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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission file number 000-32717

Instinet Group Incorporated

(Exact Name of Registrant as Specified in Its Charter)

212-310-9500

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

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. x Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. ¨

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

As of June 30, 2004, the aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was approximately $495,295,838, based upon the NASDAQ National Market closing price for such shares on that date. For purposes of this calculation, the Registrant has assumed that its directors and executive officers are affiliates.

The number of shares of Common Stock outstanding as of March 4, 2005 was 334,593,905 shares.

Portions of the Instinet Group Incorporated Proxy Statement for the 2005 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.

INSTINET GROUP INCORPORATED

ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

TABLE OF CONTENTS

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

We have made forward-looking statements in this Annual Report on Form 10-K for 2004, including in the sections entitled Business, Certain Factors that May Affect Our Business, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk, that are based on our management’s beliefs and assumptions and on information currently available to our management. 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.

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, in addition to those discussed in the section entitled Certain Factors that May Affect Our Business and elsewhere in this annual report, could cause our results to differ materially from those expressed or suggested in forward-looking statements.

PART I

Introduction

We are the largest global electronic agency securities broker and have been providing investors with electronic trading solutions and execution services for more than 30 years. We operate two major businesses:

Instinet, the Institutional Broker^®

Instinet is our institutional global electronic agency securities broker that provides its customers with sophisticated electronic and sales trading execution services that enable buyers and sellers worldwide to seek best execution and lower their transaction costs either by trading securities directly and anonymously with one another or by executing trades in global securities markets. Through Instinet’s electronic platforms, customers can access major U.S. trading venues, including NASDAQ and the NYSE, and almost 30 securities markets throughout the world, including stock exchanges in Frankfurt, Hong Kong, London, Paris, Sydney, Tokyo, Toronto and Zurich. Instinet’s customers primarily consist of institutional investors, such as hedge funds, mutual funds, and pension funds. Lynch, Jones & Ryan, Inc., Instinet Group’s commission recapture subsidiary, is also a part of Instinet.

INET^SM, The electronic marketplace

INET is our electronic equity securities marketplace that provides its U.S. broker-dealer customers trade execution and routing services. INET’s platform enables buyers and sellers to trade securities directly and anonymously with each other. INET represents the consolidation of the order flow of the former Instinet and Island electronic communications networks (ECNs), and is one of the largest liquidity pools in NASDAQ-listed securities.

We created these two business segments through a reorganization substantially completed on February 9, 2004. We have restated prior year information in this report to reflect this reorganization. For segment financial information for 2004, 2003 and 2002 including geographical information, see also “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations- Year Ended December 31, 2004 versus Year Ended December 31, 2003 —Operating Results By Segment,” “Results of Operations- Year Ended December 31, 2003 versus Year Ended December 31, 2002 —Operating Results By Segment and Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note 18. Segment Information”.

We were founded in 1969 and, although continuously headquartered in New York, New York since then, were a wholly owned subsidiary of Reuters Group PLC from May 1987 until our initial public offering in May 2001. Reuters currently owns approximately 61.9% of our outstanding common stock. In addition to New York, we have offices in Jersey City, New Jersey, Boston, Massachusetts, London, Frankfurt, Hong Kong, Paris, Tokyo, Toronto and Zurich.

Website Access

We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available, free of charge, on the “Investor Relations” section of our Internet website at www.instinetgroup.com under the heading “SEC Filings” as soon as reasonably practicable after we electronically file this material with, or furnish this material to, the Securities and Exchange Commission.

Core Values

Our business — its organization, technology and culture — has been structured to earn, sustain and build our customers’ trust and help them to obtain superior execution of their trades. This business model incorporates the following four core values:

As a result of these core values, we believe that we provide our customers with valuable benefits that help them achieve their trading objectives at reduced costs and with greater speed and efficiency.

Acquisitions and Divestitures

In an effort to expand the scope of our business and complement our existing services, in recent years, we have acquired a number of companies. On February 28 2005, we entered into a definitive agreement to acquire Bridge Trading, a soft-dollar execution broker, from our parent Reuters. We acquired Harborview LLC, a NYSE floor brokerage firm, in January 2003. In September 2002, we completed our acquisition of Island Holding Company, Inc., the parent company of The Island ECN, Inc., a leading electronic securities marketplace. In October 2001, we acquired ProTrader Group, LP, a provider of advanced trading technologies and electronic brokerage services, which we subsequently closed in June 2003 after selling most of the ProTrader assets, including most of the retail accounts, to Electronic Trading Group LLC, one of our correspondent clearing customers. In February 2000, we acquired Lynch, Jones & Ryan, a leading provider of specialized brokerage, research and commission recapture services to pension plan sponsors and managers and other financial institutions.

In December 2004, we closed our correspondent clearing business. Commenced in July 2000, this business had provided a package of clearing services to several securities brokers in the United States, including transaction processing, clearing and settlement of trades, recordkeeping and financing. We determined that the correspondent clearing business was not part of our current business strategy. On May 3, 2002, we closed our fixed income business, which we began developing in 1998 and started trading in the spring of 2000, and also closed Montag Pöpper & Partner GmbH, a German fixed income broker-dealer, that we acquired in October 1999 as part of the development of our global fixed income business. Against the background of a global economic slowdown and the uneven pace of acceptance of electronic fixed income trading platforms, our fixed income business was unable to reach a critical mass.

We periodically engage in discussions regarding various types of transactions, including possible acquisitions, investments or divestitures, some of which could be material to us. We pursue these transactions through our business segments as described below. We may agree to pay the consideration in connection with a transaction in cash, our securities or some combination of the two. Some acquisition transactions that involve our securities could have a dilutive effect on our earnings per share. It is also possible that the number of shares of our common stock that may be issued in connection with a transaction could constitute a material portion of our then outstanding common stock not held by Reuters, even if not material compared to the total amount of common stock outstanding. Except for Bridge Trading, at present, we have no agreements or understandings for any material acquisitions, investments or divestitures.

In addition, Reuters has recently announced that it will consider strategic alternatives in order to extract value from its holdings in Instinet Group. We are currently evaluating strategic alternatives for the company and our businesses. Those alternatives may include a merger or other extraordinary transaction relating to the company or one or more of its businesses. We cannot predict whether this review will result in any definitive agreement or agreements, the nature and value of any consideration that might be involved, or

when or whether any such transactions would be agreed or completed. We do not intend to update this disclosure until such time as either a definitive agreement has been reached relating to the company or one or more of our businesses, or until such other time as we deem appropriate.

Cost Reductions

We are focused on maintaining an efficient cost structure. We have successfully reduced our fixed cost base through a series of cost reduction plans we implemented over the past several years, and we continue to streamline our operations in order to generate additional cost savings. On February 4, 2005, we announced a new cost reduction plan for 2005, which we began to implement in December 2004 with a severance expense and fixed asset write offs. This cost reduction plan includes condensing our technology footprint, consolidating office space and reducing discretionary expenses and will result in accompanying declines in our headcount levels. We expect that this plan will reduce annualized fixed costs (excluding compensation expense) by approximately $50 million by the end of the fourth quarter of 2005, compared to the third quarter of 2004. Although the plan includes a reduction in headcount, compensation expense as a percentage of gross revenues may increase moderately in 2005 due to increases in stock based compensation expense and other factors. In connection with this cost reduction plan, we may have additional one-time expenses during 2005 in accordance with U.S. generally accepted accounting principles. We will continue to evaluate further cost reduction initiatives in an effort to increase our efficiency and reduce our fixed cost base.

Industry Background

Recent Market Trends

Over the past five years, the major U.S. market indices have experienced significant volatility. During 2000 through early 2003, these markets experienced a severe decline and increased volatility primarily as a result of the weak and uncertain economic climate, which together with corporate governance and accounting concerns, contributed to lower equity prices, a reduction in corporate transactions, increased market volatility, and a generally more difficult business environment. Prior to 2000, there had been a period of tremendous growth in the global equity markets; however, beginning in the second half of 2001, through 2002, the growth rate in the volume of trading in U.S. equity markets began to slow, and in 2002, NASDAQ market volumes declined, although U.S. exchange-listed securities still maintained moderate growth. In 2003, overall volume in U.S. equity markets increased slightly, although the total volume of NASDAQ-listed securities continued to decline. Trading volume in U.S. equity markets increased in 2004 versus 2003. In 2004, average daily share volume traded in NASDAQ-listed equities increased by 6.4% compared to 2003, and the average daily share volume traded in U.S. exchange-listed equities increased by 9.0% compared to 2003. This increased volume was primarily due to the continuing economic recovery, an increase in the level of corporate transactions and increased investor confidence. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Environment, Competition and Key Business Drivers.”

Similar to the U.S. markets, over the past five years, the non-U.S. markets also experienced considerable volatility and significant decline followed by recent increases in stock prices. During this period, non-U.S. markets rose to record heights in 2000 in terms of consideration (which is based on the value of transactions rather than the number of shares traded), and then declined significantly, reverting back in 2003 to the consideration levels achieved in 1999. In the first half of 2004, non-U.S. markets continued to rise then declined slightly and leveled off in the second half of 2004. In particular, in the fourth quarter of 2003, the Asian markets began to rise. This increase continued through the first half of 2004 primarily due to the economic recovery across the region, in particular in Japan and Hong Kong, and increased investor confidence. Overall, non-U.S. markets grew in 2004 compared to 2003, with very strong year-over-year gains in Asian markets.

U.S. Market Structure

U.S. stock exchanges traditionally operated primarily in a physical environment — on a trading floor — through an auction conducted by open outcry. Indeed, while the NYSE has proposed changes to its market to enhance market participants’ ability to execute orders on the exchange electronically, the majority of trading on the NYSE continues to occur through an auction system operating on a physical trading floor, with orders for each listed stock being routed for execution on the floor of the exchange, either electronically or physically, to a designated dealer, known as a specialist. In the over-the-counter market, dealers, known as market makers, traditionally conducted trades with one another through an inefficient telephone-based system.

In 1969, Instinet pioneered the electronic trading of U.S. exchange-listed stocks. In 1971, the NASD developed the NASDAQ system, which linked the quotations of over-the-counter market makers together via a screen-based electronic communications system.

Advances in technology have spurred the automation of numerous aspects of the trading process and led to gradual increases in competition for the trading of U.S. exchange-listed and NASDAQ-listed stocks. Regulatory developments have sought to foster this competition while integrating the trading of stocks on different venues into the National Market System (referred to as the NMS). The SEC has required the national securities exchanges and associations (referred to as self-regulatory organizations, or SROs) trading those stocks to jointly operate and participate in NMS systems for the consolidation, dissemination and sale of market data in U.S. exchange-listed stocks (the Consolidated Tape Association and Consolidated Quotation System) and NASDAQ-listed stocks (the NASDAQ — UTP Plan), as well as an intermarket order routing system for U.S. exchange-listed securities (the Intermarket Trading System, or ITS Plan).

In 1997, the SEC’s order handling rules for market makers and exchange specialists took effect. These rules provided a specified role for ECNs, electronic systems that widely disseminate orders entered into them by a market maker or specialist to third parties and permit execution of those orders against each other. Thereafter, in 1998, the SEC adopted Regulation ATS, which regulates the operation of alternative trading systems (ATSs) — a term that refers generally to systems, including ECNs, other than traditional exchanges or NASDAQ, that bring together the orders of buyers and sellers of securities and allow such orders to interact through automated means — and that are registered as broker-dealers. The emergence of ECNs and ATSs has provided efficient means of access to market centers and has resulted in a shift in liquidity, or trading activity, away from the major established market centers towards the ATSs and pressured the market centers to expand the automation of trading on their markets, particularly in NASDAQ-listed stocks.

NASDAQ itself has evolved from a quote-driven display system to an order-driven execution system, called Market Center (formerly called SuperMontage), that directly competes with ECNs, ATSs and exchange markets trading NASDAQ-listed stocks. NASDAQ completed its implementation of Market Center on December 2, 2002 and continues to make changes to the system in an effort to enhance its competitiveness.

On September 7, 2004, NASDAQ completed its acquisition of BRUT ECN, LLC (Brut), which operates an ATS with a substantial liquidity pool in NASDAQ-listed securities. NASDAQ currently operates Market Center and Brut as separate liquidity pools, but has taken initial steps towards the integration of the two liquidity pools. NASDAQ’s acquisition of Brut also provided NASDAQ with smart order routing technology, which previously was not a service provided by NASDAQ.

As another initiative to enhance its competitiveness, NASDAQ has submitted an application for registration as a national securities exchange. A further pending change to the NASDAQ market structure is the expected eventual replacement of NASDAQ as exclusive collector and distributor of consolidated data (known as an exclusive securities information processor, or exclusive SIP), regarding quotations and trades in NASDAQ-listed stocks. This role has given NASDAQ financial and other competitive advantages. The replacement is also expected to be an exclusive SIP.

The market for the trading of U.S. exchange-listed stocks also continues to evolve. In 2004, the NYSE proposed rule changes that would expand the automation of order execution on the exchange through the creation of a “hybrid” market. Moreover, the so-called third market — the trading of exchange-listed stocks by non-exchange members without recourse to the trading floor of an exchange — continues to account for over 10% of trading in U.S. exchange-listed stocks. In March 2004, NASDAQ received SEC approval to move trading in the third market from NASDAQ’s ITS/CAES system to Market Center. In addition, regional exchanges, most specifically the Archipelago Exchange and the National Stock Exchange, Inc. (NSX), have grown in relative importance, particularly in the trading of exchange-traded funds (ETFs) (index funds that trade on an exchange and represent a basket of stocks, with pricing throughout the day).

The regulations governing the various elements of the U.S. market structure impose numerous requirements and restrictions on the activities of market participants, including ECNs and ATSs. The order handling rules deal specifically with the processing of limit orders, which are orders with an associated limit price above which a buyer, or below which a seller, will not trade. In particular, the rules prohibit a market maker or exchange specialist from displaying through an ECN its own limit order for a security at a more favorable price than its published quote unless the ECN publishes its best-priced market maker and exchange specialist orders in that security and permits execution against those orders through the facilities, or pursuant to the rules, of an SRO. Similarly, a market maker that receives a limit order priced better than its own published quote must generally either execute the order, incorporate the limit order price into its published quote or pass the order on to an ECN for public display and execution access. Regulation ATS expands upon these requirements and requires any ATS meeting certain volume thresholds to provide an SRO with its best-priced orders from all sources, not only market makers and exchange specialists, and allow non-subscribers execution access to those orders.

Market Center provides one of a number of alternatives through which ECNs are able to meet these order display and execution access obligations. INET currently meets these obligations through NSX, although it previously has considered participation in Market Center. See “Business – Our Businesses – INET– Strategy.”

An ATS may seek to register with the SEC as a national securities exchange or a facility of a registered national securities exchange. As an exchange or exchange facility, an ATS becomes an SRO or SRO facility itself, no longer subject to regulation by the NASD or another SRO. In addition, with exchange or exchange facility status, an ATS gains direct access to ITS, enabling an ATS to access publicly displayed orders in all ITS participant markets trading U.S. exchange-listed stocks and make its own orders available for execution through ITS. It also becomes a participant in other NMS systems, affording it a role in their governance, a share of the revenues generated by the sale of consolidated market data to vendors and market participants, and direct connectivity to those systems. INET submitted a draft application for registration as a national securities exchange in May 2004 and continues to work with the SEC towards the filing of a formal application. See “Certain Factors that May Affect Our Business — Risks Related to Our Industry — We Operate in a Highly Regulated Industry, Which May Limit Our Activities — ATS Status and Exchange Registration.” In 2002, another ATS, Archipelago, was approved to operate as the Pacific Exchange’s equity trading facility, and has a significant liquidity pool in both NASDAQ-listed stocks and ETFs. On January 4, 2005, Archipelago Holdings, the parent company of Archipelago Exchange, entered into a definitive agreement to purchase the Pacific Exchange.

For U.S. exchange-listed stocks only, the ITS Plan imposes limitations and provides remedies with respect to transactions by members of ITS participant markets that involve a “trade-through” of bids and offers. A trade-through occurs when a market participant trades at a price that is inferior to a price displayed in another participating market. The ITS Plan also imposes certain requirements when market participants “lock” the market — display bids and offers at prices that equal offers and bids from other market participants — or “cross” the market — display bids that exceed offers or display offers that are less than bids of another market participant — for a particular security. Orders in U.S. exchange-listed stocks displayed on INET frequently “lock” or “cross” other markets.

The SEC regularly considers a variety of regulations or interpretative initiatives with respect to the structure of the U.S. equity securities markets, including initiatives intended to address issues relating to the interaction of trading centers (ECNs, ATSs, market makers, and markets operated by SROs) and more fully integrate ECNs and ATSs into the NMS. In particular, on February 24, 2004, the SEC proposed the adoption of Regulation NMS, which contains a number of interrelated substantive proposals designed to modernize the regulatory structure of the U.S. equity markets and also consolidates the existing rules governing the NMS into one regulation. After much public comment, the SEC reproposed Regulation NMS on December 15, 2004.

The “trade-through” rule is one of the areas addressed in Regulation NMS. Regulation NMS would require all market centers to adopt procedures to prevent the execution of orders on their markets that would trade through the best “protected quotations” in not only exchange-listed stocks, but also NASDAQ-listed stocks. The SEC proposed two alternative definitions of “protected quotations” as part of Regulation NMS. The first would limit the scope of the SEC’s trade-through rule to the best publicly displayed bid and offer of each SRO market, while the second also would extend trade-through protection to quotations that SRO markets voluntarily provided to the exclusive SIP for a particular stock. The proposed rules limit trade-through protection by excluding quotations that are not automatically accessible from the definition of protected quotation. Regulation NMS also would require SROs to adopt rules that prevent their members from publicly displaying orders to buy (or sell) through the SRO that would lock or cross other publicly displayed quotations.

Regulation NMS also addresses three issues relating to access to trading centers. First, Regulation NMS would impose a cap of $0.003 per share on the accumulated access fees that SRO trading centers and broker-dealers, including ATSs such as INET, could charge for executing orders against their protected quotations. This proposal would, for the first time, enable NASDAQ market makers and certain other broker-dealers to charge an access fee for their orders that are displayed on an SRO market center. Second, Regulation NMS would prohibit SROs from imposing unreasonably discriminatory terms on persons obtaining execution access to the SRO through an SRO member. Third, it would reduce the volume threshold for the application of the Regulation ATS fair access requirement (the written standards for granting access to trading on our systems, and not unreasonably prohibiting or limiting access to the services offered by our systems by applying these access standards in an unfair or discriminatory manner) from twenty percent of a stock’s average daily trading volume to five percent.

