporate Finance from 1995 to 1997, and Managing Director and Head of the Global Equity Transactions Group from 1990 to 1995.

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         Adena T. Friedman became Executive Vice President of Nasdaq Data Products in January 2002 and oversees Nasdaq's Market Information Services. Prior to her current position, Ms. Friedman was Senior Vice President of Nasdaq Data Products from January 2001 to January 2002, Vice President of OTC Bulletin Board, Mutual Fund Quotation Service and NasdaqTrader.com from January 2000 to January 2001, Director of OTC Bulletin Board and Mutual Fund Quotation Service from August 1997 to January 2000, and Marketing Manager overseeing Nasdaq's marketing efforts to broker-dealers from April 1995 to August 1997. Ms. Friedman joined Nasdaq in 1993.

         Steven Dean Furbush became Executive Vice President of Nasdaq Transaction Services in January 2001. Prior to his current position, Mr. Furbush was Senior Vice President of Nasdaq Transaction Services from October 2000 to January 2001, Managing Director of Nasdaq InterMarket from October 1999 to October 2000, and Chief Economist from June 1995 to October 1999.

         William R. Harts became Executive Vice President of Nasdaq Corporate Strategy in January 2002. Prior to joining Nasdaq, Mr. Harts was a Managing Director at Salomon Smith Barney, a global investment banking firm, from October 1991 to November 2001. As a Managing Director, Mr. Harts served at various times as Head of Strategic Business Development for the Global Equity Division and Head of the Portfolio Trading Department. Mr. Harts served as a Director and Vice Chairman of the Philadelphia Stock Exchange from March 1994 to June 1999.

         John L. Hilley became Executive Vice President of Nasdaq and Chairman and CEO of Nasdaq International in July 1999. Mr. Hilley joined the NASD as Executive Vice President for Strategic Development in February 1998. Prior to joining the NASD, Mr. Hilley served in the White House as senior advisor to President Clinton since February 1996. Mr. Hilley has also held a number of senior staff positions in the U.S. Senate.

         John L. Jacobs became Executive Vice President of Nasdaq Financial Products and Worldwide Marketing in July 2002 and oversees Nasdaq's Financial Products business and various marketing activities. Mr. Jacobs serves as CEO of Nasdaq Financial Products, Inc. and Chairman of Nasdaq Financial Product Services Ireland Limited. Prior to his current position, Mr. Jacobs served as Senior Vice President of Worldwide Marketing and Financial Products since January 26, 2000 and as Vice President of Investor Services and Worldwide Marketing since January 1997. Mr. Jacobs joined Nasdaq in 1983.

         Edward S. Knight became Executive Vice President and General Counsel in October 2000. Prior to his current position, Mr. Knight served as Executive Vice President and Chief Legal Officer of the NASD since July 1999. Prior to joining the NASD, Mr. Knight served as General Counsel of the U.S. Department of the Treasury from September 1994 to June 1999.

         Steven J. Randich became Executive Vice President of Operations & Technology and Chief Information Officer of Nasdaq in October 2001. Prior to his current position, Mr. Randich served as Executive Vice President and Chief Technology Officer of Nasdaq since October 2000. Prior to joining Nasdaq, Mr. Randich was Executive Vice President and Chief Information Officer of the Chicago Stock Exchange from November 1996 to October 2000.

         Denise B. Stires became Executive Vice President of Worldwide Marketing and Investor Services in March 2001. Ms. Stires was Chief Marketing Officer of BuyandHold Inc., an on-line financial services company providing dollar-based brokerage services to individuals and corporations, from 2000 to 2001. Prior to that, Ms. Stires was Senior Vice President, Marketing Director of DLJdirect, the on-line discount brokerage service of CSFB from 1997 to 2000.

         David P. Warren became Executive Vice President and Chief Administrative Officer of Nasdaq in January 2001 and Chief Financial Officer ("CFO") in September 2001. Mr. Warren oversees finance, human resources, and all administrative services including real estate, property management and purchasing. Prior to his current position, Mr. Warren was CFO of the Long Island Power Authority

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from January 1998 to December 2000, Deputy Treasurer of the State of Connecticut from March 1995 to January 1998 and a Vice President at CSFB, a financial services firm, from 1987 to 1995.

