National Association of Securities Dealers, Inc.

Profile

The National Association of Securities Dealers, Inc. (NASD®) is the largest securities industry self-regulatory organization in theUnited States. It operates and regulates The Nasdaq Stock MarketSM—the world’s largest screen-based stock market and the sec-ond largest securities market in dollar value of trading—and other screen-based markets. The NASD also oversees the activitiesof the U.S. broker/dealer profession and regulates Nasdaq® and the over-the-counter securities markets through the largest self-regulatory program in the country.

The NASD consists of a parent corporation that sets the overall strategic direction and policy agendas of the entire organizationand ensures that the organization’s statutory and self-regulatory obligations are fulfilled. Through a subsidiary, The Nasdaq StockMarket, Inc., the NASD develops and operates a variety of marketplace systems and services and formulates market policies andlisting criteria. Through another subsidiary, NASD Regulation, Inc., the NASD carries out its regulatory functions, including on-site examinations of member firms, continuous automated surveillance of markets operated by the Nasdaq subsidiary, and dis-ciplinary actions against broker/dealers and their professionals.

Origin

The NASD was organized under the 1938 Maloney Act amendments to the Securities Exchange Act of 1934 by the securitiesindustry in cooperation with the U.S. Congress and the U.S. Securities and Exchange Commission (SEC). Securities industryrepresentatives—recognizing the need for, and actively seeking the responsibilities of, self-regulation—worked with the SEC toobtain this legislative authority.

Putting into practice the principle of cooperative regulation, the Maloney Act authorized the SEC to register voluntary nationalassociations of broker/dealers for the purpose of regulating themselves under SEC oversight. The NASD is the only securitiesindustry association to have been established under the Maloney Act amendments. Presently, all securities firms in the UnitedStates that transact business with the public are required by law to be a member of the NASD.

The NASD’s founding mandate was to standardize the securities industry’s principles and practices, to promote high standardsof commercial honor, to advance just and equitable principles of trade for the protection of investors, to adopt and enforce rulesof fair practice, and to foster observance by its members of federal and state securities laws.

The NASD, taking direction from the SEC in 1963, has also adopted, as another tenet of its self-regulatory mandate, the promo-tion of capital formation by developing, operating, and regulating fair and efficient screen-based securities markets. The NasdaqStock Market was founded in 1971 to fulfill this mandate.

©1997 National Association of Securities Dealers, Inc. All rights reserved. NASD is a registered trademark and service mark ofthe National Association of Securities Dealers, Inc. CornerStone is a registered service mark of NASD Regulation, Inc. NASD

Regulation, NASDR , Research and Data Analysis Repository, RADAR, Order Audit Trail System, and OATS are service marks ofNASD Regulation, Inc. Nasdaq, Nasdaq National Market, Nasdaq-100, Nasdaq-100 Index, and OTC Bulletin Board are registeredservice marks of The Nasdaq Stock Market, Inc. The Nasdaq Stock Market, The Nasdaq SmallCap Market, Nasdaq Composite,SelectNet, StockWatch Automated Tracking, SWAT, OTCBB, Nasdaq Online, PORTAL, and logos identifying Nasdaq products

are service marks of The Nasdaq Stock Market, Inc. Nasdaq Workstation II is a registered trademark of The Nasdaq StockMarket, Inc. Central Registration Depository is a service mark of the NASD and the North American Securities Administrators

Association, Inc. (NASAA).

Written, designed, and produced by NASD Corporate Communications.

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Table of Contents

M I S S I O N

To facilitate capitalformation in thepublic and privatesectors by devel-oping, operating,and regulating themost liquid, effi-cient, and fairsecurities marketsfor the ultimateb e n e fit and protec-tion of the investor.

S e rving Investors and Companies Wo r l d w i d e

Facilitating Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Managing an Economic Institution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

The NASD's Global Responsibility by Frank G. Zarb . . . . . . . . . . . . . . 5Guiding an Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

The NASD and its Markets by Daniel P. Tu l l y . . . . . . . . . . . . . . . . . . 7Building the Future Through Te c h n o l o g y. . . . . . . . . . . . . . . . . . . . . . . . . 8

A Global Market for Growth Companies

Capital-Raising Potential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1Structured for Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2Market Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4

Nasdaq: Market of Choice for Growth Companiesby Michael W. Brown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5

Using Technology to Inform Investors . . . . . . . . . . . . . . . . . . . . . . . . . 1 6Market Integrity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7