In addition, Regulation NMS would prohibit market participants from accepting, ranking, or displaying orders in any stock equal to or greater than $1.00 in sub-penny pricing increments. Along with Regulation NMS, the SEC proposed modified formulas for allocating among SROs the revenues generated by the sale of market data by the various NMS systems.

These proposals, as well as future SEC rulemakings or interpretations in this area, could adversely affect our business, financial condition and operating results. We are unable to predict the outcome of the various deliberations and discussions on the evolution of the U.S. equities market structure and regulatory framework, although these issues or other issues of market structure may have a significant impact on our equities business. For a further discussion of Regulation NMS, see “Regulation — Proposed Regulation NMS; Proposed Changes to NMS Market Data Revenue Allocation Formulas” and “Certain Factors that May Affect Our Business — Risks Related to Our Industry.”

Impact of Technological Developments

Innovations in technology, particularly the growth of the Internet, have increased the speed of communications and the availability of information, facilitated the globalization of commerce, and simultaneously decreased the cost of electronic commerce. New methods have developed to enable institutional investors to access and participate in the equity securities markets more easily and less expensively. Electronic markets have substantially reduced the need for intermediation, such as by NYSE members and NYSE specialists or NASDAQ market makers, because direct access is effectively unlimited and technology enhances the ability to determine the best price at which a trade can be executed and provides access to that best price. These developments, combined with the regulatory changes discussed above that allowed for the emergence of ECNs and ATSs, have led to dramatic growth in electronic trading and provide a challenging competitive environment.

Technological developments have also affected investing by individuals. Technological advances have created new and inexpensive means for individual investors to access markets directly on-line. As technology continues to improve and regulatory and customer scrutiny of execution and trading services intensifies, we believe that individual investors will increasingly demand institutional-quality services.

International Securities Markets

Until the early 1990s, equity markets outside the United States were generally less developed than those in the United States, with relatively low trading volumes and less advanced trading systems. Thereafter, technological and regulatory changes, other competitive pressures, and increased globalization contributed to increasing trading activity and major structural changes in the established European exchanges, which generally moved to an electronic model. In this model, an electronic system receives and matches orders that are routed through the system. Intermediaries provide execution services to their customers primarily by providing connectivity to the exchange system. In addition, in Europe there has been an increasing trend towards consolidation of exchanges, encouraged by technology and the adoption of the euro.

Our Businesses

INSTINET, THE INSTITUTIONAL BROKER^®

Business

Instinet, the Institutional Broker, our global electronic agency securities broker, serves our U.S. and international institutional customers. Instinet had over 1,020 institutional investor customers in the United States and approximately 640 customers in Europe and Asia as of December 31, 2004. As a global agency securities broker, Instinet offers its customers a broad range of trade, execution, order management and ancillary services such as sales trading, securities crossing, block, algorithmic and portfolio trading (the simultaneous execution of multiple orders of securities) services designed to enhance their ability to obtain superior execution and to achieve their trading objectives. Instinet customers can execute their equity securities orders with Instinet’s other institutional customers on Instinet’s Continuous Block Crossing trading platform (CBX^SM), (our block matching system with minimum order size, trade size, and display size parameters) or can access other U.S. trading venues, including INET, or one of the almost 30 non-U.S. securities markets to which we are connected using Instinet’s smart order-routing technology, which directs orders to either our own liquidity pools or one of the various markets to which we are connected. Instinet customers can also seek superior execution of their trades by using Instinet’s ProActive SmartRouter^SM which simultaneously displays orders for U.S. equity securities both on Instinet CBX and in multiple other U.S. markets to which we are connected, including INET. Customers can connect to Instinet through third-party front-ends, financial information exchange (FIX) protocols, or by using Instinet’s specialized trading front-ends. Instinet customers can also trade outside traditional market hours and obtain select proprietary and third-party research.

Through its affiliate, Lynch, Jones & Ryan, Inc., Instinet is also one of the largest providers of commission recapture services to pension plans and other financial institutions worldwide. Instinet helps pension plans and other financial institutions save money by

rebating a portion of their trading commissions back to the plans or financial institutions. Instinet is also one of the largest independent providers of research and other brokerage services through soft-dollar or other similar arrangements.

Instinet Clearing Services, Inc. (ICS), Instinet Group’s clearing broker, is also a part of Instinet. Instinet is a self-clearing broker in the United States and also provides clearing and settlement services through ICS in nearly all of the U.S. markets in which INET or Instinet executes trades for customers.

During 2004, Instinet’s average daily trading volume in U.S. equities increased 5% to 104 million shares from 99 million shares in 2003. Instinet’s average daily consideration (which is based on the value of transactions rather than the number of shares traded) in non-U.S. equities increased 20% in 2004 to an average daily consideration of $812 million from $677 million in 2003. For an explanation of how we calculate our trading volumes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Calculation of Volume —Instinet, The Institutional Broker.”

Customers

Institutional investors (including mutual funds, hedge funds, pension funds, banks, insurance companies and investment portfolio managers) are the core of Instinet’s customer base. These customers included approximately 1,020 institutional investors in the United States, approximately 490 customers in Europe and approximately 150 customers in Asia as of December 31, 2004.

Instinet customers fall into the following broad categories:

Instinet offers, and is continuing to develop, product and service offerings tailored to the specific needs of customers within its various customer categories. We believe that by offering customers a tailored package of services and order management and execution functionality, together with anonymous trading and efficient connections to other trading platforms, Instinet can enhance customers’ ability to achieve their specific trading objectives.

Trading Services

Instinet’s trading services options are tailored to each customer’s unique trading requirements. Instinet’s Electronic Trading Group supports those customers who want self-directed trading, while our Sales Trading Group provides access to our sales trading expertise for those customers who want more sales trading assistance. Instinet also provides a tailored execution strategy for those customers who want to begin with substantial sales trading assistance but gradually move toward self-directed trading as their in-house traders grow comfortable with the trading technology.

Sales Trading. Instinet has a dedicated group of sales trading professionals who provide customers with various types of sales trading services. Customers trading through Instinet can place orders electronically or by telephone with sales trading professionals, who enter the orders into Instinet’s system on behalf of the customer, and in some cases will manage the execution of orders for customers over time (often referred to as working orders) in an attempt to reduce their market impact and achieve price improvement. For example, they may divide a large order into a series of smaller orders that are entered over a period of time, possibly at different prices.

In addition, Instinet has a team of sales trading professionals dedicated to assisting its customers with their portfolio trading. Instinet’s unconflicted model prevents the sales trader from leveraging customer information for proprietary purposes. Instinet’s research offering is also supported by our agency sales trading operations, offering customers comprehensive account coverage, such as research calls when new reports are released, and versatile payment options. Instinet’s sales trading also offers customized technical analysis, as well as daily market commentary, to enable customers trading through Instinet to design efficient portfolio and trading

strategies. Through its sales trading services, Instinet aims to help customers lower their transaction costs, minimize market impact, achieve best execution, and, as a result, maximize investment returns.

As of December 31, 2004, Instinet had 185 sales and trading professionals, of which 96 were located in North America, 54 in Europe and 35 in Asia. Most of Instinet’s European brokerage services is centralized in London. London also has a specialized desk to service European portfolio traders. In Asia, Instinet provides coverage for its Japanese customers and the Japanese market through its Tokyo office, with the remainder of Asia and Australia serviced through Instinet’s Hong Kong office. Instinet also has coverage in each of its offices in the United States, Canada, Europe and Asia to assist customers who wish to place orders through Instinet in a different region (for example, a European institutional investor seeking to trade a U.S. or Japanese equity security). These cross-region trades are also covered by Instinet’s sales and trading professionals for that market, thereby affording our customers in other regions access to local market expertise. Because Instinet has offices worldwide, it also is able to provide sales trading assistance to Instinet customers 24 hours a day without requiring additional sales and trading professionals to be staffed in any one office on a continuous basis throughout the day.

Electronic Trading. Instinet’s electronic trading service allows customers to engage in self-directed trading through its Electronic Trading Group. This empowers customers to lower their transaction costs and take control of their orders by providing them with direct market access through our customized trading solutions and advanced trading applications. Instinet’s Electronic Trading Group also provides technical assistance in the use of these applications. Instinet’s Electronic Trading Group can also create custom trading strategies and algorithmic rules that help to minimize market impact, transaction costs and risk exposure, and offer customers the ability to modify trading strategies as market conditions vary throughout the day. Instinet’s technology and set of algorithmic rules leverage our order-handling infrastructure, Instinet Continuous Block Crossing (CBX^SM) and ProActive SmartRouter^SM, while providing simultaneous access to all major liquidity pools. In addition, as an unconflicted agency broker that offers direct market access and does not engage in proprietary trading, Instinet is able to protect the anonymity of its customers and the confidentiality of their trading strategies.

Trading Applications

Newport^TM Execution Management Application. Newport, Instinet’s patent pending execution management application, is broker neutral and offers Instinet customers an enhanced environment in which to execute block and portfolio trades and implement their trade strategies on a global basis. Newport was developed in conjunction with passive and quantitative fund managers in the United States and Europe and uses Instinet’s existing execution and smart order-routing technology and ICS’ clearing capabilities, as well as third party market data providers. In addition, this system facilitates collaboration between multiple traders at one customer site, the automation of trading using algorithms created by the customer, customization of the interface by the customer and integration with other systems commonly used by these customers. We believe these features and services help Instinet customers to manage their orders in a more efficient manner and reduce their operational and transaction costs. Newport is available to our customers globally, though features to support asset managers trading for Japan-based domestic pension and mutual funds will not be introduced until the second half of 2005.

Instinet Trading Portal^®. Instinet Trading Portal^® (referred to as Portal) is a trading application primarily for Instinet’s active asset managers and hedge funds that enables these customers to enhance their customer interface and smart order-routing technology. This trading application uses Instinet’s existing infrastructure while giving customers a broader view and broader access to multiple markets. With Portal, Instinet customers have the ability to view information for a single stock in multiple markets, increasing their ability to execute their orders in multiple markets for better execution. We believe this enhanced functionality helps these customers to manage their orders in a more efficient manner. In addition, as an Internet-based product, Portal is designed to substantially reduce communication and field service costs associated with our traditional customer display screens.

Execution Services

Core Execution Services. Instinet provides automated, real-time matching of buy and sell orders for both NASDAQ-listed stocks and U.S. exchange-listed stocks and enables institutional customers to enter orders and execute trades directly with one another through Instinet’s trading applications. Instinet allows its customers to trade with other investors in other U.S. trading venues, including INET, market makers or other ECNs, exchanges and almost 30 non-U.S. securities markets using our smart order-routing technology.

Instinet provides an automated market interaction system with smart-order routing technology, which automatically routes customers’ orders in NASDAQ-listed and U.S. exchange-listed stocks to Instinet’s institutional liquidity pool or one of the various markets to which Instinet is connected to obtain superior execution. These customers use smart-router technology to route orders to sources of U.S. exchange-listed volume that are not traded directly on the U.S. exchanges, commonly referred to as the “upstairs market,” including Instinet’s institutional liquidity pool, INET and other ECNs and exchanges. Instinet, through its subsidiary Harborview LLC, also provides direct access to exchange-listed liquidity at NYSE though its floor brokers as well as access to the NYSE’s Super Designated Order Turnaround System, or SuperDot, by which NYSE member firms’ orders are electronically transmitted to the NYSE floor.

In a report published in January 2005 based on data for the 12 months ended September 30, 2004, Plexus Group, an independent market research group, ranked Instinet first in execution quality for all trades in U.S. exchange-listed stocks and Instinet tied for second in NASDAQ-listed stocks when compared to a universe of over 1,500 brokers for which Plexus has applicable data. In another Plexus Group report published in December 2004 based on data for the 12 months ended June 30, 2004, Instinet was ranked first in execution quality in small trades (less than 2,000 shares) in both NASDAQ-listed stocks and U.S. exchange-listed stocks when compared to a universe of approximately 900 brokers for which Plexus has applicable data.

For non-U.S. securities that are not traded in U.S. markets, Instinet primarily provides direct connections to the principal non-U.S. exchanges on which those securities are listed, although customers can also trade directly with each other through Instinet where such trading is permitted by local regulations. Instinet also provides an automated market interaction system with smart-order routing technology for these non-U.S. securities. Instinet recently introduced its smart order-routing service for European equity securities, which is initially available for Dutch equities which trade concurrently on Euronext Amsterdam, the London Stock Exchange and on Instinet’s CBX. Instinet, through its affiliates, is a member of 13 non-U.S. exchanges and provides customers with direct access to those exchanges to execute their trades. For more than 15 additional non-U.S. markets, Instinet provides access through local exchange members.

Negotiating Orders. Our Instinet trading platform utilizes technology that allows our customers to communicate anonymously both with all customers and with specific customers who have placed an order or are advertising executed trades. As a result, customers can determine whether there is interest by another customer in a potential transaction and negotiate the volume and price of that transaction, all directly and anonymously through our system, without requiring any intermediation from anyone or displaying any of the communications or negotiations to other customers. This capability is designed to improve Instinet institutional customers’ performance and efficiency when executing large, complex orders and also allows customers to manage the delivery and execution of their orders by themselves to minimize the market impact of a large order and obtain price improvement and control.

Enhanced Block Trading. Instinet’s block trading functionality allows customers to trade large orders (or block orders) directly with other institutional buyers and sellers utilizing a choice of block crossing platforms. In January 2004, Instinet introduced CBX, an alternative trading platform that is based on Instinet’s previous trading platform, including its smart order-routing technology and anonymous communication and negotiation functionality, and has minimum order, trade-size and display-size parameters. Trading also takes place in after-hours and periodic crossing sessions, which can help institutional customers execute large blocks without market impact. In July 2004, Instinet introduced its intra-day crossing session, known as IDX^SM, which provides regularly scheduled crossing sessions during regular market hours. Instinet believes the intra-day crossing provides enhanced liquidity for block trades. We believe this functionality helps Instinet institutional customers protect their identity and trading strategy, reduce market impact, control information leakage, reduce operational and transaction costs for large orders and increase their opportunity for superior execution.

The CBX platform is designed to give Instinet customers the opportunity to trade directly with each other without exposing their orders to other marketplaces unless they choose to do so. Customers control the extent they want to expose their orders to other marketplaces and can manage that exposure effectively and strategically through ProActive SmartRouter^SM, which gives them exposure to a much broader liquidity pool than Instinet’s institutional liquidity pool alone. Introduced in January 2004, ProActive SmartRouter allows parts of an order in U.S. equity securities to be simultaneously displayed in both the CBX and multiple other U.S. trading venues, instead of merely directing orders to either Instinet’s institutional liquidity pool or one of the various markets to which Instinet is connected. Displaying an order in only one liquidity pool may carry the opportunity cost of missing the potential for price and size improvement in another liquidity pool. ProActive SmartRouter is designed to reduce that opportunity cost, and we believe use of the ProActive SmartRouter can result in price improvement for the customer.

Algorithmic Trading. Instinet has been offering its customers algorithmic trading for systematic trading in global equity markets for approximately 15 years. Instinet offers customers an ability to manage their trading strategy through a series of algorithms to

automate their global order execution and stock selection. Customers may use predefined trading rule modules or may choose to customize the algorithms, while taking advantage of a wide variety of liquidity pools including certain securities crossing networks, ECNs and exchanges. We believe this functionality significantly increases our customers’ efficiency by making it easy to monitor thousands of orders across U.S., European and Asian markets simultaneously. Consistent with Instinet’s unconflicted agency model, there is no information leakage with the use of algorithmic trading. Instinet does not capitalize on customer trading information to benefit any proprietary trading interest since Instinet does not engage in proprietary trading. We believe Instinet’s algorithmic trading facilitates efficient, anonymous access to the markets while helping customers minimize market impact, achieve best execution, and, as a result, maximize returns.

Portfolio Trading. Portfolio trading allows a customer trading through Instinet to execute multiple orders in a number of different securities concurrently, including both orders to buy and sell shares of stock as well as securities that are based on an index or basket of stocks. This portfolio trading capability, combined with Instinet’s global access, also enables Instinet customers to manage and execute portfolios of securities denominated in a number of different currencies. Instinet’s portfolio trading services options are tailored to each customer’s unique trading requirements. Instinet offers advanced technology, such as Newport, to those customers who want self-directed trading, while our sales trading group offers skilled and professional individual sales traders who will trade for the customer without leveraging customer information for proprietary purposes, due to Instinet’s unconflicted model. Instinet’s portfolio trading also provides a tailored execution strategy for those customers who want a combination of electronic access and sales trading expertise, such as customers who request substantial sales trading assistance in the beginning, but gradually move toward self-directed trading as their in-house traders grow comfortable with the trading technology. Instinet offers a broker-neutral, execution platform that is designed to meet the needs of portfolio managers and traders executing baskets of global equities and provides a comprehensive view of simultaneously executed multiple-market orders. In addition, through Newport, customers have access to Instinet’s deep pool of global institutional liquidity and sophisticated routing technology.

International (Global) Portfolio Trading. Instinet provides services in Europe and Asia offering a global infrastructure that combines FIX connectivity, sophisticated trading front ends, algorithmic trading solutions, and access to exchanges, ECNs, and securities crossing networks worldwide. Instinet customers have the ability to use this platform to access liquidity in more than 30 equity markets worldwide, from their own desktops using unintermediated direct market access, or by trading through our experienced sales trading professionals located in London, Paris, Frankfurt, Tokyo and Hong Kong. Instinet offers a wide range of global trading capabilities such as portfolio trading, block trading, algorithmic trading, research, and direct market access. Instinet recently introduced its smart-order routing service in the European markets for European equity securities, which is initially available for Dutch equities which trade concurrently on Euronext Amsterdam, the London Stock Exchange and CBX. Instinet’s global offering also includes securities crossing services such as JapanCrossing^SM, the only equities crossing network in Japan, which provides customers anonymous access to a substantial liquidity pool and helps eliminates market impact.

