UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-32717

Instinet Group Incorporated

(Exact name of registrant as specified in its charter)


Delaware		13-4134098
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

3 Times Square, New York, NY		10036
(Address of Principal Executive Offices)		(Zip Code)

(212) 310-9500

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x

As of November 7, 2005 there were 340,638,905 shares of the registrant’s common stock outstanding.

Instinet Group Incorporated

FORM 10-Q QUARTERLY REPORT

For the Quarter Ended September 30, 2005


Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004		3
Consolidated Statements of Financial Condition as of September 30, 2005 and December 31, 2004		4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004		5
Notes to Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3. Quantitative and Qualitative Disclosures About Market Risk		42
Item 4. Controls and Procedures		45

Part II. OTHER INFORMATION
Item 1. Legal Proceedings		46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		47
Item 3. Defaults Upon Senior Securities		47
Item 4. Submission of Matters to a Vote of Security Holders		47
Item 5. Other Information		47
Item 6. Exhibits and Reports on Form 8-K		47

Signatures		49
Exhibit Index		50

Unless otherwise indicated or the context otherwise requires, references to the “company,” “we,” “us,” and “our” mean Instinet Group Incorporated and its subsidiaries.

Forward-Looking Statements

We have made forward-looking statements in this report on Form 10-Q that are based on our management’s beliefs and assumptions and on information currently available to our management. From time to time, we may also include oral or written forward-looking statements in other materials released to the public. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities and the effects of competition and regulation. Forward-looking statements include all statements that are not historical facts. You can identify these statements by the use of forward-looking terminology, such as the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “may” or “might” or other similar expressions. The forward-looking statements contained in this report speak only as of the date hereof, and we do not undertake any obligation to update any of them publicly in light of new information or future events.

Forward-looking statements involve significant risks, uncertainties and assumptions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements. You should understand that many important factors could cause our results to differ materially from those expressed or suggested in forward-looking statements, including those discussed below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk,” and under the caption “Certain Factors that May Affect Our Business” in our Annual Report on Form 10-K.

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Instinet Group Incorporated

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Revenue
Transaction fees	$	246,449		$	245,696		$	771,000		$	828,385
Interest income		9,414			4,061			22,522			12,923
Interest expense		(1,449	)		(743	)		(3,005	)		(2,565	)

Interest income, net		7,965			3,318			19,517			10,358

Total revenues, net		254,414			249,014			790,517			838,743

Cost of Revenues
Soft dollar		33,416			36,943			110,129			128,664
Broker-dealer rebates		63,811			59,859			204,823			190,394
Brokerage, clearing and exchange fees		56,467			47,078			165,295			159,294

Total cost of revenues		153,694			143,880			480,247			478,352

Gross margin		100,720			105,134			310,270			360,391

Direct Expenses
Compensation and benefits		57,390			43,467			167,313			153,320
Communications and equipment		13,655			18,775			41,015			57,564
Depreciation and amortization		13,886			13,363			34,396			45,139
Occupancy		22,804			9,351			42,728			28,197
Professional fees		11,160			7,410			29,087			20,568
Marketing and business development		1,111			2,725			3,781			10,655
Other		4,110			4,802			12,476			9,993

Total direct expenses		124,116			99,893			330,796			325,436

Contractual settlement		—			—			—			(7,250	)
Investments		(8,768	)		(4,031	)		(36,373	)		(8,705	)
Insurance recovery		—			—			—			(5,116	)

Total expenses		269,042			239,742			774,670			782,717

Income (loss) from continuing operations before income taxes		(14,628	)		9,272			15,847			56,026
Income tax expense (benefit)		(9,779	)		1,440			2,521			20,961

Net income (loss) from continuing operations		(4,849	)		7,832			13,326			35,065
Discontinued operations, net of tax		89,591			2,784			93,702			9,465

Net income	$	84,742		$	10,616		$	107,028		$	44,530

EARNINGS PER SHARE
Basic
Income from continuing operations	$	(0.01	)	$	0.02		$	0.04		$	0.10
Discontinued operations, net of tax		0.26			0.01			0.28			0.03

Net income	$	0.25		$	0.03		$	0.32		$	0.13

Diluted
Income from continuing operations	$	(0.01	)	$	0.02		$	0.04		$	0.10
Discontinued operations, net of tax		0.26			0.01			0.27			0.03

Net income	$	0.25		$	0.03		$	0.31		$	0.13

Weighted average shares outstanding — basic		340,474			337,327			339,513			336,127
Weighted average shares outstanding — diluted		341,876			339,226			341,044			338,111

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

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Instinet Group Incorporated

Consolidated Statements of Financial Condition

(In thousands, except per share amounts)

(Unaudited)


	September 30, 2005			December 31, 2004
ASSETS
Cash and cash equivalents	$	946,317		$	904,984
Cash and securities segregated under federal regulations		3,400			—
Securities owned, at market value		23,437			36,157
Securities borrowed		205,889			190,325
Receivable from broker-dealers		209,398			167,216
Receivable from customers		28,561			31,720
Commissions and other receivable, net		93,583			88,139
Investments		35,595			33,337
Fixed assets and leasehold improvements, net		70,108			79,784
Deferred tax asset, net		76,604			72,401
Intangible assets and goodwill, net		61,149			76,831
Other assets		86,817			55,413
Assets of discontinued operations		—			68,870

Total assets	$	1,840,858		$	1,805,177


LIABILITIES & STOCKHOLDERS’ EQUITY
LIABILITIES
Short-term borrowings	$	32,296		$	5,283
Securities loaned		154,709			133,189
Payable to broker-dealers		191,544			173,627
Payable to customers		31,837			45,151
Taxes payable		96,823			85,797
Accounts payable, accrued expenses and other liabilities		253,662			182,790
Liabilities of discontinued operations		—			40,498

Total liabilities		760,871			666,335


Commitments and contingencies (Note 12)

STOCKHOLDERS’ EQUITY
Common stock, $0.01 par value (950,000 shares authorized, 340,617 issued and outstanding as of September 30, 2005 and 338,180 issued and outstanding as of December 31, 2004)		3,406			3,381
Additional paid-in capital		1,627,843			1,736,150
Accumulated deficit		(605,313	)		(659,596	)
Accumulated other comprehensive income		38,364			55,471
Restricted stock units		26,699			13,389
Unearned compensation		(11,012	)		(9,953	)

Total stockholders’ equity		1,079,987			1,138,842

Total liabilities and stockholders’ equity	$	1,840,858		$	1,805,177

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

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Instinet Group Incorporated

Consolidated Statement of Cash Flows

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2005			2004
Cash flows from operating activities
Net income	$	107,028		$	44,530
Income from discontinued operations, net of tax		(93,702	)		(9,465	)

Net income from continuing operations		13,326			35,065

Adjustments to reconcile net income from continuing operations to cash used in operating activities from continuing operations:
Unrealized gain on investments		(37,046	)		(4,273	)
Depreciation and amortization		34,396			46,596
Deferred tax assets, net		(2,763	)		8,734
Stock based compensation		12,251			3,916
Tax benefit of options exercised		1,193			1,392
Changes in operating assets and liabilities:
Cash and securities segregated under federal regulation		(3,400	)		168,679
Securities borrowed, net of securities loaned		5,956			106,138
Net receivable/payable from/to broker-dealers		(24,265	)		(59,548	)
Net receivable/payable from/to customers		(10,232	)		(183,023	)
Receivables and other assets		(36,771	)		35,504
Payables and other liabilities		(25,607	)		(108,893	)
Cash provided by operating activities — discontinued operations		7,875			13,602

Net cash (used in)/provided by operating activities from continuing operations		(65,087	)		63,889

Cash flows from investing activities
Securities sold and matured, net of securities purchased		12,720			127,847
Purchase of fixed assets and leasehold improvements		(10,478	)		(5,179	)
Sale of investments		34,788			7,676
Net proceeds from sale of discontinued operations		173,589			—
Cash used in investing activities — discontinued operations		(2,435	)		—

Net cash provided by investing activities from continuing operations		208,184			130,344

Cash flows from financing activities
Short-term borrowings, net		27,013			(14,425	)
Dividends paid		(117,068	)		—
Issuance of common stock		5,398			4,982

Net cash used in financing activities from continuing operations		(84,657	)		(9,443	)

Effect of exchange rate differences		(17,107	)		(2,063	)

Increase in cash and cash equivalents		41,333			182,727
Cash and cash equivalents, beginning of period		904,984			502,408

Cash and cash equivalents, end of period	$	946,317		$	685,135

Noncash activities:

In connection with the Bridge Trading Company acquisition (see Note 3), the Company recorded a noncash dividend of $50,551 to Reuters during the nine months ended September 30, 2005.

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

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Instinet Group Incorporated

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

(Unaudited)

Note 1. Organization and Description of Business

Instinet Group Incorporated (the “Company” or “Instinet Group”) is a Delaware holding company which, through its operating subsidiaries, provides agency and other brokerage services to broker-dealers, institutional customers, hedge funds and professional traders. The Company is approximately 62% owned by subsidiaries of Reuters Group PLC (“Reuters” or “Parent”).

The Company has two distinct business lines:

•

Instinet, the Institutional Broker, which services our non-broker-dealer institutional customers as well as customers of Bridge Trading Company (“Bridge”).

•

INET, the electronic marketplace, our alternative trading system and ECN that services our U.S. broker-dealer customers.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant transactions and balances between and among the Company and its subsidiaries have been eliminated in consolidation. These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles. These unaudited financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as filed with the SEC.

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Earnings Per Share

Basic earnings per share (“EPS”) is calculated by dividing net earnings by the weighted average number of common shares outstanding. Common shares outstanding include common stock for which no future service is required as a condition to the delivery of the underlying common stock. Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect of the common stock deliverable pursuant to stock options and to restricted stock for which future service is required as a condition to the delivery of the underlying common stock.

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Instinet Group Incorporated

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

(Unaudited)

The computations of basic and diluted EPS are set forth below:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2005			2004		2005		2004
Numerator for basic and diluted EPS available to common shareholders
Income from continuing operations	$	(4,849	)	$	7,832	$	13,326	$	35,065
Income from discontinued operations		89,591			2,784		93,702		9,465

Net income		84,742			10,616		107,028		44,530

Denominator for basic EPS — weighted average number of common shares		340,474			337,327		339,513		336,127
Effect of dilutive stock options and dilutive potential common shares		1,402			1,899		1,531		1,984

Denominator for diluted EPS — weighted average number of common shares and dilutive potential common shares		341,876			339,226		341,044		338,111

Basic EPS
Income from continuing operations	$	(0.01	)	$	0.02	$	0.04	$	0.10
Income from discontinued operations		0.26			0.01		0.28		0.03

Net income	$	0.25		$	0.03	$	0.32	$	0.13

Diluted EPS
Income from continuing operations	$	(0.01	)	$	0.02	$	0.04	$	0.10
Income from discontinued operations		0.26			0.01		0.27		0.03

Net income	$	0.25		$	0.03	$	0.31	$	0.13

Investments

Investments with a ready market are stated at fair value as determined by available market prices. Investments with no ready market are stated at estimated fair value as determined in good faith by management. Generally, management will initially value investments at cost and require that changes in value be established by meaningful third-party transactions or a significant impairment in the financial condition or operating performance of the issuer, unless meaningful developments occur that otherwise warrant a change in the valuation of an investment. Factors considered in valuing individual investments include, without limitation, available market prices, type of security, purchase price, purchases of the same or similar securities by other investors, marketability, restrictions on disposition, current financial position, operating results and other pertinent information.

Management uses its best judgment in estimating the fair value of these investments. There are inherent limitations in any estimation technique. The fair value estimates presented herein are not necessarily indicative of an amount that the Company could realize in a current transaction. Because of the inherent uncertainty of valuation, these estimated fair values do not necessarily represent amounts that might be ultimately realized, since such amounts depend on future circumstances and the differences could be material.

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

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Instinet Group Incorporated

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

(Unaudited)

Cash and Cash Equivalents

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

Securities Borrowed and Loaned

Securities borrowed and loaned are recorded at the amount of cash collateral advanced or received. Securities borrowed require the Company to deposit cash with the lender. For securities loaned, the Company receives collateral in the form of cash in an amount generally in excess of the market value of the securities loaned. The Company monitors the market value of the securities borrowed and loaned on a daily basis, with additional collateral obtained or excess collateral refunded, as necessary.