Risk Factors

         This Form 10-K contains forward-looking statements that involve risks and uncertainties. Nasdaq's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by Nasdaq described below and elsewhere in this Form 10-K.

         The risks and uncertainties described below are not the only ones facing Nasdaq. Additional risks and uncertainties not presently known to Nasdaq or that Nasdaq currently believes to be immaterial may also adversely affect Nasdaq's business. If any of the following risks actually occur, Nasdaq's business, financial condition, or operating results could be materially adversely affected.

Nasdaq's operating results could fluctuate significantly in the future.

        Nasdaq's operating results may fluctuate significantly in the future as a result of a variety of factors, including: (i) a decrease in the trading volume in The Nasdaq Stock Market; (ii) increased competition from regional exchanges, ECNs, the ADF or other alternative trading systems that might reduce market share and create pricing pressure; (iii) competition from the NYSE or new competing exchanges for new listings; (iv) a reduction in market information revenue; (v) the rate at which The Nasdaq Stock Market obtains new listings and maintains its current listings; (vi) regulatory changes and compliance costs; (vii) Nasdaq's ability to utilize its capital effectively; (viii) Nasdaq's ability to manage personnel, overhead, and other expenses, in particular technology expenses; and (ix) general market and economic conditions.

Nasdaq's business could be harmed by market fluctuations and other risks associated with the securities industry generally.

        A substantial portion of Nasdaq's revenue is tied to the trading volume of its listed securities. Trading volume is directly affected by economic and political conditions, broad trends in business and finance, and changes in price levels of securities. A continuation of the weak economic conditions of the past several years or a worsening of the economy or the securities markets could result in a further decline in trading volume. Nasdaq is also particularly affected by declines in trading volume in technology-related securities because a significant portion of its customers trade in these types of securities and a large number of technology-related companies are listed on The Nasdaq Stock Market. A decline in trading volume would lower revenue from Transaction Services and Market Information Services, and Nasdaq's profitability may be adversely affected if it is unable to reduce costs at the same rate. A continuation of the current downturn in the initial public offering market is also likely to have an adverse effect on Nasdaq's revenue, including, in particular, revenue from listing fees. For example, in the year ended December 31, 2002, 51 IPOs were brought to market on The Nasdaq Stock Market compared to 63 in the year ended December 31, 2001. There also were 571 companies delisted during 2002.

Substantial listing competition could reduce Nasdaq's revenue.

        The Nasdaq Stock Market faces competition for listings from other primary exchanges, especially from the NYSE. In addition to competition for initial listings, The Nasdaq Stock Market also competes with the NYSE to maintain listings. In the past, a number of issuers listed on The Nasdaq Stock Market have left for the NYSE each year. The largest 50 Nasdaq-listed issuers (based on U.S. market value) accounted for approximately 50.9% of total dollar volume traded on The Nasdaq Stock Market for the year ended December 31, 2002. While the loss of one or more of these issuers would result in a decrease in revenue from Nasdaq's Corporate Client Group, such a loss would cause an even more

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significant reduction in revenue from Nasdaq's Transaction Services and Market Information Services. The reduction in initial listings or the loss of a top issuer could have an adverse effect on Nasdaq's business, financial condition, or operating results.

Competition by regional exchanges and the ADF may reduce Nasdaq's transactions, trade reporting and market information revenue and impact the ability of SuperMontage to increase Nasdaq's market share of transactions in Nasdaq-listed securities.

        Nasdaq has invested approximately $107 million in the design and implementation of its new trading system, SuperMontage, which was fully implemented on December 2, 2002. SuperMontage is intended to attract more orders and quotes to The Nasdaq Stock Market by providing a more comprehensive system that will increase competition and market transparency. SuperMontage has been launched into a competitive environment. Any decision by market participants to quote through regional exchanges or the ADF, as discussed below, could have a negative impact on Nasdaq's share of quotes and trades in securities listed on The Nasdaq Stock Market and may adversely affect Nasdaq's business, financial condition, and operating results.