Fair Markets Through Effective Regulation

Enhancing Markets Through Regulation . . . . . . . . . . . . . . . . . . . . . . . . 1 9Setting and Enforcing High Standards . . . . . . . . . . . . . . . . . . . . . . . . . 2 0R e d e fining Self-Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1Reaching Out to Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2Advantages and Challenges of Te c h n o l o g y . . . . . . . . . . . . . . . . . . . . . . 2 3

NASD Board of Governors

Facilitating Economic Gro w t h

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Serving Investors And Co mpa nies Worldwide

The National Association of SecuritiesDealers, Inc. (NASD®) facilitates capital form a-tion by providing fair, efficient, and liquidsecurities markets for the benefit of compa-nies and investors worldwide. TheseI n f o rmation Age markets have a solid techno-logical foundation and are well regulated forthe safety and protection of the providers ofc a p i t a l — i n v e s t o r s .

The United States is fortunate to have the moste fficient and best regulated markets in theworld. A national network of self-re g u l a t o r yo rganizations operating under the oversight ofthe U.S. Securities and Exchange Commission(SEC) plays a central role in providing qualitymarkets deserving of investors’ trust.

The NASD is the largest self-regulatory org a n i z a-tion for the securities industry in the United States.P resently, every broker/dealer in the nation thatconducts a securities business with the public isre q u i red by law to be a member of the NASD.The NASD’s membership is comprised of morethan 5,500 securities firms which operate over60,000 branch offices and employ more than535,000 re g i s t e red re p resentatives. The NASDserves companies and investors on all continentsof the globe.

For over one-half century, the NASD has pro-tected investors through the enforcement offederal securities laws as well as the bro a d e rethical re q u i rements of its own rules, whichobligate members to observe high standardsof comm e rcial honor.

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F u l filling its mission of helping the private sector

raise capital to finance growth and create jobs, the

NASD, through its subsidiary, The Nasdaq Stock

Market, Inc., develops, operates, and regulates a

variety of marketplace systems and services. Its fla g-

ship market, The Nasdaq Stock MarketS M, is intern a-

tionally recognized as an engine of economic

g ro w t h .

Today, The Nasdaq Stock Market accounts for more

than one-half of all equity shares traded in the

United States each day and is the second larg e s t

stock market in dollar value of trading in the world.

M o re companies—domestic and foreign—list their

securities on Nasdaq® than on all other U.S. stock

markets combined.

The Nasdaq market is the largest electronic, scre e n -

based stock market in the world, capable of handling

trading levels in excess of one billion shares a day and

eventually two billion in 1998. Trading in the Nasdaq

market is supported by multiple Market Makers—inde-

pendent dealers who openly compete with one

another for investors’ orders in each Nasdaq security.

Founded in 1971, the very design of the Nasdaq

market takes advantage of Information Age tech-

nologies, many of which its listed companies devel-

oped. Using advanced computer and telecommuni-

cation systems, the Nasdaq market enables securities

firms to execute transactions from anywhere they

a re located in an environment of real-time trade

reporting and automated market surveillance.

Known for its innovative, leading-edge growth compa-

nies, Nasdaq has two tiers: the Nasdaq National

M a r k e t®, with Nasdaq’s larger corporations whose secu-

rities are the most actively traded, and The Nasdaq

SmallCap MarketS M, with emerging growth companies.

A pioneer in applying advanced technologies to

securities trading, Nasdaq employs a wide range of

sophisticated, interactive facilities to collect, pro c e s s ,

and disseminate trade and quotation information; a

complement of order-execution and negotiation sys-

tems; an on-line MarketWatch unit for automated

market surveillance; and a variety of on-line inform a-

tional and other services provided to Nasdaq compa-

nies and Nasdaq market participants.

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Managing an Economic Institution

Pr e s e n t l y, E V E RY b r o k e r /dealer in the nation thatconducts a securities business with the public I SR E Q U I R E D b y L AW to be amember of the NASD.

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The NASD’s Global Responsibility

Fair and effic i e n tsecurities marketsare the foundation

upon which investmentcapital is raised to helpcompanies producenew products and ser-vices, create jobs, con-duct research, and inno-vate. In so doing, theymake a better life possi-ble, raising the standardof living for the citizensof the world.

The NASD, as theo w n e r, operator, and regulator of The NasdaqStock Market, plays a vital role in the globaleconomy as the prime economic engine for capi-tal formation. It will continue to perform this criti-cal function as the demand for capital continuesto rise. Everything we do is carefully evaluated interms of how it will ultimately affect the investor.We know that when regulation protects investorsand markets serve them, everyone benefit s — n o tjust investors but companies and financial inter-mediaries alike.

