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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 June 30, 2003

or

[ ] 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

(State or Other Jurisdiction 13-4134098
of Incorporation or Organization) (IRS 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
-- --


Number of shares outstanding of each of the registrant's classes of Common Stock
at August 8, 2003.

Common Stock, $0.01 par value 330,948,287 shares

INSTINET GROUP INCORPORATED

FORM 10-Q QUARTERLY REPORT
For the Quarter Ended June 30, 2003



Table of Contents Page
----

Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations for the three months and
six months ended June 30, 2003 and 2002 3
Consolidated Statements of Financial Condition as of June 30, 2003
and December 31, 2002 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2003 and 2002 5
Notes To Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 30

Part II. OTHER INFORMATION 31
Item 1. Legal Proceedings 31
Item 2. Changes in Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 32

Signatures 33
Certifications 34


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.

-2-

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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2003 2002 2003 2002
--------- --------- --------- ---------

REVENUES
Transaction fees $ 275,909 $ 269,933 $ 531,133 $ 535,814
Interest 6,651 11,958 12,998 20,892
Investments 2,841 (13,181) (18,837) (18,895)
--------- --------- --------- ---------
TOTAL REVENUES 285,401 268,710 525,294 537,811

EXPENSES
Compensation and benefits 60,749 70,989 124,733 157,207
Soft dollar and commission recapture 49,604 61,738 98,662 115,329
Broker-dealer rebates 58,630 25,503 109,050 28,794
Brokerage, clearing and exchange fees 33,446 33,767 67,471 70,448
Communications and equipment 31,617 29,187 62,337 62,496
Depreciation and amortization 23,534 17,930 47,608 37,053
Occupancy 13,175 13,595 29,633 27,147
Professional fees 7,228 6,646 13,566 11,664
Marketing and business development 3,480 7,480 6,261 10,887
Other 8,407 16,852 16,267 32,526
Restructuring -- 42,410 -- 57,440
Insurance recovery of fixed assets lost
at the World Trade Center -- -- (5,000) --
--------- --------- --------- ---------
TOTAL EXPENSES 289,870 326,097 570,588 610,991
--------- --------- --------- ---------

Loss from continuing operations before income taxes (4,469) (57,387) (45,294) (73,180)
Income tax (expense) benefit (732) 14,117 5,775 19,820
--------- --------- --------- ---------
Loss from continuing operations (5,201) (43,270) (39,519) (53,360)
Discontinued operations:
Loss from operations of fixed income business -- (23,581) -- (33,356)
Income tax benefit -- 6,946 -- 10,770
--------- --------- --------- ---------
Loss before cumulative effect of change in
accounting principle (5,201) (59,905) (39,519) (75,946)
Cumulative effect of change in accounting
principle related to goodwill, net of tax -- -- -- (18,642)
--------- --------- --------- ---------
NET LOSS $ (5,201) $ (59,905) $ (39,519) $ (94,588)
========= ========= ========= =========

LOSS PER SHARE - BASIC AND DILUTED
Loss from continuing operations $ (0.02) $ (0.17) $ (0.12) $ (0.22)
Discontinued operations:
Loss from operations of fixed income business -- (0.10) -- (0.13)
Income tax benefit -- 0.03 -- 0.04
--------- --------- --------- ---------
Loss before cumulative effect of change in
accounting principle (0.02) (0.24) (0.12) (0.31)
Cumulative effect of change in accounting
principle, net of tax -- -- -- (0.07)
--------- --------- --------- ---------
NET LOSS PER SHARE $ (0.02) $ (0.24) $ (0.12) $ (0.38)
========= ========= ========= =========

Weighted average shares outstanding
Basic & Diluted 330,841 248,554 330,803 248,641


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

-3-

INSTINET GROUP INCORPORATED

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, Except Per Share Amounts)
(Unaudited)



JUNE 30, DECEMBER 31,
2003 2002
----------- -----------

ASSETS
Cash and cash equivalents ................................................... $ 305,139 $ 275,837
Securities segregated under federal regulations ............................. 189,457 251,775
Securities owned, at market value ........................................... 272,365 348,051
Securities borrowed ......................................................... 504,371 608,475
Receivable from broker-dealers .............................................. 285,456 159,695
Receivable from customers ................................................... 122,430 56,257
Commissions and other receivables, net ...................................... 94,575 85,296
Receivable from affiliates, net ............................................. -- 3,216
Due from Reuters ............................................................ 435 --
Investments ................................................................. 19,499 41,837
Fixed assets and leasehold improvements, net ................................ 151,295 176,775
Deferred tax assets, net .................................................... 70,570 70,223
Other intangible assets, net ................................................ 115,408 127,993
Other assets ................................................................ 85,831 77,465
----------- -----------
Total assets ........................................................... $ 2,216,831 $ 2,282,895
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Short-term borrowings ....................................................... $ 9,332 $ 27,279
Securities loaned ........................................................... 486,299 453,251
Payable to broker-dealers ................................................... 136,838 115,565
Payable to customers ........................................................ 290,995 278,569
Taxes payable ............................................................... 20,781 19,943
Due to Reuters .............................................................. -- 1,616
Accrued compensation ........................................................ 45,331 90,279
Accounts payable, accrued expenses and other liabilities .................... 233,110 272,859
----------- -----------
Total liabilities ...................................................... 1,222,686 1,259,361
----------- -----------

Commitments and contingencies (Note 6)

STOCKHOLDERS' EQUITY
Common stock, $0.01 par value (950,000 shares authorized, 330,925 and 330,920
issued and outstanding at June 30, 2003 and December 31, 2002,
respectively) ............................................................. 3,309 3,309
Additional paid-in capital .................................................. 1,661,122 1,661,118
Accumulated deficit ......................................................... (700,633) (661,114)
Treasury stock, at cost (67 and 206 shares, respectively) ................... (199) (1,270)
Accumulated other comprehensive income ...................................... 31,390 23,235
Unearned compensation ....................................................... (844) (1,744)
----------- -----------
Total stockholders' equity ............................................. 994,145 1,023,534
----------- -----------

Total liabilities and stockholders' equity ............................. $ 2,216,831 $ 2,282,895
=========== ===========





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



-4-

INSTINET GROUP INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)



SIX MONTHS ENDED
JUNE 30,
---------------------------
2003 2002
--------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (39,519) $ (94,588)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Unrealized loss on investments 19,258 14,214
Write off of fixed assets 2,083 4,513
Goodwill impairment write-down -- 19,046
Depreciation and amortization 47,608 37,053
Deferred tax assets, net (347) 4,870
Amortization of unearned compensation 900 3,000
Changes in operating assets and liabilities
Securities segregated under federal regulation 62,318 34,414
Securities borrowed, net of securities loaned 137,152 (55,705)
Net receivables from broker-dealers (104,488) (47,959)
Net payables from customers (53,747) (80,749)
Net receivables from affiliates 3,216 (13,000)
Securities sold, net of securities purchased 75,686 (73,277)
Receivables and other assets (17,645) 14,331
Payables and other liabilities (84,839) (68,897)
--------- ---------
Net cash provided by (used in) in operating activities 47,636 (302,734)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets and leasehold improvements (11,626) (13,314)
Purchase of investments -- (2,000)
Sale of investments 3,080 --
Acquisitions of businesses, net of assets acquired
and liabilities assumed -- (5,319)
--------- ---------
Net cash used in investing activities (8,546) (20,633)

CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net (17,947) 36,079
Purchase of treasury stock -- (1,335)
Issuance of common stock 4 --
--------- ---------
Net cash (used in) provided by in financing activities (17,943) 34,744

Effect of exchange rate differences $ 8,155 $ 7,657
--------- ---------
Increase (decrease) in cash and cash equivalents 29,302 (280,966)
Cash and cash equivalents, beginning of period 275,837 703,678
--------- ---------
Cash and cash equivalents, end of period $ 305,139 $ 422,712
========= =========


Non-cash activities:

The Company re-issued $1,146 of Treasury Stock in connection with its restricted
stock plan in the six months ended June 30, 2003.

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


-5-

INSTINET GROUP INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. ORGANIZATION AND DESCRIPTION OF BUSINESS

Instinet Group Incorporated (the "Company" or "Instinet") 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 also operates an alternative trading
system business consisting of the Instinet and Island ECNs and their clearing
broker, Instinet Clearing Services.