Other Services

Extended Hours Trading. Instinet allows customers to input orders for a security and execute the trade with other customers in Instinet’s institutional liquidity pool before, during and after normal market hours. This permits Instinet to make the liquidity pool generated by its customers available on a 24-hour basis. This service has also allowed Instinet to expand globally to include customers and markets in Europe and Asia, whose trading hours do not coincide with those in the United States. Extended hours trading has been a particularly important innovation for Instinet customers when material information about a market or company is released or reported after that market or the principal market for that company’s securities is closed. When a pre- or post-market price-moving event occurs, market participants can interact directly at their election to discover a price, which could be significantly different from the closing price, at which they can trade following dissemination of news regarding the event. For example, after Hewlett-Packard announced the resignation of its Chief Executive Officer, Carly Fiorina, before the open on February 9, 2005, 4.5 million Hewlett-Packard shares traded through Instinet between the close on February 8, 2005 and the open on February 9, 2005. This represented approximately 45% of average daily trading volume of Hewlett-Packard during the prior 90-day period.

Crossing Services. Through Instinet Crossing^®, the automatic matching of orders at specified price levels, customers may enter buy or sell orders in U.S. traded securities for execution in a “crossing session.” In a crossing session, Instinet electronically aggregates all orders to buy or sell at a pre-specified time, matches (or “crosses”) them with other orders to sell or buy, respectively, and automatically executes them at a pre-determined benchmark price. A crossing trade will be executed only if there is a counterparty for that order (or portion of an order). Instinet Crossing provides an electronic platform with enhanced liquidity for block trades and better pricing outside regular trading hours than traditional brokerage or other intermediaries might provide, together with the reduced trading risk of a pre-determined benchmark price. Instinet has three crossing sessions each trading day, two of which occur outside of regular trading hours, the more significant of which is in the evening. Following the close of the market each day, Instinet has one

crossing session for orders priced at that day’s closing price. Before the market opens, Instinet has another crossing session using the volume-weighted average price for that trading day. In addition, Instinet introduced its IDX^SM in June 2004, which provides regularly scheduled crossing sessions during regular market hours. Instinet believes the intra-day crossing will provide enhanced liquidity for block trades.

In addition, Instinet offers customers a crossing system for Japanese equity securities. JapanCrossing^SM enables customers worldwide to enter orders to buy or sell Japanese equity securities in a pre-market crossing session at the volume-weighted average price for that trading day. Instinet also offers its customers access to a crossing system for foreign currencies through the patent pending Instinet FX Cross^®, a product of a strategic alliance with Citibank, N.A. The Instinet FX Cross, enables customers to execute large currency transactions anonymously at a transparent market price. The Instinet FX Cross currently offers three crossing sessions per day in 17 currencies, to be executed at the CitiFX Benchmark rate against Citibank, N.A., the counterparty.

Commission Management Services

Soft Dollar Program. Instinet is one of the largest independent providers of research and other brokerage services through soft dollar or other similar arrangements, and has offered soft dollar programs for over 15 years. Institutional investors often allocate a portion of their gross brokerage transaction fees for the purchase of independent third-party research products, as well as other brokerage services. The amounts allocated for those purposes are commonly referred to as soft dollar revenues. Instinet offers soft dollar programs in order to increase the amount of business institutional customers conduct through Instinet, thereby increasing its transaction volumes and the depth of its institutional liquidity pool. We continue to focus on these programs, as part of our efforts to strengthen our unconflicted global electronic agency brokerage business. Instinet is continuing to develop tailored packages of independent third-party research products for its various customer categories. In addition to the independent third-party research that Instinet provides to its customers through soft dollar programs, Instinet offers a proprietary research service from Great Lakes Review, through its subsidiary, Lynch, Jones & Ryan, which focuses on uncovering stock opportunities among lesser-known companies in the Midwest. Instinet customers, primarily institutional investors, generally use soft dollars or other similar arrangements to pay for these products and services as well.

In 2004, more than one-third of Instinet’s U.S. customers obtained third-party research services from us on a soft dollar basis. The portion of our transaction fee revenue representing soft dollar revenues is offset dollar-for-dollar by expenses we incur in paying for hedge fund expenses and research from independent third parties. Instinet made approximately $95 million in soft dollar payments to independent research providers on behalf of all customers trading through Instinet in 2004.

BrokerShare^SM. Instinet’s patent pending BrokerShare^SM system allows institutional customers to execute trades at Instinet and allocate a portion of their gross brokerage transaction fees to third party broker-dealers, chosen by the customer, for the purchase of the broker-dealer’s proprietary research products, as well as other brokerage services. BrokerShare enables Instinet customers to enter orders directly into Instinet, without the assistance of a third party broker-dealer, which gives customers the ability to execute trades without revealing their trading strategies to other broker dealers.

Instinet Research Partners. Consistent with our agency brokerage approach, we believe Instinet customers can benefit from availability of research provided by independent research providers who have an established track record of providing institutional investors with objective analysis of specific companies and sectors with no conflicts of interest with respect to the companies they analyze. These firms make use of non-traditional research methodologies, emphasizing an empirical methodology, primary information sources and strict neutrality, by combining a network of industry experts with market research and analysis in their industries. These independent research providers work directly with industry participants to explain and predict industry and company trends.

Instinet’s research is designed to enable its customers to design efficient portfolio and trading strategies. Instinet is currently an exclusive distributor of research for the following selected research providers:

Lynch, Jones & Ryan

Commission Recapture. As part of the transactional services Instinet provides to financial institutions, pension plans and other funds through their sponsors, such as corporations, unions, state and local governments, endowments and foundations, Instinet, through its subsidiary, Lynch, Jones & Ryan, enables customers to recapture a portion of the gross transaction fees that their fund managers pay us. As of December 31, 2004, Lynch, Jones & Ryan provided these services to approximately 1,400 of its financial institution, pension plan and other fund customers. In addition, Lynch, Jones & Ryan provides its plan sponsor customers with services that assist them when they transfer assets from one money manager to another. For example, Instinet Crossing^® and Lynch, Jones & Ryan’s portfolio trading can help these customers manage this transition.

In addition to commission recapture, Lynch, Jones & Ryan provides its customers with a variety of portfolio transaction services.

Soft Dollar Program. Lynch, Jones & Ryan is an independent provider of research and other brokerage services through soft dollar or other similar arrangements, and has offered soft dollar programs for over 15 years.

Research. Lynch, Jones & Ryan offers customers proprietary research tools and services, including Great Lakes Review, which focuses on uncovering stock opportunities among lesser-known companies in the Midwest.

BrokerShare^SM. Lynch, Jones & Ryan’s customers have the opportunity to participate in Instinet’s patent pending BrokerShare program.

Clearing and Settlement Operations.

INET, Instinet and Lynch, Jones & Ryan all self-clear through ICS, which enables Instinet to provide clearing and settlement services in nearly all of the markets in which we execute trades for customers. In December 2004, we closed our correspondent clearing business. Commenced in July 2000, this business had provided a package of clearing services to several securities brokers in the United States, including transaction processing, clearing and settlement of trades, recordkeeping and financing. We determined that the correspondent clearing business was not part of our current business strategy.

Competitive Strengths

Instinet Offers Unconflicted Pure Agency Brokerage Services

Instinet enables customers to anonymously execute their equity trading as efficiently as possible while helping them minimize market impact, achieve best execution, and, as a result, maximize returns. Instinet’s technology is designed to route orders to the best price automatically with no built-in preference for any particular marketplace. For more than 30 years, we have built our business based on maintaining the anonymity of, and acting in the best interest of, our customers. As a pure agency broker, Instinet has no business interests that compete with the trade performance of our customers. Our business is structured to maintain customer anonymity and ensure that their trading intentions and strategy will not be compromised.

Instinet Offers Customized Customer Solutions

Instinet offers, and is continuing to develop, product and service offerings tailored to the specific needs of customers. Instinet believes that by offering customers a tailored package of services and order management and execution functionality, together with anonymous trading and efficient connections to other trading platforms, Instinet can enhance customers’ ability to achieve their specific trading objectives.

Instinet Offers Compelling Benefits to Our Customers

We believe that our core values of independence, neutrality, anonymity, customer empowerment and commitment to agency execution enable our customers to obtain superior execution of their trades through technologically advanced tools, competitive pricing and reduced transaction costs than are generally achievable using traditional trading channels. We also believe that our unique unconflicted electronic business model, providing sophisticated technology, trading and clearing services, allows us to offer our customers a complete, convenient global brokerage offering.

Instinet offers its customers sales trading expertise, advanced trading technology and tools, and sophisticated routing technology to allow them to interact with Instinet’s institutional order flow on the CBX platform and access other U.S. trading venues, including the INET liquidity pool, and almost 30 non-U.S. securities markets, in order to seek superior execution of their trades. Instinet customers can also display orders for U.S. equity securities in multiple U.S. trading venues simultaneously through Instinet’s ProActive SmartRouter. Outside of the U.S., Instinet recently introduced its smart order-routing service for European equity securities, which is initially available for Dutch equities which trade concurrently on Euronext Amsterdam, the London Stock Exchange and on CBX. We believe that this technology, together with Instinet’s other tools and services, enables Instinet to provide institutional customers with the ability to trade equities quickly and reliably at competitive rates, the opportunity for price and size improvement and reduced transaction costs in executing their trades.

Furthermore, Instinet believes that one of the biggest concerns of institutional investors in securities trading today is the market impact that results from the disclosure of their identity and trading intentions. Because of their concern, customers often seek to break up orders to hide their overall intentions. If the market becomes aware of a large investor seeking to sell securities, the price of those securities may drop before the investor’s position can be fully liquidated. Similarly, market awareness of a large investor seeking to buy a large amount of securities may result in an increase in the price of the securities before the order can be fully executed. Instinet allows institutional customers to trade directly but anonymously with other institutions through the CBX platform, reducing the potential for this market impact, which we believe can result in better pricing for the customer. Trading also takes place in after-hours and periodic crossing sessions, which can help institutional customers execute large blocks without market impact.

Instinet believes that another major concern of institutional investors is the market impact that results when a customer uses algorithms to trade with a broker that also trades for its own account. This broker’s knowledge of their algorithms’ trading behavior allows them to take positions in the market that place them in direct competition with their institutional customers. This does not happen at Instinet because it is an agency broker with no proprietary trading desk. This unconflicted business model prevents Instinet’s sales traders from leveraging customer information for proprietary purposes and allows Instinet to ensure the anonymity of its customers and the confidentiality of their trading strategies.

Instinet Has Strong Customer Relationships and Brand Awareness

Instinet pioneered an electronic screen-based trading system over 30 years ago and is committed to building strong relationships with our customers through our unconflicted pure agency brokerage. As a result, Instinet has strong name and brand recognition among broker-dealers and institutional investors.

Instinet Offers a Broad Range of Services

Through Instinet, we offer our customers a wide variety of services including sales trading expertise, sophisticated technological tools and brokerage services to institutional customers on a global basis. Companies acting solely as ECNs are generally limited to small order electronic execution and order routing. Instinet’s broader business model extends beyond these functions, and we provide service offerings tailored to our customers’ diverse trading needs. These service offerings include a variety of trading services as discussed above, and clearing and settlement, all of which add value for our customers.

Instinet is also one of the largest global independent providers of research and other brokerage services through soft dollars or other similar arrangements, and one of the largest providers of commission recapture services to pension plan sponsors and managers and other financial institutions.

Instinet Operates Globally

For more than 15 years, Instinet has delivered solutions for trading in international markets. Instinet was among the first broker dealers to offer customers electronic and unintermediated access to global markets. Today, Instinet combines powerful technology with the expertise of sales-traders to provide institutional customers access to more than 30 securities markets worldwide, which allows Instinet to help customers locate liquidity and minimize market impact globally. Instinet, through its affiliates, is also a member

of 13 non-U.S. exchanges. As of December 31, 2004, approximately 490 customers in Europe and approximately 150 customers in Asia had access to the Instinet trading system. A total of approximately 5.7 million transactions in non-U.S. equity securities were executed through Instinet’s systems in 2004.

In addition, Instinet is a global independent provider of research and other brokerage services through soft dollar and similar arrangements and a significant provider of commission recapture services to pension plan sponsors and managers and other financial institutions. We also offer customers a choice of full service agency sales trading or direct market access services worldwide.

Instinet has a Proven Ability to Innovate and Adapt

We have been an innovator in using technology to enhance securities trading, have seized market opportunities and have adapted to numerous changes in our operating and regulatory environment while continuing to grow. Some of our most significant developments include the following:

Instinet Has an Established Technology Infrastructure

Instinet developed one of the earliest electronic trading businesses and introduced the first screen-based system through which institutional investors could trade NASDAQ-listed stocks directly with each other. Instinet’s current technology enables our customers to access the liquidity pools within our own electronic trading systems in order to trade these securities with one another or to access one of the various markets to which we are connected. Instinet’s technology allows our customers to display orders simultaneously both on our own liquidity pools and in multiple other U.S. markets to which we are connected. Instinet continues to develop and enhance our technology to provide our customers efficient access to our internal liquidity pools and to most other liquidity pools, resulting in enhanced order execution and order management capabilities and the opportunity for superior execution. Instinet believes that our ability to use advanced technology effectively to improve our services has been a key component in the development of our business.

Strategy

Instinet’s objective is to continue to strengthen its global electronic agency brokerage business both in the United States and internationally and align its resources to provide customers with a complete, customized service offering. We believe that Instinet is uniquely positioned to provide these benefits to its customers through its unconflicted business model, sophisticated trading expertise, advanced technological trading solutions, and direct, efficient and unbiased access to other Instinet customers and other U.S. and global equity markets.

The principal elements of Instinet’s strategy include:

Continue to Enhance Instinet’s Products and Services. Both in the United States and internationally, Instinet will continue to focus its initiatives on developing products and services to meet its customers’ specific needs in an effort to improve their execution performance by reducing their transaction costs, providing better pricing for their trades and enabling them to manage increasingly complex global equity trading strategies. Instinet recently re-aligned its institutional brokerage to better serve the needs of institutional customers to achieve best execution by avoiding market impact. In recognition of the growth of electronic trading in the United States, Instinet recently created a separate Electronic Trading Group from its domestic Sales Trading Group, similar to its existing trading groups in London, to create a more streamlined and effective business that further serves its customers’ individual needs. We believe this separation will enable customers to choose the best way to manage their trading strategies; customers can rely on Instinet’s sales trading expertise to execute their trading strategies or can take direct control of their orders and lower their transaction costs with direct market access. Instinet will enhance its direct market access offering by improving the ease of use and accessibility of its innovative algorithmic trading solutions, and increasing the number and type of algorithms, pre-determined and customized, available to customers. We believe broadening our algorithm offers will increase our customers’ trading efficiency. Instinet also intends to continue to innovate and expand its offering of sophisticated trading services, unconflicted professional sales trading expertise and advanced technological trading tools and products in order to enhance its customers’ individual equity trading objectives.

On February 28, 2005, we entered into a definitive agreement to acquire Bridge Trading, a soft-dollar execution broker, from Reuters. With Bridge Trading’s strong client-base and expertise in listed-trading, we believe this acquisition will give us the opportunity to grow our client base, increase our exchange-listed trading volume and expand our offerings to the institutional investor community.

Continue to seek improved cost structure and margins. We intend to continue to focus our efforts on increasing the efficiency of our cost structure and improving our margins through cost reduction efforts. In our non-U.S. operations, we intend to seek reductions in costs associated with post-trade processing in order to improve our profitability and gross margins.

Expand Instinet’s Independent Research Offering. In response to customer demands for research that is independent and objective, in June 2004 Instinet launched Instinet Research Partners, offering customers access to a broad range of high-quality investment research through exclusive distribution agreements with independent research providers that produce research based on direct, unconflicted access to primary sources of information. Instinet intends to continue to expand its independent research offering by pursuing relationships with additional independent research providers.

Strengthen Instinet’s Global Offering. Instinet intends to continue to improve its competitive position in the international markets and strengthen its global offering. Instinet currently offers a wide range of global trading capabilities such as portfolio trading, block trading, algorithmic trading, research, and direct market access. Instinet will continue to leverage its proprietary technology to globally expand its algorithmic offering. In January 2005, Instinet introduced its smart order-routing service in the European markets for European equity securities. This service will be initially available for Dutch equities which trade concurrently on Euronext Amsterdam, the London Stock Exchange and Instinet’s CBX. In addition, in the second half of 2004, Instinet began deploying Newport to those customers who trade in the Asian markets but are not based in Japan and will support customers trading Japanese equities on behalf of Japanese pension and mutual funds in the second half of 2005 to coincide with new regulations permitting greater use of electronic trading alternatives by these customers.

Competition

The financial services industry generally, and in particular, the securities brokerage business in which we engage is very competitive, and we expect competition to remain intense in the future. We expect to face competition from a number of different sources varying in size, business objectives and strategy. We compete with the following entities and types of entities, among others:

Instinet competes on the basis of a number of factors, including:

We have experienced intense price competition in our equity securities business in recent years that may continue as a result of continuing advances in technology, increased customer awareness and regulatory scrutiny of execution costs, and continuing unbundling of financial services.

Some of our competitors may have more modern technology and a broader range of services and, therefore, may be able to offer brokerage services to customers at lower prices than we can. We continue to seek ways to enhance our products and services; leverage our unconflicted, agency business model; enhance our independent research offering; maintain competitive prices and offer competitive services.

Many of the financial service providers with which we compete are substantially larger than we are and have substantially greater financial, technical, marketing and other resources. Outside the United States, in addition to our U.S. competitors with international capabilities, we compete with banks and other financial institutions that are well-capitalized and larger than we are and may have long-standing, well-established and, in some cases, dominant positions in their trading markets.

Competition may remain intense for the following principal reasons:

For a further discussion of the risks relating to our competitive environment, see “Certain Factors that May Affect Our Business — Risks Related to Our Industry —We Face Substantial Competition That Could Reduce Our Market Share and Harm Our Financial Performance.”

Technology

Instinet uses a range of sophisticated technologies, including Linux, Tibco’s Rendezvous, Oracle, Java and J2EE, for the various components of its systems, including its central order matching engines, crossing services and order management functions.

Currently, customers can access Instinet’s trading platform through Instinet^® display screens, direct links to Instinet’s systems from those of its customers using the Financial Information Exchange (FIX) protocol or Instinet’s proprietary software. Recent products that Instinet has developed to access its marketplace include:

Most of the methods of connecting to Instinet’s system are by means of dedicated networks provided by Radianz, which is currently wholly-owned by Reuters. However, Instinet also provides alternative methods of connectivity, if possible, to those customers who choose not to use Radianz. Instinet no longer provides proprietary communications and connectivity systems to customers, but instead offers various other methods of connectivity, including Internet-based systems and technology provided by third party vendors. As a result, Instinet customers are responsible for their own communications and connectivity requirements. The availability of alternative methods of connectivity also provide Instinet customers with multiple options for access to Instinet’s trading platform.