To retain and enhance their relevancy, all signifi-cant institutions, particularly those serving abroad public responsibility, must periodicallyundergo critical evaluation. The great ones arecontinually learning and responding, growingbetter and stronger. The NASD is that kind ofinstitution, always seeking to improve upon whatit does. We believe in ourselves and our mission.

We respond with deeds, not words. We demon-strate our values through the ways in which weregulate our industry and run our markets.

Our goal for the future is to set the standard formarket quality, regulatory fairness, and technolo-gy application. As the largest self-regulatoryorganization in the United States and the one thatpioneered screen-based trading—buildingNasdaq into the most active securities market inthe United States and the second largest in theworld—we have assumed for ourselves the roleof caretaker of a public trust. This is a responsi-bility we aggressively sought and willingly carryout under the oversight of the SEC.

As we look to the future, all of our initiatives—r e g u l a t o ry and market—will be pursued with acommon vision. Leadership at the NASD will con-sist of many people pulling in the same direction,mutually supporting each other, mutually support-ive of our common goals. I am extremely proudto have been chosen to lead this organization atthis important time in its continuing evolution.

As the world’s economies become more interde-pendent, the NASD welcomes the opportunity tos e rve the world’s growth companies with mar-kets that are open, fair, and effic i e n t — m a r k e t sthat will facilitate growth and a better tomorrowfor each of us.

Frank G. ZarbChairman, Chief Executive Officer and President The National Association of Securities Dealers, Inc.

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The NASD is also the primary self-regulator of thesecurities industry in the United States. Thro u g hNASD Regulation, Inc., it regulates both theb roker/dealer profession and the markets operatedby The Nasdaq Stock Market, Inc. Many of theNASD’s responsibilities go beyond the purview ofother self-regulatory org a n i z a t i o n s .

In addition, the NASD provides a variety of re g u l a-t o r y - related services, including arbitration andmediation, to enable investors and bro k e r / d e a l e rfirms to resolve disputes, as well as a telephone-and Web-based service to provide investors withb a c k g round information on securities firms andtheir sales personnel.

Guiding an Industry

The NASD protects investors and strengthens market integrityt h rough a variety of programs and activities, including:

• registration, testing, and education of securities professionals;• on-site examination of securities firms to determine and enforce their compli-

ance with federal securities laws, the rules of the Municipal SecuritiesRulemaking Board (MSRB), and NASD rules and regulations;

• continuous automated surveillance of the markets operated by The NasdaqStock Market, Inc.;

• review of advertising and sales literature as well as underwriting arrange-ments proposed by securities firms in connection with new securities offerings;

• disciplinary actions against broker/dealer firms and their professionals who failto comply with NASD rules, MSRB rules, or the federal securities laws;

• operation of a dispute resolution forum that provides mediation and arbitrations e rvices; and

• cooperative programs with governmental agencies and industry organizationsto solve problems affecting investors, public companies, and securities fir m s .

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A a new centuryapproaches and a new informa-

tion-driven economyemerges, securitiesinvesting has becomeincreasingly importantin the lives of millionsof people around theworld. There are moreindividual investors,with more invested.Because an increasingnumber are fundingtheir own retirements,the markets are moreimportant than ever for

the future economic security of people around thew o r l d .

At the same time, companies with global reach areseeking greater amounts of capital to respond to theincreased pace of technological change. They look toraise money to improve productivity, create new jobs,and turn ideas into new industries and new products.

In today’s environment of burgeoning investment,the NASD is firmly committed to meeting the needsof both providers and seekers of capital. In the last12 months alone, it has established new standardsfor self-regulation, market effic i e n c y, and fairness,continuing to earn the trust and confidence ofinvestors and companies alike.

The extraordinary growth of The Nasdaq StockMarket has continued unabated since its founding in

1971. Nasdaq is now recognized internationally as akey global market for growth companies. Its uniquecombination of Information Age technology anddealer competition forged a new paradigm in theway stocks would be traded. Indeed, the Nasdaqexperience is now replicated around the world. As aCNN market commentator said, Nasdaq is one of themost powerful financial market stories of our time.

For the future, Nasdaq is focusing on ways toimprove liquidity, immediacy of trading, and otherfeatures of the market that have enabled it to growand serve a diverse mix of market participants. Wo r khas already begun on the next generation of systemsthat will enlarge trading capacity well beyond thepresent one-billion-share daily capacity.