During the second quarter of 2003, the Company began formulating a
reorganization plan that includes separating the Company's management and
business operations into two distinct business lines: 1) the buy-side
value-added brokerage ("VAB"), which includes Lynch, Jones & Ryan ("LJR") our
commission recapture subsidiary and 2) the sell-side ECN or alternative trading
system ("ATS"). The purpose of the plan is to add strategic clarity to our
businesses and better serve our customers.

The Company is approximately 63% owned by subsidiaries of Reuters Group
PLC ("Reuters" or "Parent").

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 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
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.

TRANSACTION FEES

Transaction fees and related expenses arising from securities brokerage
transactions are recorded on a trade date basis.

SOFT DOLLAR AND COMMISSION RECAPTURE

Soft dollar and commission recapture expenses primarily relate to the
purchase of third party research products for customers as well as payments made
as part of the Company's commission recapture services. The Company reports its
transaction fee revenue from these businesses separately from its soft dollar
and commission recapture expenses.

INVESTMENTS

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


-6-

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.

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.

Investments are accounted for under the equity method if the Company has
the ability to exercise significant influence, but not control over the
investee. Significant influence is deemed to exist if the Company has ownership
of between 20% and 50%.

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

DEPRECIATION AND AMORTIZATION OF FIXED ASSETS

Depreciation of capitalized furniture and equipment is provided on a
straight-line basis using estimated useful lives of three to ten years.
Leasehold improvements are amortized on a straight-line basis over the lesser of
the lease term or the estimated useful life.

MARKETING AND BUSINESS DEVELOPMENT

Advertising costs are expensed when incurred.

SOFTWARE COSTS

Costs for internal use software, whether developed or obtained, are
assessed to determine whether they should be capitalized or expensed in
accordance with American Institute of Certified Public Accountants' Statement
("SOP") 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use."

INCOME TAXES

The Company files a consolidated income tax return in the U.S. and
combined U.S. state and local income tax returns, where applicable.

The Company records deferred tax assets and liabilities for the difference
between the tax basis of assets and liabilities and the amounts recorded for
financial reporting purposes, using current tax rates. Deferred tax expenses and
benefits are recognized in the Consolidated Statements of Operations for changes
in deferred tax assets and liabilities.

STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure an Amendment of FASB
Statement No. 123", amends the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), to require more prominent disclosures in both annual and interim
financial statements regarding the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.

The Company accounts for stock-based awards to employees and directors
using the intrinsic value method of accounting in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Under the intrinsic value method, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized in the Company's
Consolidated Statements of Operations. If the estimated fair value per share of
the Company at the date of grant is greater than the option exercise price, then
the Company


-7-

records compensation expense over the vesting period. For options granted to
non-employees, the Company uses the fair value method prescribed in SFAS 123 and
accordingly, records compensation expense over the vesting period.

Had the Company determined compensation cost based on the estimated fair
value at the grant dates for its stock based plans under SFAS 123, the Company's
net loss for the three and six months ended June 30, 2003 and 2002 would have
been as follows (in thousands, except per share amounts):



THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2003 2002 2003 2002
--------- --------- --------- ---------

Net loss, as reported $ (5,201) $ (59,905) $ (39,519) $ (94,588)
Add: Stock based employee compensation expense included in
net loss, net of related tax benefit 288 1,207 576 1,920
Deduct: Stock based employee compensation expense
determined under fair value based methods for all awards,
net of related tax benefit (7,690) (9,746) (15,640) (15,747)
--------- --------- --------- ---------
Pro forma net loss $ (12,603) $ (68,444) $ (54,583) $(108,415)
========= ========= ========= =========
Weighted average shares outstanding
Basic & diluted 330,841 248,554 330,803 248,641
Pro forma net loss per share - basic & diluted $ (0.04) $ (0.28) $ (0.17) $ (0.44)



CASH AND CASH EQUIVALENTS

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

SECURITIES OWNED ($ IN THOUSANDS)

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



BALANCE BALANCE
JUNE 30, DECEMBER 31,
-------- ------------
2003 2002
-------- --------

U.S. government and federal agency obligations $ 3,823 $ 10,867
Municipal bonds 139,830 157,683
Corporate bonds 59,640 91,909
Foreign sovereign obligations 38,312 58,146
Shares of stock exchanges 30,760 29,246
Other -- 200
-------- --------
Total $272,365 $348,051
======== ========


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 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

-8-

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 are 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 and payable to customers are primarily comprised of
institutional debit balances and payable to customers represent free credit
balances in customer accounts.

COMMISSIONS AND OTHER RECEIVABLES, NET ($ IN THOUSANDS)

Commissions and other receivables are reported net of a provision for
doubtful accounts of $26,636 and $22,002 as of June 30, 2003 and December 31,
2002, respectively.

Included in commissions and other receivables is approximately $29,545
from Archipelago L.L.C., B-Trade Services LLC and REDIBook ECN L.L.C of which
approximately $14,104 is under dispute. The Company has commenced arbitration
proceedings before the NASD and has established a reserve against the disputed
amount based upon a review of the facts and circumstances surrounding the
dispute.

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 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 its
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 as transaction fees in the period
during which they are incurred. These activities have not resulted in a material
impact to the Company's operations to date.

TREASURY STOCK

The Company's purchases of shares of its own common stock are recorded as
treasury stock under the cost method and are shown as a reduction to
stockholders' equity on the Consolidated Statements of Financial Condition.

-9-

RESTRUCTURING

The Company has accounted for its cost reduction initiatives and resulting
restructuring charges in accordance with EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)," SFAS No. 112,
"Employer's Accounting for Post Employment Benefits," and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 146,
which the Company adopted January 1, 2003, eliminates the future use of EITF
94-3 for restructuring initiatives. The adoption of SFAS No. 146 has not had a
material effect on the Company's financial condition, results of operations or
cash flows.

3. INVESTMENTS ($ IN THOUSANDS)

From time to time, the Company makes strategic alliances 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, as well as fluctuations in exchange rates for
investments made in non-U.S. dollars. The value of the Company's investments as
of June 30, 2003 and December 31, 2002 are as follows:



BALANCE BALANCE
JUNE 30, DECEMBER 31,
2003 2002
------- ------------

TP Group LDC $ -- $ 2,695
Archipelago Holdings LLC 10,000 15,000
The Nasdaq Stock Market, Inc 7,499 14,792
Tradeware S.A -- 3,254
JapanCross Securities Co. Ltd. -- 2,096
Starmine Corporation 2,000 2,000
e-Xchange Advantage Corporation -- 2,000
------- -------
Total $19,499 $41,837
======= =======


4. COLLATERAL ARRANGEMENTS ($ IN THOUSANDS)

As of June 30, 2003 and December 31, 2002, the fair value of collateral
held by the Company that can be sold or repledged totaled $601,987 and $777,286,
respectively. Such collateral is generally obtained under resale and securities
borrowing agreements. Of this collateral, $586,300 and $699,037 had been sold or
repledged generally to cover short sales or effect deliveries of securities as
of June 30, 2003 and December 31, 2002, respectively. In addition, securities in
customer accounts with a fair value of $48,525 and $47,549 could be sold or
repledged by the Company as of June 30, 2003 and December 31, 2002,
respectively.

5. NET CAPITAL REQUIREMENTS ($ IN THOUSANDS)

The Company's U.S. broker-dealer subsidiaries are subject to the SEC's
Uniform Net Capital Rule, which requires the maintenance of minimum net capital.
The subsidiaries have elected to use the alternative method, which requires that
they maintain minimum net capital equal to the greater of $250 or 2% of
aggregate debit items arising from customer transactions. As of June 30, 2003
and December 31, 2002, Instinet Clearing Services, Inc., which is the
counterparty to each of the customer transactions in U.S. securities executed
through Instinet Corporation, had net capital of $92,477 and $163,084, which was
$85,756 and $160,179 in excess of its required net capital of $6,721 and $2,905,
respectively. Certain other U.S. broker-dealer subsidiaries of the Company are
also subject to capital adequacy requirements and were in compliance with their
respective requirements.

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 June 30, 2003 and December 31, 2002, these
subsidiaries had met their local capital adequacy requirements.



