NASDAQ OMX Group (NDAQ)

Overview

On February 27, 2008, Nasdaq and OMX AB combined their businesses and Nasdaq was renamed The NASDAQ OMX Group, Inc. Under the purchase method of accounting, Nasdaq was treated as the accounting and legal acquirer in the business combination with OMX AB. We also completed our acquisitions of PHLX in July 2008, BSX in August 2008 and certain businesses of Nord Pool in October 2008. These acquisitions also have been treated as purchases for accounting purposes, with NASDAQ OMX treated as the acquirer. Additionally, during 2008, we purchased a majority stake in IDCG in December 2008 and a 20% aggregate equity interest in Agora-X (13.3% in March 2008 and an additional 6.7% in December 2008). The financial results of OMX are included in the consolidated financial results beginning on February 27, 2008. PHLX is included beginning July 2008, BSX is included beginning August 2008, the Nord Pool businesses are included beginning October 2008, IDCG is included beginning December 2008 and our initial equity interest in Agora-X of 13.3% beginning in March 2008 and the aggregate 20% beginning in December 2008.

Overview

This compensation discussion and analysis describes the compensation program for the year ended December 31, 2008 for our named executive officers: Robert Greifeld, David P. Warren, Magnus Böcker, Christopher R. Concannon and Anna M. Ewing.

NASDAQ OMX’s board of directors is responsible for overseeing our executive compensation program, and the board has delegated to its management compensation committee the primary responsibility for administering the program. Among other things, the management compensation committee is responsible for establishing the principles that underlie our executive compensation program, approving compensation for executive and senior officers and in conjunction with the board, evaluating the performance and determining the compensation of our CEO. For additional information on the committee and its members, see “Proposal I: Election of Directors—Board Committees.” The committee’s charter can be found on NASDAQ OMX’s website at http://ir.nasdaqomx.com/governance.cfm. The committee welcomes input from our stockholders on NASDAQ OMX’s compensation program through the communication process discussed in “Stockholder Communication With Directors.”

Overview

We are a leading global exchange group that delivers trading, exchange technology, securities listing, and public company services across six continents. Our global offerings are diverse and include trading across multiple asset classes, market data products, financial indexes, capital formation solutions, financial services and market technology products and services. Our technology powers markets across the globe, supporting cash equity trading, derivatives trading, clearing and settlement and many other functions.

In the U.S., we operate The NASDAQ Stock Market, a registered national securities exchange. The NASDAQ Stock Market is the largest electronic cash equities securities market in the U.S. in terms of number of listed companies and in the world in terms of share value traded. As of December 31, 2008, The NASDAQ Stock Market was home to over 3,000 listed companies with a combined market capitalization of approximately $2.6 trillion. In addition, in the U.S. we operate NASDAQ OMX PHLX, the third largest U.S. options market, The NASDAQ Options Market, a second options market, NASDAQ OMX BX, a second cash equities trading market, and NASDAQ OMX Futures Exchange (formerly the Philadelphia Board of Trade), or NFX, a futures market.

In Europe, we operate exchanges in Stockholm (Sweden), Copenhagen (Denmark), Helsinki (Finland), and Iceland as NASDAQ OMX Nordic and exchanges in Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania) as NASDAQ OMX Baltic. In addition, we operate NASDAQ OMX Europe, our new marketplace for pan-European blue chip trading, as well as NASDAQ OMX Commodities, our new offering for trading and clearing commodities, and the Armenian Stock Exchange.

The exchanges that comprise NASADQ OMX Nordic and NASDAQ OMX Baltic offer trading in cash equities, bonds, structured products and ETFs, as well as trading and clearing of derivatives. Our Nordic and Baltic operations also offer alternative marketplaces for smaller companies. As of December 31, 2008, the exchanges within NASDAQ OMX Nordic and NASDAQ OMX Baltic were home to over 800 listed companies with a combined market capitalization of approximately $605 billion.