Receivable From and Payable to Broker-Dealers

Receivable from broker-dealers is primarily comprised of fails to deliver with broker-dealers. Fails to deliver arise when the Company does not deliver securities on the settlement date. The Company records the selling price as a receivable due from the purchasing broker-dealer. The receivable is collected upon delivery of the securities. Payable to broker-dealers is primarily comprised of fails to receive. Fails to receive arise when the Company does not receive securities on settlement date. The Company records the amount of the purchase price as a payable due to the selling broker-dealer. The liability is paid upon receipt of the securities.

Receivable From and Payable to Customers

Receivable from customers is comprised of institutional debit balances and payable to customers represents free credit balances in customer accounts.

Commissions and Other Receivables, Net

Commissions and other receivables are reported net of an allowance for doubtful accounts of $16,729 and $18,830 as of September 30, 2005 and December 31, 2004, respectively. The allowance for doubtful accounts is based on our assessment of the collectibility of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances and current economic conditions that may affect a customer’s ability to pay.

As of September 30, 2005 and December 31, 2004, included in commissions and other receivables is $17,539 and $15,348, respectively, from Archipelago Holdings, Inc., and REDIBook ECN, LLC of which $9,208 is in arbitration. The Company has commenced arbitration proceedings before the NASD and has established a reserve against this disputed arbitration amount based upon a review of the facts and circumstances surrounding the dispute.

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Instinet Group Incorporated

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

(Unaudited)

Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase

Transactions involving purchases of securities under agreements to resell and securities sold under agreements to repurchase are treated as collateralized financing transactions and are recorded at their contracted resale amounts plus accrued interest. It is the Company’s policy to take possession of securities with a market value in excess of the principal amount loaned plus the accrued interest thereon, in order to collateralize reverse repurchase agreements. Similarly, the Company is required to provide securities to counterparties in order to collateralize repurchase agreements. The Company’s agreements with counterparties generally contain contractual provisions allowing for additional collateral to be obtained, or excess collateral returned, when necessary. It is the Company’s policy to value collateral daily and to obtain additional collateral, or to retrieve excess collateral from counterparties, when deemed appropriate.

Foreign Currency Translation

Assets and liabilities of subsidiaries whose functional currency is not the U.S. dollar are translated based on the end of period exchange rates from local currency to U.S. dollars. Results of operations are translated at the average exchange rates in effect during the period. The resulting gains or losses are reported as comprehensive income. The accumulated gains and losses are reported as a component of Stockholder’s Equity on the Consolidated Statements of Financial Condition.

Derivatives

The Company may enter into forward foreign currency contracts to facilitate customers’ settling transactions in various currencies, primarily the U.S. dollar, British pound or euro. These forward foreign currency contracts are entered into with third parties and with terms generally identical to the Company’s customers’ transactions, thereby mitigating exposure to currency risk. Forward foreign currency contracts generally do not extend beyond 14 days and realized and unrealized gains and losses resulting from these transactions are recognized in the Consolidated Statements of Operations in the period they are incurred. These activities have not resulted in a material impact to the Company’s operations to date.

Restatements and Reclassifications

All historical information has been restated to include Bridge (see Note 3) as if Bridge had been a wholly-owned subsidiary of the Company since it was acquired by Reuters in September 2001. Bridge is included in the results of the Instinet business segment.

During the fourth quarter of 2004, the Company began classifying transaction related regulatory fees as an expense in brokerage, clearing and exchange fees. These fees had previously been recorded as a reduction of transaction fees and shown on a net basis. For the three months ended September 30, 2005 and 2004, these regulatory fees totaled $18,481 and $9,828, respectively. For the nine months ended September 30, 2005 and 2004, these regulatory fees totaled $54,342 and $42,418, respectively.

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Instinet Group Incorporated

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

(Unaudited)

The Company’s consolidated financial statements have been restated to present Lynch, Jones & Ryan, Inc. (“LJR”) as a discontinued operation (see note 10).

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

Note 3. Acquisitions and Other Significant Events

On March 31, 2005, the Company acquired Bridge, an agency execution broker, from Reuters for 3,752 shares of the Company’s common stock, valued at approximately $21,500. The Company’s unaudited quarterly financial statements and the accompanying notes reflect the results of operations as if Bridge had been a wholly-owned subsidiary of the Company since it was acquired by Reuters in September 2001. This acquisition was accounted for as a transfer of entities under common control.

On April 22, 2005, the Company announced that it entered into a definitive agreement pursuant to which The NASDAQ Stock Market, Inc. (“NASDAQ”) will acquire all outstanding shares of the Company for an aggregate purchase price of approximately $1,769,000 in cash, or $5.10 per share on a fully diluted basis. The estimated merger consideration of $5.10 per share has been adjusted for a special cash dividend of $0.32 per share that was paid on August 15, 2005. The final per share price will vary based on the actual closing date, which is currently estimated to be the end of the fourth quarter, the number of vested employees’ stock plan shares outstanding and transaction costs. Upon completion of the transaction, INET will be combined with NASDAQ’s current operations. Instinet, The Institutional Broker, along with certain Instinet Group corporate liabilities, will be acquired from NASDAQ by a group led by Silver Lake Partners and Instinet senior management immediately following the NASDAQ acquisition of the Company. On April 22, 2005, the Company also entered into a definitive agreement for the acquisition of the Company’s subsidiary, LJR, by The Bank of New York which was completed on July 1, 2005 for $174,000 in cash.

On June 17, 2005 the Department of Justice (“DOJ”) issued a Request for Additional Information and Documentary Materials (a “second request”) to Instinet Group and NASDAQ in connection with the DOJ’s investigation under the Hart-Scott Rodino Antitrust Improvements Act of the pending acquisition of Instinet Group by NASDAQ. Instinet Group certified substantial compliance with the DOJ Second Request on September 30, 2005. Based on discussions with the DOJ staff responsible for reviewing the NASDAQ/Instinet transaction, we understand that the staff has forwarded its recommendation to senior DOJ officials and that we anticipate a formal decision from the DOJ soon.

Note 4. Cost Reductions and Special Charges

The Company has initiated several cost reduction programs, which have resulted in restructuring charges.

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Instinet Group Incorporated

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

(Unaudited)

In December 2002, the Company announced that it had commenced a cost-reduction plan to reduce operating costs in order to achieve cost synergies in connection with its acquisition of Island. This restructuring included reducing staff levels and related occupancy costs. During the year ended December 31, 2002, the Company recorded a charge of $62,405. As of September 30, 2005, the Company carried a liability of $12,074 associated with this restructuring on its Consolidated Statements of Financial Condition, which is reflected as follows:


	December 31, 2004		Payments			September 30, 2005
Workforce reductions	$	736	$	—		$	736
Office closures/consolidations		12,279		(941	)		11,338

Total	$	13,015	$	(941	)	$	12,074

The Company expects to pay approximately $659 of the total remaining liability by December 31, 2005.

In December 2003, the Company announced a cost restructuring plan and recorded a charge of $59,497 related to the reduction of workforce by approximately 185 employees and the consolidation of the Company’s office space. This cost-reduction is primarily due to the strategic decisions related to the separation of Instinet and INET and the Company’s ongoing efforts to streamline its operations. As of September 30, 2005, the Company carried a liability of $9,840 associated with this restructuring on its Consolidated Statements of Financial Condition, which is reflected as follows:


	December 31, 2004		Payments			September 30, 2005
Workforce reductions	$	1,407	$	(1,407	)	$	—
Office closures/consolidations		13,184		(3,344	)		9,840

Total	$	14,591	$	(4,751	)	$	9,840

The Company expects to pay approximately $547 of the total remaining liability by December 31, 2005.

Note 5. Securities Owned, at Market Value

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


	September 30, 2005		December 31, 2004
Municipal bonds	$	—	$	10,941
Foreign sovereign obligations		23,437		25,216

Total	$	23,437	$	36,157

- 11 -

Instinet Group Incorporated

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

(Unaudited)

Note 6. Investments

The Company makes strategic alliances with and long-term investments in other companies. The changes in the carrying values at the end of each period result from additional investments, sales and unrealized and realized gains and losses. The carrying value of the Company’s investments consists of the following:


	September 30, 2005		December 31, 2004
Archipelago Holdings, Inc.	$	—	$	23,838
NASDAQ		33,595		7,499
Starmine Corporation		2,000		2,000

Total	$	35,595	$	33,337

The Company’s investment in NASDAQ has been recorded at the available quoted market value as of September 30, 2005.

Note 7. Intangible Assets and Goodwill, Net

Information regarding the Company’s intangible assets and goodwill is as follows:


	Estimated Life (Years)	September 30, 2005							December 31, 2004
	Estimated Life (Years)	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Technology	7.0	$	102,916	$	(56,819	)	$	46,097	$	102,916	$	(46,294	)	$	56,622
Customer relationships	5.0		24,778		(16,723	)		8,055		24,778		(13,006	)		11,772
Goodwill	—		14,677		(7,680	)		6,997		14,677		(6,240	)		8,437

Total		$	142,371	$	(81,222	)	$	61,149	$	142,371	$	(65,540	)	$	76,831

Intangible assets and goodwill arose in connection with the Company’s acquisitions of ProTrader in October 2001, Island in September 2002 and Bridge in March 2005 (see Note 3).

Intangible Assets

The intangible assets are amortized on a straight-line basis over their respective estimated useful lives. Amortization expense was $4,747 for the three months ended September 30, 2005 and 2004, and $14,242 for the nine months ended September 30, 2005 and 2004. Estimated amortization expense for the remainder of the year and each of the next four years is as follows:


Remainder of year ending December 31, 2005	$	4,748
Year ending December 31, 2006	$	18,525
Year ending December 31, 2007	$	16,359
Year ending December 31, 2008	$	11,524
Year ending December 31, 2009	$	2,996

- 12 -

Instinet Group Incorporated

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

(Unaudited)

Goodwill

In connection with the acquisition of Bridge (see Note 3), goodwill previously held at Reuters was transferred to the Company. Statement of Financial Accounting Standard (“SFAS”) No. 109, Accounting for Income Taxes, requires the excess of tax-deductible goodwill over the reported amount of goodwill be applied to reduce to zero the goodwill related to an acquisition.

The amount recorded against goodwill and shown as an additional income tax expense was $480 for the three months ended September 30, 2005 and 2004, and $1,440 for the nine months ended September 30, 2005 and 2004. Estimated income tax expense for the remainder of the year and each of the next four years is as follows:


Remainder of year ending December 31, 2005	$	480
Year ending December 31, 2006	$	1,920
Year ending December 31, 2007	$	1,920
Year ending December 31, 2008	$	1,920
Year ending December 31, 2009	$	757

Note 8. Comprehensive Income

Comprehensive income includes net income and changes in stockholders’ equity except those resulting from investments by or distributions to stockholders. Comprehensive income is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net income	$	84,742		$	10,616		$	107,028		$	44,530

Changes in comprehensive income
Foreign currency translation adjustment		(569	)		(1,685	)		(17,107	)		(2,064	)

Total comprehensive income	$	84,173		$	8,931		$	89,921		$	42,466

Note 9. Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004) (“SFAS No. 123R”), Share-Based Payment, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and generally would require that such transactions be accounted for using a fair-value-based method. The Company is currently evaluating SFAS No. 123R to determine which fair-value-based model and transitional provision it will follow upon adoption. The transition methods as prescribed in SFAS No. 123R include either the modified prospective or the modified retrospective methods. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock as the requisite service is rendered beginning with the first

- 13 -

Instinet Group Incorporated

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

(Unaudited)

quarter of adoption, while the modified retrospective method would record compensation expense for stock options and restricted stock beginning with the first period restated. Under the modified retrospective method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. SFAS No. 123R will be effective for the Company beginning January 1, 2006. Although the Company will continue to evaluate the application of SFAS No. 123R, adoption is expected to have a material impact on its results of operations.

The Company currently measures compensation expense for its employee stock-based compensation plans using the intrinsic value method prescribed by APB Opinion No. 25. The Company applies the disclosure provisions of SFAS No. 123, Accounting for Stock-based Compensation, as amended by SFAS No. 148, Accounting for Stock-based Compensation – Transition and Disclosure, as if the fair-value-based method had been applied in measuring compensation expense. Under APB Opinion No. 25, when the exercise price of the Company’s employee stock options equals or is less than the market price of the underlying stock on the date of the grant, no compensation expense is recognized.

As required under SFAS No. 123, the pro forma effects of stock-based compensation on net income and earnings per share for employee stock options granted and employee stock purchase plan share purchases have been estimated at the date of grant and beginning of the period, respectively, using an option pricing model. For purposes of pro forma disclosures, the estimated fair value of the options and shares is amortized to pro forma net income over the options’ vesting period and the shares’ plan period.