Clearing and Settlement. ICS’ clearing and settlement operations are similar in design and function to other clearing brokers. ICS is responsible for a variety of activities that take place after a securities trade has been executed, including confirming trades before settlement, submitting executed transaction information to industry clearing and settlement utilities, managing failed trades, communicating trade and settlement data including allocations to customers, managing corporate actions and updating and maintaining books and records. Instinet handles customer ticketing and processing of allocations while ICS uses its proprietary Clearing Information System^TM (CIS) to handle communications with industry clearing agents, depositories and books and records processing providers. In February 2003, INET substantially replaced portions of CIS with a new system for the processing of trades for its U.S. broker-dealer customers. This new system has improved the efficiency of our clearing services by providing increased capacity to process significantly higher volumes of trades for these customers. In the third quarter 2004, ICS substantially completed the replacement of the remainder of CIS with a new system for the processing of trades for institutional customers. We anticipate the replacement of the customer ticketing function and processing of allocations for institutional customers to be completed by the end of the second quarter of 2005. For processing of books and records, ICS uses Automated Data Processing, Inc. (ADP) in the United States, Nomura Institute’s I-Star system in Japan, SLIB, or the Euronext books and records system in France and on Euronext, and ACT Fiscal for all other non-U.S. business. We are currently considering replacing ACT Fiscal with another system during 2005.

Marketing and Communications

Instinet’s marketing and communications strategy is focused on the following goals:

We pursue these goals through a combination of several marketing communications strategies. These include print advertising, interactive marketing on our own websites and other online channels, sponsorships of customer events, direct one-to-one marketing, traditional public relations, a variety of alliances and co-marketing programs and the production of customer newsletters, premiums and promotional items. We also develop white papers and sponsor and conduct studies on topics that we believe are relevant to our customers and potential customers, such as transaction cost and trading execution quality. Through our website, prospective customers can get detailed information on our services, as well as news about us and our market environment.

INET^SM

Business

INET is an electronic marketplace that offers U.S. broker-dealers one of the largest liquidity pools in NASDAQ-listed stocks, as well as liquidity in U.S. exchange-listed securities and significant market share in ETFs. This electronic marketplace executes trades quickly and reliably, while operating at a low cost. INET also provides its customers with access to other major U.S. trading venues.

During 2004, INET, which represents the consolidated broker-dealer order flow of the former Instinet and Island ECNs, accounted for 25.1% of the total trading volume in NASDAQ-listed stocks compared to 23.8% in 2003. In 2004, INET’s average daily matched trading volume in NASDAQ-listed stocks increased 5.9% to 449 million shares from 424 million shares in 2003. During 2004, INET also accounted for 3.4% of the total trading volume in U.S. exchange-listed stocks compared to 2.3% in 2003. INET’s average daily matched trading volume in U.S. exchange-listed stocks increased 34.4% to an average volume of 70 million shares from 52 million shares in 2003. Matched volume reflects transactions where the buyer and seller are matched on INET. Routed volume increased to 112 million shares in 2004 from 36 million in 2003. More than 80% of INET customers’ transactions are generally executed within its internal liquidity pool.

For an explanation of how we calculate our trading volumes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Calculation of Volumes — INET, The electronic marketplace.”

Customers

As of December 31, 2004, INET provided equities trading services to approximately 800 broker-dealer customers in the United States.

INET’s customers fall into the following broad categories:

Trading Platform and Services

INET offers its customers matching and routing services through its ECN, including the following:

Core Execution Services. INET provides the automated matching of buy and sell orders for both NASDAQ-listed stocks and U.S. exchange-listed stocks. Through the INET trading platform, INET customers are able to enter orders and execute trades directly with one another. Direct trading between customers over INET’s platform creates a deep liquidity pool, in particular for NASDAQ-listed stocks and ETFs.

Trading Platform. As part of INET’s efforts to consolidate its order handling trading applications into a single platform, in the fourth quarter of 2004, INET completed the deployment of the INET Terminal, INET’s new proprietary market data and order handling trading platform that permits its customers to place orders in INET’s marketplace. The INET Terminal is designed for reliable, anonymous, high-speed trading at low cost and offers advanced order functionality that we believe allows our customers to control transaction costs and to obtain superior execution by managing their own trade strategies.

Infocenter. Infocenter is an automated Internet-based system for INET customers that provides quick access to customer trade information, billing, and other customer related information. Infocenter also enables INET customers to place new orders through the Internet and manage existing orders, although it does not allow customers to view other orders on the INET platform or access other major U.S. trading venues.

Support Services. INET has a dedicated staff that provides customers with technical assistance in the use of INET’s screen-based trading systems. INET also allows customers to place orders by telephone with its customer support staff, who enter the orders into INET’s system on behalf of a customer.

Extended Hours Trading. INET allows customers to input orders for a security and execute trades with other customers in our liquidity pool before, during and after normal market hours. This permits INET to make the liquidity pool generated by its customers available from 7:00 a.m. until 8:00 p.m., New York City time.

Co-Location Services. INET’s co-location services allow customers to place their trading systems, including servers and telecommunications equipment, inside INET’s co-location facility within the data center in Jersey City, NJ. This co-location facility is directly connected to the INET ECN, allowing customers to establish and maintain a continuous local area network (LAN) connection to INET protocols and data feeds such as ITCH^®, OUCH^®, and FIX. INET believes this service offers its customers the opportunity to realize substantial savings in infrastructure and market data costs while leveraging INET’s superior liquidity and speed, potentially resulting in faster executions and improved execution quality.

INET recently developed its own smart-order routing technology, known as RASH^SM, or Routing and Special Handling, that will provide access to either the INET liquidity pool or one of the various markets to which it is connected and will eliminate INET’s need to use Instinet’s smart order-routing technology. RASH^SM will also enable customers to enter advanced order types such as pegging (pricing of orders relative to the current market price for a security), reserve (entering a large order while only displaying a portion of it to the market) and discretionary orders (display of non-active orders at discretionary prices that only become active orders when shares are available within the discretionary price range). We expect to substantially complete the deployment of RASH to all customers by the end of the second quarter of 2005.

Competitive Strengths

INET is a Market Leader

INET, our ECN, offers its U.S. broker-dealer customers the combined liquidity of the former Instinet and Island ECNs. INET has retained the aggregate market share of both ECNs by consolidating the order flows of the two liquidity pools onto the INET matching engine and, as a result, INET offers direct trading between diverse customers that creates one of the largest liquidity pools in NASDAQ-listed stocks, as well as liquidity in U.S. exchange-listed securities and significant market share in ETFs. In 2004, INET accounted for 25.1% of the total trading volume in NASDAQ-listed stocks. For an explanation of how we calculate our trading volumes, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Calculation of Volumes— INET, The electronic marketplace.”

INET is an Efficient and Anonymous Liquidity Pool

INET enables customers to efficiently and anonymously execute their equity trading. INET operates without market intermediaries, such as specialists on the NYSE or market makers on NASDAQ for trade execution. INET has no business interests that compete with the trade performance of its customers and is structured to maintain customer anonymity and ensure that its customers trading intentions and strategy are not compromised.

INET’s Technology Offers Low Cost, Speed, Reliability and Functionality

INET’s trading platform is designed for reliable, anonymous, high-speed electronic trading at low cost. It also offers advanced order functionality that we believe allows our customers to control transaction costs and to obtain superior execution by managing their own trading strategies. INET’s current technology enables customers to access our own internal liquidity pools or to access one of the various markets to which we are connected through the use of Instinet’s smart order-routing technology. INET is currently developing its own smart order-routing technology for use solely by INET customers. INET continues to develop and enhance its technology to provide customers efficient access to our internal liquidity pools and to most other liquidity pools, resulting in enhanced order execution and order management capabilities and the opportunity for superior execution. We believe that our ability to use advanced technology effectively to improve our services has been a key component in the development of our business.

Strategy

INET is focused on continuing to deliver systems and services that empower its customers to reduce their total transaction costs, improve execution quality and better achieve their trading objectives. INET’s objective is to increase its market share in NASDAQ-listed and U.S. exchange-listed stocks, strengthen its competitive position in the U.S. equities markets and continue to offer efficient, low-cost and technologically sophisticated trading solutions. We believe that INET’s substantial liquidity pool, competitively priced services, high-speed and reliable technology, and routing services will enable INET to achieve these goals.

The principal elements of INET’s strategy include:

Maintain and Expand Liquidity. INET continues to seek ways to maintain and expand its trading volumes in the U.S. markets for NASDAQ-listed and U.S. exchange-listed stocks. As part of its plans to build market share and strengthen its competitive position in U.S. equities securities, INET successfully completed the consolidation of the Instinet and Island ECN order flow into its single marketplace in February 2004 and INET has retained the aggregate market share of both ECNs prior to the consolidation. INET announced at the end of December 2004 an initiative involving market data revenue sharing for American Stock Exchange-listed securities which will allow customers that add liquidity to the INET ECN in these securities, including ETFs, to receive fifty percent of the market data revenue that INET receives. In addition, INET continues to focus on capitalizing on its routing services to further build up its liquidity. INET also has significant market share in ETFs, and is continuing to explore various initiatives and pursue regulatory changes to increase its market share in these and other U.S. exchange-listed stocks.

Pursue Exchange Registration. To further enhance its competitive position, INET is currently considering registering as a national securities exchange. See “Certain Factors that May Affect Our Business — Risks Related to Our Industry.” If this initiative is successful, INET would no longer be subject to regulation by the NASD or another SRO. INET believes that this may allow it to obtain greater efficiencies in its business, create a more level playing field with its direct competitors, and allow it to capture a larger share of market data revenue. INET continues to discuss its draft application with the SEC.

Improve Efficient Technology and Maintain Low-Cost Infrastructure. INET intends to continue to make its technology more efficient while maintaining its low-cost infrastructure. As part of INET’s efforts to consolidate its order handling trading applications into a single platform, in the fourth quarter of 2004, INET completed the deployment of the INET Terminal, INET’s new proprietary market data and order handling trading platform, which permits its customers to place orders in INET’s marketplace. In addition, INET recently developed its own smart-order routing technology, known as RASH. INET believes this advanced technology will provide customers with greater flexibility in their routing abilities and enable INET to continue to reduce its technology costs by eliminating the need to use Instinet’s smart order-routing technology. In addition, INET continues to operate with approximately 80 employees, enabling it to maintain its low-cost structure.

Competition

The financial services industry generally, and in particular, the securities brokerage business in which we engage is very competitive, and we expect competition to remain intense in the future. We expect to face competition from a number of different sources varying in size, business objectives and strategy. We compete with the following entities and types of entities, among others:

INET competes on the basis of a number of factors, including:

INET has experienced intense price competition in our equity securities business in recent years that may continue as a result of continuing advances in technology, regulatory limitations, abundance of providers and ease of entry into the business, and increased customer awareness and regulatory scrutiny of execution costs.

Some of our competitors may have more modern technology and a broader range of services and, therefore, may be able to offer brokerage services to customers at lower prices than we can. To maintain our customer base and attempt to counter this pressure, we have aggressively reduced pricing, reduced fees for taking liquidity and offered rebates for providing liquidity for our U.S. broker-dealer customers, and offered rebates for taking liquidity and charged fees for providing liquidity in non-ETF exchange-listed stocks. In addition, we seek to continue to maintain and expand liquidity, maintain competitive prices and offer competitive services.

Competition may remain intense for the following principal reasons:

For a further discussion of the risks relating to our competitive environment, see “ Certain Factors that May Affect Our Business — Risks Related to Our Industry— We Face Substantial Competition That Could Reduce Our Market Share and Harm Our Financial Performance.”

Technology

INET uses a number of proprietary and other technologies, including Linux, Windows, Java and Microsoft SQL, for the various components and operational support of its trading system.

Customers can access INET’s trading platform either directly, through the use of INET’s proprietary technology, or through third-party trading platforms for which INET has developed various products to allow those trading platforms to access its trading platform. Products that INET has developed to access its trading platform include:

Currently, INET provides its customers with access to other major U.S. trading venues by allowing its customers to connect directly to Instinet’s smart order-routing technology through the INET Terminal. INET recently developed its own smart-order routing technology, known as RASH, that will eliminate INET’s need to use Instinet’s smart order-routing technology.

INET offers various methods of connectivity, including Internet-based systems and technology provided by third party vendors. INET customers are responsible for their own communications and connectivity requirements. The availability of alternative methods of connectivity provides INET customers with multiple options for access to INET’s trading platform.

In the second quarter of 2004, INET phased out IslandNet, INET’s managed network service that provided simplified connectivity to INET’s trading platform and fully-redundant access over a private network to INET’s full range of products. Although INET no longer offers IslandNet to new customers; INET has made arrangements through Radianz to accommodate those customers still using IslandNet. INET has also partnered with other leading providers of front-end trading platforms, network services and trade and order management systems to expand access to INET’s matching services and data information. These third-party systems generally connect to INET’s trading platform through OUCH^® or FIX and then redistribute this connectivity to their customers.

In order to deal with increasing demands on our execution and clearing capacity in our equity securities trading system due to greater service levels and external circumstances such as decimalization, our technology staff is dedicated to managing our capacity. We believe that it will be important not only to add capacity in the future, but to make this capacity more flexible to handle the complexity of changing circumstances. We have a test network to simulate complex system trading scenarios and to carry out various performance tests on our capacity. In addition, we have other ongoing capacity projects relating to clearing and other areas.

Marketing and Communications

INET’s marketing and communications strategy is focused on the following goals:

We pursue these goals through a combination of several marketing communications strategies. These include print advertising, interactive marketing on our own websites and other online channels, sponsorships of customer events, traditional public relations, and the production of customer newsletters, premiums and promotional items. Through INET’s website, prospective customers can get detailed information on our services, as well as news about us and our market environment.

Instinet Group

Regulation

As a securities broker, an operator of several systems considered ATSs and an ECN under SEC regulations and an operator of a clearing business for our own customers and third parties, we are subject to extensive regulation in the United States and in certain other jurisdictions in which we operate. This regulatory framework generally applies directly to our subsidiaries that are registered or licensed in the various jurisdictions. Instinet, LLC, Inet ATS, Inc., Island Execution Services, LLC, Instinet Clearing Services, Inc., Lynch, Jones & Ryan, Inc. and Harborview, LLC are each registered as U.S. broker-dealers with, and are subject to regulation by, the SEC and other entities, as described below. Inet Futures Exchange, LLC is a dormant registered contract market with the CFTC and a limited purpose national securities exchange with the SEC.

The purpose of these regulations is to generally safeguard the integrity of the markets and to protect the interests of investors participating in those markets, rather than the interests of securities firms or their creditors or stockholders. As a result, these regulations cannot be expected to protect or further the interests of our company and may have the effect of limiting or curtailing our activities, including activities that might be profitable. Furthermore, additional rulemaking or the initiation of proceedings could adversely affect our business, financial results and condition, prospects and reputation.

Regulation covers all aspects of our brokerage business, including:

In addition, our business may be significantly affected by regulation that extends to the structure of the markets for equities securities.

The various governmental authorities and industry SROs that supervise and regulate us generally have broad enforcement powers. If we fail to remain in regulatory compliance, we could be censured or fined. Alternatively, regulators could issue cease-and-desist orders against us, prohibit us from engaging in some of our businesses, or suspend or expel us or any of our officers or employees from SRO membership or the securities industry more generally. We face the risk of significant intervention by regulatory authorities, including extensive examination and surveillance activity. In the case of non-compliance or alleged non-compliance with regulations, we could be subject to investigations and judicial or administrative proceedings that may result in substantial penalties. In the case of

non-compliance, we could also, in some situations, be subject to civil lawsuits by customers, in some cases for substantial damages. Our ability to comply with all applicable laws and rules is largely dependent on our establishment and maintenance of appropriate compliance, audit and reporting systems, as well as our ability to attract and retain qualified compliance and other personnel.

Our U.S. Activities

The securities industry in the United States is subject to extensive regulation under both federal and state laws. The SEC is the federal agency responsible for the administration of the federal securities laws. Our U.S. brokerage and clearing subsidiaries are registered with the SEC as broker-dealers, and our brokerage subsidiary, Instinet, LLC, is also registered with the SEC as an investment advisor. The SEC has delegated much of the regulation of broker-dealers to SROs, including the NASD, which has been designated by the SEC as our principal regulator. The NASD adopts rules (subject to approval by the SEC) that regulate the broker-dealer industry and govern the market structure of NASDAQ and the ADF. These rules regulate the conduct of our U.S. broker-dealer subsidiaries and their activities in NASDAQ-listed, U.S. exchange-listed stocks and other non-NASDAQ and over-the-counter securities. The NASD also conducts periodic examinations of the operations of those subsidiaries. Our U.S. broker-dealer and clearing subsidiaries also are registered as broker-dealers in a number of states and are subject to regulation by state securities administrators in states in which they conduct business. Instinet, LLC, Instinet Clearing Services, Inc., The Inet ATS, Inc., Island Execution Services, LLC, Lynch, Jones & Ryan, Inc. and Harborview, LLC are also subject to regulation by the exchanges of which they are members.

In addition, our U.S. broker-dealer subsidiaries are members of the Securities Investor Protection Corporation (SIPC). SIPC provides certain protection for customers’ accounts in the event of the liquidation of a broker-dealer. SIPC is funded through assessments on registered broker-dealers, including us.

This regulatory environment is also subject to change. Our business, financial condition and operating results may be adversely affected as a result of new or revised regulations or rules imposed by the SEC, other U.S. regulatory authorities or self-regulatory organizations, such as the NASD. Our business, financial condition and operating results also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by the SEC, other regulatory authorities and SROs.

In recent years, the SEC and the NASD have proposed and adopted a number of regulatory changes in an effort to shape or respond to developments in the securities markets and market structure that have resulted from, among other things, advances in technology and the growth of electronic trading. Because a substantial part of our business involves electronic trading and relies heavily on technological advances, these proposals may have a direct and substantial impact on us.

The Order Handling Rules

The SEC adopted the order handling rules for market makers and exchange specialists in 1996. These rules took effect in 1997. The order handling rules prohibit a market maker or exchange specialist from displaying its own limit order for a stock through an ECN at a more favorable price than its published quote unless the ECN publishes its best-priced market maker and exchange specialist orders in that stock and permits execution against those orders through the facilities, or pursuant to the rules, of an SRO. Similarly, a market maker that receives a limit order priced better than its own published quote must generally execute the order, incorporate the limit order price into its published quote or pass the order on to an ECN for public display and execution access. Regulation ATS, discussed below, requires an ATS meeting certain volume thresholds in a particular stock to provide all of its best-priced subscriber orders in that stock, including institutional orders, to an SRO for public display and provide non-subscribers with execution access to these orders.