Overview

Overview

On February 27, 2008, Nasdaq and OMX AB combined their businesses and Nasdaq was renamed The NASDAQ OMX Group, Inc. Under the purchase method of accounting, Nasdaq was treated as the accounting and legal acquirer in the business combination with OMX AB. We also completed our acquisitions of PHLX on July 24, 2008, BSX on August 29, 2008 and certain businesses of Nord Pool on October 21, 2008. These acquisitions also have been treated as purchases for accounting purposes, with NASDAQ OMX treated as the acquirer. On December 19, 2008, we purchased a majority stake in IDCG. The financial results of OMX are included in the consolidated financial results beginning on February 27, 2008. PHLX is included beginning July 24, 2008, BSX is included beginning August 29, 2008, certain businesses of Nord Pool are included beginning October 21, 2008 and IDCG is included beginning December 19, 2008.

Overview

Overview

On February 27, 2008, Nasdaq and OMX combined their businesses and Nasdaq was renamed The NASDAQ OMX Group, Inc. Under the purchase method of accounting, Nasdaq was treated as the accounting and legal acquirer in the business combination with OMX. We also completed our previously announced acquisitions of PHLX on July 24, 2008 and BSX on August 29, 2008. Both acquisitions have also been treated as purchases for accounting purposes, with NASDAQ OMX treated as the acquirer. The financial results of OMX are included in the consolidated financial results beginning on February 27, 2008. PHLX is included beginning July 24, 2008 and BSX is included beginning August 29, 2008.

Overview

On February 27, 2008, Nasdaq and OMX combined their businesses and Nasdaq was renamed The NASDAQ OMX Group, Inc. Under the purchase method of accounting, Nasdaq was treated as the accounting and legal acquirer in the business combination with OMX. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations include the consolidated financial results of Nasdaq as of and through June 30, 2008. The financial results of OMX are included in the consolidated financial results beginning on February 27, 2008.

Overview

On February 27, 2008, Nasdaq and OMX combined their businesses and Nasdaq was renamed The NASDAQ OMX Group, Inc., or NASDAQ OMX. Under the purchase method of accounting, Nasdaq was treated as the accounting and legal acquirer in the business combination with OMX. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations include the consolidated financial results of Nasdaq for the quarter ended March 31, 2008 and 2007. The financial results of OMX are included in the consolidated financial results beginning on February 27, 2008.

Overview

This compensation discussion and analysis describes the compensation program for the year ended December 31, 2007 for our named executive officers: Robert Greifeld, David P. Warren, Christopher R. Concannon, Anna M. Ewing and Edward S. Knight. Among its responsibilities in administering NASDAQ OMX’s executive compensation program, the management compensation committee is responsible for establishing the principles that underlie our compensation program, evaluating the performance of the CEO, determining CEO compensation and approving compensation for other executive and senior officers. For additional information, see “Proposal I: Election of Directors—Board Committees.” The management compensation committee’s charter can be found on NASDAQ OMX’s website at http://ir.nasdaqomx.com/governance.cfm. The committee welcomes input from our stockholders on NASDAQ OMX’s compensation program through the communication process discussed in “Stockholder Communication With Directors.”

This compensation discussion and analysis focuses on Nasdaq’s compensation policies during 2007, prior to its combination with OMX in early 2008 to become The NASDAQ OMX Group, Inc. These policies were established by the members who served on Nasdaq’s management compensation committee prior to the acquisition of OMX. The NASDAQ OMX management compensation committee is continuing its review of whether changes to compensation policies of the combined entity are appropriate.

Overview

Our results for 2007 continue to demonstrate our ability to improve profitability by focusing on the execution of our business plan. Revenues less liquidity rebates, brokerage, clearance and exchange fees increased $124.9 million, or 18.2%, to $812.3 million in 2007, compared with $687.4 million in 2006, and our operating income increased $151.6 million, or 70.8%, to $365.7 million in 2007, compared with $214.1 million in 2006. Net income was $518.4 million, or $3.46 per diluted share, in 2007 compared with $127.9 million, or $0.95 per diluted share, in 2006.

The following pre-tax items impacted our 2007 results:

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These current and prior year items are discussed in more detail below.

Overview

Since it was founded in 1984, OMX’s business model has been based on creating competitive advantages and building business from the network and experience that derive from ownership and operation of exchanges combined with the development of technology and system operations for a global customer base. OMX has also focused on streamlining its organizational structure to create effective operation and integration over national borders and becoming the leading global supplier in developing, delivering, maintaining and operating technology and solutions for exchanges and other central operators. These efforts have allowed OMX to reduce operating costs and to become more efficient.