On the regulatory front, the NASD is working toanticipate changes in markets, securities products,and technology that will require measures to edu-cate and protect investors. The NASD is also build-ing on a culture of vigorous enforcement and highprofessional standards, strengthening its processesof adjudication and dispute resolution.

The future of the global economy depends on theviability of our securities markets. The NASD isdoing its part by striving for regulatory excellenceand building markets that are the fairest and moste f ficient for investors and companies throughoutthe world.

Daniel P. Tu l l yFormer Chairman and Chief Executive Offic e rMerrill Lynch & Co., Inc.

The NASD and its Marketss

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Today the NASD is at the fore f ront of applyingadvanced technology to the securities industry.The NASD recognized early on that technologicalenhancements to securities trading, market sur-veillance, and regulatory oversight could pro-vide real benefits to investors and companies.

The application of technology to securities trad-ing was originally envisioned to enhance bothregulation and market functionality. In 1963, ina special study of the securities markets submit-ted to the U.S. Congress, the SEC re c o m m e n d e dthat “the Commission and the NASD shouldjointly consider possibilities for developing andcoordinating automation programs in such man-ner as to fulfill their respective regulatory needs,as well as operational needs of the markets.”

The NASD’s answer to that mandate was TheNasdaq Stock Market. The NASD’s design forNasdaq proved to be so successful that in justtwo decades Nasdaq emerged as the world’sl a rgest screen-based stock market.

Over the years, the NASD has developed a vastarray of trading services to complement theNasdaq market’s basic quotation service. Themost recent trading service developed, in re -sponse to the new SEC Order Handling Rules,automates the displayof private trading systemquotes when better than the market quote,allowing investors to access those better prices

when buying and selling in The Nasdaq StockM a r k e t .

Nasdaq’s automated market surveillance systemsa re among the most advanced in the world.Developed with the help of two Nobel laure-ates, the StockWatch Automated Tr a c k i n gS M s y s-tem (SWATS M) records every bid and offer quota-tion and every trade in every security in themarket as well as the computer from which thequote was entered or the trade was made.

C u r rently the NASD is completing a technologysystem that will virtually revolutionize market

Building the Future Through Te c h n o l o g y

9

surveillance. The Order Audit Trail SystemS M

( O AT SS M) will track electronically the handlingof an investor order from the moment the firmreceives it through its execution and settlement.This system will enable NASD RegulationS M s t a ffto determine more efficiently whether a cus-tomer’s order is executed promptly and givenpriority and best execution.

P e rhaps the most dramatic demonstration of theNASD’s ability to design and deploy advancedtechnological systems is the recent migration ofThe Nasdaq Stock Market to an entirely newcomputer system and telecommunications net-work. This the NASD was able to achieve whilethe market continued normal trading operationsand services, handling record levels of volume.

This project re p resented the largest single tech-nology conversion undertaken by a major stockm a r k e t .

The NASD is already preparing the nextphase of Nasdaq’s trading system expansion,taking the next step in a continuing pro c e s sto anticipate and meet investor demand. Tomaintain its leadership in market technology,the NASD broke ground in 1996 for the con-struction of a state-of-the-art, $33 millionexpansion of the Nasdaq data center locatedin Trumbull, Connecticut. One of the objec-tives in building this addition, two-and-a-halftimes larger than the current facility, is againto increase Nasdaq trading capacity substan-tially as the 21st century appro a c h e s .

10

11

The fastest growing stock market in the United States,The Nasdaq Stock Market has drawn the attention ofcompanies and investors the world over. During thelast 10 years (1987-1996), annual share volumei n c reased 264 percent to 138.1 billion, the record forany U.S. securities market, while market capitalizationexpanded 343 percent to $1.52 trillion. The numberof trades executed in the Nasdaq National Marketg rew 392 percent to over 79 million a year.

For companies, this growth signifies a market thato ffers them substantial capital-raising potential. Overthe past 10 years, 3,691 companies have gone publicon the Nasdaq market, raising $101.3 billion. In sec-ondary public offerings, companies raised an addi-tional $102.2 billion.

Companies headquartered outside of the UnitedStates also take advantage of the Nasdaq market’scapital-raising potential. For many years Nasdaq haslisted the shares of more foreign-based companiesthan any other U.S. stock market. The number off o reign securities listed on Nasdaq grew to 318 in1996, with an additional 142 as American DepositaryR e c e i p t s .