The Company’s pro forma information for the three and nine months ended September 30, 2005, and 2004 is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Income from continuing operations, as reported	$	(4,849	)	$	7,832		$	13,326		$	35,065
Add: Stock based employee compensation expense included in income from continuing operations, net of related tax benefit		2,083			682			7,334			1,583

Deduct: Stock based employee compensation expense determined under fair value based methods for all awards, net of related tax benefit		(5,493	)		(4,317	)		(17,946	)		(14,071	)

Pro forma income from continuing operations	$	(8,259	)	$	4,197		$	2,714		$	22,577


Weighted Average Shares Outstanding
Basic		340,474			337,327			339,513			336,127

Diluted		341,876			339,226			341,044			338,111


Income from continuing operations per share — as reported
Basic	$	(0.01	)	$	0.02		$	0.04		$	0.10

Diluted	$	(0.01	)	$	0.02		$	0.04		$	0.10


Income from continuing operations per share — pro forma
Basic	$	(0.02	)	$	0.01		$	0.01		$	0.07

Diluted	$	(0.02	)	$	0.01		$	0.01		$	0.07

- 14 -

Instinet Group Incorporated

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

(Unaudited)

Restricted Stock Units

During the nine months ended September 30, 2005 and 2004, the Company issued restricted stock units (“RSU”) to employees under a performance share plan. All of the RSUs require future service, cliff vest over a one or three year period and are based on certain performance criteria of the Company as a condition to the delivery of the underlying shares of common stock. As of September 30, 2005 and December 31, 2004, RSUs remain outstanding and are classified as Unearned Compensation and Restricted Stock Units on the Consolidated Statements of Financial Condition.


	RSUs Outstanding
Outstanding, December 31, 2003	—
Issued 3 Year RSUs	2,300
Forfeited	(80	)

Outstanding, December 31, 2004	2,220

Issued 1 Year RSUs	2,245
Issued 3 Year RSUs	2,113
Forfeited	(1,206	)

Outstanding, September 30, 2005	5,372

Stock Options

During the nine months ended September 30, 2005 and 2004, the Company issued approximately 6,842 and 5,111 stock options, respectively, that vest 50% after one year and on a pro rata basis over the next 24 to 36 months.

Note 10. Discontinued Operation

On July 1, 2005, the Company sold LJR to The Bank of New York for $174 million in cash.

The revenue and results of operations of the discontinued operations for the three months ended September 30, 2005, the three months ended September 30, 2004, the nine months ended September 30, 2005, and nine months ended September 30, 2004 are summarized as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2005			2004		2005			2004
Revenue	$	—		$	41,816	$	76,178		$	128,103

Pre-tax income from discontinued operation, before transaction-related items		—			4,853		8,111			16,551

Proceeds from sale of discontinued operation		174,000			—		174,000			—
Post closing adjustments		1,301			—		1,301
Net equity in discontinued operations		(21,584	)		—		(21,584	)		—
Transaction-related costs		(3,831	)		—		(4,831	)		—

Pre-tax income from discontinued operations		149,886			4,853		156,997			16,551
Income tax expense		60,295			2,069		63,295			7,086

Income from discontinued operations, net of tax	$	89,591		$	2,784	$	93,702		$	9,465

- 15 -

Instinet Group Incorporated

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

(Unaudited)

The Consolidated Statements of Financial Condition include assets of discontinued operations and liabilities of discontinued operations. The net balance of these items represents the adjusted book value of the discontinued operations in accordance with the sale of LJR. The major asset and liability classes included within these categories at December 31, 2004 are as follows:


	December 31, 2004
Cash and cash equivalents	$	19,553
Cash and securities segregated under federal regulations		23,050
Receivable from broker-dealers		5,386
Commissions and other receivable, net		6,115
Fixed assets and leasehold improvements, net		162
Deferred tax asset, net		14,445
Other assets		159

Assets of discontinued operations	$	68,870

Taxes payable	$	—
Accounts payable, accrued expenses and other liabilities		40,498

Liabilities of discontinued operations	$	40,498

Note 11. Income Taxes

Income tax benefit was $9,779 for the three months ended September 30, 2005 and income tax expense was $1,440 for the three months ended September 30, 2004. Our effective income tax rate was 66.9% for the three months ended September 30, 2005 and 15.5% in the comparable period in 2004. The effective tax rate for the three months ended September 30, 2005 was greater than the comparable period in 2004 primarily due to changes in valuation allowances and other provisions resulting from changes in business conditions.

Income tax expense was $2,521 for the nine months ended September 30, 2005 and $20,961 for the nine months ended September 30, 2004. Our effective income tax rate was 15.9% for the nine months ended September 30, 2005 and 37.4% in the comparable period in 2004. The effective tax rate for the nine months ended September 30, 2005 was less than the comparable period in 2004 primarily due to the offset of a portion of investment gains with capital losses and changes in valuation allowances and other provisions resulting from changes in business conditions.

Note 12. Commitments and Contingencies

Litigation

In April and May 2005, four purported class action lawsuits were filed in the Court of Chancery in the State of Delaware against Instinet Group, each of our directors and Reuters alleging, among other things, that defendants breached their fiduciary duties as to our public stockholders in connection with the proposed merger by approving the transaction at an allegedly unfair and inadequate price. On June 22, 2005, plaintiffs filed a consolidated amended complaint consolidating three of the lawsuits while voluntarily dismissing the fourth lawsuit. The amended complaint seeks,

- 16 -

Instinet Group Incorporated

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

(Unaudited)

among other things, class action status, an injunction against consummation of the transaction, invalidation of certain provisions of the Merger Agreement, damages in an unspecified amount, rescission in the event the transaction is consummated and attorney’s fees.

On September 9, 2005, the parties entered into a proposed settlement of the action pursuant to a Stipulation and Agreement of Compromise, Settlement and Release. Pursuant to the proposed settlement: (i) Instinet revised the definitive proxy statement to include certain disclosures that have been agreed upon and reviewed by plaintiffs; (ii) Nasdaq and Instinet agreed to reduce by 15%, from $66,500,000 to $56,525,000, the break-up fee that Instinet would pay to Nasdaq under certain conditions pursuant to Section 8.6(a) of the merger agreement; and (iii) Nasdaq agreed to waive, with respect to members of the purported plaintiff class only, the provisions of the merger agreement pursuant to which the aggregate merger consideration was to have been reduced by up to $2.5 million based on the total amount of certain of our transaction liabilities, the net effect of which is an increase of approximately $0.007 per share (or approximately $1.0 million in the aggregate) in the merger consideration that will be received by Instinet stockholders other than the defendants.

On September 16, 2005, Instinet mailed a notice of settlement to its stockholders. On October 25, 2005, the Delaware Court of Chancery certified the class of Instinet Group shareholders and approved the proposed settlement as fair and reasonable. Separately, on November 30, 2005, the Court will hold a hearing to consider plaintiffs’ counsel’s application for an award of attorneys’ fees and reimbursement of expenses. The settlement is still subject to the entry of a final and non-appealable judgment dismissing the consolidated action with prejudice and the delivery of appropriate releases.

From time to time, the Company is involved in various legal and regulatory proceedings arising in the ordinary course of business. The Company is also subject to periodic regulatory audits, inspections and investigations. While any litigation contains an element of uncertainty, management believes, after consultation with counsel, that the outcomes of such proceedings or claims are unlikely to have a material adverse effect on the Company.

- 17 -

Instinet Group Incorporated

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

(Unaudited)

Leases

The Company has contractual obligations to make future payments primarily for operating leases for office space with Reuters and third parties. Certain leases contain renewal options and escalation clauses. The Company’s aggregate minimum lease commitments after 5 years primarily relate to the Company’s office space leases in New York City and Jersey City, New Jersey, expiring on various dates through 2021. As of September 30, 2005, future minimum rental commitments under non-cancelable operating leases (net of non-cancelable sublease proceeds) for future periods are as follows:


	Gross Rental Commitments		Sublease Income		Net Rental Commitments
Remainder of the year ending December 31, 2005	$	10,499	$	3,501	$	6,998
Year ending December 31, 2006		37,782		12,736		25,046
Year ending December 31, 2007		34,949		13,149		21,800
Year ending December 31, 2008		33,829		13,287		20,542
Year ending December 31, 2009		33,414		13,877		19,537
Year ending December 31, 2010 and Thereafter		237,224		135,761		101,463

Total	$	387,697	$	192,311	$	195,386

Note 13. Collateral Arrangements

As of September, 2005 and December 31, 2004, the fair value of collateral held by the Company that could be sold or repledged totaled $201,607 and $185,511, respectively. Such collateral is generally obtained under resale and securities borrowing agreements. Of this collateral, $199,446 and $179,853 had been sold or repledged as of September 30, 2005 and December 31, 2004, respectively, generally to cover short sales or effect deliveries of securities.

Note 14. Net Capital Requirements

The Company’s broker-dealer subsidiaries are subject to the SEC Uniform Net Capital Rule 15c3-1 under the Securities Exchange Act of 1934 administered by the SEC, the New York Stock Exchange and the National Association of Securities Dealers, which requires the maintenance of minimum net capital. All subsidiaries have elected to use the alternative method, which requires that they maintain minimum net capital equal to:

•

$250 for general broker-dealers;

•

$1,000 for market makers; and

•

the greater of $1,500 or 2% of aggregate debit items arising from customer transactions for clearing firms.

- 18 -

Instinet Group Incorporated

Notes to Consolidated Financial Statements

(In thousands, except per share amounts)

(Unaudited)

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


	September 30, 2005						December 31, 2004
	Net Capital		Net Capital Requirement		Excess Net Capital		Net Capital		Net Capital Requirement		Excess Net Capital
Instinet, LLC	$	35,295	$	250	$	35,045	$	24,140	$	250	$	23,890
Inet ATS, Inc.		36,199		1,000		35,199		29,932		1,000		28,932
Instinet Clearing Services, Inc.		20,014		1,500		18,514		7,542		1,500		6,042
Bridge Trading Company		3,921		250		3,671		11,227		797		10,430
Harborview, LLC		4,820		250		4,570		1,123		250		873
Island Execution Services, LLC		1,470		1,000		470		1,449		1,000		449

Total	$	101,719	$	4,250	$	97,469	$	75,413	$	4,797	$	70,616

The Company’s international broker-dealer subsidiaries are subject to capital adequacy requirements promulgated by authorities of the countries in which they operate. As of September, 2005 and December 31, 2004, these subsidiaries had met their local capital adequacy requirements.

Note 15. Segment Information

In reporting to management, the Company’s operating results are categorized into two business segments, Instinet and INET. Eliminations represent intercompany revenue and expenses. Segment operating results exclude LJR, which is treated as a discontinued operation.

Segment Operating Results


	Three Months Ended September 30, 2005											Three Months Ended September 30, 2004
	Instinet			INET		Eliminations & Corporate			Total			Instinet		INET		Eliminations & Corporate			Total
Transaction fees	$	139,638		$	114,865	$	(8,054	)	$	246,449		$	146,605	$	104,057	$	(4,966	)	$	245,696
Interest income, net		2,009			953		5,003			7,965			2,916		402		—			3,318

Total revenue, net		141,647			115,818		(3,051	)		254,414			149,521		104,459		(4,966	)		249,014
Total expenses		169,435			111,426		(11,819	)		269,042			149,386		99,353		(8,997	)		239,742

Pre-tax earnings	$	(27,788	)	$	4,392	$	8,768		$	(14,628	)	$	135	$	5,106	$	4,031		$	9,272

Quarter-end total assets	$	934,348		$	200,879	$	705,631		$	1,840,858		$	1,187,736	$	203,532	$	284,323		$	1,675,591


	Nine Months Ended September 30, 2005											Nine Months Ended September 30, 2004
	Instinet			INET		Eliminations & Corporate			Total			Instinet		INET		Eliminations & Corporate			Total
Transaction fees	$	436,487		$	356,853	$	(22,340	)	$	771,000		$	508,216	$	334,915	$	(14,746	)	$	828,385
Interest income, net		6,929			1,873		10,715			19,517			9,298		1,060		—			10,358

Total revenue, net		443,416			358,726		(11,625	)		790,517			517,514		335,975		(14,746	)		838,743
Total expenses		487,662			335,006		(47,998	)		774,670			504,978		313,556		(35,817	)		782,717

Pre-tax earnings	$	(44,246	)	$	23,720	$	36,373		$	15,847		$	12,536	$	22,419	$	21,071		$	56,026

- 19 -

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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

Our total revenues, net of interest expense, were $254.4 million for the three months ended September 30, 2005, an increase from $249.0 million in the comparable period in 2004. Cost of revenues was $153.7 million in the three months ended September 30, 2005, resulting in a gross margin of $100.7 million. Cost of revenues and gross margin in the comparable period in 2004 were $143.9 million and $105.1 million, respectively.