As a result of OMX’s continued efforts to control operating costs and increase its revenues, despite an increasingly competitive market and sometimes turbulent market conditions, net profit from continuing operations attributable to shareholders in OMX increased from SEK 555 million in 2005 to SEK 953 million in 2006. In 2004, OMX’s net profit amounted to SEK 223 million. The increase in net profit over the three years between 2004 and 2006 was largely due to OMX’s continued efforts to control operating costs and increase its revenues, despite an increasingly competitive market and sometimes turbulent market conditions. Over the three-year period, OMX’s operating income increased as a percentage of revenues from 16% in 2004 to 30% in 2005 to 36% in 2006 as a result of improving market conditions and cost control efforts.

Net profit and operating income continued to increase in the first nine months of 2007. Increased trading activity on the Nordic Exchange and a continued increase in the number of information terminals together with the SEK 101 million capital gain from the sale of shares in Orc Software produced a 25% increase in operating income from continuing operations, from SEK 882 million in the first nine months of 2006 to SEK 1,100 million in the first nine months of 2007. As a percentage of revenues, operating income was 36% in the first nine months of 2007, compared to 35% in the first nine months of 2006.

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Overview

Our results for the third quarter of 2007 continue to demonstrate our ability to improve profitability by focusing on the execution of our business plan. Revenues less liquidity rebates, brokerage, clearance and exchange fees increased $38.8 million, or 22.7%, to $210.0 million in the third quarter of 2007, compared with $171.2 million in the third quarter of 2006, and our operating income increased $16.0 million, or 23.6%, to $83.9 million in the third quarter of 2007, compared with $67.9 million in the third quarter of 2006. Net income was $365.0 million, or $2.41 per diluted share, in the third quarter of 2007 compared with $30.2 million, or $0.22 per diluted share, in the third quarter of 2006.

The following pre-tax items impacted our third quarter 2007 results:

These current and prior year items are discussed in more detail below.

Overview

Our results for the second quarter of 2007 continue to demonstrate our ability to improve profitability by focusing on the execution of our business plan. Revenues less liquidity rebates, brokerage, clearance and exchange fees increased $27.6 million, or 16.1%, and our operating income increased $62.7 million. Net income was $56.1 million, or $0.39 per diluted share, in the second quarter of 2007 compared with $16.6 million, or $0.13 per diluted share, in the second quarter of 2006.

Our second quarter 2007 results were impacted by the following:

These current and prior year items are discussed in more detail below.

Overview

Our results for the first quarter of 2007 demonstrate our ability to improve profitability by focusing on the execution of our business plan. Gross margin (revenues less cost of revenues) increased $30.1 million, or 18.6%, and our operating income increased $39.6 million, or 94.7%. Net income was $18.3 million, or $0.14 per diluted share, in the first quarter of 2007 compared with $18.0 million, or $0.16 per diluted share, in the first quarter of 2006.

Our first quarter 2007 results were impacted by the following:

These current and prior year items are discussed in more detail below.

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Overview

This compensation discussion and analysis describes the compensation program for, and material elements of compensation of, our named executive officers for the year ended December 31, 2006. Among its responsibilities, the management compensation committee is responsible for establishing the principles that underlie our executive compensation program, evaluating the performance of the CEO, determining CEO compensation and approving compensation for other executive and senior officers. For additional information, see “Proposal I: Election of Directors—Board Committees.” The management compensation committee’s charter can be found on Nasdaq’s website at http://ir.nasdaq.com/governance.cfm. The committee welcomes input from our stockholders on Nasdaq’s compensation program through the communication process discussed in “Stockholder Communication With Directors.”

Overview

Nasdaq had a highly successful year in 2006. Our financial performance improved substantially, going from net income of $61.7 million or $0.57 per diluted share in 2005, to net income of $127.9 million or $0.95 per diluted share in 2006. Our recent acquisitions contributed to our earnings and we expect further contributions from them in our future results. Our investment in the LSE also contributed to our 2006 earnings and included a $29.4 million unrealized gain, net of tax, on foreign currency option contracts purchased to hedge the foreign exchange exposure on our acquisition bid for the LSE. In August 2006, we began operating as a national securities exchange for Nasdaq-listed securities and on February 12, 2007 became operational as a national securities exchange in non-Nasdaq-listed securities. We recently completed the integration of Nasdaq’s legacy execution system and the Brut and INET execution systems onto a single platform. In October 2006, we migrated all trading in Nasdaq-listed securities to the INET platform, and all non-Nasdaq-listed securities trading on the Brut platform to INET’s platform in November 2006.