        Nasdaq is currently facing increased competition from regional exchanges for quoting and trade reporting business, which affects Transaction Services and Market Information Services revenue. Island began reporting its trades to the Cincinnati Stock Exchange in February 2002, while another ECN, Archipelago, began quoting and reporting certain trades to the Archipelago Exchange, the equities arm of the Pacific Stock Exchange, in February 2003. Nasdaq has taken several steps in response, including discussions with UTP Plan exchanges about how they can continue to interact with SuperMontage (as the Chicago Stock Exchange does), adjusting our transactions pricing to be more competitive with ECNs that do not quote or report through Nasdaq, and working to make functionality of SuperMontage reflect the needs of ECNs that choose to remain in Nasdaq. These actions may not be sufficient to regain lost business or prevent other market participants from shifting some of their trade reporting to regional exchanges. Nasdaq may be required to take further action to remain competitive.

        As a condition for its approval of SuperMontage, the SEC required the NASD to provide NASD members with the ability to opt-out of SuperMontage by providing the ADF as an alternative quotation and trade reporting facility for NASD members. At least one ECN has been quoting through the ADF rather than through SuperMontage. The NASD recently reduced the fees it charges for the ADF. Nasdaq has requested that the SEC abrogate this new fee schedule as inconsistent with the Exchange Act, however, there can be no assurance that the SEC will respond favorably to Nasdaq's request. If additional market participants quote through the ADF, Nasdaq faces the risk of reduced market share in Transaction Services and Market Information Services revenue, which could adversely affect Nasdaq's business, financial condition and operating results.

Nasdaq's revenue would be adversely affected by ECNs that register as exchanges.

        The Pacific Stock Exchange has established the Archipelago Exchange as its equities trading facility. In addition, Island has applied to register as an exchange. Exchanges that are UTP Plan participants are entitled to a share of Tape Fees. A proliferation in the number of exchanges and UTP Plan participants could have an adverse impact on Nasdaq's Transaction Services and Market Information Services revenue if quoting, trading and trade reporting are fragmented across exchanges and marketplaces.

        In addition, new exchanges could adversely affect Nasdaq's revenue from listings. ECNs, unlike exchanges, historically have not provided listing venues. The Pacific Stock Exchange has announced that the Archipelago Exchange intends to begin competing for listings. If more ECNs become exchanges and are successful in attracting listings, there can be no assurances that Nasdaq will be able to maintain or increase its listing revenue. The reduction in initial listings or the loss of a top issuer could have an

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adverse effect on Nasdaq's business, financial condition and operating results. See "—Substantial listing competition could reduce Nasdaq's revenue."

Substantial competition could reduce The Nasdaq Stock Market's market share and harm Nasdaq's financial performance.

        It is possible that a competing securities exchange, network provider, or technology company could develop ways to replicate Nasdaq's network more efficiently than Nasdaq and persuade a critical mass of market participants to switch to a new network.

        If there is an increase in the number of market makers or ECNs that determine they do enough order routing traffic to justify setting up a proprietary network for their traffic, Nasdaq may be forced to alter its pricing structure or risk losing its share of the order routing or execution business. In addition, certain system providers link many market makers in The Nasdaq Stock Market. These systems may be able to increase the number of orders executed through their systems versus the Nasdaq systems. A reduction in Nasdaq's order routing or execution business could have an adverse effect on Nasdaq's business, financial condition and operating results.

        The traditional products and services offered by markets are being unbundled. Historically, Nasdaq has provided listings, execution services information services, and regulatory services to the investing public. Currently, there are many competitors operating in the execution services market. Nasdaq has not historically implemented pricing strategies that isolate its various businesses. Due to competition in the execution services business, as well as Nasdaq's past practice of bundling products and services, it is uncertain whether Nasdaq will be able to compete successfully in this business. Furthermore, Nasdaq faces multiple pricing constraints, including in particular, regulatory constraints that may prevent it from competing effectively in certain markets.

Nasdaq is subject to extensive regulation that may harm its ability to compete with less regulated entities.

        Under current federal securities laws, changes in Nasdaq's rules and operations, including its pricing structure, must be approved by the SEC. The SEC may approve, disapprove, or recommend changes to proposals submitted by Nasdaq. In addition, the SEC may delay the initiation of the public comment process or the approval process. This delay in approving changes, or the altering of any proposed change, could have an adverse effect on Nasdaq's business, financial condition and operating results. Nasdaq not only must compete with ECNs that are not subject to the SEC approval process, but Nasdaq must also compete with other exchanges that are subject to lower regulation and surveillance costs than Nasdaq. This self-regulation cost that Nasdaq is required to undertake contributes to the high quality regulation of its market that Nasdaq desires. However, with the fragmentation of trading that has occurred through SEC encouragement, fragmentation of regulation has followed, and there is a significant risk that the effectiveness of the regulation services that Nasdaq pays the NASD to provide will diminish due to this fragmentation. Additionally, there is a risk that trading will shift to exchanges that spend significantly less on regulation services. Nasdaq has raised both concerns -regulatory fragmentation and regulatory arbitrage—to the SEC in an attempt to ensure that the SEC does not permit competition to harm regulation. However, there can be no assurance that the SEC will act favorably regarding Nasdaq's arguments.