When the order handling rules were introduced, Instinet was the first and only existing ECN, and the best bids and offers from the Instinet trading system were directly displayed for the first time in the NASDAQ quote montage. The order handling rules, however, facilitated the proliferation of ECNs by providing a role for ECNs in the display and execution of orders. As additional ECNs came into existence, their quotes also were displayed in and accessible through the NASDAQ market, which has produced greater price transparency for investors in the market for NASDAQ-listed, and later, U.S. exchange-listed stocks and resulted in greater competition for us.

Since the introduction of the order handling rules, the SEC’s Division of Market Regulation has issued a series of “no-action” letters to the ECNs operated by Instinet and Island (now INET) over a number of years verifying and extending their status as ECNs in compliance with these rules. The most recent “no-action” letter for INET is valid until October 6, 2005. The Division continues to condition its “no-action” positions upon, among other things, specified limitations on the fees we charge brokers who are not subscribers to our systems for executing orders on our systems displayed on an SRO through the SRO’s facilities or according to the

SRO’s rules (fees commonly known as “access fees”). The Division also conditions its positions upon our representation that the trade execution and communication systems of the ECN operated by INET are able to handle anticipated present and future peak trading volumes. In connection with its annual examination of the capacity of market participants, the Division has in the past raised issues regarding the adequacy of our capacity, our testing of capacity limits and our plans for increasing capacity, which we believe we have addressed. The Division also has in the past raised issues regarding our access fees. We expect that the Division will continue to extend its “no-action” positions, but we cannot assure you that it will do so or that its applicable rules or the enforcement of those rules will not change.

Regulation ATS

In December 1998, the SEC promulgated new rules relating to the regulation of certain ATSs. The SEC expanded its interpretation of the definition of “exchange” under the U.S. securities laws to encompass a range of electronic brokerage activities, including certain of those conducted by us. Specifically, the Instinet Real-Time Trading Service (Instinet RTTS), Instinet Crossing^® systems, Instinet Continuous Block Crossing^SM system, and INET. At the same time, Regulation ATS permits an ATS to be registered with the SEC as a broker-dealer, rather than as a national securities exchange, if the ATS complies with the applicable requirements of the regulation.

The requirements of Regulation ATS applicable to us include:

We have modified and enhanced our trading systems to comply with Regulation ATS and continue to review and monitor our systems and procedures for compliance. The SEC’s proposed Regulation NMS would reduce the volume threshold for the application of the fair access requirement of Regulation ATS. See “— Proposed Regulation NMS; Proposed Changes to NMS Market Data Revenue Allocation Formulas.”

Exchange Registration and the INET Exchange Application

As a consequence of their compliance with the requirements of Regulation ATS, none of the ATSs we operate currently are required to register as a national securities exchange under applicable U.S. securities laws. However, it is possible that INET’s future share of the average daily trading volume in specified securities or classes of securities could result in an SEC determination that exchange registration is necessary. Moreover, INET submitted to the SEC on May 3, 2004 a draft application for registration as a national securities exchange and continues to discuss with the SEC issues related to the filing of a formal application for exchange registration.

Current SEC policy limits the ability of any person to directly or indirectly own or vote more than a certain percentage of the interest in an SRO or a facility of the SRO. Under this policy, any person, alone or with its related persons, cannot own more than 40% of the interest in an SRO or SRO facility and cannot vote more than 20% of the interest in the SRO or SRO facility. However, if the person or any of its related persons are members of the SRO or SRO trading facility, such person cannot own or vote more than 20% of the interest in the SRO or SRO facility. Upon making certain findings, and subject to SEC approval, an SRO could waive the ownership and voting limitations if the person and any of its related persons were not members of the SRO or SRO facility.

On November 9, 2004, the SEC proposed rulemaking to establish governance requirements for SROs, including the adoption of formal limits with respect to ownership and voting interests in an SRO or SRO facility (SRO Governance Proposal). Under the SRO Governance Proposal, the SEC would only place such ownership and voting limitations on persons who are, or had related persons who are, members of the SRO or SRO facility. These ownership and voting limitations would remain at the 20% level of the current policy for SRO members and their related persons. The SEC has indicated that its existing policy would remain in effect until such

time as action was taken on the SRO Governance Proposal. Consequently, if the SRO Governance Proposal is not approved, if INET becomes a registered national securities exchange (and therefore an SRO), we are unsure whether the SEC would approve a waiver of its ownership and voting policy that would avoid the imposition of material limitations or restrictions on Reuters equity interest in us or Reuters ability to exercise its voting and other governance rights in the manner contemplated by our amended and restated corporate agreement with Reuters. Further, as currently proposed, the SRO Governance Proposal would require INET to seek an exemption from the SEC to pursue an exchange application in which an affiliated broker-dealer of the exchange entity would provide smart order routing as a service to exchange members. We cannot be sure that the SEC would grant such an exemption.

Quote Display and Order Execution Access in Exchange-Listed Stocks; Intermarket Trading System

Under Regulation ATS, an ATS meeting certain trading volume thresholds in a stock during four calendar months in any six calendar month period in a stock for which it displays orders to its subscribers must provide to an SRO its best priced orders in that stock for public display and must provide other broker-dealers execution access to such orders. Under current SRO regulations, ATSs that provide order information for U.S. exchange-listed stocks to an SRO, including INET’s ATS, are subject to the rules of the ITS Plan. Among other provisions, the ITS Plan imposes limitations and provides remedies with respect to transactions by members of ITS participant markets that involve a “trade-through” of bids and offers. A trade-through occurs when a market participant trades at a price that is inferior to a price displayed in another participating market. The ITS Plan also provides remedies to aggrieved parties when market participants “lock” the market — display bids or offers at prices that equal offers or bids from other market participants — or “cross” the market — display bids that exceed offers or display offers that are less than bids of another market participant — for a particular security. Orders in U.S. exchange-listed stocks displayed on INET’s ATS frequently “lock” or “cross” other markets.

On May 30, 2003, an SEC order became effective that extended a temporary de minimis exemption from the ITS trade-through rule for the trading of SPYs, QQQQs and Diamonds. This temporary de minimis exemption, which has been extended through September 4, 2005 for SPYs and Diamonds alone (an exemption is no longer necessary for QQQQ as its listing has moved to NASDAQ, where no trade-through rule currently is in effect), enables ATSs and other market participants to effect trade-throughs up to three cents away from the current best bid and offer in these three stocks. This temporary de minimis exemption has facilitated the ability of INET (and the Instinet and Island ECNs previously) to display order information in and maintain its liquidity pool in SPYs, QQQQs, and Diamonds. Without the de minimis exception, INET’s ATS would be required either to discontinue the display of order information in SPYs and Diamonds or to continue its participation in NSX or another SRO’s market with restrictions on its ability to execute trades that would result in trade-throughs. Either alternative could have a significant adverse effect on INET’s ability to attract orders to its liquidity pool and maintain and grow its market share and liquidity pool in the affected stocks.

Instinet’s CBX system does not display its customers’ orders and provide access to such orders in any SRO market. In addition, CBX neither provides market makers a means to meet their ECN order display and access obligations nor currently meets the Regulation ATS volume thresholds that would require it to display and provide access to its orders. However, if CBX did meet the ATS trading volume thresholds in any stock, because CBX orders are conditional in nature, they would be ineligible for display on any SRO, as the rules of all SROs prohibit the display of conditional orders. Accordingly, if CBX were to meet the Regulation ATS volume thresholds in any stock, we are unsure what, if any, steps the SEC would require Instinet to take to comply with the Regulation ATS order display and execution access requirements.

We have been engaged in discussions with the SEC regarding issues relating to the ITS Plan rules, their application to the INET ATS and their potential application to Instinet CBX, but we are unable to predict the outcome of these discussions. See “— Proposed Regulation NMS; Proposed Changes to NMS Market Revenue Allocation Formulas.”

NASDAQ Market Center

On December 2, 2002, NASDAQ completed its implementation of SuperMontage, a new trading platform for the NASDAQ market. SuperMontage was renamed the NASDAQ Market Center^SM in 2004. Any ECN or market maker using NASDAQ facilities to display quotations in NASDAQ-listed or U.S. exchange-listed stocks or to access quotations on NASDAQ is now required to use Market Center. INET does not currently display its quotations in NASDAQ-listed or U.S. exchange-listed stocks on Market Center.

On September 7, 2004, NASDAQ completed its acquisition of Brut. Brut operates an ATS with a substantial liquidity pool in NASDAQ-listed securities. NASDAQ currently operates Market Center^SM and Brut as separate liquidity pools, but has taken initial steps towards the integration of the two liquidity pools. NASDAQ’s acquisition of Brut also provides NASDAQ with smart order routing technology, which previously was not a service provided by NASDAQ. We are unable to predict what impact NASDAQ’s

acquisition of Brut, the further integration of the Market Center and Brut liquidity pools, or the availability of smart order routing technology to NASDAQ customers will have on our business.

NASDAQ began disseminating a proprietary NASDAQ Official Closing Price in April 2003 and a NASDAQ Official Opening Price in January 2004, both derived from Market Center^SM market information. NASDAQ utilizes these proprietary official opening and closing prices in Market Center opening and closing securities crossing sessions it introduced in March and October 2004, respectively. We are continuing to assess, but are unable to predict at this time what the impact of the implementation of these crossing sessions will have on our business.

NASDAQ Exchange Application

NASDAQ is in the process of becoming a for-profit exchange, independent from the NASD. On March 15, 2001, NASDAQ submitted its application for registration as a national securities exchange to the SEC. If NASDAQ is approved as an exchange, we are unable to predict what changes to its operations it might propose or eventually implement. We are also unable to predict what impact NASDAQ’s registration as an exchange may have on our business.

Archipelago Exchange

Archipelago Exchange currently operates as the equity trading facility of the Pacific Exchange and has a significant liquidity pool in both NASDAQ-listed stocks and ETFs. On January 4, 2005, Archipelago Holdings entered into a definitive agreement to purchase the Pacific Exchange. We are unable to predict what impact Archipelago’s purchase of the Pacific Exchange may have on our business.

Securities Information Processor

Another pending change to the NASDAQ market structure, in recognition of NASDAQ’s growing role as a competitor, is the anticipated replacement of NASDAQ as the exclusive SIP for NASDAQ-listed stocks. We believe that role has given NASDAQ financial and other competitive advantages. The replacement is also expected to be an exclusive SIP, but is unlikely to compete directly with us.

Market Data Revenues

INET earns market data revenues by participating in market data revenue-sharing programs and other revenue-sharing programs provided by NASDAQ and the NSX. Market data revenues consist of a portion of the fees that the SROs and NASDAQ receive for selling quotation and transaction data to independent market data providers and market participants such as broker-dealers. On July 2, 2002, the SEC abrogated proposals that were submitted by several markets, including NASDAQ and the NSX, to continue certain of their market data revenue-sharing programs.

The SEC subsequently allowed SROs to reinstate market data revenue-sharing programs in U.S. exchange-listed stocks. INET commenced a program of sharing market data revenue rebates with its subscribers solely in Amex-listed securities on January 3, 2005. The SEC, however, has not taken any action on SRO proposals to reinstate market data revenue-sharing programs for NASDAQ-listed stocks, and, although the SEC has indicated that it could approve such programs in the future if it adopted changes to the market data revenue allocations formulas proposed along with Regulation NMS, we cannot assure you that the SEC will approve any of them. In addition, we cannot assure you that the market data revenue-sharing programs for U.S. exchange-listed stocks will continue or remain in their current form. See “— Proposed Regulation NMS; Proposed Changes to NMS Market Data Revenue Allocation Formulas.”

Proposed Regulation NMS; Proposed Changes to NMS Market Data Revenue Allocation Formulas

On February 24, 2004, the SEC proposed the adoption of Regulation NMS, which contains a number of interrelated substantive proposals designed to modernize the regulatory structure of the U.S. equity markets. After much public comment, on December 15, 2004, the SEC reproposed Regulation NMS. First, Regulation NMS would require all market centers, including INET, to adopt procedures to prevent trade-throughs of “protected quotations” in not only U.S. exchange-listed stocks, to which the ITS trade-through rule currently applies, but also NASDAQ-listed stocks. The SEC proposed two alternative definitions of protected quotations as part of Regulation NMS. The first would limit the scope of the SEC’s trade-through rule to the best publicly displayed bid and offer of each SRO market, while the second would go further by providing trade-through protection for quotations at additional price levels that SRO markets voluntarily provide to the exclusive SIP for a particular NASDAQ-listed or U.S. exchange-listed stock. The

proposed rules limit trade-through protection by excluding quotations that are not automatically accessible from the definition of protected quotations.

Second, Regulation NMS also addresses three issues relating to access to trading centers. Regulation NMS would impose a cap of $0.003 per share on the accumulated access fees that SRO trading centers and broker-dealers, including ATSs such as INET, could charge for executing orders against their protected quotations. This proposal would, for the first time, enable NASDAQ market makers and certain other broker-dealers to charge an access fee for their orders that are displayed on an SRO trading center. Regulation NMS also would prohibit SROs from imposing unreasonably discriminatory terms on persons seeking to obtain execution access to the SRO through an SRO member. It also would reduce the volume threshold for the application of the Regulation ATS fair access requirement from twenty percent of a stock’s average daily trading volume to five percent.

Third, Regulation NMS would require SROs to adopt rules that prevent their members from displaying quotes that would lock or cross publicly displayed quotations that are protected quotations. Although the ITS Plan already prohibits locked and crossed markets in U.S. exchange-listed stocks, this proposal would, for the first time, apply intermarket locked and crossed market prohibitions to the trading of NASDAQ-listed stocks.

Fourth, Regulation NMS would prohibit market participants from accepting, ranking, or displaying orders in any NASDAQ-listed or exchange-listed stock priced equal to or greater than $1.00 in sub-penny pricing increments. Finally, Regulation NMS would update the existing rules governing the NMS and consolidate them into a single regulation.

Concurrent with the proposal of Regulation NMS, the SEC proposed amendments to the rules governing the Consolidated Tape Association, Consolidated Quotation System, and the NASDAQ-UTP Plan to modify the formulas for allocating the market data revenues generated by these systems and to revise the terms of their governance. See “Certain Factors that May Affect Our Business — Risks Relating to Our Industry.”

NASD Fees

The NASD has implemented proposed changes in its fee structure, including the introduction of a fee based on all NASD members’ transactions in U.S. exchange-listed and NASDAQ-listed stocks regardless of where those transactions occur. The NASD’s trading activity fee requires NASD member clearing firms to report and remit payment monthly to the NASD based on the trading activity cleared and settled by the firm on behalf of itself and other NASD members. However, the NASD has established an exemption from the trading activity fee for NASD members that act as agent on behalf of another NASD member. As a result of the exemption, INET has experienced a reduction in its transaction-based NASD regulatory fees. Because the NASD’s proposed fee structure is still subject to revision by the NASD and review by the SEC, we are unable to predict what future impact the fee structure will have on our business.

Section 28(e)

Section 28(e) of the Exchange Act creates a limited safe harbor that allows investment advisers exercising investment discretion to cause their customer accounts to pay more than the lowest available commission rate, as long as the adviser determines in good faith that the commission is reasonable in relation to the value of the research and brokerage services a broker provides to the adviser.

Soft Dollars

In the wake of ongoing investigations and regulatory actions taken against alleged trading abuses by investment advisors and certain of their customers, the U.S. Congress currently is considering proposed legislation that would restrict the use of soft dollars and similar arrangements. In addition, according to some reports, the SEC staff is considering recommending rulemaking that may impose restrictions and enhanced disclosures relating to the use of soft dollars by investment advisors.

NASDAQ Market Data-Related Rule Changes

Instead of using consolidated market data for NASDAQ-listed stocks for closing price calculations and meeting certain market data-related regulatory requirements, NASDAQ has obtained SEC approval to establish NASDAQ-specific market data for these purposes. For example, NASDAQ has established NASDAQ official opening and closing prices and is actively marketing their use instead of the consolidated closing price for market participants’ closing price-related activities. In addition, NASDAQ requires market

participants using NASDAQ facilities to execute or report trades to use the NASDAQ best bid instead of the consolidated best bid in meeting their short sale regulatory requirements.

Regulation of Clearing Activities

We are a self-clearing broker in the United States through our subsidiary Instinet Clearing Services, Inc. Brokers that clear their own trades are subject to substantially more regulatory requirements than brokers that rely on others to perform those functions. Errors in performing clearing functions, including clerical, technological and other errors related to the handling of funds and securities held by us on behalf of customers, could lead to civil penalties imposed by applicable regulatory authorities as well as losses and liability in related lawsuits and proceedings brought by our customers, and others. Any liability that arises as a result of our clearing operations could have a material adverse effect on our business, financial condition and operating results.

Net Capital Requirements

The SEC and the NASD, as well as other regulatory agencies and securities exchanges within and outside the United States, have stringent rules with respect to the maintenance of specific levels of net capital by regulated broker-dealers. These rules include the SEC’s net capital rule, to which our U.S. broker-dealer subsidiaries are subject. The failure by one of these subsidiaries to maintain its required net capital may lead to suspension or revocation of its registration by the SEC and its suspension or expulsion by the NASD and other U.S. or international regulatory bodies, and ultimately could require its liquidation. In addition, a change in the net capital rules, the imposition of new rules or any unusually large charge against the net capital of one of our broker-dealer subsidiaries could limit its operation, particularly those, such as correspondent clearing, that are capital intensive. A large charge to the net capital of one of these subsidiaries could result from an error or other operational failure or a failure of a customer to complete one or more transactions, including as a result of that customer’s insolvency or other credit difficulties, and we cannot assure you that we would be able to furnish the affected subsidiary with the requisite additional capital to offset that charge. The net capital rules could also restrict our ability to withdraw capital from our broker-dealer subsidiaries, which could limit our ability to pay cash dividends, repay debt or repurchase shares of our outstanding stock. A significant operating loss or any unusually large charge against net capital could adversely affect our ability to maintain our present levels of business, or to expand, which could have a material adverse effect on our business, financial condition and operating results.