In addition to the above, during 2006, we:

Our 2006 results were impacted by the following:

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These current and prior year items are discussed in more detail below.

Overview

We are a leading provider of securities listing, trading, and information products and services. Our revenue sources are diverse and include revenues from transaction services, market data products and services, listing fees and client services, and financial products. The Nasdaq Stock Market is the largest electronic equity securities market in the United States, both in terms of number of listed companies and traded share volume. As of September 30, 2006, we were home to 3,206 listed companies. We also operate The Nasdaq Market Center, which provides our market participants with the ability to access, process, display and integrate orders and quotes in The Nasdaq Stock Market and other national stock exchanges. Transactions involving 431.6 billion equity securities were executed on or reported to our systems in the nine months ended September 30, 2006.

Overview

We are a leading provider of securities listing, trading, and information products and services. Our revenue sources are diverse and include revenues from transaction services, market data products and services, listing fees and client services, and financial products. The Nasdaq Stock Market is the largest electronic equity securities market in the United States, both in terms of number of listed companies and traded share volume. As of June 30, 2006, we were home to 3,205 listed companies. We also operate The Nasdaq Market Center, which provides our market participants with the ability to access, process, display and integrate orders and quotes in The Nasdaq Stock Market and other national stock exchanges. Transactions involving 291.6 billion equity securities were executed on or reported to our systems in the first six months of 2006.

On August 1, 2006, we completed a corporate restructuring in connection with becoming operational as a national securities exchange. Under the new structure, The Nasdaq Stock Market, Inc. was converted to a holding company and, its wholly-owned subsidiary, The NASDAQ Stock Market LLC, assumed the operations of the national securities exchange.

Overview

We are a leading provider of securities listing, trading, and information products and services. Our revenue sources are diverse and include revenues from transaction services, market data products and services, listing fees, and financial products. We operate The Nasdaq Stock Market, the largest electronic equity securities market in the United States, both in terms of number of listed companies and traded share volume. As of March 31, 2006, we were home to 3,191 listed companies. We also operate The Nasdaq Market Center, which provides our market participants with the ability to access, process, display and integrate orders and quotes in The Nasdaq Stock Market and other national stock exchanges. Transactions involving 139.0 billion equity securities were executed on or reported to our systems in the first quarter of 2006.

Overview

Nasdaq had a highly successful year in 2005. Our financial performance improved substantially, going from net income of $1.8 million and a loss of $0.14 per diluted share in 2004, to net income of $61.7 million or $0.57 per diluted share in 2005. We also acquired the INET ECN, which we expect will provide us with a technologically superior trading platform, enhance our ability to compete with U.S. and international market centers, and generate cost savings through technology. We describe the INET acquisition in more detail below. We expect to begin migrating trading activity to the INET platform early in the third quarter of 2006. The migration of the customer communication networks resulting from the migration of trading activity to the INET platform is expected to continue into the fourth quarter, resulting in a full integration of INET in the fourth quarter of 2006. During 2005, we also continued with our cost reduction program, and were able to decrease expenses by $64.1 million, or 13.5%, in 2005.

We have recently completed several other acquisitions, including:

Our 2005 results were positively impacted by increases in gross margin (revenues less cost of revenues) from our Market Services segment and revenues from our Issuer Services segment. Gross margin from Market Services increased $21.0 million, or 7.5%, to $299.7 million in 2005, compared with $278.7 million in 2004. This increase was primarily due to increases in our market share of trade executions, an increase in the percentage of share volume reported to Nasdaq’s systems, additional trading activity from the Brut and INET acquisitions, increases in market subscription users, and changes in the amount shared under Nasdaq’s General Revenue Sharing Program. These increases were partially offset by amounts that Nasdaq paid as liquidity rebates due to increases in market share and activity from Brut and INET and changes to the liquidity rebate tiers. Also, partially offsetting the increase in gross margin were fee reductions for The Nasdaq Market Center introduced in 2004 and a decline in the subscriber base for access services legacy products, which we discontinued as of December 31, 2005. Issuer Services segment revenues increased $20.3 million, or 9.9%, to $226.1 million in 2005, compared with $205.8 million in 2004, primarily due to an increase in Nasdaq’s annual listing fees implemented in 2005 and revenues from the Nasdaq Insurance Agency, including from the acquisition of Carpenter Moore. These current and prior year items are discussed in more detail below.