Income (loss) from continuing operations before income taxes, income tax expense (benefit), net income (loss) from continuing operations, and net income in our Consolidated Statements of Operations for the three and nine months ended September 30, 2005 have been revised from the previously announced disclosure in our earnings release dated November 2, 2005 due to an adjustment in income tax expense. The effect of the adjustment was to decrease income tax expense by $0.5 million, resulting in a corresponding decrease in income (loss) from continuing operations and an increase in net income. Our basic and diluted earnings per share for the three months ended September 30, 2005 and diluted earnings per share for the nine months ended September 30, 2005 were not impacted by this adjustment. Our basic earnings per share for the nine months ended September 30, 2005 increased by $0.01 as a result of this adjustment. The impact of this revision on earnings per share is highlighted in the following table:


	Earnings Release					Form 10-Q					Net change

	Three Months Ended			Nine Months Ended		Three Months Ended			Nine Months Ended		Three Months Ended			Nine Months Ended
	September 30, 2005			September 30, 2005		September 30, 2005			September 30, 2005		September 30, 2005			September 30, 2005

Basic EPS
Income from continuing operations	$	(0.02	)	$	0.04	$	(0.01	)	$	0.04	$	0.01		$	—
Income from discontinued operations		0.27			0.27		0.26			0.28		(0.01	)		0.01

Net income	$	0.25		$	0.31	$	0.25		$	0.32		—		$	0.01


Diluted EPS
Income from continuing operations	$	(0.02	)	$	0.04	$	(0.01	)	$	0.04	$	0.01		$	—
Income from discontinued operations		0.27			0.27		0.26			0.27		(0.01	)		—

Net income	$	0.25		$	0.31	$	0.25		$	0.31		—		$	—

Strategic Developments

On April 22, 2005, we announced that we entered into a definitive agreement pursuant to which The NASDAQ Stock Market Inc. (“NASDAQ”) will acquire all outstanding shares of Instinet Group for an aggregate purchase price of approximately $1.8 billion in cash or $5.10 per share on a fully diluted basis. The estimated merger consideration of $5.10 per share has been adjusted for a special cash dividend of $0.32 per share that was paid on August 15, 2005. The final per share price will vary based on the actual closing date, which is currently estimated to be the end of the fourth quarter, the number of vested employees’ stock plan shares outstanding and transaction costs. Upon completion of the transaction, INET will be combined with NASDAQ’s current operations. Instinet along with certain other Instinet Group corporate liabilities will be acquired from NASDAQ by a group led by Silver Lake Partners and Instinet senior management immediately following the NASDAQ acquisition of Instinet Group. We also entered into a definitive agreement for the acquisition of our subsidiary, Lynch, Jones & Ryan, Inc. (“LJR”) by The Bank of New York. This sale of LJR to The Bank of New York was completed on July 1, 2005 for $174 million in cash. In the third quarter of 2005, we recorded a net after tax gain of $89.6 million related to this sale. LJR is shown as a discontinued operation for all periods presented.

The NASDAQ merger agreement was adopted by a majority of Instinet Group shareholders on September 21, 2005. Completion of the transaction is still subject to customary conditions, including regulatory approvals.

- 20 -

staff responsible for reviewing the NASDAQ/Instinet transaction, we understand that the staff has forwarded its recommendation to senior DOJ officials and that we anticipate a formal decision from the DOJ soon.

In accordance with the provisions of the NASDAQ merger agreement, we are required to receive written consent from NASDAQ and Silver Lake Partners prior to undertaking certain actions including actions relating to capital expenditures, dividend payments, share issuances, acquisitions, debt incurrence, amendments to our charter or bylaws and material contracts or other material transactions. We cannot assure you that we would receive NASDAQ and Silver Lake Partners’ consent to undertake these actions, which could impact the operation of our business.

On March 31, 2005, we acquired Bridge Trading Company (“Bridge”), an agency execution broker, from Reuters for 3,751,527 shares of Instinet Group’s common stock, valued at approximately $21.5 million. All historical information has been restated to include Bridge as if Bridge had been a wholly-owned subsidiary of Instinet Group since it was acquired by Reuters in September 2001. This acquisition was accounted for as a transfer of entities under common control. Bridge is included in the results of the Instinet business segment.

Business Environment

Total U.S. equity share volume decreased 2.7% during the third quarter of 2005 from the second quarter of 2005 but increased 12.9% over the third quarter of 2004. NASDAQ-listed equity share volume decreased 7.5% in the third quarter of 2005 from the second quarter of 2005 but increased 4.7% over the third quarter of 2004. Outside of the U.S., market volumes were higher during the third quarter of 2005 compared to the second quarter of 2005, with international market consideration, or total trading value, increasing 11.4%. Total international market consideration increased 49.1% compared to the third quarter of 2004.

Average daily U.S. equity share volume was 3.8 billion, 3.9 billion and 3.4 billion in the third quarter of 2005, second quarter of 2005 and third quarter of 2004, respectively. There were 64 trading days in the third quarter of 2005, second quarter of 2005 and third quarter of 2004, respectively.

Market Share and Market Volumes

During the three months ended September 30, 2005, trading volumes in the U.S. equity markets increased 12.9% to 245.3 billion shares from 217.3 billion shares in the comparable period in 2004. Total NASDAQ-listed share volume increased 4.7% to 103.4 billion shares for the three months ended September 30, 2005 from 98.7 billion shares in the comparable period in 2004. U.S. exchange-listed share volume increased 19.6% to 141.9 billion shares for the three months ended September 30, 2005 from 118.6 billion shares in the comparable period in 2004.

Instinet’s overall market share decreased to 2.6% or 6.3 billion shares of total U.S. equity trading volume compared to 2.7% or 5.9 billion shares in the comparable period in 2004. Instinet’s international market consideration increased 49.1% from the third quarter of 2004.

INET’s overall market share decreased to 13.5% or 33.0 billion shares of total U.S. market share volume, which comprised 25.8% or 26.6 billion shares of NASDAQ-listed share volume, and 4.5% or 6.4 billion shares of U.S. exchange-listed share volume, for the three months ended September 30, 2005. In the comparable 2004 period, INET’s overall market share was 13.9% or 30.3 billion

- 21 -

shares of total U.S. market share volume, which comprised 26.0% or 25.7 billion shares of NASDAQ-listed share volume, and 3.9% or 4.6 billion shares of U.S. exchange-listed share volume.

Cost Reductions

In response to the intense competitive environment in the United States and our price reduction actions, we began a series of cost-cutting efforts in 2001 that have continued through the third quarter of 2005. In connection with these cost-cutting efforts, which primarily involved headcount reductions and office closures, we recorded $9.5 million of severance charges and $20.2 million of charges related to facility and asset write-offs in the third quarter of 2005. For the nine months ended September 30, 2005, we recorded $24.6 million of severance charges and $21.0 million of charges related to facility and asset write-offs.

Critical Accounting Policies

Our financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for us include valuation of investments, allowance for doubtful accounts, accounting for goodwill and intangible assets, accounting for restructurings and accounting for income taxes.

Valuation of Investments

Our investments are stated at estimated fair value as determined in good faith by management. Generally, we will initially value investments at cost as a proxy for fair value, and require that changes in value be established by meaningful third-party transactions or a significant impairment in the financial condition or operating performance of the issuer, unless meaningful developments occur that otherwise warrant a change in the valuation of an investment. Factors considered in valuing individual investments include, without limitation, available market prices, type of security, purchase price, purchases of the same or similar securities by other investors, marketability, restrictions on disposition, current financial position and operating results, and other pertinent information.

We use our best judgment in estimating the fair value of these investments. There are inherent limitations to any estimation technique. The fair value estimates presented herein are not necessarily indicative of an amount that we could realize in a current transaction. Because of the inherent uncertainty of valuation, these estimated fair values do not necessarily represent amounts that might be ultimately realized, since such amounts depend on future circumstances, and the differences could be material. During the nine months ended September 30, 2005, we increased the carrying value of our investment in NASDAQ by $26.1 million, based upon the closing market price per share. During the nine months ended September 30, 2005, we recorded a gain of $11.0 million as a result of liquidating our investment in Archipelago Holding, Inc.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is based on our assessment of the collectibility of customer accounts. We regularly review the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances and current economic conditions

- 22 -

that may affect a customer’s ability to pay. If a customer’s creditworthiness deteriorates, or if actual defaults are higher than our historical experience, or if other circumstances arise, our estimates of the recoverability of amounts due to us could be overstated, and additional allowances could be required, which could have an adverse impact on our revenue. The allowance for doubtful accounts as of September 30, 2005 decreased to $16.7 million from $18.8 million as of December 31, 2004 primarily due to recoveries of aged customer receivables.

Accounting for Goodwill and Other Intangible Assets

Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, requires that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques and that management perform a detailed review of the carrying value of the Company’s tangible and intangible assets. In this process, management is required to make estimates and assumptions in order to determine the fair value of the Company’s assets and liabilities and projected future earnings using various valuation techniques. Management uses its best judgment and information available to it at the time to perform this review, as well as the services of an expert valuation specialist. Because management’s assumptions and estimates are used in the valuation, actual results may differ. There were no adjustments for the three and nine months ended September 30, 2005 and 2004.

Accounting for Restructurings

Restructuring-related liabilities include estimates for, among other things, anticipated disposition of lease obligations. Key variables in determining such estimates include anticipated timing of sublease rentals, estimates of sublease rental payment amounts and tenant improvement costs, and estimates for brokerage and other related costs. We periodically evaluate and, if necessary, adjust our estimates based on currently available information.

Accounting for Income Taxes

SFAS No. 109, Accounting for Income Taxes, establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Valuation allowances are established when it is deemed more likely than not that future taxable income will not be sufficient to realize income tax benefits. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position or our results of operations.

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Key Statistical Information

The following table presents operating data for our two business segments.


	Three Months Ended						Nine Months Ended
	Sep 30, 2005			Sep 30, 2004			Sep 30, 2005			Sep 30, 2004
U.S. Market
Trade Days		64			64			189			188

Average daily NASDAQ-listed equity share volume (millions)		1,615			1,542			1,777			1,767
Average daily U.S. exchange-listed equity share volume (millions)		2,217			1,853			2,220			2,058

Average daily U.S. equity share volume (millions)		3,832			3,395			3,998			3,825

Total U.S. equity share volume (millions)		245,255			217,305			755,558			719,013

Instinet, The Institutional Broker
*A. U.S. Equities ¹*

Our total average daily volume (million shares)		99			92			101			101
Our share of total market		2.6	%		2.7	%		2.5	%		2.7	%

Our average daily volume (million shares) — Institutional and Crossing		58			67			65			78
Average amount charged to client per share (cents per share) ² — Institutional and Crossing		1.34			1.52			1.35			1.49

Our average daily volume (million shares) — Institutional Correspondents		41			25			36			24
Average amount charged to client per share (cents per share) ² — Institutional Correspondents		0.04			0.06			0.05			0.08

*B. Non-US Equities ³*
Our average daily consideration (millions)	$	1,011		$	678		$	922		$	835
Average basis points charged to client per consideration traded		4.5			5.4			4.6			5.3

INET, The electronic marketplace
*A. Our Matched Average Daily Volume ⁴*
Our NASDAQ-listed equity share volume (million shares)		416			401			462			446
Our share of total market		25.8	%		26.0	%		26.0	%		25.2	%

Our U.S. exchange-listed equity share volume (million shares)		100			72			85			69
Our share of total market		4.5	%		3.9	%		3.8	%		3.4	%

Our total U.S. equity share volume (million shares)		516			473			548			515
Our share of total market		13.5	%		13.9	%		13.7	%		13.5	%

*B. Our Routed Average Daily Volume (million shares) ⁵*		202			115			175			107

Headcount ⁶		785			1,059			785			1,059

¹	For a description of how we calculate Instinet’s share volumes, see — “Calculation of Volume — Instinet, The Institutional Broker.”

²	The amount charged per share is the average cents per share charged net of soft dollar expenses.

³	Commissions on international transactions are presented as basis points (one hundred of one percent) of the total value (consideration) of the transaction.

⁴	For a description of how we calculate INET’s share volumes, see — “Calculation of Volume — INET, The electronic marketplace.”

⁵	Routed volume reflects transactions where the trade was not matched on INET.