-10-




6. COMMITMENTS AND CONTINGENCIES

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


7. COMPREHENSIVE INCOME (LOSS) ($ IN THOUSANDS)

Comprehensive income (loss) includes net loss and changes in stockholders'
equity except those resulting from investments by, or distributions to,
stockholders. Comprehensive income (loss) is as follows:


THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----

Net loss $ (5,201) $(59,905) $(39,519) $(94,588)
Changes in other comprehensive loss:
Foreign currency translation
adjustment 7,079 10,762 8,155 7,657
-------- -------- -------- --------
Total comprehensive income (loss),
net of tax $ 1,878 $(49,143) $(31,364) $(86,931)
======== ======== ======== ========



8. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ($ IN THOUSANDS)

Pursuant to SFAS 142, the Company changed its accounting policy related to
goodwill effective January 1, 2002. SFAS 142 requires that goodwill no longer be
amortized to earnings, but instead be reviewed for impairment at least annually.
Under SFAS 142, impairment is deemed to exist when the carrying value of
goodwill is greater than its implied fair value. This methodology differs from
the Company's previous policy, as permitted under accounting standards existing
before SFAS 142, of using undiscounted cash flows of the businesses acquired
over its estimated life.

During the first quarter of 2002, the Company identified indicators of
possible impairment of its recorded goodwill related to its ProTrader Group, LP
("ProTrader") and Montag Popper & Partner GmbH ("Montag") acquisitions. For
ProTrader, such indicators were an overall decrease in customer transaction
volumes, which primarily led to operating losses. As a result, the Company
closed several trading offices and restructured its operations. Based on the
results of a discounted cash flow analysis, the Company calculated a level of
goodwill impairment of $15,750, which was represented by the shortfall of the
discounted cash flows versus the carrying amount of goodwill. In May 2002, the
Company closed its fixed income trading platform. Due to a global economic
slowdown and the uneven pace of acceptance of electronic fixed income trading
platforms, the business had been unable to reach a critical mass. Therefore, the
Company's goodwill related to its acquisition of Montag, a fixed income
broker-dealer, was impaired and the Company recorded an impairment loss of
$3,296, the remaining carrying value of its goodwill.

The Company recorded goodwill impairment, net of taxes, of $18,642 or
$0.07 a share, for the six months ended June 30, 2002 as a change in accounting
principle.


9. RESTRUCTURING ($ IN THOUSANDS)

The Company has initiated several cost reduction programs, which have
resulted in restructuring charges. Information regarding the Company's
restructuring charges follows:

In July 2001, the Company announced a review of spending initiatives with
the aim of reducing its underlying operating cost structure. This restructuring
was completed in 2001 at a cost of $24,400 in the year ended December 31, 2001.
As of June 30, 2003, the Company carried a liability of $1,917 associated with
this restructuring on its Consolidated Statements of Financial Condition, which
is reflected as follows:



-11-



BALANCE BALANCE
DECEMBER JUNE 30,
31, 2002 PAYMENTS 2003
-------- -------- ----

Workforce reduction $2,798 $ 881 $1,917
Office closures/consolidation 475 475 --
------ ------ ------
Total $3,273 $1,356 $1,917
====== ====== ======



The Company expects to pay the remaining liability by December 31, 2003.

In March 2002, the Company announced that it would reduce its annualized
fixed operating costs in order to offset the impact of reduced revenues due to
its price reductions to U.S. broker-dealer customers. This restructuring
included reducing staff levels and related occupancy costs, improving system and
network efficiencies and restructuring non-core businesses. During the year
ended December 31, 2002, the Company incurred a charge of $58,395. As of June
30, 2003, the Company carried a liability of $12,133 associated with this
restructuring on its Consolidated Statements of Financial Condition, which is
reflected as follows:


BALANCE BALANCE
DECEMBER JUNE 30,
31, 2002 PAYMENTS 2003
-------- -------- ----

Workforce reduction $14,870 $8,073 $6,797
Office closures/consolidation 14,673 9,337 5,336
------- ------ ------
Total $29,543 $17,410 $12,133
======= ======= =======



The Company expects to pay a significant portion of the liability by
December 31, 2003.

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 The Island ECN ("Island"). This
restructuring included reducing staff levels and related occupancy costs. During
the year ended December 31, 2002, the Company incurred a charge of $62,405. As
of June 30, 2003, the Company carried a liability of $28,429 associated with
this restructuring on its Consolidated Statements of Financial Condition, which
is reflected as follows:


BALANCE BALANCE
DECEMBER 31, JUNE 30,
2002 PAYMENTS 2003
---- -------- ----

Workforce reduction $19,496 $16,814 $ 2,682
Office closures/consolidation 31,213 5,466 25,747
------- ------- -------
Total $50,709 $22,280 $28,429
======= ======= =======



The Company expects to pay approximately $6 million to $8 million of the
remaining liability by December 31, 2003.


-12-

10. DISCONTINUED OPERATIONS ($ IN THOUSANDS)

On May 3, 2002, the Company closed its fixed income trading platform. The
Company began developing its fixed income business in 1998 and started trading
in the spring of 2000. Against the background of a global economic slowdown and
the uneven pace of acceptance of electronic fixed income trading platforms, the
business had been unable to reach a critical mass. As a result of the closure,
the Company incurred the following charges:


THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2002
------------- -------------

Loss from discontinued operations:

Loss from operation of fixed income business $ (23,581) $ (33,356)
Income tax benefit 6,946 10,770
---------- ----------
Net loss from discontinued operations $ (16,635) $ (22,586)
========== ==========

Loss per share - basic and diluted:
Loss from operation of fixed income business $ (0.10) $ (0.13)
Income tax benefit 0.03 0.04
---------- ----------
Net loss per share $ (0.07) $ (0.09)
========== ==========



The Company recorded a restructuring charge of $22,514 related to the
closure of its fixed income platform for the year ended December 31, 2002. As of
June 30, 2003, the Company had substantially paid this liability.


11. INTANGIBLE ASSETS ($ IN THOUSANDS)

Information regarding the Company's identifiable intangible assets are as
follows:


ESTIMATED
LIFE IDENTIFIABLE
(YEARS) VALUE
------- -----

Technology 7.0 $ 122,984
Customer relationships 5.0 15,500
Trade name 1.5 4,800
Non-compete agreements 1.0 1,300



BALANCE
BALANCE DECEMBER
JUNE 30, 31,
2003 2002
---- ----

Gross carrying amount $ 144,584 $ 144,584
Accumulated amortization (29,176) (16,591)
--------- ---------
Net carrying amount $ 115,408 $ 127,993
========= =========



Intangible assets arose in connection with the Company's acquisitions of
ProTrader in October 2001 and Island in September 2002. The intangible assets
are amortized on a straight-line basis over their respective estimated useful
lives as shown above.

Amortization expense was $6,292 and $2,572 for the three months ended June
30, 2003 and 2002, respectively, and $12,585 and $5,166 for the six months ended
June 30, 2003 and 2002, respectively. Estimated amortization expense for each of
the next 5 years is as follows:


Year Ending December 31, 2004 $21,390
Year Ending December 31, 2005 $20,670
Year Ending December 31, 2006 $20,670
Year Ending December 31, 2007 $19,817
Year Ending December 31, 2008 $15,211


-13-

12. SALE OF PROTRADER ACCOUNTS ($ IN THOUSANDS)

During the second quarter of 2003, the Company sold substantially all of
ProTrader Securities L.P.'s assets to Electronic Trading Group LLC and
recognized a loss of $350.


13. STOCK-BASED PLANS (SHARES IN THOUSANDS)

During the six months ended June 30, 2003, the Company issued 10,002
options with an exercise price of $3.25 per option, expiring in March 2010.


14. TREASURY STOCK ($ AND SHARES IN THOUSANDS)

During the three months ended June 30, 2003, the Company reissued 28
shares of treasury stock at a cost of $559 and in the six months ended June 30,
2003, the Company reissued 166 shares of treasury stock at a cost of $1,146 in
connection with its Restricted Stock Unit plan. During the three months ended
June 30, 2003, the Company purchased 21 shares at a cost of $75.





-14-

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

OVERVIEW

We are the largest global electronic agency securities broker and have
been providing investors with electronic trading solutions for more than 30
years. Our services enable buyers and sellers worldwide to trade securities
directly and anonymously with each other, gain price improvement for their
trades, manage their orders and lower their overall trading costs. Through our
electronic platforms, our customers also can access over 40 securities markets
throughout the world, including Nasdaq, the NYSE and stock exchanges in
Frankfurt, Hong Kong, London, Paris, Sydney, Tokyo, Toronto and Zurich. Our
customers primarily consist of institutional investors, such as mutual funds,
pension funds, insurance companies and hedge funds, as well as market
professionals, including broker-dealers.