Our priorities in 2006 are to complete the integration of INET, continue to increase our market share of U.S equity trading and company listings, and raise the value of our proprietary market data products, while maintaining the discipline necessary to complete our cost reduction program. At the same time, we will look for additional sources of revenue through enhanced product offerings and/or potential acquisitions that complement our business. In addition, as contemplated by our acquisition strategy, we have submitted a non-binding indication of interest to acquire the LSE. See “Business—Competition—Acquisition Strategy.”

Overview

The following discussion and analysis of the financial condition and results of operations of Nasdaq should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. Certain prior period amounts presented in the discussion and analysis have been reclassified to conform to the 2005 presentation.

This discussion and analysis may contain statements with respect to Nasdaq’s financial condition, results of operations, future performance and business that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Nasdaq’s actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Item 1. Business—Risk Factors” in The Nasdaq Stock Market, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004.

Nasdaq is a leading provider of securities listing, trading, and information products and services. Nasdaq operates The Nasdaq Stock Market, the largest electronic screen-based equity securities market in the United States, both in terms of number of listed companies and traded share volume. As of September 30, 2005, Nasdaq was home to 3,214 listed companies. Nasdaq also operates the Nasdaq Market Center, which as of September 30, 2005 enabled our customers to trade over 7,700 equity securities. Our revenue sources are diverse and include transaction services revenues, market data product and services revenues, listing fees, and financial product revenues.

Nasdaq offers our products and services for fees that are among the lowest in the industry and are designed to help us maintain and extend our market share. In order to sustain this competitive price strategy, we have significantly reduced operating expenses consistent with our regulatory obligations. We intend to implement further changes to our cost structure to further reduce expenses so that we can maintain our competitive pricing advantage, to attract additional business, and achieve our profitability goals. See “2005 and 2004 Cost Reductions,” of Note 3, “Significant and Related Party Transactions,” to the condensed consolidated financial statements for further discussion.

Nasdaq manages, operates and provides its products and services in two business segments, our Market Services segment and our Issuer Services segment. The Market Services segment includes our transaction-based business (Nasdaq Market Center) and our market information services business (Nasdaq Market Services Subscriptions), which are interrelated because the transaction-based business generates the quote and trade information that we sell to market participants and data vendors. The Issuer Services segment includes our securities listings business (Corporate Client Group) and our financial products business (Nasdaq Financial Products). The companies listed on The Nasdaq Stock Market represent a diverse array of industries. This diversity of Nasdaq-listed companies allows us to develop industry-specific indexes and other Nasdaq indexes that we use to develop and license financial products and associated derivatives. Because of the foregoing interrelationships, our management allocates resources, assesses performance and manages these businesses as two separate segments. See Note 10, “Segments,” to the condensed consolidated financial statements for further discussion.

On September 7, 2004, Nasdaq completed its acquisition of Brut. Accordingly, results for the three and nine months ended September 30, 2005 include activity related to Brut. Results for the three and nine months ended September 30, 2004 include activity related to Brut from September 7, 2004 through September 30, 2004. See “Business Developments and Combinations—Acquisition of Brut,” of Note 3, “Significant and Related Party Transactions,” and Note 5, “Acquisition of Brut,” to the condensed consolidated financial statements for further discussion.

For the three months ended September 30, 2005, Nasdaq’s net income was $17.8 million, compared with a net loss of $5.5 million for the three months ended September 30, 2004, an increase of $23.3 million. For the nine