System limitations or failures or security breaches could harm Nasdaq's business.

        Nasdaq's business depends on the integrity and performance of the computer and communications systems supporting it. If Nasdaq's systems cannot be expanded to cope with increased demand or otherwise fail to perform, Nasdaq could experience unanticipated disruptions in service, slower response times and delays in the introduction of new products and services. These consequences could result in lower trading volumes, financial losses, decreased customer service and satisfaction, litigation

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or customer claims and regulatory sanctions. Nasdaq has experienced occasional systems failures and delays in the past and it could experience future systems failures and delays.

        Nasdaq uses internally developed systems to operate its business, including transaction processing systems to accommodate increased capacity. However, if The Nasdaq Stock Market's trading volume increases unexpectedly, Nasdaq will need to expand and upgrade its technology, transaction processing systems and network infrastructure. Nasdaq does not know whether it will be able to project accurately the rate, timing, or cost of any increases, or expand and upgrade its systems and infrastructure to accommodate any increases in a timely manner.

        Nasdaq's systems and operations also are vulnerable to damage or interruption from human error, natural disasters, power loss, sabotage or terrorism, computer viruses, intentional acts of vandalism, and similar events. Nasdaq has active and aggressive programs in place to identify and minimize its exposure to these vulnerabilities and works in collaboration with the technology industry to share corrective measures with Nasdaq's business partners. Nasdaq currently maintains multiple computer facilities that are designed to provide redundancy and back-up to reduce the risk of system disruptions, and has facilities in place that are expected to maintain service during a system disruption. Any system failure that causes an interruption in service or decreases the responsiveness of Nasdaq's service could impair its reputation, damage its brand name and negatively impact its revenue. Nasdaq also relies on a number of third parties for systems support. Any interruption in these third-party services or deterioration in the performance of these services could also be disruptive to Nasdaq's business and have a material adverse effect on its business, financial condition and operating results.

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

        The markets in which Nasdaq competes are characterized by rapidly changing technology, evolving industry standards, frequent enhancements to existing services and products, the introduction of new services and products and changing customer demands. These market characteristics are heightened by the emerging nature of the Internet and the trend for companies from many industries to offer Internet-based products and services. In addition, the widespread adoption of new Internet, networking, or telecommunications technologies or other technological changes could require Nasdaq to incur substantial expenditures to modify or adapt its services or infrastructure. Nasdaq's future success will depend on its ability to respond to changing technologies on a timely and cost-effective basis. Nasdaq's operating results may be adversely affected if it cannot successfully develop, introduce, or market new services and products. In addition, any failure by Nasdaq to anticipate or respond adequately to changes in technology and customer preferences, or any significant delays in other product development efforts, could have a material adverse effect on Nasdaq's business, financial condition and operating results.

Nasdaq may have difficulty continuing prior levels of growth.

        For several years, Nasdaq experienced significant growth in its business and the number of its employees. This required Nasdaq to increase its investment in technology, management personnel, market regulatory services and facilities. Over the last three years, however, the securities industry and stock markets have faced adverse conditions. As a result, Nasdaq has not been able, and in the future may not be able, to continue prior levels growth. In addition, Nasdaq may have difficulty managing its business as it is forced to reduce its expenses to deal with contraction in its business. In an attempt to stimulate future growth, Nasdaq has undertaken several initiatives to increase its business, including enhancing existing products, developing new products and forming strategic relationships. The increased costs associated with these initiatives may not be offset by corresponding increases in its revenue. No assurance can be made that Nasdaq has made adequate allowances for the changes and risks associated with the weakened equities market, that its systems, procedures, or controls will be adequate to support

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its operations, or that its management will be able to offer and expand its services successfully, particularly if adverse market conditions continue. If Nasdaq is unable to manage its operations effectively, its business, financial condition and operating results could be adversely affected.