Business Environment

Market and economic conditions improved in the second quarter of 2003
compared to the first quarter of 2003 but we continue to operate in a
challenging business, economic and regulatory environment characterized by
strong competition. Equity market volumes increased during the second quarter of
2003 with the Nasdaq share volume, a primary driver of our business, up 26.4%
over the first quarter of 2003 but down 3.9% from the second quarter of 2002.
Although, our gross transaction fee revenues of $275.9 million increased from
$269.9 million in the comparable period in 2002, much of this gain was offset by
an increase to $58.6 million from $25.5 million in broker-dealer rebate expense.
Our average pricing for U.S. equities has leveled off the past several quarters
but has decreased significantly compared to the three months ended June 30,
2002. This decrease is due primarily to reductions in our broker-dealer pricing
during 2002 as well as an increase in lower priced broker-dealer volume as a
percentage of total volume. We believe the increase in our broker-dealer volume
resulted from our acquisition of Island in September 2002 and organic growth
due to our price change and improvements in our services.

Strategic Developments

During the second quarter of 2003, we began formulating a reorganization
plan that includes separating our management and business operations into two
distinct business lines: 1) the value-added brokerage ("VAB"), which includes
our buy-side institutional customers as well as Lynch, Jones & Ryan ("LJR"), our
commission recapture subsidiary and 2) the sell-side ECN or alternative trading
system ("ATS"). The purpose of the plan is to add strategic clarity to our
businesses and better serve our customers. As a result of the reorganization
plan, we expect to record a restructuring charge in the second half of 2003 or
concurrent with the implementation of the restructuring plan.

The VAB is a global business that seeks best execution on behalf of its
customers. The VAB will continue to focus on products and services that enhance
the trading experience and investment performance of its clients. These may
include unbiased access to all major equity pools of liquidity, unconflicted and
trusted sales trading expertise along with sophisticated execution tools and
strategies, and independent and exclusive research to help improve investment
performance. The VAB is expected to cater to both self-directed electronic
traders and those seeking sales trading and assisted execution, and to provide
for all clients access to domestic and international equity markets, rules-based
trading, block trading, portfolio trading and other services.

LJR provides agency broker services and focuses on pension plan sponsors
rather than money management.

Our sell-side ATS business consists of the Instinet and Island ECNs and
their clearing broker, Instinet Clearing Services. The ATS collects,
prioritizes, displays, and matches orders within its member network. We will
focus on integrating our two ECNs and developing the ATS to offer matching and
routing services for our U.S.-registered broker-dealer subscribers. Institutions
and non-U.S. broker-dealers will need to be sponsored by a U.S. broker-dealer to
gain access to the ATS. All member broker-dealers will enjoy equal access to the
ATS, and will be permitted to redistribute access to third parties.


-15-

Upon completion of the reorganization we will provide separate financial
disclosures for the VAB and the ATS as established by SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information".

Market Share and Market Volumes

During the quarter ended June 30, 2003, trading volumes in the U.S.
markets increased to 239.8 billion shares from 224.5 billion for the comparable
period in 2002. Total Nasdaq-listed share volume was 112.5 billion shares in the
three months ended June 30, 2003, down 3.1% from 116.1 billion shares for the
comparable period in 2002. U.S. exchange-listed share volume was 127.3 billion
shares in the three months ended June 30, 2003, up from 108.4 billion shares for
the comparable period in 2002. Our percentage of overall market share increased
to 15.5% of total U.S. market share volume, which comprised 28.4% of Nasdaq
share volume, and 4.0% of U.S. exchange-listed share volume, in the three months
ended June 30, 2003. Our market share in Nasdaq-listed stocks and trading
volumes has increased significantly since the third quarter of 2002, due to our
acquisition of Island in September 2002, our various pricing changes and the
introduction of our broker-dealer rebate expense.

Non-GAAP Financial Measurements

In evaluating our financial performance and results of operations,
management reviews certain financial measures that are not in accordance with
generally accepted accounting principles in the United States ("non-GAAP").
Non-GAAP measurements do not have any standardized meaning and are therefore
unlikely to be comparable to similar measures presented by other companies.
Management uses non-GAAP financial measures in evaluating our operating
performance. In light of the use by management of these non-GAAP measurements to
assess our operational performance, we believe it is useful to provide
information with respect to these non-GAAP measurements so as to share this
perspective of management. These non-GAAP financial measures should be
considered in context with our GAAP results.

Our transaction fees earned from our customers trading equity securities
have represented, and continue to represent, a substantial part of our revenues.
GAAP requires us to add our soft dollar and commission recapture expenses and
broker-dealer rebates, dollar-for-dollar, to related equity transaction fee
revenues, which has a dilutive effect on our operating margins. Therefore, when
evaluating our revenues from equity transactions, management reviews our net
equity transaction fee revenue, based on U.S. securities and non-U.S.
securities. Our net equity transaction fee revenues are calculated by
subtracting the soft dollar and commission recapture expenses as well as
broker-dealer rebates from the related equity transaction fees, as well as
non-equity related revenues, and is calculated as follows:


THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2003 2002 2003 2002
---- ---- ---- ----

Total

Transaction fee revenue, as reported $275,909 $269,933 $531,133 $535,814
Less non equity related transaction fee
revenue 3,360 2,538 6,717 5,547
Less soft dollar revenues and commission
recapture expenses 49,604 61,738 98,662 115,329

Less broker-dealer rebates 58,630 25,503 109,050 28,794
-------- -------- -------- --------
Net equity transaction fee revenue $164,315 $180,154 $316,704 $386,144
======== ======== ======== ========

U.S. markets

Transaction fee revenue $229,973 $213,851 $441,907 $429,369
Less non equity related transaction fee
revenue 3,360 2,538 6,717 5,547
Less soft dollar revenues and commission
recapture expenses 32,508 45,598 68,295 88,043
Less broker-dealer rebates 58,630 25,503 109,050 28,794
-------- -------- -------- --------
Net equity transaction fee revenue $135,475 $140,212 $257,845 $306,985
======== ======== ======== ========

U.S. markets revenue per share

Average U.S. equity transaction fee
revenue (per share, per side) $ 0.0031 $ 0.0056 $ 0.0032 $ 0.0063
Less non equity related transaction fee
revenue 0.0001 0.0001 0.0001 0.0001
Less soft dollar revenues and commission
recapture expenses 0.0004 0.0012 0.0005 0.0013


-16-



Less broker-dealer rebates 0.0008 0.0007 0.0008 0.0004
-------- -------- -------- --------
Average U.S. equity net transaction fee
revenue (per share, per side) $ 0.0018 $ 0.0036 $ 0.0018 $ 0.0045
======== ======== ======== ========

Non-U.S. markets

Transaction fee revenue $ 45,936 $ 56,082 $ 89,226 $106,445
Less soft dollar revenues and commission
recapture expenses 17,096 16,140 30,367 27,286
-------- -------- -------- --------
Net equity transaction fee revenue $ 28,840 $ 39,942 $ 58,859 $ 79,159
======== ======== ======== ========




Critical Accounting Policies

Our accounting policy related to our strategic alliances and long term
investments ("investments") is a critical accounting policy that requires us to
make estimates and use judgments that could affect our results.

Our investments with no ready market 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.

For the six months ended June 30, 2003, we wrote down our investments in
TP Group LDC, Archipelago Holding LLC, The Nasdaq Stock Market, Inc., Tradeware
S.A., JapanCross Securities Co. Ltd. and e-Xchange Advantage Corporation by an
aggregate $22.3 million, based upon management's best judgment of each
investment's respective fair market value. For the six months ended June 30,
2002, we wrote down our investments in WR Hambrecht & Co., TP Group LDC,
Tradeware S.A., JapanCross Securities Co. Ltd., Vencast, Inc. and Knight
Roundtable Europe Ltd. by an aggregate $14.2 million, based upon management's
best judgment of each investment's respective fair market value.


Recently Issued Accounting Standards

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
In addition, the statement clarifies when a contract is a derivative and when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. SFAS No. 149 is generally effective prospectively for
contracts entered into or modified, and hedging relationships designated, after
June 30, 2003. Management does not expect adoption of this standard to have a
material effect on our financial condition, results of operations or cash flows.

In May 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 is effective for
all financial instruments created or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. Management does not expect adoption of this standard to have a
material effect on our financial condition, results of operations or cash flows.

-17-

KEY STATISTICAL INFORMATION

The following table presents key transaction volume information as well as
certain other operating information.