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months ended September 30, 2005, Nasdaq’s net income was $44.5 million, compared with net income of $3.9 million for the nine months ended September 30, 2004, an increase of $40.6 million. For the three and nine months ended September 30, 2005, results were positively impacted by lower operating expenses from corporate-wide cost reduction programs. Total expenses were $99.3 million and $306.9 million for the three and nine months ended September 30, 2005, respectively, compared with $123.7 million and $355.0 million for the three and nine months ended September 30, 2004, respectively, a decrease of $24.4 million, or 19.7%, and $48.1 million, or 13.5%, respectively. Also contributing to results were increases in gross margin (revenues less cost of revenues) from our Market Services segment and revenues from our Issuer Services segment. Gross margin from Market Services increased $10.7 million, or 16.7%, to $74.8 million for the three months ended September 30, 2005 compared with $64.1 million for the three months ended September 30, 2004 and increased $11.2 million, or 5.4%, to $220.4 million for the nine months ended September 30, 2005 compared with $209.2 million for the nine months ended September 30, 2004. These increases were primarily due to an increase in market share in both Nasdaq-listed securities and securities listed on other exchanges, an increase in the percentage of share volume reported to Nasdaq’s systems, additional trading activity due to the acquisition of Brut, increases in revenues generated from propriety data products and changes in revenue sharing under the Nasdaq General Revenue Sharing Program. However, the amount that Nasdaq rebated also increased based on the increases in market share and Brut activity and changes to the liquidity rebate tiers. Also, partially offsetting the increase in gross margin were fee reductions for the Nasdaq Market Center introduced in 2004 and declines in both the three and nine months ended September 30, 2005 in the subscriber base for legacy Access Services products, which are being discontinued (see Cost Reduction and Operating Efficiencies section below for further discussion). Issuer Services segment revenues increased $5.1 million, or 10.1%, to $55.8 million for the three months ended September 30, 2005 compared with $50.7 million for the three months ended September 30, 2004 and increased $12.8 million, or 8.3%, to $166.7 million for the nine months ended September 30, 2005 compared with $153.9 million for the nine months ended September 30, 2004 primarily due to an increase in Corporate Client Group’s annual fees. These current and prior year items are discussed in more detail below.

Beginning with the acquisition of Brut on September 7, 2004, pursuant to EITF 99-19, Nasdaq recorded execution revenues from transactions executed through Brut on a gross basis in revenues and recorded expenses such as liquidity rebate payments as cost of revenues as Brut acts as principal. Prior to the second quarter of 2005, Nasdaq’s other execution revenues were reported net of liquidity rebates as Nasdaq does not act as principal. However, in the second quarter of 2005, under Nasdaq’s new Limitation of Liability Rule, Nasdaq, subject to certain caps, will provide compensation for losses due to malfunctions of the order-execution systems of the Nasdaq Market Center. Therefore, pursuant to EITF 99-19, Nasdaq has recorded all execution revenues from transactions executed through the Nasdaq Market Center on a gross basis in execution and trade reporting revenues and has recorded liquidity rebate payments as cost of revenues as Nasdaq now has certain risk associated with trade execution subject to rule limitations and caps. This rule change in fact was made on a prospective basis beginning April 1, 2005 as required under GAAP. This rule change did not have a material impact on the consolidated financial position or results of operations of Nasdaq in the second or third quarters of 2005. See Note 2, “Basis of Presentation,” to the condensed consolidated financial statements for further discussion.

Overview

The following discussion and analysis of the financial condition and results of operations of Nasdaq should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. Certain prior period amounts presented in the discussion and analysis have been reclassified to conform to the 2005 presentation.

This discussion and analysis may contain statements with respect to Nasdaq’s financial condition, results of operations, future performance and business that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Nasdaq’s actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Item 1. Business—Risk Factors” in The Nasdaq Stock Market, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004.

Nasdaq is a leading provider of securities listing, trading, and information products and services. Nasdaq operates The Nasdaq Stock Market, the largest stock-based equity securities market in the United States, both in terms of number of listed companies and traded share volume. As of June 30, 2005, Nasdaq was home to 3,241 listed companies. Nasdaq also operates the Nasdaq Market Center, which as of June 30, 2005 enabled our customers to trade over 7,800 equity securities. Our revenue sources are diverse and include transaction services revenues, market data product and services revenues, listing fees, and financial product revenues.

Nasdaq offers our products and services for fees that are among the lowest in the industry and are designed to help us maintain and extend our market share. In order to sustain this competitive price strategy, we have significantly reduced operating expenses consistent with our regulatory obligations. We intend to implement further changes to our cost structure to further reduce expenses so that we can maintain our competitive pricing advantage, to attract additional business, and achieve our profitability goals. See “2005 and 2004 Cost Reductions,” of Note 3, “Significant Transactions,” to the condensed consolidated financial statements for further discussion.