⁶	Instinet Group headcount is as of the end of the reporting period, includes Bridge and excludes LJR for all periods presented.

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Calculation of Volume

Instinet, The Institutional Broker

Instinet’s average daily U.S. equity share volume is counted as the sum of our customers’ share volume per side related to a trade. For example, a matched trade, where one customer buys 100 shares and the other sells 100 shares, is counted as 200 shares; if the buy or sell order were routed out, we would count 100 shares on the customer side.

Institutional and Crossing customers comprise certain U.S. buy-side clients, all of the clients of Bridge and our international business. They include fund managers, pension plans, hedge funds and other clients. Crossing includes order flow from both buy-side and sell-side clients who execute through our crossing networks.

Institutional Correspondents represent our direct market access U.S. buy-side clients.

All periods presented incorporate Bridge, which was acquired on March 31, 2005, and exclude LJR, which is treated as a discontinued operation.

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

INET, The electronic marketplace

In computing our U.S. share volume for INET in either NASDAQ-listed or U.S. exchange-listed equities, we count the customer share volume on one side of the matched trade. Matched volume reflects transactions where the buyer and seller are matched on INET.

For example, where a customer sells 100 shares to another customer as a matched trade, we count 100 shares. INET share volume includes transactions sent to it by Instinet and prior quarters have been presented to include this volume.

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RESULTS OF OPERATIONS — THREE MONTHS ENDED SEPTEMBER 30, 2005 VERSUS THREE MONTHS ENDED SEPTEMBER 30, 2004

The following table sets forth our consolidated statements of operations data for the periods presented:


($ In millions) (Unaudited)	Three Months Ended											Percentage of
($ In millions) (Unaudited)	September 30,			September 30,			$			%		Total Revenues, Net
	2005			2004			Change			Change		2005		2004
Revenue
Transaction fees	$	246.4		$	245.7		$	0.7		0.3	%	96.9	%	98.7	%
Interest income		9.4			4.1			5.3		129.3	%	3.7	%	1.6	%
Interest expense		(1.4	)		(0.7	)		(0.7	)	100.0	%	-0.6	%	-0.3	%

Interest income, net		8.0			3.3			4.7		142.4	%	3.1	%	1.3	%

Total revenues, net		254.4			249.0			5.4		2.2	%	100.0	%	100.0	%

Cost of Revenues
Soft dollar		33.4			36.9			(3.5	)	-9.5	%	13.1	%	14.8	%
Broker-dealer rebates		63.8			59.9			3.9		6.5	%	25.1	%	24.1	%
Brokerage, clearing and exchange fees		56.5			47.1			9.4		20.0	%	22.2	%	18.9	%

Total cost of revenues		153.7			143.9			9.8		6.8	%	60.4	%	57.8	%

Gross margin		100.7			105.1			(4.4	)	-4.2	%	39.6	%	42.2	%

Direct Expenses
Compensation and benefits		57.4			43.5			13.9		32.0	%	22.6	%	17.5	%
Communications and equipment		13.7			18.8			(5.1	)	-27.1	%	5.4	%	7.6	%
Depreciation and amortization		13.9			13.4			0.5		3.7	%	5.5	%	5.4	%
Occupancy		22.8			9.4			13.4		142.6	%	9.0	%	3.8	%
Professional fees		11.2			7.4			3.8		51.4	%	4.4	%	3.0	%
Marketing and business development		1.1			2.7			(1.6	)	-59.3	%	0.4	%	1.1	%
Other		4.1			4.8			(0.7	)	-14.6	%	1.6	%	1.9	%

Total direct expenses		124.1			99.9			24.2		24.2	%	48.8	%	40.1	%

Contractual settlement		—			—			—		—		0.0	%	0.0	%
Investments		(8.8	)		(4.0	)		(4.8	)	120.0	%	-3.5	%	-1.6	%
Insurance recovery		—			—			—		—		0.0	%	0.0	%

Total expenses		269.0			239.7			29.3		12.2	%	105.7	%	96.3	%

Income/(loss) from continuing operations before income taxes		(14.6	)		9.3			(23.9	)	-257.0	%	-5.7	%	3.7	%
Income tax expense/(benefit)		(9.8	)		1.4			(11.2	)	-800.0	%	-3.9	%	0.6	%

Net income/(loss) from continuing operations		(4.8	)		7.8			(12.6	)	-161.5	%	-1.9	%	3.1	%
Income from discontinued operations, net of tax		89.6			2.8			86.8		3100.0	%	35.2	%	1.1	%

Net income	$	84.7		$	10.6		$	74.1		699.1	%	33.3	%	4.3	%

Overview

Our loss from continuing operations was $4.8 million for the three months ended September 30, 2005 compared to net income of $7.8 million in the comparable period in 2004. Our net revenues increased 2.2% to $254.4 million for the three months ended September 30, 2005 from $249.0 million in the comparable period in 2004 primarily due to an increase in our trading volume, partially offset by lower average price charged to clients per share. Total expenses increased 12.2% to $269.0 million for the three months ended September 30, 2005 from $239.7 million in the comparable period in 2004. Cost of revenues increased 6.8% to $153.7 million for the three months ended September 30, 2005 from $143.9 million in the comparable period in 2004 due to increases in broker-dealer rebates and brokerage, clearing and exchange fees partially offset by a decrease in soft dollar expenses. Cost of

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revenues as a percentage of total revenues increased to 60.4% from 57.8% primarily due to a lower average price charged per share. Direct expenses were up 24.2% to $124.1 million from $99.9 million.

Revenues

Transaction fees

Transaction fee revenue increased 0.3% to $246.4 million for the three months ended September 30, 2005 from $245.7 million for the three months ended September 30, 2004. The increase was primarily due to an increase in our trading volume, partially offset by a decline in average price charged per share.

Interest income, net

Interest income, net increased 142.4% to $8.0 million for the three months ended September 30, 2005 from $3.3 million in the comparable period in 2004. This increase was primarily due to higher interest rates and higher cash balances compared to the prior period.

Cost of Revenues

Soft dollar

Soft dollar expense decreased 9.5% to $33.4 million for the three months ended September 30, 2005 from $36.9 million in the comparable period in 2004. This expense is offset by soft dollar revenues. The decrease was primarily due to decreases in trading volume from our soft dollar clients.

Broker-dealer rebates

Broker-dealer rebates expense increased 6.5% to $63.8 million for the three months ended September 30, 2005 from $59.9 million in the comparable period in 2004. The increase was primarily due to a modification of INET’s rebate tier structure, resulting in a greater volume of transactions that qualified for higher rebates. This modification also increased broker-dealer rebates as a percentage of revenues, net.

Brokerage, clearing and exchange fees

Brokerage, clearing and exchange fees increased 20.0% to $56.5 million for the three months ended September 30, 2005 from $47.1 million in the comparable period in 2004. The increase was primarily due to higher trading volumes and an increase in INET’s routed volume.

Gross Margin

Gross margin decreased 4.2% to $100.7 million for the three months ended September 30, 2005 from $105.1 million in the comparable period in 2004. The decrease was primarily due to our lower overall average pricing combined with an increase in broker dealer rebates and brokerage, clearing and exchange fees.

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Expenses

Compensation and benefits expense

Compensation and benefits expense increased 32.0% to $57.4 million for the three months ended September 30, 2005 from $43.5 million in the comparable period in 2004. This increase was primarily due to severance charges totaling $9.5 million and an increase in variable compensation, partially offset by a decrease in worldwide headcount as part of our cost reduction initiatives. The $9.5 million severance charge is part of our continuing efforts to streamline the institutional broker business. Our total headcount decreased to 785 employees as of September 30, 2005 from 1,059 employees as of September 30, 2004.

Communications and equipment

Communications and equipment expense decreased 27.1% to $13.7 million for the three months ended September 30, 2005 from $18.8 million in the comparable period in 2004. This decrease was primarily due to lower client and firm communication and maintenance expenses.

Depreciation and amortization

Depreciation and amortization expense increased 3.7% to $13.9 million for the three months ended September 30, 2005 from $13.4 million in the comparable period in 2004. This increase was primarily due to $4.8 million of asset write-offs as part of our cost reduction initiatives, offset by decreases in depreciation expenses due to disposals of technology assets and furniture and fixtures throughout 2004.

Occupancy

Occupancy expense increased 142.6% to $22.8 million for the three months ended September 30, 2005 from $9.4 million in the comparable period in 2004. This increase was primarily due to $15.4 million of facilities write-offs as part of our cost reduction initiatives, partially offset by lower operating costs in our New York City office compared to the three months ended September 30, 2004.

Professional fees

Professional fees increased 51.4% to $11.2 million for the three months ended September 30, 2005 from $7.4 million in the comparable period in 2004. This increase was primarily due to advisory fees related to the pending merger with NASDAQ.

Marketing and business development

Marketing and business development expense decreased 59.3% to $1.1 million for the three months ended September 30, 2005 from $2.7 million in the comparable period in 2004. This decrease was primarily due to lower advertising expense.

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Other expenses

Other expenses decreased 14.6% to $4.1 million for the three months ended September 30, 2005 from $4.8 million in the comparable period in 2004. The decrease was primarily a result of lower regulatory related expenses.

Investments

Net gains on our investments were $8.8 million for the three months ended September 30, 2005 compared to $4.0 million in the comparable period in 2004. For the three months ended September 30, 2005, we increased the carrying value of our investment in NASDAQ by $8.6 million to reflect the closing market price per share. For the three months ended September 30, 2004, we increased the carrying value of our investment in Archipelago Holdings, Inc. by $4.7 million, partially offset by losses of $0.4 million on the sale of Archipelago Holdings, Inc. in connection with its initial public offering.

Income tax provision

Income tax benefit was $9.8 million for the three months ended September 30, 2005 compared to income tax expense of $1.4 million in the comparable period in 2004. Our effective income tax rate was 66.9% for the three months ended September 30, 2005 and 15.5% in the comparable period in 2004. The effective tax rate for the three months ended September 30, 2005 was greater than the comparable period in 2004 primarily due to changes in valuation allowances and other provisions resulting from changes in business conditions.

Discontinued operations

On April 22, it was announced that we entered into a definitive agreement for the acquisition of our subsidiary, LJR by The Bank of New York. This sale of LJR to The Bank of New York was completed on July 1, 2005. LJR is shown as a discontinued operation for all periods presented. Income from the discontinued operations of LJR, net of tax was $89.6 million for the three months ended September 30, 2005, representing gain on sale. Income from the discontinued operations of LJR, net of tax was $2.8 million for the three months ended September 30, 2004, representing the results of operations.

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OPERATING RESULTS BY SEGMENT


(Unaudited) (In thousands)	Three Months Ended September 30, 2005											Three Months Ended September 30, 2004
	Instinet			INET		Eliminations & Corporate			Total			Instinet			INET			Eliminations & Corporate			Total
Revenue
Transaction fees	$	139,638		$	114,865	$	(8,054	)	$	246,449		$	146,605		$	104,057		$	(4,966	)	$	245,696
Interest income, net		2,009			953		5,003			7,965			2,916			402			—			3,318

Total revenue, net		141,647			115,818		(3,051	)		254,414			149,521			104,459			(4,966	)		249,014

Cost of revenues
Soft dollar		33,416			—		—			33,416			36,943			—			—			36,943
Broker-dealer rebates		—			63,811		—			63,811			—			59,859			—			59,859
Brokerage, clearing and exchange fees		36,755			27,766		(8,054	)		56,467			30,140			21,904			(4,966	)		47,078

Total cost of revenues		70,171			91,577		(8,054	)		153,694			67,083			81,763			(4,966	)		143,880

Gross margin		71,476			24,241		5,003			100,720			82,438			22,696			—			105,134

Direct Expenses
Compensation and benefits		41,296			3,834		12,260			57,390			35,943			3,590			3,934			43,467
Communications and equipment		12,251			1,109		295			13,655			16,839			1,418			518			18,775
Depreciation and amortization		6,736			2,089		5,061			13,886			10,502			2,518			343			13,363
Occupancy		10,456			380		11,968			22,804			5,922			503			2,926			9,351
Professional fees		3,283			720		7,157			11,160			5,219			383			1,808			7,410
Marketing and business development		913			43		155			1,111			2,507			206			12			2,725
Other		4,654			177		(721	)		4,110			3,822			(715	)		1,695			4,802
Technology service company charges		(1,242	)		1,242		—			—			(5,573	)		5,573			—			—
Corporate overhead charges		20,917			10,255		(31,172	)		—			7,122			4,114			(11,236	)		—

Total direct expenses		99,264			19,849		5,003			124,116			82,303			17,590			—			99,893

Investments		—			—		(8,768	)		(8,768	)		—			—			(4,031	)		(4,031	)

Total expenses		169,435			111,426		(11,819	)		269,042			149,386			99,353			(8,997	)		239,742

Net income (loss) from continuing operations before income taxes	$	(27,788	)	$	4,392	$	8,768		$	(14,628	)	$	135		$	5,106		$	4,031		$	9,272

Instinet

Total revenues, net of interest expense, were down 5.3% to $141.6 million for the three months ended September 30, 2005 from $149.5 million in the comparable period in 2004 primarily due to a decline in average amounts charged to our clients per share. Total average daily volume of U.S. equities was 99 million shares for the three months ended September 30, 2005, up 7.7% from 92 million shares for the three months ended September 30, 2004. Average daily international consideration traded increased 49.1% to $1,011 million in the three months ended September 30, 2005 from $678 million in the comparable period in 2004. The average basis points charged to our clients decreased 16.7% to 4.5 basis points in the three months ended September 30, 2005 from 5.4 basis points in the comparable period in 2004.