CONSOLIDATED STATISTICAL DATA



THREE MONTHS SIX MONTHS
ENDED (5) ENDED (5)
------------------- -------------------
JUNE JUNE JUNE JUNE
30, 30, 30, 30,
2003 2002 2003 2002
---- ---- ---- ----

Total U.S. equity share volume (millions)1,2 239,780 224,527 444,139 436,826
Instinet's U.S. equity share volume
(millions)1,2 37,065 19,221 68,606 34,381
Instinet's share of total U.S. equity share
volume 1,2 15.5% 8.6% 15.4% 7.9%
-------- -------- -------- --------
Total Nasdaq-listed equity share volume
(millions)2 112,524 116,114 201,539 225,543
Instinet's Nasdaq-listed equity share volume
(millions)2 31,996 16,149 58,337 28,192
Instinet's share of total Nasdaq-listed equity
share volume 2 28.4% 13.9% 28.9% 12.5%
-------- -------- -------- --------

Total U.S. exchange-listed equity share
volume (millions)2 127,256 108,413 242,599 211,283
Instinet's U.S. exchange-listed equity share
volume (millions)2 5,069 3,072 10,269 6,189
Instinet's share of total U.S.
exchange-listed equity share volume 2 4.0% 2.8% 4.2% 2.9%
-------- -------- -------- --------

Instinet's U.S. equity transaction volume
(thousands) 75,934 27,000 143,921 45,953
Instinet's non-U.S. equity transaction
volume (thousands) 1,547 1,955 3,708 3,912
-------- -------- -------- --------
Instinet's total equity transaction volume
(thousands) 77,481 28,955 147,629 49,865
-------- -------- -------- --------
Instinet's average U.S. equity transaction
size (shares per transaction) 488 712 477 748
Instinet's average equity transactions per
day (thousands) 1,205 422 1,161 371
-------- -------- -------- --------
Transaction fees from U.S. equities
(thousands) $229,973 $213,851 $441,907 $429,369
Transaction fees from non-U.S. equities
(thousands) 45,936 56,082 89,226 106,445
-------- -------- -------- --------

Total equity transaction fees (thousands) $275,909 $269,933 $531,133 $535,814
======== ======== ======== ========
Net transaction fees from U.S. equities
(thousands) (non-GAAP financial measure)3 $135,475 $140,212 $257,845 $306,985
Net transaction fees from non-U.S. equities
(thousands) (non-GAAP financial measure)3 28,840 39,942 58,859 79,159
-------- -------- -------- --------
Total net equity transaction fees (thousands)
(non-GAAP financial measure) 3 $164,315 $180,154 $316,704 $386,144
======== ======== ======== ========
Instinet's average U.S. equity transaction
fee revenue per share 4 $ 0.0031 $ 0.0056 $ 0.0032 $ 0.0063
Instinet's average net U.S. equity transaction
fee revenue per share (non-GAAP financial
measure) 3,4 $ 0.0018 $ 0.0036 $ 0.0018 $ 0.0045


(1) U.S. shares consist of shares of U.S. exchange-listed and Nasdaq-listed
stocks.

(2) For a description of how we calculate our share volumes, see "Nasdaq
Volume Calculations" and "Calculation of Instinet ATS and Island ATS Volume
Combined Volumes" in our Annual Report on Form 10-K for the year ended December
31, 2002.

(3) Our net equity transaction fee revenues are calculated by subtracting the
soft dollar and commission recapture expenses and broker-dealer rebates from the
related equity transaction fees. GAAP requires us to add our soft dollar and
commission recapture expenses and broker-dealer rebates, dollar-for-dollar, to
related equity transaction fee revenues. See Non-GAAP Financial Measurements.

(4) Average transaction fee revenue is calculated by dividing transaction fee
revenue for the buy and sell side of each transaction by total share volume. See
Non-GAAP Financial Measurements.

(5) Represents Instinet Group Incorporated volume from all sources, including
the Island ECN subsequent to September 20, 2002 and Instinet Corporation.


-18-

The following table presents customer operating data and market share that
reflects our planned reorganization of the company into two separate business
lines.

CUSTOMER OPERATING DATA 1


QUARTER ENDED
-------------------------------------------------------------
JUNE 30, MAR 31, DEC 31, SEPT 30, JUNE 30, MAR 31,
2003 2003 2002 2002 2002 2002
---- ---- ---- ---- ---- ----

Value Added Broker
A. US Equities
Average daily volume (million shares) 87 83 85 88 90 100
Amount charged to client per share 2 $0.0144 $0.0141 $0.0150 $0.0154 $0.0168 $0.0176

B. Non-US Equities
Average daily consideration (millions) 3 $ 666 $ 783 $ 751 $ 936 $ 874 $ 940
Average basis points charged to client per
consideration traded 3 5.7 5.1 5.5 5.6 5.8 5.9

Alternative Trading System
Matched average daily volume 4

NASDAQ-listed equity share volume (million
shares) 444 380 450 313 208 155
Share of total market 24.8% 26.1% 27.4% 18.2% 11.4% 8.5%

U.S. exchange-listed equity share volume
(million shares) 45 48 47 17 6 8
Share of total market 2.2% 2.5% 2.4% 0.8% 0.4% 0.5%

U.S. total equity share volume (million
shares) 5 489 428 497 330 214 163
Share of total market 12.8% 12.8% 13.9% 8.8% 6.1% 4.6%


(1) For a description of how we calculate our share volumes, see "Nasdaq
Volume Calculations" and "Calculation of Instinet ATS and Island ATS Volume
Combined Volumes" in our Annual Report on Form 10-K for the year ended December
31, 2002.

(2) Net of soft dollar and commission recapture expenses and broker-dealer
rebates.

(3) Commissions on European and Asian transactions are calculated as a
percentage (i.e., basis points) of the total value (i.e., consideration of the
transaction) (price times number of shares).

(4) Matched volume reflects transactions where the buyer and seller are matched
on our ATSs.

(5) U.S. shares consist of shares of exchange-listed and Nasdaq-listed stocks.




-19-

RESULTS OF OPERATIONS

The following table sets forth our consolidated statements of operations
data for the periods presented as a percentage of total revenues:


THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----

REVENUES

Transaction fees 96.7% 100.5% 101.1% 99.6%
Interest 2.3% 4.5% 2.5% 3.9%
Investments 1.0% (4.9)% (3.6)% (3.5)%
----- ----- ----- -----
TOTAL REVENUES 100.0% 100.0% 100.0% 100.0%

EXPENSES

Compensation and benefits 21.3% 26.4% 23.7% 29.2%
Soft dollar and commission recapture 17.4% 23.0% 18.8% 21.4%
Broker-dealer rebates 20.5% 9.5% 20.8% 5.4%
Brokerage, clearing and exchange fees 11.7% 12.6% 12.8% 13.1%
Communications and equipment 11.1% 10.9% 11.9% 11.6%
Depreciation and amortization 8.2% 6.7% 9.1% 6.9%
Occupancy 4.6% 5.1% 5.6% 5.0%
Professional fees 2.5% 2.5% 2.6% 2.2%
Marketing and business development 1.2% 2.8% 1.2% 2.0%
Other 2.9% 6.3% 3.1% 6.0%
Restructuring -- 15.8% -- 10.7%
Insurance recovery of fixed assets lost
at the World Trade Center -- -- (1.0)% --
----- ----- ----- -----
TOTAL EXPENSES 101.6% 121.4% 108.6% 113.6%
----- ----- ----- -----

Loss from continuing operations before income taxes (1.6)% (21.4)% (8.6)% (13.6)%
Income tax (expense) benefit (0.3)% 5.3% 1.1% 3.7%
----- ----- ----- -----
Loss from continuing operations (1.8)% (16.1)% (7.5)% (9.9)%
Discontinued operations:
Loss from operations of fixed income business
-- (8.8)% -- (6.2)%
Income tax benefit -- 2.6% -- 2.0%
----- ----- ----- -----
Loss before cumulative effect of change in accounting
principle (1.8)% (22.3)% (7.5)% (14.1)%
Cumulative effect of change in accounting principle
related to goodwill, net of tax -- -- -- (3.5)%
----- ----- ----- -----

NET LOSS (1.8)% (22.3)% (7.5)% (17.6)%
===== ===== ===== =====



-20-


THREE MONTHS ENDED JUNE 30, 2003 VERSUS THREE MONTHS ENDED JUNE 30, 2002

Overview

Our net loss was $5.2 million in the three months ended 2003 compared
to $59.9 million for the three months ended 2002. Our revenues increased 6.2% to
$285.4 million for the three months ended June 30, 2003 from $268.7 million for
the comparable period in 2002 primarily due to increased volumes due to our
acquisition of Island and market share growth partly offset by lower average
pricing.