Nasdaq manages, operates and provides its products and services in two business segments, our Market Services segment and our Issuer Services segment. The Market Services segment includes our transaction-based business (Nasdaq Market Center) and our market information services business (Nasdaq Market Services Subscriptions), which are interrelated because the transaction-based business generates the quote and trade information that we sell to market participants and data vendors. The Issuer Services segment includes our securities listings business (Corporate Client Group) and our financial products business (Nasdaq Financial Products). The companies listed on The Nasdaq Stock Market represent a diverse array of industries. This diversity of Nasdaq-listed companies allows us to develop industry-specific indices and other Nasdaq indices that we use to develop and license financial products and associated derivatives. Because of the foregoing interrelationships, our management allocates resources, assesses performance and manages these businesses as two separate segments. See Note 10, “Segments,” to the condensed consolidated financial statements for further discussion.

On September 7, 2004, Nasdaq completed its acquisition of Brut. Accordingly, results for the three and six months ended June 30, 2005 include activity related to Brut. See “Business Developments and Combinations-Acquisition of Brut,” of Note 3, “Significant Transactions,” and Note 5, “Acquisition of Brut,” to the condensed consolidated financial statements for further discussion.

For the three months ended June 30, 2005, Nasdaq’s net income was $14.0 million compared with net income of $4.8 million for the three months ended June 30, 2004, an increase of $9.2 million. For the six months ended June 30, 2005, Nasdaq’s net income was $26.7 million, compared with net income of $9.4 million for the six months ended June 30, 2004, an increase of $17.3 million. For the three and six months ended June 30, 2005, results were positively impacted by lower operating expenses from corporate-wide cost reduction programs. Total expenses were $104.1 million and $207.6 million for the three and six

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months ended June 30, 2005, respectively, compared with $111.4 million and $231.3 million for the three and six months ended June 30, 2004, respectively, a decrease of $7.3 million, or 6.6%, and $23.7 million or 10.2%, respectively. Also contributing to results were increases in gross margin (revenues less cost of revenues) from our Market Services segment and revenues from our Issuer Services segment. Gross margin from Market Services increased $5.4 million, or 7.8%, to $74.3 million for the three months ended June 30, 2005 compared with $68.9 million for the three months ended June 30, 2004 and slightly increased to $145.6 million for the six months ended June 30, 2005 compared with $145.0 million for the six months ended June 30, 2004. These increases were primarily due to an increase in market share and the percentage of share volume reported to Nasdaq’s systems, additional trading activity due to the acquisition of Brut and changes in revenue sharing under the Nasdaq General Revenue Sharing Program. However, the amount that Nasdaq rebated also increased based on the increases in market share and Brut activity and an increase in certain liquidity rebates. Also, partially offsetting the increase in gross margin were fee reductions for the Nasdaq Market Center introduced in 2004 and declines in both the three and six months ended June 30, 2005 in the subscriber base for legacy Access Services products, which are being discontinued (See Cost Reduction and Operating Efficiencies section below for further discussion.) Issuer Services segment revenues increased $5.0 million, or 9.8%, to $56.1 million for the three months ended June 30, 2005 compared with $51.1 million for the three months ended June 30, 2004 and increased $7.6 million, or 7.4%, to $110.9 million for the six months ended June 30, 2005 compared with $103.3 million for the six months ended June 30, 2004 primarily due to an increase in Corporate Client Group’s annual fees. These current and prior year items are discussed in more detail below.

Beginning with the acquisition of Brut on September 7, 2004, pursuant to EITF 99-19, Nasdaq recorded execution revenues from transactions executed through Brut on a gross basis in revenues and recorded expenses such as liquidity rebate payments as cost of revenues as Brut acts as principal. Prior to the second quarter of 2005, Nasdaq’s other execution revenues were reported net of liquidity rebates as Nasdaq does not act as principal. However, in the second quarter of 2005, under Nasdaq’s new Limitation of Liability Rule, Nasdaq, subject to certain caps, will provide compensation for losses due to malfunctions of the order-execution systems of the Nasdaq Market Center. Therefore, pursuant to EITF 99-19, Nasdaq has recorded all execution revenues from transactions executed through the Nasdaq Market Center on a gross basis in revenues and has recorded liquidity rebate payments as cost of revenues as Nasdaq now has certain risk associated with trade execution subject to rule limitations. This rule change in fact was made on a prospective basis beginning April 1, 2005 as required under GAAP. This rule change did not have a material impact on the consolidated financial position or results of operations of Nasdaq in the second quarter of 2005.