Cost of revenues was up 4.6% to $70.2 million for the three months ended September 30, 2005 from $67.1 million in the comparable period in 2004 due to higher brokerage, clearing and exchange fees, partially offset by a decrease in volume from our soft dollar clients. Cost of revenues as a percentage of total revenues was 49.5% for the three months ended September 30, 2005 and 44.9% in the comparable period in 2004.

Gross margin decreased 13.3% to $71.5 million for the three months ended September 30, 2005 from $82.4 million in the comparable period in 2004 primarily due to lower average amounts charged to our clients per share.

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Direct expenses increased 20.6% to $99.3 million for the three months ended September 30, 2005 from $82.3 million in the comparable period in 2004 primarily due to higher compensation and benefits expenses, occupancy expenses and corporate overhead charges related to our cost reduction initiatives, and lower usage by INET of Instinet’s technology resources. These increases are partially offset by lower communication and equipment expenses, depreciation and amortization expenses and marketing and business development expenses.

Net loss from continuing operations before income taxes was $27.8 million for the three months ended September 30, 2005 and net income from continuing operations was $0.1 million for the three months ended September 30, 2004.

INET

Total revenues, net of interest expense, were up 10.9% to $115.8 million for the three months ended September 30, 2005 from $104.5 million in the comparable period in 2004 primarily due to higher overall average daily matched volumes. Transaction fees increased primarily due to an increase of 9.1% in total average matched daily volume to 516 million shares from 473 million shares.

Cost of revenues was up 12.0% to $91.6 million for the three months ended September 30, 2005 from $81.8 million in the comparable period in 2004 primarily due to a modification of the rebate tier structure, resulting in a greater volume of transactions qualifying for higher rebates, and increased transaction volume routed to other market destinations, resulting in higher brokerage, clearing and exchange fees. Cost of revenues as a percentage of total revenues was 79.1% for the three months ended September 30, 2005 and 78.3% in the comparable period in 2004.

Gross margin decreased 6.8% to $24.2 million for the three months ended September 30, 2005 from $22.7 million in the comparable period in 2004 primarily due to increased broker-dealer rebates and routed transaction volume.

Direct expenses increased 12.8% to $19.8 million for the three months ended September 30, 2005 from $17.6 million in the comparable period in 2004 primarily due to higher corporate overhead charges related to our cost reduction initiatives, partially offset by lower usage of Instinet’s technology resources.

Net income from continuing operations before income taxes for the three months ended September 30, 2005 was $4.4 million and $5.1 million for the three months ended September 30, 2004.

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RESULTS OF OPERATIONS — NINE MONTHS ENDED SEPTEMBER 30, 2005 VERSUS

NINE MONTHS ENDED SEPTEMBER 30, 2004

The following table sets forth our consolidated statements of operations data for the periods presented:


($ In millions) (Unaudited)	Nine Months Ended						$ Change			% Change		Percentage of
($ In millions) (Unaudited)	September 30, 2005			September 30, 2004								Total Revenues, Net
	September 30, 2005			September 30, 2004								2005		2004
Revenue
Transaction fees	$	771.0		$	828.4		$	(57.4	)	-6.9	%	97.5	%	98.8	%
Interest income		22.5			12.9			9.6		74.4	%	2.8	%	1.5	%
Interest expense		(3.0	)		(2.6	)		(0.4	)	15.4	%	-0.4	%	-0.3	%

Interest income, net		19.5			10.4			9.1		87.5	%	2.5	%	1.2	%

Total revenues, net		790.5			838.7			(48.2	)	-5.7	%	100.0	%	100.0	%


Cost of Revenues
Soft dollar		110.1			128.7			(18.6	)	-14.5	%	13.9	%	15.3	%
Broker-dealer rebates		204.8			190.4			14.4		7.6	%	25.9	%	22.7	%
Brokerage, clearing and exchange fees		165.3			159.3			6.0		3.8	%	20.9	%	19.0	%

Total cost of revenues		480.2			478.4			1.8		0.4	%	60.7	%	57.0	%

Gross margin		310.3			360.4			(50.1	)	-13.9	%	39.3	%	43.0	%


Direct Expenses
Compensation and benefits		167.3			153.3			14.0		9.1	%	21.2	%	18.3	%
Communications and equipment		41.0			57.6			(16.6	)	-28.8	%	5.2	%	6.9	%
Depreciation and amortization		34.4			45.1			(10.7	)	-23.7	%	4.4	%	5.4	%
Occupancy		42.7			28.2			14.5		51.4	%	5.4	%	3.4	%
Professional fees		29.1			20.6			8.5		41.3	%	3.7	%	2.5	%
Marketing and business development		3.8			10.7			(6.9	)	-64.5	%	0.5	%	1.3	%
Other		12.5			10.0			2.5		25.0	%	1.6	%	1.2	%

Total direct expenses		330.8			325.4			5.4		1.7	%	41.8	%	38.8	%

Contractual settlement		—			(7.3	)		7.3		-100.0	%	0.0	%	-0.9	%
Investments		(36.4	)		(8.7	)		(27.7	)	318.4	%	-4.6	%	-1.0	%
Insurance recovery		—			(5.1	)		5.1		-100.0	%	0.0	%	-0.6	%

Total expenses		774.7			782.7			(8.0	)	-1.0	%	98.0	%	93.3	%

Income from continuing operations before income taxes		15.8			56.0			(40.2	)	-71.8	%	2.0	%	6.7	%
Income tax expense		2.5			21.0			(18.5	)	-88.1	%	0.3	%	2.5	%

Net income from continuing operations		13.3			35.1			(21.8	)	-62.1	%	1.7	%	4.2	%
Income from discontinued operations, net of tax		93.7			9.5			84.2		886.3	%	11.9	%	1.1	%

Net income	$	107.0		$	44.5		$	62.5		140.4	%	13.5	%	5.3	%

Overview

Our income from continuing operations was $13.3 million for the nine months ended September 30, 2005 compared to $35.1 million in the comparable period in 2004. Our net revenues decreased 5.7% to $790.5 million for the nine months ended September 30, 2005 from $838.7 million in the comparable period in 2004 primarily due to a lower average price charged to clients per share. Total expenses decreased 1.0% to $774.7 million for the nine months ended September 30, 2005 from $782.7 million

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in the comparable period in 2004. Cost of revenues increased 0.4% to $480.2 million for the nine months ended September 30, 2005 from $478.4 million in the comparable period in 2004 due to increases in brokerage, clearing and exchange fees and broker-dealer rebates, partially offset by a decrease in soft dollar expenses. Cost of revenues as a percentage of total revenues increased to 60.7% from 57.0% primarily due to a lower average price charged per share. Direct expenses were up 1.7% to $330.8 million from $325.4 million.

Revenues

Transaction fees

Transaction fee revenue decreased 6.9% to $771.0 million for the nine months ended September 30, 2005 from $828.4 million for the nine months ended September 30, 2004. The decrease was primarily due to shifts in the mix of our business towards lower priced trading.

Interest income, net

Interest income, net increased 87.5% to $19.5 million for the nine months ended September 30, 2005 from $10.4 million in the comparable period in 2004. This increase was primarily due to higher interest rates and higher cash balances compared to the prior period.

Cost of Revenues

Soft dollar

Soft dollar expense decreased 14.5% to $110.1 million for the nine months ended September 30, 2005 from $128.7 million in the comparable period in 2004. This expense is offset by soft dollar revenues. The decrease was primarily due to decreases in trading volume from our soft dollar clients.

Broker-dealer rebates

Broker-dealer rebates expense increased 7.6% to $204.8 million for the nine months ended September 30, 2005 from $190.4 million in the comparable period in 2004. The increase was primarily due to a modification of INET’s rebate tier structure, resulting in a greater volume of transactions that qualified for higher rebates. This modification also increased broker-dealer rebates as a percentage of revenues, net.

Brokerage, clearing and exchange fees

Brokerage, clearing and exchange fees increased 3.8% to $165.3 million for the nine months ended September 30, 2005 from $159.3 million in the comparable period in 2004. The increase was primarily due to higher international revenues resulting in higher clearing expenses and an increase in INET’s routed volume.

Gross Margin

Gross margin decreased 13.9% to $310.3 million for the nine months ended September 30, 2005 from $360.4 million in the comparable period in 2004. The decrease was primarily due to our lower overall average pricing combined with an increase in broker dealer rebates and brokerage clearing and exchange fees.

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Expenses

Compensation and benefits expense

Compensation and benefits expense increased 9.1% to $167.3 million for the nine months ended September 30, 2005 from $153.3 million in comparable period in 2004. The increase is due to $24.6 million of severance charges as part of our cost reduction initiatives, partially offset by decreases in our worldwide headcount. The severance charges are part of our continuing efforts to streamline the institutional broker business. Our total headcount decreased to 785 employees as of September 30, 2005 from 1,059 employees as of September 30, 2004.

Communications and equipment

Communications and equipment expense decreased 28.8% to $41.0 million for the nine months ended September 30, 2005 from $57.6 million in the comparable period in 2004. This decrease was primarily due to lower client and firm communication and maintenance expenses and our consolidation of the order flow of our two ECNs (the Instinet ECN and Island ECN), which was substantially completed by the end of the first quarter of 2004. This consolidation decreased our communications and equipment expense as a percentage of revenues, net.

Depreciation and amortization

Depreciation and amortization expense decreased 23.7% to $34.4 million for the nine months ended September 30, 2005 from $45.1 million in the comparable period in 2004. This decrease was primarily due to disposals of technology assets and furniture and fixtures throughout 2004, partially offset by asset write-offs in 2005 related to our consolidation of office space.

Occupancy

Occupancy expense increased 51.4% to $42.7 million for the nine months ended September 30, 2005 from $28.2 million in the comparable period in 2004. This increase was primarily due to $15.4 million of facilities write-offs during the nine months ended September 30, 2005 related to our cost reduction initiatives.

Professional fees

Professional fees increased 41.3% to $29.1 million for the nine months ended September 30, 2005 from $20.6 million in the comparable period in 2004. This increase was primarily due to advisory fees related to the pending merger with NASDAQ and our acquisition of Bridge in 2005.

Marketing and business development

Marketing and business development expense decreased 64.5% to $3.8 million for the nine months ended September 30, 2005 from $10.7 million in the comparable period in 2004. This decrease was primarily due to lower advertising expense.

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Other expenses

Other expenses increased 25.0% to $12.5 million for the nine months ended September 30, 2005 from $10.0 million in the comparable period in 2004. The increase was primarily a result of higher legal and regulatory related expenses and bad debt expenses.

Contractual settlement

For the nine months ended September 30, 2004, we received $7.3 million associated with the mutual release of Instinet Group, Zone Trading Partners and affiliated parties of obligations in the final settlement of an execution contract.

Investments

Net gains on our investments were $36.4 million for the nine months ended September 30, 2005 compared with net gains of $8.7 million in the comparable period in 2004. We increased the carrying value of our investment in NASDAQ by $26.1 million during the nine months ended September 30, 2005 to reflect the closing market price per share. In addition, we liquidated our interests in Archipelago Holding, Inc. in 2005, resulting in a recognized gain of $11.0 million. For the nine months ended September 30, 2004, the reported net gains were primarily due to an increase in the carrying value of our investment in Archipelago Holdings, Inc. of $4.7 million and gain on sales of shares owned in various stock exchanges.

Insurance Recovery

Insurance recoveries related to the events of September 11, 2001 were $5.1 million for the nine months ended September 30, 2004. We do not anticipate any additional recoveries related to the events of September 11, 2001.