Expenses decreased 11.1% to $289.9 million for the three months ended
June 30, 2003 from $326.1 million for the comparable period in 2002. Our
expenses for the three months ended June 30, 2003 included $7.9 million of
expense related to severance charges. Our expenses for the three months ended
June 30, 2002 included a restructuring charge of $42.4 million related to our
cost reduction initiatives. The 11.1% decrease is primarily related to the prior
year restructuring charge, lower compensation and benefits, soft dollar and
commission recapture offset by higher broker-dealer rebates and depreciation and
amortization expense.

Revenues

Transaction fee revenue increased 2.2% to $275.9 million for the three
months ended June 30, 2003 from $269.9 million for the three months ended June
30, 2002. The increase was primarily because of an increase in volume due to the
acquisition of Island partly offset by lower average pricing and a decline in
our soft dollar revenues and revenues that are subject to commission recapture.
Our total net equity transaction fee revenue (a non-GAAP financial measure)
declined 8.8% to $164.3 million for the three months ended June 30, 2003 from
$180.2 million for the three months ended June 30, 2002 primarily due to a
decrease in our average pricing for U.S. equities and a decline in non-U.S.
volume traded. Our average net U.S. equity transaction fee revenue per U.S.
share (a non-GAAP financial measure) decreased approximately 50.0% to $0.0018 in
the three months ended June 30, 2003 from $0.0036 for the comparable period in
2002. Our average U.S. equity transaction fee revenue per U.S. share (the
equivalent GAAP measure) decreased approximately 44.6% to $0.0031 in the three
months ended June 30, 2003 from $0.0056 for the comparable period in 2002. The
decline in our average pricing reflects an increase in broker-dealer rebate
expense and an increase in lower priced broker-dealer volume as a result of both
our acquisition of Island and organic growth due to our price changes.

Our soft dollar revenues and revenues that are subject to commission
recapture, which are offset dollar-for-dollar by our soft dollar research
payments and commission recapture expenses, decreased 19.7% to $49.6 million for
the three months ended June 30, 2003 from $61.7 million for the comparable
period in 2002. This change was primarily due to a decrease in our soft dollar
service mitigated by expanded use of our commission recapture services offered
by our Lynch, Jones & Ryan subsidiary.

Interest revenue decreased 44.4% to $6.7 million for the three months
ended June 30, 2003 from $12.0 million for the comparable period in 2002. This
decrease was primarily due to lower cash balances compared to the prior year and
a decrease in interest rates which affects the revenue generated by our stock
borrowing activities related to our clearing services.

Unrealized gains and losses on our investments changed to a gain of
$2.8 million for the three months ended June 30, 2003 from a loss of $13.2
million for the comparable period in 2002. For the three months ended June 30,
2003, we recorded gains due to an increase in the carrying value of certain of
our investments in non-U.S. exchanges, offset in part by write-downs of other
investments. For the three months ended June 30, 2002, we recorded write-downs
of $11.2 million, in particular, on our investments in WR Hambrecht + Co, TP
Group LDC and JapanCross Securities Co. Ltd.



-21-

Expenses

Compensation and benefits expense decreased 14.4% to $60.7 million for
the three months ended June 30, 2003 from $71.0 million for the comparable
period in 2002. This decrease was primarily due to a decrease in our worldwide
headcount as part of our cost reduction initiatives, as well as a decline in
incentive compensation due to our lower net revenues. Partly offsetting this
decrease was a severance charge of $7.9 million in the three months ended June
30, 2003. Our total headcount decreased to 1,311 (including 86 employees from
Island) as of June 30, 2003 from 1,559 employees as of June 30, 2002. Employees
have also been given incentives through the issuance of stock options and it is
our policy not to reflect an expense for stock options granted to employees.

Soft dollar and commission recapture expense decreased 19.7% to $49.6
million for the three months ended June 30, 2003 from $61.7 million for the
comparable period in 2002. This expense is offset dollar-for-dollar by soft
dollar revenues and revenues that are subject to commission recapture. The
decrease was primarily due to a reduced use of our soft dollar services partly
offset by expanded use of commission recapture services offered by our Lynch,
Jones & Ryan subsidiary.

Broker-dealer rebates expense increased to $58.6 million for the three
months ended June 30, 2003 from $25.5 million for the comparable period in 2002.
In March 2002, we began offering commission rebates, which are recorded as an
expense to broker-dealers who provide liquidity to our ECNs. Commissions are
charged to broker-dealers who consume liquidity, which is recorded as
transaction fee revenue. The commissions we charge to liquidity consumers more
than offset the amount we pay to broker-dealers who provide liquidity. Island
contributed $28.7 million of additional broker-dealer rebate expense for the
three months ended June 30, 2003.

Brokerage, clearing and exchange fees decreased 1.0% to $33.4 million
for the three months ended June 30, 2003 to $33.8 million for the comparable
period in 2002. The impact of higher transaction volumes was more than offset by
lower clearing costs, particularly in the U.S., due to a decline in trade
reporting expenses and benefits from technology efficiencies.

Communications and equipment expense increased 8.3% to $31.6 million
for the three months ended June 30, 2003 from $29.2 million for the comparable
period in 2002. This increase was primarily due to additional charges associated
with our migration of clients to a third-party network. We expect this
transition to be substantially complete by the end of the third quarter. Island
contributed $3.3 million of additional communications and equipment costs in the
three months ended June 30, 2003.

Depreciation and amortization expense increased 31.3% to $23.5 million
for the three months ended June 30, 2003 from $17.9 million for the comparable
period in 2002. This increase was primarily due to amortization related to
intangible assets recorded in connection with our acquisition of Island in
September 2002.

Occupancy expense decreased 3.1% to $13.2 million for the three months
ended June 30, 2003 from $13.6 million for the comparable period in 2002. This
decrease was primarily a result of consolidation of our office space as part of
the cost reduction initiative, partially offset by our acquisition of Island,
which contributed $1.1 million.

Other expenses decreased 50.1% to $8.4 million for the three months
ended June 30, 2003 from $16.9 million for the comparable period in 2002. The
decrease was due to lower expense for bad debt. As part of our cost reduction
initiatives, travel and office related expenses also decreased.

Provision for Income Taxes

Our provision for taxes increased to $0.7 million for the three months
ended June 30, 2003 from a benefit of $14.1 million in the comparable period in
2002 as a result of our lower loss before income taxes and our ability to
realize our losses in our non-U.S. entities and investments. As a result, our
effective income tax rate decreased to negative 16.4% for the three months ended
June 30, 2003 from 24.5% for the comparable period in 2002.

-22-

SIX MONTHS ENDED JUNE 30, 2003 VERSUS SIX MONTHS ENDED JUNE 30, 2002

Overview

Our net loss was $39.5 million for the six months ended June 30, 2003
compared to a net loss of $94.6 million for the six months ended June 30, 2002.
Our revenues decreased 2.3% to $525.3 million for the six months ended June 30,
2003 from $537.8 million for the comparable period in 2002 primarily as a result
of lower average pricing, which was partly offset by increased volumes due to
our acquisition of Island.

Expenses decreased 6.6% to $570.6 million for the six months ended June
30, 2003 from $611.0 million for the comparable period in 2002. Our expenses for
the first six months of 2003 included $19.4 million of charges related to our
recently announced cost reduction initiative as well as an insurance recovery of
$5.0 million for fixed assets lost at the World Trade Center on September 11,
2001. Our expenses for the first six months of 2002 included a restructuring
charge of $57.4 million related to our cost reduction initiatives. The 6.6%
decrease is primarily related to the prior year restructuring charge lower
compensation and benefits, soft dollar and commission recapture and other
expenses offset by higher broker-dealer rebates and depreciation and
amortization expense.

Revenues

Transaction fee revenue decreased 0.9% to $531.1 million for the six
months ended June 30, 2003 from %535.8 million for the comparable period in
2002. The decrease was primarily because of lower average pricing and a decline
in our soft dollar revenues and revenues that are subject to commission
recapture partly offset by an increase in volume due to the acquisition of
Island. Our total net equity transaction fee revenue (a non-GAAP financial
measure) declined 18.0% to $316.7 million for the six months ended June 30, 2003
from $386.1 million for the six months ended June 30, 2002 primarily due to our
average pricing for U.S. equities decreased 59.6% to $0.0018 in the six months
ended June 30, 2003 from $0.0045 for the comparable period in 2002. Our average
U.S. equity transaction fee revenue per U.S. share (the equivalent GAAP measure)
decreased approximately 48.9% to $0.0032 in the six months ended June 30, 2003
from $0.0063 for the comparable period in 2002. The decline in our average
pricing reflects an increase in lower priced broker-dealer volume as a result of
both our acquisition of Island and organic growth due to our price reduction and
service improvements.