Other U.S. Regulation

The SEC and NASD are currently considering, and we are periodically in discussions with them regarding, other regulatory issues. These currently include:

We are unable to predict the outcome of the various deliberations and discussions on the evolution of the U.S. equities market structure, SRO governance issues and the self-regulatory framework more generally, although these issues or other issues of market structure may have a significant impact on our equities business. In this regard, we may consider it desirable to modify the regulatory status of one or more of our ATSs to advance our business strategy. Potential steps could include the creation of new subsidiaries regulated in the United States or abroad, efforts to register INET as an exchange to conduct some or all of its business, the establishment of linkages that would enable us to act as a facility of a registered national securities exchange, the display of some or all of our orders in NASDAQ-listed or U.S. exchange-listed stocks on another exchange, or the reporting of additional trades to another exchange.

Our business, especially our communications with and connectivity to customers, increasingly relies on the Internet and other electronic communications gateways. We are in the process of expanding use of these gateways. Although to date the use of the Internet has been relatively free from regulatory restraints, the SEC, certain SROs and certain states are beginning to address the regulatory issues that may arise in connection with the use of the Internet for securities and financial services transactions. Accordingly, new regulations or interpretations may be adopted that could constrain our ability and our customers’ ability to transact business through the Internet or other electronic communications gateways and could have a material adverse effect on our business, financial condition and operating results.

Regulation of the Non-U.S. Securities Industries and Investment Service Providers

The financial services industry, including the securities brokerage business, is heavily regulated outside of the United States. We are required to comply with regulatory controls of each specific country in which we or our subsidiaries conduct business, as well as the regulations of each exchange of which we or our subsidiaries are members. As we expand our international operations, we may be required to comply with requirements that are inconsistent with our existing international activities. As a result, the varying compliance requirements of these different regulatory jurisdictions and other factors may affect our business or limit our ability to expand our international operations.

In many countries, the laws and regulations applicable to the securities and financial services industries are uncertain and evolving. In these countries, it may be difficult for us to determine the exact requirements of local laws and regulations in every market, particularly because legal and regulatory developments generally trail technological advances. Our inability to remain in compliance with regulatory requirements in a particular jurisdiction could have a materially adverse effect on our operations in that market and on our reputation generally.

The securities industry in the member states of the European Union (EU) is regulated by a number of agencies in each member state. European Union legislation governing investment services (Investment Services Directive), however, allows investment firms like us to obtain single authorization, or “passport,” which is generally valid throughout the European Union and which in particular allows for remote membership of regulated markets or exchanges. Because our largest international operations are in the United Kingdom, our principal European regulator is the Financial Services Authority and we currently “passport” out of the UK into most EU member states.

The Investment Services Directive has recently been amended (The Markets in Financial Instruments Directive, MIFID) and is due to be implemented by April 30, 2006, although this date may be deferred by a year. The MIFID removes the concentration rules applied in a number of member states, thereby potentially allowing for competition between different execution venues. It therefore applies broadly similar rules to exchanges, to investment firms operating multilateral trading facilities (MTFs, also known as ATSs) and to investment firms matching shares for customer orders internally, not on an exchange. The MTF rules require investment firms to notify regulators that they are operating an ATS, ensure that users are treated fairly, provide pre- and post-trade price transparency, monitor user compliance with the rules of the system, assist regulators in preventing market manipulation, have adequate systems capacity and explain their arrangements for clearing and settlement. The MIFID also includes rules on best execution, order handling, investor protection, trade and transaction reporting. The details of these requirements are currently been worked on by European regulators (The Committee of European Securities Regulators, CESR) and the European Commission and are expected to be finalized mid 2005. We are unable at this time to predict how the finalized European legislation will affect our business. We expect, however, that only a small portion of our European business operations will be subject to the MTF requirements.

In the U.K., the FSA has been reviewing its regime governing the use of execution commissions to pay for additional services such as research. (The current FSA rules on soft dollars permit the use of commissions paid to a broker to purchase a range of additional third party services; bundled commissions used to pay for additional services such as research provided by the broker are not regulated). In papers in June and November 2004, the FSA proposed treating soft and bundled commissions equally, disallowing the use of either to pay for any services that fall outside the definitions of research and execution and requiring all asset managers to disclosure, under a new self regulatory code, the breakdown of their commissions to their end customers. The FSA indicated that they would like to see greater unbundling of execution and research as a result of these changes. We believe that on balance these regulatory changes are beneficial to Instinet as a provider of execution only brokerage and as a supplier of independent research.

The provision of investment services is also regulated by other agencies in other jurisdictions outside of the European Union in which we operate, such as the Securities and Futures Commission in Hong Kong and the Financial Supervisory Authority in Japan. In April 2005, the Japanese Securities and Exchange Law will be amended to allow regulated brokers to seek best execution for their customers’ orders, across any regulated execution venue. Previously, the rules required brokers to execute customer orders in a single venue specified by the customer, even if a better price could be obtained in an alternative venue.

Any of these non-U.S. regulatory agencies, as well as many non-U.S. exchanges of which we are a member, may conduct administrative proceedings against us which could result in censure, fine, the prevention of activities or our suspension or expulsion from their country or exchange as an investment services provider. The applicable regulations cover minimum financial resource requirements and conduct of business rules for all authorized investment businesses.

New regulations, changes in existing regulations or changes in the interpretation or enforcement of existing regulations outside the United States may adversely affect or limit our business or operations and adversely affect our financial condition and operating results.

Our Technology and Intellectual Property

Technology

Our sophisticated and proprietary technology connects us to our customers, automates traditionally labor-intensive securities transactions, provides us with a platform to support our operations, and is an important part of our compliance activities. We believe that our ability to use technology effectively to expand and enhance our services has been a key component in the development of our business.

Our systems provide customers with efficient service and have a proven track record of reliability and adaptability as usage has increased and service and product offerings have expanded. Our systems are designed to be interoperable and flexible. For example, our core matching systems use an architecture that allows us to independently develop and evolve the functionality of the systems in different areas as business needs and opportunities demand.

We have four core data centers that enhance the capacity and reliability of our Instinet and INET trading platforms. Our two core data centers for Instinet are located in Jersey City, New Jersey and Bedford, Massachusetts. These two data centers support customer connectivity, as well as trading and execution systems, clearing and settlement operations and customer interfaces. They also provide redundancy for Instinet’s critical applications, systems and services, allowing Instinet to continue to operate from either site should the other site fail. INET is supported by two data centers located in Secaucus and Jersey City, New Jersey. These two data centers support customer connectivity, trading and execution systems, as well as customer interfaces. If one of our four data centers were to be damaged, disabled or otherwise fail or experience difficulties, it might be more difficult for us to continue operating without disruption to our services. In order to mitigate this risk, we have installed additional power, telecommunications and hardware at the four core data centers that support both the Instinet and INET systems. In addition, our network infrastructure is able to support both Instinet and INET customer connectivity and critical systems and services from our Jersey City facility. We also have two subsidiary data centers and distribution points in London serving Instinet’s customers in Europe. See “Our Businesses—INSTINET, THE INSTITUTIONAL BROKER— Technology” and “INET— Technology.”

Our Investments

We have made a number of investments in companies with operations or technology to enhance our core service offerings in our global electronic agency securities business. We have beneficial ownership interests in the following companies:

Exchange Memberships

Overall, through our subsidiaries, we are a member of 23 exchanges in North America, Europe and Asia, and we continue to develop our direct connections to non-U.S. exchanges. The following chart shows our various exchange memberships:

EXCHANGE MEMBERSHIPS

Intellectual Property

To protect our proprietary technology and intellectual property rights, we rely primarily on patent, copyright, trade secret and trademark law. We principally use material, software and technology that we have developed and that are protected by our own intellectual property rights. However, we also use software, as well as other material and technology, that is protected primarily by intellectual property rights belonging to third parties. We have taken measures to register and protect our trade name, logos, trademarks and service marks both in the United States and in various countries throughout the world. Notwithstanding the precautions we take to protect our intellectual property rights, it is possible that third parties may copy or otherwise obtain and use our proprietary technology without authorization or otherwise infringe on our proprietary rights.

Certain Factors that May Affect Our Business

You should carefully consider the risks described below before making a decision to invest in our company. There may be additional risks that we do not currently know of or that we currently deem immaterial based on the information available to us. All of these risks may impair our business operations.

RISKS RELATED TO OUR INDUSTRY

Economic, Political and Market Factors Beyond Our Control Could Reduce Demand for Our Services and Harm Our Business

We earn revenues primarily from securities brokerage and related services and expect to continue to do so. The demand for these services is directly affected by domestic and international factors that are beyond our control, including economic, political and market conditions; unforeseen market closures or other disruptions in trading; the availability of short-term and long-term funding and capital; the level and volatility of interest rates; currency exchange rates; and inflation. Any one or more of these factors may contribute to reduced activity and prices in the securities markets generally. Although the markets have experienced recent economic upturns, over the past few years, the global markets have experienced economic downturns and political uncertainty which have led to volatile trading volumes, intensified price competition and generally a more difficult business environment for us. These conditions may continue and may have a material adverse effect on our business, financial condition and operating results.

Decreases in Trading Volumes or Prices Could Harm Our Business and Profitability

Declines in the volume of securities trading and in market liquidity generally result in lower revenues from our trade execution, brokerage, and related activities. In addition, Instinet’s revenues from trading outside the United States are determined on the basis of the value of transactions (rather than the number of shares traded), which are adversely affected by price declines. Our profitability would be adversely affected by a decline in our revenues because a significant portion of our costs is fixed. Volatility in trading volumes has had, and may continue to have, a significant adverse effect on our business, financial condition and operating results. Our competitors with more diversified business lines might withstand these declines better than we could.

We Face Substantial Competition that Could Reduce Our Market Share and Harm Our Financial Performance

The financial services industry generally, and the securities brokerage business in which we engage in particular, is very competitive, and we expect competition to intensify in the future. Many of the financial service providers with which Instinet competes are well-capitalized and substantially larger than Instinet and have substantially greater financial, technical, marketing and other resources. Many of them offer a wider range of services, have broader name recognition and have larger customer bases than Instinet does. Some of them may be able to respond more quickly to new or evolving opportunities, technologies and customer requirements than Instinet can and may be able to undertake more extensive promotional activities.

Consolidation and alliances within the industry have resulted, and may continue to result, in increasingly intense competition for both Instinet and INET. Outside the United States, in addition to our U.S. competitors with international capabilities, Instinet competes with non-U.S. banks and other financial institutions that may also have long-standing, well-established and, in some cases, dominant positions in their trading markets. If we are not able to compete successfully in the future, our business, financial condition and operating results could be adversely affected.

INET competes with NASDAQ as a trading venue for NASDAQ-listed stocks. The NASD regulates and polices the NASDAQ market, regulates the activities of our U.S. broker-dealer subsidiaries, holds a controlling stake in NASDAQ and operates the ADF. The NASD, either directly or through its subsidiaries, is thus able to propose, and often obtain, SEC approval of rule changes that we believe can be to NASDAQ’s competitive benefit as a securities marketplace and our competitive disadvantage.

NASDAQ has applied to register as a national securities exchange, and another of our competitors, Archipelago, serve as the equity trading facility of the Pacific Exchange and has recently announced that it has entered into a definitive agreement to purchase the Pacific Exchange. Competitors that receive status as national securities exchanges or operate as facilities of exchanges will be able to gain certain benefits from their exclusive participation in the various NMS systems. These benefits may give these competitors an advantage over INET in attracting business in, and generating revenues from, their activity in U.S. exchange-listed and NASDAQ-listed stocks.

Both Instinet and INET have experienced intense price competition in their equity securities businesses in recent years. Some of their competitors may have more modern technology and a broader range of services and, therefore, may be able to offer brokerage services to customers at lower prices than they can. As a result, INET has aggressively reduced pricing for our U.S. broker-dealer customers and reduced fees for taking liquidity and offered rebates for providing liquidity. In the past, these pricing changes have caused volatility in INET’s market share and a significant decline in the transaction fee revenue it received from this customer group. Both Instinet and INET may continue to experience price competition, which could result in the loss of market share and revenue.

We Operate in a Highly Regulated Industry, Which May Limit Our Activities

General

The securities markets and the brokerage industry in which we operate are highly regulated. In our case, the impact of regulation extends beyond “traditional” areas of securities regulation, such as disclosure and prohibitions on fraud and manipulation by market participants, to the regulation of the structure of markets. We are subject to regulation as a securities broker, as an operator of ATSs and an ECN, and as an operator of a clearing business for our own customers. Many of the regulations applicable to us may have the effect of limiting our activities, including activities that might be profitable, or causing us to modify our business model in ways that may adversely affect our revenues.

ATS Status and Exchange Registration

As a result of our compliance with the requirements of Regulation ATS, none of our ATSs currently are required to register as a national securities exchange. In May 2004, INET submitted a draft application to the SEC for registration as a national securities exchange and continues to discuss with the SEC issues related to the filing of a formal application for exchange registration.

If INET or any of our other subsidiaries were to voluntarily register as a national securities exchange, or if the SEC were to require INET to register as a national securities exchange, we could become subject to substantial additional regulation, which might reduce our operational flexibility in ways that could have a material adverse effect on our business. Among other consequences, we would be required to comply with fair representation requirements, and policies or proposed rules limiting ownership and voting interests in the exchange entity that the SEC has applied to other for-profit national securities exchanges and has proposed to apply to all exchanges and exchange facilities. These and other requirements could adversely affect our operations and could also result in material limitations or restrictions on Reuters’ equity interest in us or Reuters’ ability to exercise its voting and other governance rights in the manner contemplated by our amended and restated corporate agreement with Reuters. In addition, our amended and restated corporate agreement with Reuters requires Reuters’ consent for any voluntary registration of INET or any of our subsidiaries as a national securities exchange. We cannot assure you that Reuters would not withhold its consent to such a registration, even if our management determines that exchange registration would be beneficial to us or one of our subsidiaries. Further, as currently proposed, the SRO Governance Proposal would require INET to seek an exemption from the SEC to pursue an exchange application to allow an affiliated broker-dealer of the exchange entity to provide smart order routing as a service to exchange members. We cannot be sure that the SEC would grant such an exemption. See “Business – Regulation –Exchange Registration and the INET Exchange Application.”

Quote Display and Order Execution Access in Exchange-Listed Stocks; Intermarket Trading System

The requirements of Regulation ATS requiring ATSs to display order information and provide order execution access for securities for which certain trading volume thresholds have been met, as well as the rules of the ITS Plan for ATSs that provide order information for U.S. exchange-listed stocks to an SRO, and a determination by the SEC to adopt proposed Regulation NMS, could have a significant adverse effect on our business, financial condition and operating results, including the following:

We have been engaged in discussions with the SEC regarding issues relating to the proposed Regulation NMS and its application to INET and, to a lesser extent, Instinet. We intend to continue to work on solutions to these issues and to discuss these issues with the SEC; however, we are unable to predict the outcome of these discussions.

Structural Developments in the Markets in Which We Operate May Place Us at a Competitive Disadvantage

The structure of the market for NASDAQ-listed stocks continues to evolve, which may place us at a competitive disadvantage, adversely affecting our business, financial condition and operating results.

NASDAQ has moved from a quote-driven display system to an order-driven execution system that directly competes with ECNs and ATSs. NASDAQ continues to make various changes to Market Center^SM to enable it to compete with other market centers trading NASDAQ-listed stocks, including pricing changes and introducing opening and closing securities crossing sessions in 2004. We are unable to predict the extent to which NASDAQ’s changes to Market Center^SM may cause INET to receive fewer orders for NASDAQ-listed stocks.

Through its acquisition of Brut, NASDAQ gained ownership of an ATS with a substantial liquidity pool in NASDAQ-listed securities. NASDAQ currently operates Market Center^SM and Brut as separate liquidity pools, but has taken initial steps towards the integration of the two liquidity pools. NASDAQ’s acquisition of Brut also provides NASDAQ with smart order routing technology, which previously was not a service provided by NASDAQ. We are unable to predict what impact NASDAQ’s acquisition of Brut, the further integration of the Market Center^SM and Brut liquidity pools, or the availability of smart order routing technology to NASDAQ customers will have on INET’s business.

Moreover, if at any time INET were to be unable to use the NSX to meet its regulatory requirements, we would be required to consider possible alternatives, including participation in Market Center^SM. We cannot assure you that any of these alternatives would not have a significant material adverse effect on INET’s business.

In addition, the structure of the U.S. exchange-listed markets may be due for significant changes, as a result of the SEC’s proposed Regulation NMS, the SRO Governance Proposal, investigations of trading practices of NYSE specialists, the NYSE’s proposal to enhance its NYSE Direct+^® system to expand market participants’ ability to execute orders electronically on the exchange, and NASDAQ use of Market Center^SM for the trading of U.S. exchange-listed securities in place of NASDAQ’s former ITS/CAES system, all or any of which may place INET at a competitive disadvantage, adversely affecting our business, financial condition and operating results.

Our Business May Be Affected by SEC Actions Relating to ECNs

General

The SEC regularly considers a variety of regulations or interpretative initiatives with respect to the structure of the equity securities markets, including initiatives intended to reduce fragmentation, integrate ECNs and ATSs into the NMS and create a national consolidated limit order book. Future SEC rulemakings or interpretations in this area could adversely affect our business, financial condition and operating results.

Access Fees

The SEC is currently considering, and we are periodically in discussions with it regarding, other important issues, such as the fees (including subscriber and non-subscriber access fees) ECNs charge, the levels of those fees, the circumstances in which access fees may be charged and the criteria for customers’ access to an ECN’s system and the requirements of Regulation ATS. For example, the SEC has, at times, approved rules or issued interpretations that directly govern how we determine prices for different types of customers and services. We are currently in a dispute with one of our customers regarding the application of these rules or interpretations to our past pricing policies. We are unable to predict the outcome of this dispute. See also “Legal Proceedings.” Future SEC rules or interpretations regarding any of these issues could have a significant and material adverse impact on our equity securities business.

On December 15, 2004, the SEC published its Regulation NMS reproposal for public comment. Among other things, Regulation NMS would impose an aggregate cap of $0.003 per share on the access fees charged SRO trading centers and broker-dealers,

including ATSs such as INET, could charge for executing orders against quotations subject to the proposed trade-through rule. See “Business – Regulation – Proposed Regulation NMS; Proposed Changes to NMS Market Data Revenue Allocation Formulas.” The adoption of the proposal could cause INET to receive and execute fewer orders in its liquidity pool or have an adverse impact on INET’s ability to compete with other market centers for the display and execution of limit orders from market participants, thereby having a serious adverse affect on INET’s business, financial condition, and operating results.