Nasdaq may need additional funds to support its business plan.

        Nasdaq depends on the availability of adequate capital to maintain and develop its business. Nasdaq believes that its current capital requirements will be met from internally generated funds and from the funds raised in connection with the Restructuring. However, based upon a variety of factors, including the market share of SuperMontage, reductions in fee levels caused by increased competition, the cost of service and technology upgrades and regulatory costs, Nasdaq's ability to fund its capital requirements may vary from those currently planned. There can be no assurance that additional capital will be available on a timely basis, or on favorable terms or at all.

        Nasdaq had total debt outstanding of approximately $441.0 million on December 31, 2002. This debt contains certain covenant provisions that are normally associated with debt financing. Failure to satisfy these covenants could cause the acceleration of principal and interest on all of the outstanding debt. In addition, as of the date of this report, Nasdaq had issued and outstanding 1,338,402 shares of Series A Preferred Stock, as a result of which Nasdaq is required to make regular dividend payments to the NASD. The dividends payable are calculated based on a dividend rate that is currently 7.6% and increases to 10.6% in all years commencing after March 2004.

Nasdaq may not be successful in executing its international strategy.

        Nasdaq has had only very limited experience in developing localized versions of its services and in marketing and operating its services internationally. To date, Nasdaq's international efforts have not yet achieved profitability and Nasdaq Japan ceased operations in 2002, resulting in Nasdaq taking an other than temporary impairment of its entire investment in Nasdaq Japan. See "Consolidated Financial Statements, Note 2."

        There can be no assurance that Nasdaq will be able to succeed in deploying its market model and brand in other international markets. Nasdaq may experience difficulty in managing its international operations because of, among other things, competitive conditions overseas, difficulties in supervising foreign operations, established domestic markets, language and cultural differences, political and economic instability, sustained weakness in European equities markets, and changes in regulatory requirements or the failure to obtain requested regulatory changes and approvals. Any of the above could have an adverse effect on the success of Nasdaq's international operations and, consequently, on Nasdaq's business, financial condition and operating results. See "Item 1. Business—Other Products and Markets—Nasdaq Europe S.A./N.V." and "—Nasdaq Japan."

Certain Congressional and SEC reviews could result in a reduction in data fees that could reduce Nasdaq's revenue.

        The SEC is reviewing concerns by industry members that the present levels of data fees do not properly reflect the costs associated with their collection, processing and distribution. The SEC currently is reviewing a report on the issues from its Advisory Committee on Market Information that was issued in September 2001 and comments on the report. Nasdaq has argued that there is significant value in the quality of data it provides to the investing community. Nasdaq also has argued that there are regulatory, market capacity, and other related costs of operating the market. A fee realignment that does not recognize the full value of the data and/or the market costs of creating and delivering high quality market data could reduce overall data revenue in the future and adversely affect Nasdaq's business, financial condition and operating results.

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        Congress conducted hearings in 2000 and 2001 and introduced legislation in 2000 pertaining to whether stock exchanges and markets have a property right to quote and trade data. Since securities firms are required to supply the market operator with quote and trade information, some have argued that the operator has no right to be able to validate the data, consolidate the data with other market participant data and sell the data back to the securities firms. This issue may continue to be debated and the outcome could have a significant impact on the viability of Nasdaq's data revenue and, as a consequence, on its business, financial condition and operating results.

Failure to protect its intellectual property rights could harm Nasdaq's brand-building efforts and ability to compete effectively.

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

Failure to attract and retain key personnel may adversely affect Nasdaq's ability to conduct its business.

        Nasdaq's future success depends on the continued service and performance of its senior management and certain other key personnel. For example, Nasdaq is dependent on specialized systems personnel to operate, maintain and upgrade its systems. The inability of Nasdaq to retain key personnel or retain other qualified personnel could adversely affect Nasdaq's business, financial condition and operating results.

Nasdaq is subject to risks relating to litigation and potential securities laws liability.

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

Lack of operating history as for-profit entity and potential conflicts of interest with related parties.