Our soft dollar revenues and revenues that are subject to commission
recapture, which are offset dollar-for-dollar by our soft dollar research
payments and commission recapture expenses, decreased 14.5% to $98.7 million for
the six months ended June 30, 2003 from $115.3 million for the comparable period
in 2002. This change was primarily due to a decrease in our soft dollar service
mitigated by expanded use of our commission recapture services offered by our
Lynch, Jones & Ryan subsidiary.

Interest revenue decreased 37.8% to $13.0 million for the six months
ended June 30, 2003 from $20.9 million for the comparable period in 2002. This
decrease was primarily due to lower cash balances compared to the prior year and
a decrease in interest rates which affects the revenue generated by our stock
borrowing activities related to our clearing services.

Unrealized losses on our investments were $18.8 million for the six
months ended June 30, 2003 and $18.9 million for the six months ended June 30,
2002. For the six months ended June 30, 2003, we recorded write-downs of certain
investments offset in part by the increase in the carrying value of certain of
our investments in non-U.S. exchanges. For the six months ended June 30, 2002,
we recorded aggregate write-downs of $11.8 million, in particular, to our
investments in WR Hambrecht + Co, TP Group LDC and JapanCross Securities Co.
Ltd. In addition, we recognized an unrealized loss of $2.5 million on shares we
own in certain non-U.S. stock exchanges.

-23-

Expenses

Compensation and benefits expense decreased 20.7% to $124.7 million for
the six months ended June 30, 2003 from $157.2 million for the comparable period
in 2002. This decrease was primarily due to a decrease in our worldwide
headcount, as part of our cost reduction initiatives, as well as a decline in
incentive compensation due to our lower net revenues. Partly offsetting this
decrease was a severance charge of $17.1 million related to headcount reduction
as a result of the cost reduction initiative we announced in March 2003. Our
total headcount decreased to 1,311 employees as of June 30, 2003 (including 86
employees from Island) from 1,559 employees as of June 30, 2002. Employees have
also been given incentives through the issuance of stock options and it is the
Company's policy not to reflect an expense for stock options granted to
employees.

Soft dollar and commission recapture expense decreased 14.5% to $98.7
million for the six months ended June 30, 2003 from $115.3 million for the
comparable period in 2002. This expense is offset dollar-for-dollar by soft
dollar revenues and revenues that are subject to commission recapture. The
decrease was primarily due to a reduced use of our soft dollar services partly
offset by expanded use of commission recapture services offered by our Lynch,
Jones & Ryan subsidiary.

Broker-dealer rebates expense increased to $109.1 million for the six
months ended June 30, 2003 from $28.8 million for the comparable period in 2002.
In March 2002, we began offering commission rebates, which are recorded as an
expense to broker-dealers who provide liquidity to our ECNs. Commissions are
charged to broker-dealers who consume liquidity, which is recorded as
transaction fee revenue. The commissions we charge to liquidity consumers more
than offset the amount we pay to broker-dealers who provide liquidity. Island
contributed $53.2 million of additional broker-dealer rebate expense for the six
months ended June 30, 2003.

Brokerage, clearing and exchange fees decreased 4.2% to $67.5 million
for the six months ended June 30, 2003 from $70.4 million for the comparable
period in 2002. Higher transaction volumes were more than offset by lower
clearing costs, particularly in the U.S., due to a decline in trade reporting
expenses and benefits from technology efficiencies.

Communications and equipment expense was $62.3 million for the six
months ended June 30, 2003 and $62.5 million for the six months ended June 30,
2002, comparable to the prior year. The decrease was due to lower core
communications, equipment and maintenance costs mitigated by additional charges
associated with our migration of clients to a third-party network. We expect
this transition to be substantially complete by the end of the third quarter.
Island contributed $5.9 million of additional communications and equipment costs
in the six months ended June 30, 2003.

Depreciation and amortization expense increased 28.5% to $47.6 million
for the six months ended June 30, 2003 from $37.1 million for the comparable
period in 2002. This increase was primarily due to amortization related to
intangible assets recorded in connection with our acquisition of Island in
September 2002.

Occupancy expense increased 9.2% to $29.6 million for the six months
ended June 30, 2003 from $27.1 million for the comparable period in 2002. This
increase was primarily due to a one-time charge of $2.3 million related to
consolidation of our office space as part of the cost reduction initiative
announced in March 2003, as well as our acquisition of Island, which contributed
$2.8 million. Offsetting this increase was the impact of the consolidation of
our office space as part of the cost reduction initiative.

Other expenses decreased 50.0% to $16.3 million for the six months
ended June 30, 2003 from $32.5 million for the comparable period in 2002. The
decrease was due to a lower bad debt expense and the fact that other expenses in
the six months ended June 30, 2002 included a $2.5 million expense for a loan to
an investment, which ceased operations. As part of our cost reduction
initiatives, travel and office related expenses also decreased.

Recovery of fixed assets lost at the World Trade Center relates to
insurance recovery of losses we incurred in our office at the World Trade Center
as a result of the events of September 11, 2001. We recovered $5.0 million from
our insurance carrier in the six months ended June 30, 2003.

-24-

Provision for Income Taxes

Our tax benefit decreased to $5.8 million in the six months ended June
30, 2003 from $19.8 million in the comparable period in 2002 as a result of our
decreased loss before income taxes. Our effective income tax rate decreased to
12.8% for the six months ended June 30, 2003 from 27.1% for the comparable
period in 2002 primarily due to the ability to realize our losses in our
non-U.S. entities and investments.

Cumulative Effect of Change in Accounting Principle

Cumulative effect of change in accounting principle related to
goodwill, net of tax, was $18.6 million for the six months ended June 30, 2002.
We adopted SFAS 142 on January 1, 2002. SFAS 142 requires that goodwill no
longer be amortized to earnings, but instead be reviewed for impairment.
Impairment is deemed to exist when the carrying value of goodwill exceeds its
implied fair value. This methodology differs from our previous policy, as
permitted under accounting standards existing before SFAS 142, of using
undiscounted cash flows of the businesses acquired over its estimated life. We
incurred goodwill impairment before tax of $15.7 million related to our
acquisition of ProTrader and $3.3 related to our acquisition of Montag, a fixed
income broker-dealer in Germany. Decreased customer transaction volumes led to
operating losses, closure of several trading offices and restructuring of our
Pro Trader subsidiary. In addition, after a review of market conditions we
determined our fixed income operations could not reach critical mass and
therefore the carrying value of goodwill related to our acquisition of Montag
was impaired and written off.



-25-

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 and regulatory
capital requirements, operating losses, 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, together with assets readily convertible
into cash, accounted for 65.8% and 67.7% of our assets as of June 30, 2003 and
December 31, 2002, respectively. Cash and cash equivalents increased to $305.1
million as of June 30, 2003 from $275.8 million as of December 31, 2002. Our
cash and cash equivalents and securities owned decreased to $587.5 million as of
June 30, 2003 from $623.9 million as of December 31, 2002 primarily due to
payouts of our seasonal incentive compensation payments to our employees as well
as severance payments in connection with our cost reduction initiatives. Changes
in our total assets and liabilities, in particular, receivable from
broker-dealers and customers, securities borrowed, 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.

Capital expenditures for the six months ended June 30, 2003 and 2002
related to the purchase of data processing and communications equipment,
leasehold improvements and purchases of furniture for our additional office
facilities. Capital expenditures and investments in new technology were financed
primarily through our operations.

We received $5.0 million for the six months ended June 30, 2003 from
our insurance carrier for fixed assets lost at the World Trade Center.

Our future cash payments associated with contractual obligations, which
are primarily leases for office space and equipment under non-cancelable
operating leases with third parties and Reuters, are summarized as follows:



Year ending December 31, 2004 $ 30.5 million
Year ending December 31, 2005 $ 26.7 million
Year ending December 31, 2006 $ 24.9 million
Year ending December 31, 2007 $ 24.1 million
Year ending December 31, 2008 $ 20.3 million
Thereafter $ 90.2 million


Our aggregate minimum lease commitments after 2008 primarily relate to
our 20 year lease for our headquarters in New York. We anticipate that we will
meet our 2003 capital expenditure needs from our operating cash flows.