Market Data Revenue

In July 2002, the SEC abrogated certain SRO market data revenue sharing programs. These programs were subsequently reinstated, but only for U.S. exchange-listed securities. On December 15, 2004, the SEC proposed changes to the NMS Plan formulas governing the allocation of market data revenue among SROs, and thus the revenues available for SRO revenue-sharing programs. The SEC also indicated that it could allow the reinstatement of such programs in NASDAQ-listed stocks in the future if its proposed allocation formulas were adopted. In January 2005, INET began sharing with subscribers a portion of the market data revenues it receives from SROs in American Stock Exchange-listed securities.

At this time, we are unable to determine whether the adoption of the proposed formulas would adversely impact the value of INET’s market data for purposes of determining an SRO’s share of market data revenue, and thus affect the revenues INET would be eligible to receive through SRO revenue sharing programs and rebate to its subscribers. In addition, we cannot assure you that the market data revenue sharing programs for U.S. exchange-listed stocks will continue or remain in their current form, or whether such programs will be reinstated for NASDAQ-listed stocks. As a result, we cannot assure you that INET’s ATS will continue to earn market data revenues or, if it does, what the level of those revenues will be in the future. If INET’s ATS is unable to resume earning market data revenue for NASDAQ-listed stocks or continue earning market data revenue for U.S. exchange-listed stocks, this could adversely affect our business, financial condition and operating results.

Regulatory Changes Could Adversely Affect Our Business

The securities industry generally has been and is subject to continuous regulatory changes, including changes in the rules of the SEC and of SROs such as the NYSE and the NASD. In the future, the industry may become subject to new regulations or changes in the interpretation or enforcement of existing regulations. We cannot predict the extent to which any future regulatory changes may adversely affect our business. Our activities as an agency broker in equity securities are the principal source of our revenues and profits. Although regulatory changes can affect all aspects of our business, the markets for equity securities may be subject to very significant regulatory changes including:

International Regulation Could Adversely Affect Our Business

The financial services industry, including the securities brokerage business, is heavily regulated in many jurisdictions outside the United States. Instinet is required to comply with the regulatory regime of each country in which it conducts business, as well as the regulations of each exchange of which we are a member. The varying requirements of these jurisdictions may adversely affect Instinet’s business or limit our ability to expand our international operations. Instinet may not be able to obtain the necessary regulatory approvals for planned expansion or restructuring; if approvals are obtained, they may impose restrictions on its business, or Instinet may not be able to continue to comply with the terms of the approvals or applicable regulations. In addition, in many countries, the regulations applicable to the securities and financial services industries are uncertain and evolving, and it may be difficult for Instinet to determine the exact regulatory requirements. Instinet’s inability to remain in compliance with regulatory requirements in a particular jurisdiction could have a materially adverse effect on its operations in that market and on its reputation generally. Changes in regulations or changes in the interpretation or enforcement of existing regulation outside the United States may adversely affect our business, financial condition and operating results.

New European securities legislation, MIFID, is due to be implemented by April 30, 2006, though it is expected to be delayed by a year. The MIFID removes the concentration rule applied in a number of member states and includes broadly similar rules for exchanges, investment firms operating Multilateral Trading Facilities, and investment firms matching shares for customer orders internally, not on an exchange. It will potentially allow for increased competition between different execution venues. The MIFID also includes rules on a range of conduct of business rules. We are unable at this time to predict how the finalized European legislation will affect our business.

Our Inability to Manage the Risks of International Operations Effectively Could Adversely Affect Our Business

Instinet has operations in Europe and Asia, and there are a number of risks inherent in doing business in international markets, including the following:

Instinet’s inability to manage these risks effectively could adversely affect our business, financial condition and operating results.

Instinet’s international operations also expose us to the risk of fluctuations in currency exchange rates. If our risk management strategies relating to exchange rates prove ineffective, we could suffer losses that would adversely affect our business, financial condition and operating results.

Regulatory Net Capital Requirements Could Adversely Affect Our Ability to Continue to Conduct or Expand Our Business Operations or to Pay Dividends

Our broker-dealer subsidiaries are subject to stringent rules with respect to the maintenance of specific levels of net capital by regulated broker-dealers, including the SEC’s net capital rule. The failure by one of these subsidiaries to maintain its required net capital may lead to suspension or revocation of its registration by the SEC and its suspension or expulsion by the NASD or other U.S. or international regulatory bodies, and ultimately could require its liquidation. In addition, changes in net capital regulation or a significant operating loss or any unusually large charge against the net capital of one of our broker-dealer subsidiaries could limit its operations. A large charge to the net capital of one of these subsidiaries could result from an error or other operational or systems failure or a failure of a customer to complete one or more transactions, including as a result of that customer’s insolvency or other credit difficulties. Our inability to maintain our present levels of business or to expand as a result of the net capital rules could have a material adverse effect on our business, financial condition and operating results. The net capital rules also could restrict our ability to withdraw capital from our broker-dealer subsidiaries, which could limit our ability to pay cash dividends, repay debt or repurchase shares of our outstanding stock.

RISKS RELATED TO OUR BUSINESS

We May Have Difficulty Managing Our Restructuring Successfully

We substantially completed our restructuring in February 2004, which established Instinet and INET as our two distinct business lines. As part of the restructuring, Instinet developed and introduced new services that may not achieve market acceptance. In addition, Instinet may have difficulty competing successfully in the future and operating profitably as a separate, stand-alone entity from INET. Failure of Instinet to remain a viable operation could have a material adverse effect on our business, financial condition and operating results.

Our Inability to Adjust Our Cost Structure If Revenues Decline Suddenly Could Adversely Affect Our Results

Our expense structure is based on historical expense levels and historical and expected levels of demand for our services. If demand for our services and our resulting revenues should decline suddenly (as has occurred in the past), we may be unable to adjust our fixed cost base on a timely basis, which could have a material adverse effect on our operating results and financial condition.

Shifts in Our Business Mix May Decrease Our Profitability and Net Income

Changes in the mix of customers we serve (large institutional investors, portfolio managers, hedge funds and broker-dealers) and in the use of our trading system by our customers can materially affect our profitability and net income. A substantial portion of our trading volume is derived from our broker-dealer customers. A shift in INET’s customer mix toward fewer broker-dealers or a further decline in the use of its trading system by broker-dealers could reduce the depth and breadth of INET’s liquidity pool, which could reduce its attractiveness to its customers and adversely affect INET’s trading volumes. A shift in Instinet’s customer mix or a shift by its customers towards algorithmic and electronic trading instead of traditional sales trading could reduce Instinet’s revenues. Any of these factors could adversely affect our overall trading volumes, operating results and financial condition.

We May Have Difficulty Managing Our Acquisitions Successfully

From time to time, to achieve our strategic objectives, we have acquired or invested in, and in the future may seek to acquire or invest in, other companies or businesses. We cannot assure you that we will realize, when anticipated or at all, the benefits we expect as a result of our acquisitions. Achieving the benefits of our acquisitions will depend on many factors, including the successful and timely integration and, in some cases, the consolidation of products, technology, operations and administrative functions, of two companies that have previously operated separately. Considering the highly technical and complex nature of our products, these integration efforts may be difficult and time consuming. Acquisitions entail numerous other risks, including the following:

Failure to manage our acquisitions to avoid these risks could have a material adverse effect on our business, financial condition and operating results.

If We Fail to Introduce New Services and Service Enhancements and Adapt Our Technology in a Timely Manner, We May Be Unable to Compete Effectively

Our business environment is characterized by rapid technological change, changing and increasingly sophisticated customer demands and evolving industry standards. If we are unable to anticipate and respond to the demand for new services, products and technologies on a timely and cost-effective basis and to adapt to technological advancements and changing standards, we will be less competitive, which could have a material adverse effect on our business, financial condition and operating results. In addition, new services that we may develop and introduce may not achieve market acceptance.

Costs Related to Our Investments in Technology May Adversely Affect Our Profitability and Net Income

In the past, we have incurred significant costs associated with our efforts to strengthen, expand and diversify our business and enhance our technology. Any technological innovations may require significant expenditures over long periods of time, so that our operating margins and profitability could be adversely affected.

We Depend on Our Executive Officers and Key Personnel

Our future success depends, in significant part, upon the continued service of our executive officers, as well as various key sales, trading and technical personnel. The loss of these key people could have a material adverse effect on our business, financial condition and operating results. We also cannot assure you that our recent headcount reductions as part of our cost-cutting initiatives will not have a material adverse effect on our business, financial condition and operating results.

Our future success also will depend in significant part on our ability to recruit and retain highly skilled and often specialized individuals as employees, particularly in light of the rapid pace of technological advances. The level of competition in our industry for people with these skills is intense, and from time to time we have experienced losses of key employees. Significant losses of key

personnel, particularly to other firms with which we compete, could have a material adverse effect on our business, financial condition and operating results.

Insufficient Systems Capacity or Systems Failures Could Harm Our Business

We are heavily dependent on the capacity and reliability of the our proprietary software, computer and communications systems supporting our operations. Heavy use of our computer systems during peak trading times or at times of unusual market volatility could cause our systems to operate slowly or even to fail for periods of time. We also cannot assure you that our recent headcount reductions as part of our cost-cutting initiatives will not impact our ability to respond to system problems. Instinet’s CBX^SM and Instinet Crossing^®, as well as INET, are each SEC-recognized ATSs. Their status as SEC-recognized ATSs requires that our trade execution and communications systems be able to handle anticipated present and future peak trading volumes. In addition, the status of our subsidiaries as SEC-registered broker-dealers and NASD members is conditioned in part on their ability to process and settle trades. If any of our systems do not operate properly or are disabled, that ability could be compromised and we could suffer financial loss, liability to customers, regulatory intervention or reputational damage.

To accommodate potential increases in order message volume and trading volume, the trading practices of new and existing customers, the development of new and enhanced trading system functionalities, sub-penny pricing, and regulatory changes, we have made and will continue to make significant investments in additional hardware and software. We cannot assure you that our estimates of future trading volumes and order messages will be accurate or that our systems will always be able to accommodate actual trading volumes and order messages without failure or degradation of performance. System failure or degradation could result in regulatory inquiries or proceedings, and could also lead our customers to file formal complaints with industry regulatory organizations, file lawsuits against us, trade less frequently through us or cease doing business with us altogether.

From time to time in the past, we have experienced periods of extremely high trading volume in the equity securities markets. On a few occasions during these periods, the volume order messages and trading activity may have caused a slowing of our order execution, trade allocation and related systems. Sustained periods of high trading volumes in the past have enabled us to identify specific areas of vulnerability in our transaction processing systems. From time to time, our systems may execute trades but may not have the ability to send those trades for clearing and settlement for periods of time. These or similar events could interfere with our customers’ ability to execute orders, and settle trades through us or prevent us from satisfying our responsibilities to clearing and settlement organizations and could result in financial exposure or regulatory action.

We continually upgrade and modify our systems, including our order handling trading platforms, as necessary, but we cannot assure you that a hardware or software error will not occur that could impact our ability to execute transactions. We may use new technologies to upgrade our established systems, and the development of these new technologies entails technical, financial and business risks.

We also cannot assure you that we will successfully implement new technologies or adapt our existing technology and transaction processing systems to customer requirements, emerging industry standards, or new regulatory requirements. In the past, we have had occasions where we experienced unintended consequences from enhancements to our customer interface technology. If similar events were to occur in the future, we could suffer financial loss, liability to customers, regulatory intervention or reputational damage.

Our core data centers support our trading and execution systems, clearing and settlement operations and customer interfaces. If one of our data centers were to be damaged, disabled or otherwise fail or experience difficulties, it may be more difficult for us to continue operating without disruption to our services. Our electronic systems could be adversely affected by general power or telecommunications failures, computer viruses or natural or other disasters (including terrorist attacks). They are also vulnerable to damage or failure due to human error and sabotage (both external and internal). The loss of support services from third parties could also have a material adverse effect on our electronic systems.

Financial or Other Problems Experienced by Third Parties, Including Customers, Trading Counterparties, Clearing Agents and Exchanges, Could Have an Adverse Effect on Our Business

We are exposed to credit risk from third parties that owe us money, securities or other obligations. These parties include our customers, trading counterparties, clearing agents, exchanges and other financial intermediaries. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Although we believe we have no obligation to do so, we generally settle trades with a counterparty even if our customer fails to meet its obligations to us.

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. Adverse movements in the prices of securities that are the subject of these open transactions can increase our credit risk. Credit difficulties or insolvency or the perceived possibility of credit difficulties or insolvency of one or more large or visible market participants could also result in market-wide credit difficulties or other market disruptions whereby a large number of market participants may not settle transactions or otherwise perform their obligations. Credit losses could adversely affect our financial condition and operating results.

We May Have Difficulty Managing Our Joint Ventures and Alliances Successfully

From time to time we consider forming joint ventures or alliances with various strategic partners throughout the world. Entering into joint ventures and alliances entails risks, including:

Unsuccessful joint ventures or alliances could have a material adverse effect on our business, financial condition and operating results.

Our Compliance Systems Might Not Be Fully Effective

Our ability to comply with all applicable laws and rules is largely dependent on our establishment and maintenance of compliance, audit and reporting systems and procedures, as well as our ability to attract and retain qualified compliance, audit and risk management personnel. We cannot assure you that these systems and procedures are fully effective. We also cannot assure you that our recent headcount reductions as part of our cost-cutting initiatives will not reduce the effectiveness of these systems and procedures. We face the risk of significant intervention by regulatory authorities, including extensive examination and surveillance activity. In the case of actual or alleged non-compliance with regulations, we could be subject to investigations and judicial or administrative proceedings that may result in substantial penalties or civil lawsuits, including by customers, for damages, which can be substantial. Any of these could adversely affect our business, reputation, financial condition and operating results and, in extreme cases, our ability to conduct our business or portions thereof.

Our Risk Management Methods Might Not Be Fully Effective

Our policies and procedures to identify, monitor and manage our risks may not be fully effective and may vary among our various businesses and subsidiaries worldwide. Some of our risk management methods depend upon evaluation of information regarding markets, customers or other matters that are publicly available or otherwise accessible by us. That information may not in all cases be accurate, complete, up-to-date or properly evaluated. We cannot assure you that our recent headcount reductions as part of our cost-cutting initiatives will not reduce the effectiveness of our risk management policies and procedures. If our policies and procedures are not fully effective or we are not always successful in monitoring or evaluating the risks to which we are or may be exposed, our business, reputation, financial condition and operating results could be materially adversely affected. In addition, although we maintain insurance policies proportionate with those maintained by others in the securities industry, we cannot assure you that our insurance policies will provide adequate coverage.

We May Not Be Able to Obtain Additional Financing If We Need It

Our business is dependent upon the availability of adequate funding and regulatory capital under applicable regulatory requirements. Historically, we have satisfied these needs from internally generated funds and from lines of credit made available to us by commercial banking institutions. Prior to our initial public offering, Reuters had issued non-binding, short-term letters to certain of these institutions confirming its ownership of us and indicating that if we were to default under the relevant facility, Reuters would consider, without any obligation, requests by these institutions for compensation. Reuters has withdrawn these letters and advised us that it will not issue any additional letters in the future, and we will thus not have the benefits of these letters.

Based on management’s experience and current industry trends, we anticipate that our available cash resources will be sufficient to meet our presently anticipated working capital and capital expenditure requirements for at least the next 12 months. However, if for any reason we need to raise additional funds, we may not be able to obtain additional financing when needed on terms favorable to us. 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 million, excluding any indebtedness incurred by us in the ordinary course of our brokerage or similar business or in connection with our clearing of securities trades or our 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.

We Depend on Third Party Suppliers for Key Services

Our reliance on third parties to supply elements of our trading, clearing and other systems, as well as computers and other equipment, and related support and maintenance has increased. We cannot assure you that any of these third party providers will be able to continue to provide these services in an efficient, cost- effective manner or that they will be able to adequately expand their services to meet our needs. If we are unable to make alternative arrangements for the supply of critical services in the event of an interruption in or the cessation of service by an existing service provider, our business, financial condition and operating results could be materially adversely affected.

In particular, we depend largely on the services of Radianz for the telecommunications network that connects us with our customers. Radianz, wholly-owned by Reuters, currently provides network communications services to us through an agreement with Reuters to which we are not a party but under which we get the benefit. Reuters has terminated this agreement effective May 22, 2005. In addition, on March 11, 2005 Reuters announced the sale of Radianz to BT Group. We intend to enter into an agreement directly with Radianz for these services prior to the termination date. Disruptions in Radianz’ network services to us, its inability to continue to support our business or our inability to enter into a direct agreement with Radianz prior to the termination date, would have a material adverse effect on our business, financial condition and operating results.

Our Clearing Operations Could Expose Us to Potential Liability

Errors in performing clearing functions, including clerical, technological and other errors related to the handling of funds and securities held by us on behalf of customers, could lead to civil penalties imposed by applicable regulatory authorities, as well as losses and liability in related lawsuits brought by customers and others. Any liability that arises as a result of our clearing operations could have a material adverse effect on our business, financial condition and operating results.

Employee Misconduct or Errors Could Harm Us and Are Difficult to Detect and Deter

Employee misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Misconduct by our employees could include fraud, misappropriation of our assets, hiding unauthorized activities from us, improper or unauthorized activities on behalf of customers or improper use of confidential information.

Employee errors in recording or executing transactions for customers can cause us to enter into transactions that customers may disavow and refuse to settle. These transactions expose us to risk of loss, which can be material, until we detect the errors in question and unwind or reverse the transactions. As with any unsettled transaction, adverse movements in the prices of the securities involved in these transactions before we unwind or reverse them can increase this risk.

Our Quarterly Results May Fluctuate Significantly

We have experienced, and may continue to experience, significant seasonality in our business. This seasonal trend may continue for the foreseeable future and similar trends may affect our business, financial condition and operating results in the future. As a result of this and the other factors and risks discussed in this section and under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” period-to-period comparisons of revenues and operating results are not necessarily meaningful, and the results of any quarter are not necessarily indicative of results for any future period.

We May Not Be Able to Protect Our Intellectual Property Rights

We rely primarily on trade secret, copyright, trademark and patent law to protect our proprietary technology. However, it is possible that third parties may copy or otherwise obtain and use our proprietary technology without authorization or otherwise infringe on our rights. We may also face claims of infringement that could result in substantial defense costs to us and could interfere with our ability to use technology that is material to our business operations.

In addition, in the future, we may have to rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. Any such litigation, whether successful or unsuccessful, could result in substantial costs to us and diversions of our resources, either of which could negatively affect our business.