        While Nasdaq has an established operating history, it has only operated as a for-profit company with private ownership interests since June 28, 2000. Therefore, Nasdaq is subject to the risks and uncertainties associated with any newly independent company. Until Exchange Registration, the NASD will retain voting control over Nasdaq. See "Item 1. Business—Nasdaq's History and Structure." In addition, four of the 20 members of the Nasdaq Board are currently members of the NASD Board. Until Exchange Registration, the NASD will be in a position to continue to control substantially all

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matters affecting Nasdaq, including any determination with respect to the direction and policies of Nasdaq, acquisition or disposition of assets, future issuances of securities of Nasdaq, Nasdaq's incurrence of debt and any dividend payable on the Common Stock.

        Conflicts of interest may arise between Nasdaq and the NASD, or its affiliates, in a number of areas relating to their past and ongoing relationships, including the nature, quality, and pricing of services rendered; shared marketing functions; tax and employee benefit matters; indemnity agreements; sales or distributions by the NASD of all or any portion of its ownership interest in Nasdaq; or the NASD's ability to influence certain affairs of Nasdaq prior to Exchange Registration. There can be no assurance that the NASD and Nasdaq will be able to resolve any potential conflict or that, if resolved, Nasdaq would not receive more favorable resolution if it were dealing with an unaffiliated party.

        Conflicts may also arise between Nasdaq and Amex by virtue of commitments made by the NASD in connection with the NASD's acquisition of Amex.

The intercompany agreements may not be effected on terms as favorable to Nasdaq as could have been obtained from unaffiliated third parties.

        For purposes of governing their ongoing relationship, Nasdaq and the NASD, or their affiliates, have entered into various agreements involving the provision of services such as market surveillance and other regulatory functions, finance, technology infrastructure, legal and facilities sharing. Nasdaq has negotiated an agreement with the NASDR pursuant to which NASDR will regulate Nasdaq trading activity commencing upon the effectiveness of Exchange Registration. At the time the parties negotiated this agreement, the parties envisioned that the NASDR would continue regulating trading activity on Nasdaq under a long-term contract that establishes the various functions NASDR will perform and the price that Nasdaq will pay for these functions. The functions covered under this agreement, as negotiated, are substantially of the same type and scope as those NASDR performs under the Delegation Plan.

        In the future Nasdaq may determine that it is necessary to negotiate new contracts with the NASD or its affiliates, or to renegotiate existing contracts between the parties. Although it is the intention of the parties to negotiate agreements that provide for arm's length, fair market value pricing, there can be no assurance that these contemplated agreements, or the transactions provided in them, will be effected on terms as favorable to Nasdaq as could have been obtained from unaffiliated third parties. The cost to Nasdaq for such services could increase at a faster rate than its revenue and could adversely affect Nasdaq's business, financial condition and operating results. See "Item 13. Certain Relationships and Related Transactions."

The SEC may challenge or not approve Nasdaq's plan to become a national securities exchange or it may require changes in the manner Nasdaq conducts its business before granting this approval.

        The SEC may not approve Nasdaq's application for Exchange Registration or may require changes in Nasdaq's corporate governance structure and the way Nasdaq conducts its business before granting this approval. Failure to be so registered could adversely effect Nasdaq's competitive position and could have a material adverse effect on Nasdaq's business conditions and business prospects.

        In connection with Exchange Registration, certain changes must be made to the national market system plans. Certain participants in the plans may object to, or request modifications to, amendments proposed by Nasdaq. Failure to resolve these issues in a timely manner could delay Exchange Registration.

        There can be no assurance that Exchange Registration will occur or that the registration process will occur in a timely manner. Because of the nature of the regulatory process and the variety of

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market structure issues that would have to be resolved across all markets, the registration process could be lengthy. In the long-term, the failure to be approved as an exchange by the SEC may have negative implications on the ability of Nasdaq to fund its planned initiatives.

        In addition, the SEC has not yet agreed and may not agree to Nasdaq's proposal to continue to operate the OTC Bulletin Board after Exchange Registration.

There currently is a limited trading market for the Common Stock.

        The Common Stock is traded in the over-the-counter market through the OTC Bulletin Board. The trading volume in the Common Stock has been relatively limited, with average daily trading volume from the start of trading on July 1, 2002 through December 31, 2002 of approximately 14,000 shares. A more active trading market for the Common Stock may not develop and such market as does develop on the OTC Bulletin Board may have limited liquidity and considerable volatility.