As of June 30, 2003, we had access to $200.0 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 June 30, 2003, there
were no borrowings outstanding under these credit lines. We currently pay no
annual fees to maintain these facilities. In addition, as of June 30, 2003, we
had access to $81.9 million of uncommitted credit lines from commercial banking
institutions to meet the funding needs of our European and Asian subsidiaries.
During the quarter our lender reviewed our credit facility usage and reduced
them accordingly. These credit lines are uncollateralized, and we currently pay
no annual fees to maintain these facilities. As of June 30, 2003, there was $9.3
million 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


-26-

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. As of June 30, 2003, our U.S. registered broker-dealer
subsidiary Instinet Clearing Services, Inc., which is the counterparty to each
of our customer transactions in U.S. securities, had regulatory net capital of
$92.4 million, which was $85.7 million in excess of its required net capital of
$6.7 million.

We participate in securities borrowing and lending activities, 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 $494.4 million and $608.5 million as collateral for securities borrowed
as of June 30, 2003 and December 31, 2002, respectively. We also received $486.3
million and $453.3 million as collateral for securities loaned as of June 30,
2003 and December 31, 2002, respectively.

Included in commissions and other receivables is approximately $29.5
million from Archipelago L.L.C., B-Trade Services LLC and REDIBook ECN L.L.C. of
which we have commenced arbitration proceedings before the NASD for
approximately $14.1 million. We have established an appropriate reserve against
the disputed amount based upon a review of the facts and circumstances
surrounding the dispute.

In connection with our correspondent clearing business, we are required
to maintain segregated funds in a special reserve bank account for the exclusive
benefit of our customers. As of June 30, 2003, these funds amounted to $189.5
million.

In addition, so 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 will
receive Reuters consent to incur indebtedness above this amount in the future if
we need to do so for any reason.



-27-

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:



BALANCE BALANCE
JUNE 30, DECEMBER 31,
2003 2002
---- ----

U.S. government and federal agency obligations $3.8 $ 10.9
Municipal bonds 139.8 157.7
Corporate bonds 59.6 91.9
Foreign sovereign obligations 38.3 58.1
------ -------
Total $241.5 $ 318.6
====== =======


These securities are subject to interest rate risk and will fall in
value if interest rates increase. If interest rates had increased immediately
and uniformly by 100 basis points, or 65 basis points in the case of municipal
bonds, as of June 30, 2003 and December 31, 2002, the fair value of the
portfolio would have declined by $1.6 million and $1.5 million, respectively. 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 $305.1 million and $275.8 million as of June
30, 2003 and December 31, 2002, respectively. We also had short-term borrowings
of $9.4 million and $27.3 million as of June 30, 2003 and December 31, 2002,
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.

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 in the future.

-28-

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):



BALANCE BALANCE
JUNE 30, DECEMBER 31,
2003 2002
---- ----

British pound $27.2 $52.7
Euros 26.1 18.1
Japanese yen 8.4 8.4
Canadian dollar 7.4 7.2
Hong Kong dollar - 1.0
----- -----
Total $69.1 $87.4
===== =====


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 $6.3 million and $7.9 million as of June 30, 2003 and December 31, 2002,
respectively.

A portion of our revenues is denominated in non-U.S. dollar currencies.
Approximately 16.6% and 20.8% of our revenues for the three months ended June
30, 2003 and 2002, respectively, and 16.8% and 19.9% of our revenue for the six
months ended June 30, 2003 and 2003, 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 $4.6, $5.6, $8.9 and
$10.6 million for the three months ended June 30, 2003 and 2002 and six months
ended June 30, 2003 and 2002, 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 June 30, 2003, we
owned marketable securities of the London and Euronext stock exchanges as a
result of their demutualizations and we are exposed to market price risk. This
risk is estimated as the potential loss in fair value resulting from a
hypothetical 10% adverse change in quoted market prices and amounted to
approximately $3.1 million and $2.9 million as of June 30, 2003 and December 31,
2002, 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 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. Over the last three
years, our loss from transactions in which a party refused or was unable to
settle and other credit losses has 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


-29-

reasons. Over the last three years, our loss from a counterparty refusing to pay
or being unable to settle with us has been immaterial.

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 six months, our credit policy is that all
investments have at least an A1/P1 credit rating from Standard & Poors and
Moody's Investors Service. We also maintain counterparty concentration limits
that specify the amount that we can invest with any one counterparty.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls And Procedures

As of the end of the quarter ended June 30, 2003, management, including
our Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures. Based upon the evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that as of June 30, 2003 the disclosure
controls and procedures were effective, to provide reasonable assurance that
information required to be disclosed in the reports we file and submit under the
Exchange Act is recorded, processed, summarized and reported as and when
required.

Changes In Internal Controls

There has been no change in our internal control over financial
reporting during the quarter ended June 30, 2003 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.



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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, 2002. There have been no material developments with
respect to the legal and administrative proceedings.

Item 2. Changes in Securities and Use of Proceeds

None.


Item 3. Defaults Upon Senior Securities

None

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

We held our Annual Meeting of Stockholders on May 14, 2003.

The following individuals were nominated and elected to serve as directors:

Thomas H. Glocer, C. Kevin Landry and John C. Bogle

The stockholders voted as follows on the following matters:

1. Election of Directors. The voting results for each nominee
were as follows:




NAME VOTES FOR VOTES WITHHELD

Thomas H. Glocer 296,446,615 3,919,427
C. Kevin Landry 300,099,478 266,564
John C. Bogle 299,639,580 726,462



2. The reappointment of the Company's independent auditors was
approved by a count of 300,198,916 votes for, 156,030 votes
against and 11,096 votes abstaining.

Item 5. Other Information

On May 30, 2003, Jean-Marc Bouhelier resigned as Chief Operating
Officer of Instinet. Also, on June 27, 2003, William Sterling resigned as
President and Chief Technology Officer of the Island ECN and Senior Vice
President of Instinet's Broker Dealer Execution and Clearing Group. Alexander
Goor, Executive Vice President for Strategic Planning, will lead Instinet's
ATS/ECN initiative which includes the Instinet ECN, the Island ECN and Instinet
Clearing Services, Inc. We have also created an interim Office of the President,
which consists of Edward J. Nicoll, Chief Executive Officer of Instinet, Michael
Plunkett, formerly the Managing Director of the Hedge Fund group, and Natan
Tiefenbrun, formerly the Managing Director of the Quantitative Passive group, to
lead our value-added brokerage initiative.



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Item 6. Exhibits and Reports on Form 8-K

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



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 Services 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).

10.1* Global Solutions Agreement dated as of effective March
19, 2003, between Instinet Group Inc. and Reuters
Limited.

10.2* Settlement, Release, Covenant Not To Sue, Waiver and
Non-Disclosure Agreement between Instinet Group
Incorporated and Jean-Marc Bouhelier dated May 30,
2003.

10.3* Settlement, Release, Covenant Not To Sue, Waiver and
Non-Disclosure Agreement between Instinet Group
Incorporated and William J. Sterling dated June 27,
2003.

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
August 1, 2003.

32* Certificate of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350
dated August 1, 2003.


- ---------------
* Filed herewith.


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(b) The following reports on Form 8-K were filed or furnished for
the last quarter covered by this report, and subsequently
through August 8, 2003:

Date of Report Item Number Financial Statements Required to be Filed
- --------------- ------------------ -----------------------------------------

April 22, 2003 Items 7 & 12 No
June 2, 2003 Items 5 & 7 No
June 27, 2003 Items 5 & 7 No
July 21, 2003 Item 12 No




-33-

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: August 14, 2003



INSTINET GROUP INCORPORATED

By: /s/ JOHN F. FAY
--------------------------------------
Name: John F. Fay

Title: Executive Vice President and
Chief Financial Officer

(Duly Authorized Officer and
Principal Financial 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
Services 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).

10.1* Global Solutions Agreement dated as of effective March 19, 2003, between
Instinet Group Inc. and Reuters Limited.

10.2* Settlement, Release, Covenant Not To Sue, Waiver and Non-Disclosure Agreement
between Instinet Group Incorporated and Jean-Marc Bouhelier dated May 30,
2003.

10.3* Settlement, Release, Covenant Not To Sue, Waiver and Non-Disclosure Agreement
between Instinet Group Incorporated and William J. Sterling dated June 27,
2003.

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
August 1, 2003.

32* Certificate of Chief Executive Officer and Chief Financial Officer pursuant
to 18 U.S.C. Section 1350 dated August 1, 2003.


- ---------------
* Filed herewith.



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