Use of the Internet to Access Our Services Could Expose Us to Risks of Failure of Internet Performance and Adverse Customer Reaction

Our business has traditionally been conducted with our customers through the use of proprietary networks for the execution of trades and the communication of information. To achieve better economies of distribution or to improve the delivery of our services to our customers, we have moved a portion of our business from our proprietary networks to non-proprietary networks and the Internet. Existing and prospective customers may react unfavorably to these changes due to their concerns regarding the security, reliability, cost, ease of use, accessibility and quality of service of the Internet or other systems.

RISKS RELATING TO OUR RELATIONSHIP WITH RELATED PARTIES

Reuters Has Significant Control Over Us and May Not Always Exercise Its Control in a Way that Benefits Our Public Stockholders

As of December 31, 2004, Reuters beneficially owned approximately 61.9% of our common stock. Under our amended and restated certificate of incorporation, for as long as it continues to beneficially own more than 50% of our common stock, Reuters will control many matters that require a stockholder vote. These matters include the election of directors and the removal of directors without cause, mergers, acquisitions and other business combinations. In addition, Reuters exercises a significant amount of influence over corporate matters, such as payment of dividends and stock issuances, and over our management, business activities and operations. Currently, five of our directors are also officers, former officers or directors of Reuters. In addition, if we are deemed to supply news services at a time when Reuters beneficially owns more than 50% of our common stock, we will be required to adhere to certain principles relating to integrity, independence, reliability and freedom from bias which apply to Reuters generally. If applicable, these principles may influence how we conduct our business. In addition, to the extent that these principles apply, they may affect Reuters ability to enter into a transaction that would effect a change of control of our company.

Our amended and restated certificate of incorporation and our amended and restated corporate agreement with Reuters also include provisions that provide Reuters with rights, including when it beneficially owns less than a majority of our voting stock, that may be less favorable to you and us than the corporate law governing these matters would be in the absence of these provisions. These provisions include the right, when Reuters beneficially owns between 35% and 50% of our voting stock, to block some issuances of equity securities and some dispositions and acquisitions of assets or businesses exceeding specified thresholds.

We have agreed not to take any action voluntarily that would reduce Reuters ownership of our then-outstanding voting stock to less than 51% of our capital stock or then-outstanding voting stock without Reuters consent. In addition, we have agreed with Reuters not to take any action that would violate a stock exchange rule or similar requirement applicable to Reuters, or that would result in adverse tax consequences for Reuters as a result of its relationship with us. We have also agreed with Reuters not to voluntarily register our ATSs or any of our subsidiaries as a national securities exchange without Reuters consent, even if our management determines that exchange registration would be beneficial to us or one of our subsidiaries. Reuters substantial ownership position

could also limit our ability to enter into a transaction that involves a change of control, which might adversely affect the market price of our common stock.

Certain Other of Our Stockholders Have Significant Contractual Rights and May Exercise Those Rights in a Manner that May Not Benefit Our Public Stockholders

TA Associates and Bain Capital each have the right to nominate one member to our board of directors as long as each respectively owns 8,000,000 shares of our common stock that they received as consideration in our acquisition of Island. If the size of our board of directors is increased beyond its current size, then in most instances these stockholders would have the right to appoint additional directors. The right of these stockholders to nominate directors is based on the number of shares of our common stock issued to them as a result of the acquisition that they continue to own in the future and not the percentage of our outstanding common stock represented by those shares. If we issue a significant number of additional shares in the future, then these stockholders may retain the right to nominate directors to our board in a manner disproportionate to their overall ownership of our outstanding common stock.

Reuters and Certain Other Stockholders May Have Interests that Conflict with the Interests of Our Other Stockholders and Us and May Cause Us to Forego Opportunities

Various conflicts of interest between Reuters, TA Associates or Bain Capital and us may arise in the future in a number of areas relating to our business and relationships, including the following:

Individuals who are officers or directors of us and either Reuters, one of its other subsidiaries or one of the former stockholders of Island may have fiduciary duties to both companies. Our amended and restated certificate of incorporation includes provisions confirming the right of Reuters, TA Associates or Bain Capital, who have the right to nominate directors to our board, to engage in activities that compete with us and relating to the allocation of business opportunities between Reuters, TA Associates or Bain Capital and us. The resulting situation may be more advantageous to Reuters, TA Associates or Bain Capital than the corporate law governing those opportunities would be in the absence of those provisions.

None of Reuters, TA Associates or Bain Capital are prohibited from engaging in our lines of business, including brokerage and research, and they may directly or indirectly compete with us in the future.

Some of Our Agreements with Reuters May Not Be the Result of Arms-Length Negotiations Between Independent Parties

Previously, we have entered into a number of commercial agreements with Reuters. Some of these agreements were negotiated in the context of a parent-subsidiary relationship and therefore may not be the result of arm’s-length negotiations between independent parties. Accordingly, we cannot assure you that the terms of those agreements, including pricing and other material terms, are as advantageous to us as the terms we could have negotiated with unaffiliated third parties.

RISKS ASSOCIATED WITH PURCHASING OUR COMMON STOCK

Certain Provisions of Our Certificate of Incorporation, Bylaws and Delaware Corporate Law Could Make a Take-Over More Difficult, Could Adversely Affect the Market Price of Our Common Stock or Deprive You of a Premium over Our Market Price

Our amended and restated certificate of incorporation and amended and restated bylaws and the laws of Delaware (the state in which we are organized) contain provisions that might make it more difficult for someone to acquire control of us in a transaction not approved by our board of directors. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors other than the candidates nominated by our board. For example, our certificate of incorporation authorizes our board of directors to determine the rights, preferences, privileges and restrictions of unissued series of preferred stock, without any vote or action by our stockholders. Thus, the board can authorize and issue shares of preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of our common stock. In addition, the issuance of preferred stock may have the effect of delaying, deferring, or preventing a change of control of our company, because the terms of the preferred stock that might be issued could potentially prohibit our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction without the approval of our stockholders.

The existence of these provisions could adversely affect the market price of our common stock. Although these provisions do not have a substantial practical significance to investors while Reuters controls us, these provisions could have the effect of depriving stockholders of an opportunity to sell their shares at a premium over prevailing market prices should Reuters voting power decrease to less than 50%. See the information incorporated in this annual report by reference from the “Certain Business Relationships” section of the Proxy Statement.

Future Sales of Our Shares Could Adversely Affect the Market Price of Our Common Stock

As of December 31, 2004, there were 334,428,388 shares of our common stock outstanding. Of this amount, 206,900,000 shares are owned beneficially by our parent, Reuters. Reuters will be able to sell its shares in the public markets from time to time, subject to certain limitations on the timing, amount, and method of such sales imposed by SEC regulations. We have also granted Reuters (and its transferees) rights to demand registration of their shares and to include their shares in future registration statements. If Reuters were to sell a large number of its shares, the market price of our stock could decline significantly. In addition, the perception in the public markets that sales by Reuters might occur could also adversely affect the market price of our common stock.

In connection with our acquisition of ProTrader Group, L.P. in October of 2001, we issued 5,017,058 common shares to former ProTrader stockholders. All of these shares may now be sold without restriction.

On September 23, 2002, we filed a registration statement on Form S-8 under the Securities Act with respect to up to 1,553,151 shares of our common stock that are reserved for issuance pursuant to our stock option plan. As a result, shares received by employees upon exercise of their options will be eligible for resale by the holders in the public markets, subject to certain lock-up agreements and Rule 144 limitations applicable to affiliates. We may increase the size of its option plan and include additional shares in the Form S-8 under the Securities Act. We may file a registration statement permitting resale of these shares by affiliates.

In connection with our acquisition of Island, we issued 80,658,829 common shares to former Island stockholders along with warrants and options to purchase an additional 5,793,455 of our common shares. Many of these shares may now be sold without restriction. In addition, we have agreed to provide some Island security holders with registration rights that would facilitate their future sales of our common shares received as a result of the acquisition of Island.

On February 28, 2005, we entered into a definitive agreement to acquire Bridge Trading from Reuters. In connection with this acquisition, we will issue common shares to Reuters valued at $21.5 million at the closing of the transaction.

In the future, we may issue our securities in connection with acquisitions or investments. The amount of our common stock issued in connection with an acquisition or investment could constitute a material portion of our then outstanding common stock not held by Reuters.

Sales of substantial amounts of our common shares in the public market could adversely affect the market price of those shares. A decline in the market price of our common shares could adversely affect its access to the equity capital markets. In addition, any issuance of shares by us could dilute our earnings per share.

We lease all of our office space, most of which is located in New York City and Jersey City, New Jersey. Our principal offices are located at 3 Times Square, New York, New York. Our principal offices for Instinet are located at 3 Times Square, New York, New York while our principal offices for INET are located at Harborside Plaza 10, Jersey City, New Jersey. We sublease the space for our principal offices from an affiliate of Reuters. For further information about this lease, see “Notes to Consolidated Financial Statements—Related Party Transactions.” In addition we have lease agreements for office space outside the United States in Frankfurt, Hong Kong, London, Paris, Tokyo, Toronto and Zurich. For further information about our leased properties, see “Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements.”

From time to time, we are involved in various legal proceedings (including those described below) arising in the ordinary course of business. We are also subject to periodic regulatory audits and inspections. While any litigation contains an element of uncertainty, we believe that the outcomes of such proceedings or claims are unlikely to have a material adverse effect on Instinet Group.

The Island ECN Inc. v. Archipelago L.L.C. and REDIBook ECN L.L.C. Archipelago Securities LLC v. Instinet Group Incorporated

On September 20, 2002, Island commenced an arbitration proceeding against respondents Archipelago L.L.C. (“Archipelago”); B-Trade Services LLC (“B-Trade”); and REDIBook ECN L.L.C. (“REDIBook”) before the NASD. Island alleged that each respondent entered into a subscriber agreement with Island which prescribed certain fees and, despite Island’s demand that each respondent abide by the terms of its contract, each respondent has refused to pay such fees. Island sought total damages in the amount of at least approximately $11,100,000, of which approximately $1,900,000 was due from B-Trade, $5,200,000 from Archipelago and $4,000,000 from REDIBook. The claim against B-Trade was severed from those claims against Archipelago and REDIBook, and was tried to conclusion.

In the claims against Archipelago and REDIBook, Archipelago and REDIBook have answered and counterclaimed against Island by denying the substantive allegations of Island’s statement of claim, asserting certain affirmative defenses and counterclaims against Island, alleging that Island engaged in unfair, discriminatory pricing practices against these respondents and asserting claims involving breach of contract, breach of obligations of good faith, and attempted monopolization and conspiracy to restrain trade under the Sherman Act. The counterclaims allege damages of no less than $30 million before trebling, for a total of no less than $90 million treble damages pursuant to the federal antitrust laws. Archipelago is also seeking attorney’s fees.

Additionally, on February 19, 2003, Archipelago commenced a separate action against Instinet Group before the NASD, in which it alleged that Instinet Group also engaged in unfair, discriminatory pricing practices against it and asserted claims involving breach of contract, breach of obligation of good faith, and attempted monopolization and conspiracy to restrain trade under Sherman Act. Archipelago seeks no less than $41 million before trebling for a total of no less than $123 million trebled damages. Instinet Group has answered and intends to vigorously defend the proceeding.

These two actions have been consolidated by agreement of the parties and are in the discovery phase.

NexTrade Holdings, Inc. v. ProTrader Group, LP, ProTrader Securities Corp., ProTrader Technologies LP, ProTrader Trading LLC, ProTrader Services, LP, ProTrader.com LP and Instinet Group Incorporated

On February 4, 2003, NexTrade Holdings, Inc. commenced an action against certain ProTrader subsidiaries in the United States District Court, Middle District of Florida, Tampa Division. The complaint alleges that these subsidiaries adopted and used the mark “ProTrader” in violation of § 32(1) of the Lanham Act. The complaint further alleges that these subsidiaries’ use of the ProTrader mark is likely to cause confusion, mistake or deception among purchasers of software, services and goods bearing the name “ProTrader,” which allegedly constitutes false designation of origin and unfair competition in violation of § 43(a) of the Lanham Act. The complaint also alleges that these subsidiaries’ use constitutes trademark infringement in violation of Florida state statutes and its common law, and unfair competition based on trademark infringement in violation of the common law of Florida. Finally, the complaint alleges fraud in the inducement based on defendants’ alleged deceitful negotiations to resolve the dispute. Plaintiff seeks to recover all of these subsidiaries’ profits, gains and advantages resulting from the unauthorized use of the “ProTrader” mark, damages

sustained by the plaintiff of no less than $15 million before trebling and that such damages be trebled, and exemplary and punitive damages of not less than $90 million. Defendants have answered the complaint by denying the substantive allegations, asserting certain affirmative defenses and by counterclaiming against NexTrade, seeking a cancellation of the “Pro-Trade” trademark on the ground that it is descriptive and Plaintiff committed fraud on the Patent and Trademark Office during the prosecution of its application. In June 2004, the Court ordered that Instinet Group as well as certain former officers of the ProTrader entities be named as additional defendants in the action. Instinet Group and NexTrade all filed motions for summary judgment on June 15, 2004 and filed renewed motions for summary judgment on August 31, 2004. On October 15, 2004, the Court granted ProTrader and Instinet Group’s motion with respect to their claim that NexTrade failed to demonstrate that it had sustained damages as a result of any alleged infringement and further decided that any profits of ProTrader and Instinet to which NexTrade may be entitled, if any, are to be offset by their losses which may be aggregated over the years of alleged infringement. The Court also granted Plaintiff’s motion for summary judgment dismissing Defendants’ counterclaims, but decided that Defendants’ counterclaims are a valid defense to Plaintiff’s trademark infringement claims. On January 21, 2005 the Court ruled that neither party will be permitted to introduce evidence regarding Instinet Group’s profits. On February 16, 2005, the parties reached a settlement in the action and on February 17, 2005, the Court issued an order dismissing the action with prejudice subject to the right by any party to re-open the action within sixty days of the date of the order.

No matters were submitted to security holders for a vote during the fourth quarter ended December 31, 2004.

PART II

Our common stock commenced trading on the NASDAQ National Market on May 18, 2001 under the symbol “INET.” Prior to that date, there was no public market for our common stock. We subsequently changed our ticker symbol to “INGP” on October 27, 2003. The following table sets forth, for the periods indicated, the high and low closing prices per share for our common stock as reported on the NASDAQ National Market and there were no dividends declared for our common stock:

On March 4, 2005, the last reported sales price for our common stock on the NASDAQ National Market was $5.96. As of March 4, 2005, there were approximately 11,100 holders of record of our common stock.

The equity compensation plan information required to be furnished pursuant to this item is incorporated by reference from the “Equity Compensation Plan Information” section of the Proxy Statement.

Dividends

Prior to our reorganization in 2000, most of our international operations and some of our other activities were conducted by other companies within the Reuters Group. In order to fund these operations, we paid dividends to Reuters, which then made capital contributions to those companies. As a result of our reorganization, all of our international operations are now conducted by our own subsidiaries.

In connection with our acquisition of Island, we paid a $1.00 per common share cash dividend to our stockholders of record as of September 19, 2002, which represented a distribution of $248.7 million, of which $206.9 million was paid to Reuters. We paid this dividend on October 3, 2002.

We intend to retain our future earnings for use in our business and do not anticipate paying any cash dividends in the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors, after taking into account our financial results, capital requirements and other factors they may deem relevant. So long as Reuters continues to beneficially own more than 50% of our outstanding common stock, it will be able to exercise control over our payment of dividends.

Issuer Purchases of Equity Securities

Neither Instinet Group nor any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) purchased any shares of our common stock during the fourth quarter of our fiscal year ended December 31, 2004.

Recent Sales of Unregistered Securities

The following information relates to securities issued or sold by the Registrant since January 1, 2002. During that time, the Registrant has issued unregistered securities in the transactions described below. Securities issued in such transactions were offered and sold in reliance upon the exemption from registration under Section 4(2) of the Securities Act, relating to offers of securities by an issuer not involving any public offering, or in reliance upon the exemption from registration under Regulation S under the Securities Act, relating to offers of securities outside the United States to persons who are not citizens or residents of the United States. The offers and sales of securities described below were made without an underwriter and the certificates representing the securities bear a restrictive legend permitting the transfer of the securities only upon their registration under, or pursuant to an exemption from the registration requirements of, the Securities Act.

(1) On October 1, 2001, we acquired ProTrader Group, LP pursuant to an Interest Purchase Agreement dated as of July 23, 2001, as amended as of October 1, 2001 (the “Purchase Agreement”), between us and David G. Jamail, David R. Burch, Overunder, LLC, John A. McEntire IV, John Bunda, Laura Horne, Currin Van Eman and Shayne Young (together, the “ProTrader Sellers”). Pursuant to the Purchase Agreement, we paid the ProTrader Sellers a purchase price of $100 million in cash and an aggregate of 5,017,058 shares of our common stock, valued at $50 million. We sold 4,629,427 shares to the ProTrader Sellers on October 1, 2001 in a private placement pursuant to Regulation D of the Securities Act. We sold the remaining 387,631 shares to one of the ProTrader Sellers on January 3, 2002 in a private placement pursuant to Regulation D of the Securities Act.

(2) In connection with our merger with Island on September 20, 2002, we assumed two hedge option agreements with Ameritrade Holding Corporation. These hedge option agreements were originally entered into between Island and Datek Online Holdings Corp. (which Ameritrade acquired on September 9, 2002) and hedged Ameritrade’s obligations under a stock appreciation rights (SARs) plan. The SARs were granted to various directors, officers and employees of Datek and, upon exercise, entitled the holders to receive cash in an amount equal to the excess of the market value of our common shares over the exercise price of the SAR. In connection with our merger with Island, Ameritrade accelerated the SARs, in accordance with the terms of the SAR plan. Pursuant to an option exercise agreement dated as of October 18, 2002 we entered into with Ameritrade and Datek, we sold 1,651,238 shares of our common stock to Ameritrade for an exercise price of $0.91 per share in a series of private placements pursuant to Regulation D of the Securities Act in November and December 2002.

The following selected consolidated historical financial and operating information of Instinet Group should be read in conjunction with “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes that appear elsewhere in this Form 10-K. The information as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002 were derived from our audited consolidated financial statements and related notes, which appear in Item 8 in this Form 10-K. The information as of December 31, 2002, 2001 and 2000 and for the years ended December 31, 2002, 2001 and 2000 set forth below was derived from our audited consolidated financial statements that are not included in this Form 10-K. The historical financial information may not be indicative of our future performance and does not reflect what our financial position and results of operations would have been had we operated as a separate stand-alone entity during 2000.