NASDAQ Second Quarter 2003 Results

New York, N.Y.—-The Nasdaq Stock Market, Inc. ("NASDAQ"; OTCBB: NDAQ), today reported a net loss of $49.0 million for the second quarter ended June 30, 2003. Excluding the impact of NASDAQ's strategic review, which includes costs associated with the elimination of non-core product lines, initiatives and severance, the net loss was $3.3 million for the period calculated on a Non-GAAP basis. The net loss applicable to common shareholders was $51.5 million or $(0.66) per basic and diluted share.¹ Excluding the impact of NASDAQ's strategic review the Non-GAAP net loss applicable to common shareholders was $5.8 million or $(0.07) per basic and diluted share. Total revenue for the second quarter 2003 was $151.4 million.

Key quarterly events included:

• The appointment of Robert Greifeld as President and Chief Executive Officer.
• The announcement of NASDAQ's mission and strategic imperatives.
• A strategic business review and subsequent elimination of non-core product lines and initiatives.

"As we move into the second half of 2003, NASDAQ is directing its energies toward becoming the dominant U.S. equity market," noted Bob Greifeld, President and Chief Executive Officer of NASDAQ. "After a comprehensive review of the business portfolio, we are executing a plan designed to leverage our brand and technology platform that best serves the interests of investors, traders, listed companies and that drives shareholder value."

NASDAQ outlined its key strategic imperatives, which include:

• The expansion of the Corporate Client Group business to capture an even greater portion of the Initial Public Offering market and attract listings from competing exchanges.
• The capture of increased trading volume, independent of where an issue is listed by increasing the volume of transactions processed, leveraging NASDAQ's technology infrastructure and enhancing the value of its data products.

In order to support these objectives, NASDAQ is taking aggressive steps toward enhancing its customer-facing sales and marketing efforts. Noted Mr. Greifeld, "We will demonstrate to current and potential customers the initiatives underway which will further increase the value of NASDAQ's products and services."

Financial Results

Total revenue declined 26.2% to $151.4 million in the second quarter 2003 from $205.1 million in the second quarter 2002 and 8.7% from $165.9 million when compared with the first quarter 2003.

• Transaction Services revenue declined 41.6% to $60.4 million when compared to the second quarter of 2002 and declined 11.0% when compared with the first quarter 2003, due to the competitive pressure on NASDAQ's Access Services, Execution Services and Trade Reporting revenue.
• Market Information Services revenue declined 27.7% to $36.5 million when compared with the second quarter 2002 and declined 16.9% when compared with the first quarter 2003, primarily due to a decline in InterMarket Tape Fee revenue, NASDAQ's Level 1 revenue and an increase in UTP revenue sharing.
• Corporate Client Group revenue declined 2.5% to $42.9 million when compared with the second quarter 2002 primarily driven by the decline in annual renewal fee revenue and was relatively flat when compared to the first quarter 2003. Initial listing fees and fees associated with the listing of additional shares are amortized over six-year and four-year periods, respectively, in accordance with SEC Staff Accounting Bulletin 101.
• Other revenue increased 61.1% to $11.6 million when compared with the second quarter 2002 primarily due to an increase in licensing revenue related to the exchange-traded fund QQQ and was relatively flat when compared with the first quarter 2003.

NASDAQ continued to take decisive action to effectively reduce the cost and infrastructure required to operate its business.

• Direct expenses improved 6.7% to $146.6 million from $157.2 million when compared with the second quarter 2002 but increased 1.5% from $144.4 million when compared with the first quarter 2003 primarily due to a $5.0 million technology infrastructure write-off as part of the on-going cost reduction initiative and employee benefit obligations totaling $2.0 million.
• Total expenses increased 14.3% to $217.3 million from $190.1 million when compared to the second quarter 2002 and 34.5% from $161.6 million when compared to the first quarter 2003.

Included in the quarter's results are:

• Strategic review costs, including severance, totaling, pre-tax, $59.8 million. The net impact to NASDAQ is $57.8 million pre-tax. The difference represents costs absorbed by NASDAQ Europe minority shareholders. The net impact to NASDAQ after tax on a Non-GAAP basis is $45.7 million. The strategic review costs primarily relate to the following:
  • NASDAQ Europe - The orderly wind-down of market operations of the pan-European stock market located in Belgium resulted in a second quarter 2003 charge applicable to NASDAQ totaling $12.1 million. Completion of the orderly wind-down is expected by year-end 2003.
  • Product Lines - Includes costs associated with the cancellation of The Bulletin Board Exchange initiative, the redemption of NASDAQ's interest in the NQLX joint venture and wind-down of Liquidity Tracker and NASDAQ Tools totaling $23.1 million. NASDAQ anticipates recognizing additional closing costs associated with some or all of these products throughout the remainder of 2003.
  • Severance - The fulfillment of employment contracts and obligations associated with the reduction in force initiative as well as the retirement and departure of certain members of senior management totaling $20.7 million. Total headcount was 1,155 as of the end of June versus 1,284 at the end of first quarter 2003.
     
• Excluding the strategic review costs, total expenses calculated on a Non-GAAP basis improved 17.1% to $157.5 million, a decrease of $32.6 million when compared to the second quarter 2002 and 2.5% or $4.1 million when compared to the first quarter 2003.

NASDAQ currently expects to continue to recognize additional costs throughout the balance of the year in the range of $12 million to $15 million related to the wind-down of these eliminated products.

• NASDAQ reversed $5.0 million of the reserves related to NASDAQ Japan due to favorable contract negotiations and lower legal costs resulting from the complete liquidation of NASDAQ Japan.

NASDAQ's Chief Financial Officer, David Warren, noted: "NASDAQ continues to drive costs out of the business. Through a combination of measures, we eliminated more than $12 million in recurring total expenses since the second quarter 2002. We are continuing our assault on expenses and believe we are taking strong measures to make NASDAQ an efficient, for-profit, publicly owned entity."

Conclusion

Mr. Greifeld concluded: "NASDAQ is taking decisive action, focusing on value-enhancing products, services and processes for our customers, investors and ultimately, for our shareholders. We are assembling the talent and will continue to allocate resources toward initiatives that further our drive toward becoming the dominant U.S. equity market. We will not commit resources or pursue initiatives that do not meet this mission."

With over 3,400 companies, NASDAQ lists more companies and, on average, trades more shares per day than any other U.S. market. It is home to category-defining companies that are leaders across all areas of business including technology, retail, communications, financial services, media and biotechnology industries.

For more information about NASDAQ, visit the NASDAQ Web site at www.NASDAQ.com or the NASDAQ Newsroom^SM at www.nasdaq.com/newsroom.

Non-GAAP Information

In addition to disclosing results determined in accordance with generally accepted accounting principles ("GAAP"), NASDAQ also discloses certain non-GAAP results of operation that exclude items associated with the strategic review. Management believes that the Non-GAAP information provides investors with additional information to access NASDAQ's operating performance by excluding the costs, which are non-operational items. The Non-GAAP information may not be comparable to other companies and should not be viewed as a substitute for or superior to net loss or other data prepared in accordance with GAAP. A reconciliation table is provided at the end of this release.

Cautionary Note Regarding Forward-Looking Statements

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

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