Income tax provision

Income tax expense was $2.5 million for the nine months ended September 30, 2005 compared to $21.0 million in the comparable period in 2004. Our effective income tax rate was 15.9% for the nine months ended September 30, 2005 and 37.4% in the comparable period in 2004. The effective tax rate for the nine months ended September 30, 2005 was less than the comparable period in 2004 primarily due to the offset of a portion of investment gains with capital losses and changes in valuation allowances and other provisions resulting from changes in business conditions.

Discontinued operations

On April 22, it was announced that we entered into a definitive agreement for the acquisition of our subsidiary, LJR by The Bank of New York. This sale of LJR to The Bank of New York was completed on July 1, 2005. LJR is shown as a discontinued operation for all periods presented. Income from the discontinued operations of LJR, net of tax was $93.7 million for the nine months ended September 30, 2005, representing $89.6 million gain on sale, and $4.1 million results of operations. Income from the discontinued operations of LJR, net of tax was $9.5 million for the nine months ended September 30, 2004, representing results of operations.

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OPERATING RESULTS BY SEGMENT


(Unaudited) (In thousands)	Nine Months Ended September 30, 2005											Nine Months Ended September 30, 2004
	Instinet			INET		Eliminations & Corporate			Total			Instinet			INET			Eliminations & Corporate			Total
Revenue
Transaction fees	$	436,487		$	356,853	$	(22,340	)	$	771,000		$	508,216		$	334,915		$	(14,746	)	$	828,385
Interest income, net		6,929			1,873		10,715			19,517			9,298			1,060			—			10,358

Total revenue, net		443,416			358,726		(11,625	)		790,517			517,514			335,975			(14,746	)		838,743

Cost of revenues
Soft dollar		110,129			—		—			110,129			128,664			—			—			128,664
Broker-dealer rebates		—			204,823		—			204,823			—			190,394			—			190,394
Brokerage, clearing and exchange fees		110,882			76,753		(22,340	)		165,295			111,101			62,939			(14,746	)		159,294

Total cost of revenues		221,011			281,576		(22,340	)		480,247			239,765			253,333			(14,746	)		478,352

Gross margin		222,405			77,150		10,715			310,270			277,749			82,642			—			360,391

Direct Expenses
Compensation and benefits		122,237			12,323		32,753			167,313			123,207			10,470			19,643			153,320
Communications and equipment		35,976			3,938		1,101			41,015			48,524			7,262			1,778			57,564
Depreciation and amortization		22,799			6,060		5,537			34,396			36,632			7,512			995			45,139
Occupancy		25,195			1,334		16,199			42,728			22,269			1,456			4,472			28,197
Professional fees		10,718			1,289		17,080			29,087			13,129			1,263			6,176			20,568
Marketing and business development		3,076			406		299			3,781			7,670			2,274			711			10,655
Other		10,359			1,302		815			12,476			8,511			(1,340	)		2,822			9,993
Technology service company charges		(6,015	)		6,015		—			—			(20,383	)		20,383			—			—
Corporate overhead charges		42,306			20,763		(63,069	)		—			25,654			10,943			(36,597	)		—

Total direct expenses		266,651			53,430		10,715			330,796			265,213			60,223			—			325,436

Contractual settlement		—			—		—			—			—			—			(7,250	)		(7,250	)
Investments		—			—		(36,373	)		(36,373	)		—			—			(8,705	)		(8,705	)
Insurance recovery		—			—		—			—			—			—			(5,116	)		(5,116	)

Total expenses		487,662			335,006		(47,998	)		774,670			504,978			313,556			(35,817	)		782,717

Net income (loss) from continuing operations before income taxes	$	(44,246	)	$	23,720	$	36,373		$	15,847		$	12,536		$	22,419		$	21,071		$	56,026

Instinet

Total revenues, net of interest expense, were down 14.3% to $443.4 million for the nine months ended September 30, 2005 from $517.5 million in the comparable period in 2004 primarily due to a decline in average amounts charged to our clients per share. Total average daily volume of U.S. equities was 101 million shares for the nine months ended September 30, 2005 and 2004. Average daily international consideration traded increased 10.4% to $922 million in the nine months ended September 30, 2005 from $835 million in the comparable period in 2004. The average basis points charged to our clients decreased 13.2% to 4.6 basis points in the nine months ended September 30, 2005 from 5.3 basis points in the comparable period in 2004.

Cost of revenues was down 7.8% to $221.0 million for the nine months ended September 30, 2005 from $239.8 million in the comparable period in 2004 due to decreases in volume from our soft dollar clients and lower brokerage, clearing and exchange fees. Cost of revenues as a percentage of total revenues was 49.8% for the nine months ended September 30, 2005 and 46.3% in the comparable period in 2004.

Gross margin decreased 19.9% to $222.4 million for the nine months ended September 30, 2005 from $277.7 million in the comparable period in 2004 primarily due to lower average amounts charged to our clients per share.

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Direct expenses increased 0.5% to $266.7 million for the nine months ended September 30, 2005 from $265.2 million in the comparable period in 2004 primarily due to higher corporate overhead charges and occupancy expenses related to our cost reduction initiatives, and lower usage by INET of Instinet’s technology resources. These increases were partially offset by lower communication and equipment expenses, depreciation and amortization expenses, marketing and business development expenses and professional fees.

Net loss from continuing operations before income taxes was $44.2 million for the nine months ended September 30, 2005 compared with net income of $12.5 million for the nine months ended September 30, 2004.

INET

Total revenues, net of interest expense, were up 6.8% to $358.7 million for the nine months ended September 30, 2005 from $336.0 million in the comparable period in 2004 primarily due to higher overall average daily matched volumes. Transaction fees increased primarily due to an increase of 6.4% in total average matched daily volume to 548 million shares from 515 million shares, partially offset by lower amount per share charged to our clients.

Cost of revenues was up 11.1% to $281.6 million for the nine months ended September 30, 2005 from $253.3 million in the comparable period in 2004 primarily due to a modification of the rebate tier structure, resulting in a greater volume of transactions qualifying for higher rebates, and increased transaction volume routed to other market destinations, resulting in higher brokerage, clearing and exchange fees. Cost of revenues as a percentage of total revenues was 78.5% for the nine months ended September 30, 2005 and 75.4% in the comparable period in 2004.

Gross margin decreased 6.6% to $77.2 million for the nine months ended September 30, 2005 from $82.6 million in the comparable period in 2004 primarily due to increased broker-dealer rebates and routed transaction volume.

Direct expenses decreased 11.3% to $53.4 million for the nine months ended September 30, 2005 from $60.2 million in the comparable period in 2004 primarily due to decreased reliance on Instinet’s technology resources and lower communication and equipment expenses, partially offset by higher corporate overhead resulting from our cost reduction initiatives and increased compensation and benefits expenses.

Net income from continuing operations before income taxes for the nine months ended September 30, 2005 was $23.7 million and $22.4 million for the nine months ended September 30, 2004.

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LIQUIDITY AND CAPITAL RESOURCES

We finance our business primarily through cash generated by our operating activities. In addition, we have access to a number of uncommitted credit facilities, although our borrowings under these facilities have been traditionally low. Our financial liquidity is primarily determined by the performance of our business. We maintain a highly liquid balance sheet that can fluctuate significantly between financial statement dates. Our cash equivalents and securities owned are primarily comprised of highly liquid investments that can be sold in the secondary market, if necessary. We currently anticipate that our existing cash resources and credit facilities will be more than sufficient to meet our anticipated working capital, capital expenditures, regulatory capital requirements and cash needs for restructuring charges as well as other anticipated requirements for at least the next twelve months. To the extent that overall market volumes and our trading volumes decrease beyond certain levels, we may be required to obtain additional financing from third parties or Reuters.

Cash and cash equivalents and assets readily convertible into cash, accounted for 81.9% and 78.6% of our total assets as of September 30, 2005 and December 31, 2004, respectively. Cash and cash equivalents increased to $946.3 million as of September 30, 2005 from $905.0 million as of December 31, 2004.

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

Operating Activities. Net cash used in operating activities from continuing operations was $65.1 million for the nine months ended September 30, 2005 compared with net cash provided by operating activities from continuing operations of $63.9 million for the nine months ended September 30, 2004. We experienced an increase in cash used in customer settlement activities and made annual compensation payments related to 2004 incentive compensation in the nine months ended September 30, 2005.

Investing Activities. Net cash provided by investing activities was $208.2 million for the nine months ended September 30, 2005 compared with $130.3 million for the nine months ended September 30, 2004. For the nine months ended September 30, 2005, we generated $173.6 million from the sale of LJR, $34.8 million from the sale of investments and $12.7 million from the sale or maturity of our securities owned, net of purchases, partially offset by $10.5 million in purchases of fixed assets and leasehold improvements and $2.4 million invested in discontinued operations. For the nine months ended September 30, 2004, we generated $127.8 million from the sale or maturity of securities owned, net of purchases and $7.7 million from the sale of investments, partially offset by $5.2 million purchases of fixed assets and leasehold improvements.

Financing Activities. Net cash used in financing activities was $84.7 million for the nine months ended September 30, 2005 compared with $9.4 million for the nine months ended September 30, 2004. For the nine months ended September 30, 2005, we paid $117 million of cash dividends that were primarily related to the sale of LJR, offset by $27.0 million of proceeds generated by short-term borrowings, net of repayments, and $5.4 million from the issuance of common stock. For the nine months ended September 30, 2004, we repaid $14.4 of short term borrowings offset by $5.0 million generated from the issuance of common stock.

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Contractual Obligations

The table below summarizes our future cash payments associated with contractual obligations, which are related to leases for office space under non-cancelable operating leases with Reuters and third parties (net of non-cancelable subleases). Our aggregate minimum lease commitments after 5 years primarily relate to our office space leases in New York City and Jersey City, New Jersey, expiring on various dates through 2021.


	Payments Due by Period
	Total		Less than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
		(in millions)
Operating leases for office space	$	195.4	$	23.7	$	63.7	$	41.2	$	66.8

Other Obligations

As of September 30, 2005 and December 31, 2004, we had letter of credit agreements and guarantees totaling $239.1 million and $263.7 million, respectively, issued by commercial banking institutions on our behalf to various non-U.S. securities clearing and regulatory agencies. We pay annual fees of up to one percent of the value of the agreements.

As of September 30, 2005 and December 31, 2004, we had access to $245.0 million of uncommitted credit lines from commercial banking institutions to meet the funding needs of our U.S. operations. These credit lines are collateralized by a combination of customer securities and our marketable securities. As of September, 2005 and December 31, 2004, there were no borrowings outstanding under these credit lines. We currently pay no annual fees to maintain these facilities. In addition, as of September 30, 2005 and December 31, 2004, we had access to $99.4 million and $100.3 million, respectively, of uncommitted credit lines from commercial banking institutions to meet the funding needs of our European and Asian subsidiaries. The credit lines are uncollateralized, and we currently pay no annual fees to maintain these facilities. As of September 30, 2005 and December 31, 2004, there were $32.3 million and $5.3 million, respectively, outstanding under these credit lines.

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

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The table below summarizes the minimum capital requirements for our U.S. broker-dealer subsidiaries (in millions):


	September 30, 2005						December 31, 2004
	Net Capital		Net Capital Requirement		Excess Net Capital		Net Capital		Net Capital Requirement		Excess Net Capital
Instinet, LLC	$	35.3	$	0.3	$	35.0	$	24.1	$	0.3	$	23.9
Inet ATS, Inc.		36.2		1.0		35.2		29.9		1.0		28.9
Instinet Clearing Services, Inc.		20.0		1.5		18.5		7.5		1.5		6.0
Bridge Trading Company		3.9		0.3		3.7		11.2		0.8		10.4
Harborview, LLC		4.8		0.3		4.6		1.1		0.3		0.9
Island Execution Services, LLC		1.5		1.0		0.5		1.4		1.0		0.4

Total	$	101.7	$	4.3	$	97.5	$	75.4	$	4.8	$	70.6

Our international broker-dealer subsidiaries are subject to capital adequacy requirements promulgated by authorities of the countries in which they operate. As of September 30, 2005 and December 31, 2004, these subsidiaries had met their local capital adequacy requirements.

We have an active securities borrowing and lending business, where we borrow securities from one party and lend them to another, primarily to facilitate the settlement process to meet our customers’ needs. Under these transactions, we either receive or provide collateral, generally cash. When we borrow securities, we provide cash to the lenders as collateral and earn interest on the cash. Similarly, when we loan securities, we receive cash as collateral and pay interest to the borrower. The initial collateral advanced or received approximates, or is greater than, the fair value of the securities borrowed or loaned. In the event the counterparty is unable to meet its contractual obligations to return the pledged collateral, we may be exposed to the market risk of acquiring the collateral at prevailing market prices. We provided $205.9 million and $190.3 million as collateral for securities borrowed as of September 30, 2005 and December 31, 2004, respectively. We also received $154.7 million and $133.2 million as collateral for securities loaned as of September 30, 2005 and December 31, 2004, respectively.

As of September 30, 2005 and December 31, 2004, included in commissions and other receivables is approximately $17.5 million and $15.3 million, respectively, from Archipelago Holdings, Inc. and REDIBook ECN, LLC of which we have commenced arbitration proceedings before the NASD for approximately $9.2 million. We have established an appropriate reserve against this disputed arbitration amount based upon a review of the facts and circumstances surrounding the dispute.

We are required to maintain segregated funds in a special reserve bank account for the exclusive benefit of our customers. These funds amounted to $3.4 million at September 30, 2005. No deposit was required as of December 31, 2004.

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

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Recently Issued Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123R), Share-Based Payment, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using the intrinsic value method under APB Opinion No. 25, Accounting for Stock Issued to Employees, and generally would require instead that such transactions be accounted for using a fair-value-based method. We are currently evaluating SFAS No. 123R to determine which fair-value-based model and transitional provision we will follow upon adoption. The options for transition methods as prescribed in SFAS No. 123R include either the modified prospective or the modified retrospective methods. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock as the requisite service is rendered beginning with the first quarter of adoption, while the modified retrospective method would record compensation expense for stock options and restricted stock beginning with the first period restated. Under the modified retrospective method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. SFAS 123R will be effective for us beginning January 1, 2006. Adoption of this standard is expected to have a material effect on our results of operations.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

We invest a portion of our available cash in marketable securities, classified as securities owned in our Consolidated Statements of Financial Condition, to maximize yields while continuing to meet our cash and liquidity needs and the net capital requirements of our regulated subsidiaries. We maintain a portfolio of securities consisting of the following (in millions):


	September 30, 2005		December 31, 2004
Municipal bonds	$	—	$	10.9
Foreign sovereign obligations		23.4		25.3

Total	$	23.4	$	36.2

During 2005, upon maturity of these securities, we have been investing the proceeds in short-term interest earning assets.

These securities are subject to interest rate risk and will fall in value if interest rates increase. We generally hold these securities until maturity and therefore would not expect our financial condition, operating results or cash flows to be affected to any significant degree by a sudden change in interest rates.

In addition, as a part of our brokerage business, we invest portions of our excess cash in short-term interest earning assets (mainly cash and money market instruments), which totaled $952.5 million and $905.0 million as of September 30, 2005 and December 31, 2004, respectively. We also had short-term borrowings of $32.3 million and $5.3 million as of September 30, 2005 and December 31, 2004, respectively, on which we are generally charged rates that approximate the U.S. Federal Funds rate or the local equivalent rate. As a result, we do not anticipate that changes in interest rates will have a material impact on our financial condition, operating results or cash flows.

Exchange Rate Risk

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

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

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

The following is a breakdown of the currency denominations of our non-U.S. securities owned (in millions):


	September 30, 2005		December 31, 2004
Euros	$	5.6	$	6.2
Japanese yen		9.1		9.8
Canadian dollar		8.7		9.3

Total	$	23.4	$	25.3

Our resulting exposure to exchange rate risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in foreign exchange rates due to functional versus reporting currency exposure and was $2.1 million and $2.3 million as of September 30, 2005 and December 31, 2004, respectively.

A portion of our revenues is denominated in non-U.S. dollar currencies. Approximately 11.4%, 9.4%, 10.2% and 9.9% of our revenues for the three months ended September 30, 2005 and 2004 and the nine months ended September 30, 2005 and 2004, respectively, were so denominated. Our profits are therefore exposed to foreign currency risk — not of a loss of funds but rather of a loss for financial reporting purposes. We estimate this risk as the potential loss in revenue resulting from a hypothetical 10% adverse change in foreign exchange rates on the mix in our profits between our functional currency and the respective reporting currencies of our subsidiaries. On this basis, the estimated risk of revenue was approximately $2.9 million, $2.3 million, $8.1 million and $8.3 million for the three months ended September 30, 2005 and 2004 and nine months ended September 30, 2005 and 2004, respectively.

Equity Price Risk

As an agency broker, we do not trade securities for our own account nor maintain inventories of securities for sale. However, as of September 30, 2005 we owned marketable securities of NASDAQ and as of December 31, 2004, we owned marketable securities of Archipelago Holdings, Inc. and NASDAQ and are exposed to market price risk. This risk is estimated as the potential loss in

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fair value resulting from a hypothetical 10% adverse change in quoted market prices and amounted to approximately $3.6 million and $3.1 million as of September 30, 2005 and December 31, 2004, respectively.

Credit Risk on Unsettled Trades

We are exposed to substantial credit risk from both parties to a securities transaction during the period between the transaction date and the settlement date. This period is generally three business days in the U.S. equities markets and can be as much as 30 days in some international markets. In addition, we have credit exposure that extends beyond the settlement date in the case of a party that does not settle in a timely manner by failing either to make payment or to deliver securities. We hold the securities that are the subject of the transaction as collateral for our customer receivables. Adverse movements in the prices of these securities can increase our credit risk. The majority of the Company’s transactions and, consequently, the concentration of its credit exposure are with broker-dealers and other financial institutions, primarily located in the U.S. and the U.K. The Company seeks to control its credit risk through a variety of reporting and control procedures, including establishing credit limits and enforcing credit standards based upon a review of the counterparty’s financial condition and credit ratings. The Company monitors trading activity and collateral levels on a daily basis for compliance with regulatory and internal guidelines and obtains additional collateral, if appropriate. For the three and nine months ended September 30, 2005 and 2004, losses from transactions in which a party refused or was unable to settle have been immaterial.

We are also exposed to credit risks from third parties that owe us money, securities or other obligations. These parties include our customers, trading counterparties, clearing agents, exchanges and other financial institutions. These parties may default on their obligations due to bankruptcy, lack of liquidity, operational failure or other reasons. For the three and nine months ended September 30, 2005 and 2004, losses from transactions in which a party refused or was unable to settle have not had a material adverse effect on our consolidated statements of operations, financial condition or cash flows.

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

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company has carried out an evaluation under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, including our internal control over financial reporting. Based on our evaluation, our management concluded that, as of the end of the quarter ended September 30, 2005, the disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Changes In Internal Control Over Financial Reporting

There has been no change in the Company’s internal controls over financial reporting during the quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. In connection with the sale of the Company’s subsidiary, LJR, which was completed July 1, 2005, the internal controls related to this business segment will no longer be applicable.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

For a description of our previously reported legal and administrative proceedings, see “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2004. Except as described below, there have been no material developments with respect to the legal and administrative proceedings.

Shareholder Actions

In April and May 2005, four purported class action lawsuits were filed against our company, each of our directors and Reuters, all in the Delaware Court of Chancery in and for New Castle County. The plaintiffs voluntarily dismissed one of the lawsuits. The remaining lawsuits, Donovan Spamer, et al. v. Instinet Group, Inc., et al. (Filing ID 5675328; filed on April 22, 2005), Caroline Weisz, et al. v. Instinet Group, Inc., et al. (Filing ID 5773404; filed on May 9, 2005) and Dr. Lee J. Pittman, et al. v. Instinet Group Inc., et al. (Filing ID 5773404; filed May 9, 2005) were filed on behalf of all stockholders other than the defendants. The three lawsuits were consolidated (In re Instinet Group, Inc. Shareholders Litigation, Civil Action No. 1289-N). On June 22, 2005, plaintiffs, through their counsel, filed a consolidated amended complaint. The consolidated action is being brought on behalf of a putative class consisting of stockholders of the company who are not affiliated with the defendants. The amended complaint alleges, among other things, that defendants breached their fiduciary duties as to our public stockholders in connection with the proposed merger by approving the transaction at an allegedly unfair and inadequate price. The amended complaint seeks, among other things, class action status, an injunction against consummation of the merger, invalidation of certain provisions of the merger agreement, damages in an unspecified amount, rescission in the event the merger is consummated and attorney’s fees. Plaintiffs filed for expedited proceedings, which the Court granted on June 29, 2005.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There have been no unregistered sales of equity securities or share repurchases for the quarterly period ended September 30, 2005.

Item 3. Defaults Upon Senior Securities

None.

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

On September 21, 2005, we held a special meeting of stockholders to adopt the proposed merger agreement between Instinet Group and The Nasdaq Stock Market, Inc. and to approve the adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to adopt the merger agreement.

The merger agreement was adopted by a count of 253,933,566 votes for, 36,240,419 votes against and 1,462,641 votes abstaining.

The adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to adopt the merger agreement was approved by a count of 249,061,022 votes for 40,973,218 votes against and 1,602,386 votes abstaining

Item 5. Other Information

None

Item 6. Exhibits

(a)

The following exhibits are filed or incorporated by reference as part of this quarterly report on Form 10-Q:

Pursuant to the rules and regulations of the Securities and Exchange Commission, we have filed certain agreements as exhibits to this report. These agreements may contain representations and warranties by the parties. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may be intended not as statements of fact, but rather as a way of allocating the risk to one of the parties to such agreements if those statements turn out to be inaccurate, (ii) may have been qualified by disclosures that were made to such other party or parties and that either have been reflected in the company’s filings or are not required to be disclosed in those filings, (iii) may apply materiality standards different from what may be viewed as material to investors and (iv) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments. Accordingly, these representations and warranties may not describe our actual state of affairs at the date hereof.

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EXHIBIT NUMBER		DESCRIPTION

3.1		Amended and Restated Certificate of Incorporation of Instinet Group Incorporated (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K as filed with the Commission on September 23, 2002).

3.2		Amended and Restated Bylaws of Instinet Group Incorporated (Incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K as filed with the Commission on September 23, 2002).

4.1		Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Registrant’s Form S-1 (Registration No. 333-55190)).

4.2		Rights Agreement between Instinet Group Incorporated and Mellon Investor Service LLC, dated May 15, 2001 (Incorporated by reference to Exhibit 4.3 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2001).

4.3		Amendment No. 1 to the Rights Agreement, by and between Instinet and Mellon Investor Services LLC, as Rights Agent, dated as of September 3, 2002 (Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K as filed with the Commission on September 13, 2002).

4.4		Amendment No. 2 to the Rights Agreement, dated as of April 22, 2005, between Instinet Group Incorporated and Mellon Investor Services LLC (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K as filed with the Commission on April 25, 2005).

10.1	*	Amendment to the Amended and Restated Transition Services Agreement, dated as of May 6, 2005, by and among Instinet Group Incorporated, Bridge Trading Company and Reuters America LLC.

31	*	Certificates of Chief Executive Officer and Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 9, 2005.

32	*	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 dated November 9, 2005.

*	Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: November 9, 2005


INSTINET GROUP INCORPORATED

By:		/s/ JOHN F. FAY

Name: John F. Fay Title: Co-President and Chief Financial Officer

By:		/s/ TIMOTHY A. SMITH

Name: Timothy A. Smith Title: Chief Accounting Officer

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EXHIBIT INDEX


EXHIBIT NUMBER		DESCRIPTION

3.1		Amended and Restated Certificate of Incorporation of Instinet Group Incorporated (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K as filed with the Commission on September 23, 2002).

3.2		Amended and Restated Bylaws of Instinet Group Incorporated (Incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K as filed with the Commission on September 23, 2002).

4.1		Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Registrant’s Form S-1 (Registration No. 333-55190)).

4.2		Rights Agreement between Instinet Group Incorporated and Mellon Investor Service LLC, dated May 15, 2001 (Incorporated by reference to Exhibit 4.3 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2001).

4.3		Amendment No. 1 to the Rights Agreement, by and between Instinet and Mellon Investor Services LLC, as Rights Agent, dated as of September 3, 2002 (Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K as filed with the Commission on September 13, 2002).

4.4		Amendment No. 2 to the Rights Agreement, dated as of April 22, 2005, between Instinet Group Incorporated and Mellon Investor Services LLC (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K as filed with the Commission on April 25, 2005).

10.1	*	Amendment to the Amended and Restated Transition Services Agreement, dated as of May 6, 2005, by and among Instinet Group Incorporated, Bridge Trading Company and Reuters America LLC

31	*	Certificates of Chief Executive Officer and Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 9, 2005.

32	*	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 dated November 9, 2005.

*	Filed herewith

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INSTINET GROUP INC 10-Q