Over the past few years, a number of foreign com-panies have, in fact, chosen Nasdaq as their primarymarket, a trend on the rise. In Europe and Israel, forinstance, some 64 companies chose to go public onNasdaq rather than on their home market.

What drives the growth of Nasdaq is the phenome-nal growth of the companies that list on this market.A recent study conducted by Cognetics, Inc., foundthat, from January 1990 through June 1994, Nasdaqcompanies were responsible for creating one in sixnew jobs in the United States, though they re p re-sented less than 1 percent of all U.S. businesses.Some 51 percent of Nasdaq companies were gro w-ing at an “explosive” rate (45 percent or gre a t e rg rowth in employees during study period) com-p a red to a national average of 3 perc e n t .

Investors who have looked to the Nasdaq market forg rowth companies of this caliber have, in turn, beenamply rewarded. During the past decade, theNasdaq CompositeS M Index increased over 290 per-cent. The Nasdaq-100 Index® g rew 426 percent dur-ing the same period of time and has risen 42.5 per-cent in each of the past two years.

A Global Ma rk et f orGr owth CompaniesCapital-Raising Potential

S t ru c t u red for Gro w t hA system of multiple Market Makers serves asNasdaq’s foundation. Nasdaq Market Makers make afundamental commitment to the success of thes h a res they trade beyond that of any other market.In addition to strong trading support, their sponsor-ship activities give Nasdaq stocks maximum visibilityto create investor intere s t .

Each Nasdaq company has, on average, 10 MarketMakers that commit their capital to support the trad-ing of Nasdaq shares. In aggregate, this capital com-mitment provides substantial market depth and con-tinuous trading opportunities for investors.

The combined capital support provided by multipleMarket Makers gives the market stability and superior liquidity. Numerous academicstudies have found

that it generally takes a much higher dollar volumeof trading to cause a price change on Nasdaq.

As critical as trading support is for a stock, themultiple-Market-Maker structure of Nasdaq off e r sanother dimension of service beyond that of otherkinds of markets—sponsorship. Market Makerswrite and distribute re s e a rch reports to supporttheir retail broker network and institutional salesf o rce. Through these eff o r t s , Nasdaq MarketMakers increase visibility and generate demand forthe stocks of the companies they trade.

12

With the advantages of multiple Market Makers andan electronic, screen-based system that links all trad-ing in Nasdaq securities throughout the world andp e rmits participation anywhere, Nasdaq is oftendescribed as the market of the future. Testimony tothis fact is the number of markets around the worldthat have adopted screen-based trading. Accordingto the Federation Internationale des Bourses deValeurs, Paris, of the 45 developedstock markets in the

world today, only three still rely exclusively on atrading floor. The rest either are entirely screen-based (28) or employ screen-basedtrading to supplement transac-tions done on a tradingfloor (14).

NYSE Nasdaq London Paris Tokyo German Taiwan Zurich Osaka Toronto AMEX

Stock Markets

4 , 5 0 0

4 , 0 0 0

3 , 5 0 0

3 , 0 0 0

2 , 5 0 0

2 , 0 0 0

1 , 5 0 0

1 , 0 0 0

5 0 0

0

4 , 0 6 3 . 7

3 , 3 0 1 . 8

1 , 3 8 1 . 2 *

9 8 2 . 2 9 3 8 . 8 8 1 1 . 6

4 7 8 . 4 4 4 0 . 12 5 3 . 1 2 2 1 . 1

9 1 . 3

International Securities Markets1996 Dollar Volume of Equity Trading

Source: Federation Internationale des Bourses de Valeurs

*Estimate based on the first 10 months of 1996.

13

14

The Nasdaq Stock Market is committed to beingthe fairest, most effective, and most efficient marketin the world. We recognize that there are millionsof investors—and millions more to come—wholook to securities investing to create wealth thatwill be needed to finance education, achieve finan-cial independence, and provide for retirement in anew, knowledge-driven economy.

Nowhere is this commitment more evident than inNasdaq’s continuing effort to improve market quali-ty. Nasdaq has a long history of applying the mostadvanced technology to the trading of securities toenhance access and competitive pricing. Forinvestors, a quality market is one in which allinvestors, both individual and institutional, cancompete on an equal footing for the best pricewhen buying or selling stock.

Nasdaq took a major step to improve the marketfor investors when, in 1997, it used advanced tech-nology to implement the new SEC Order HandlingRules. Working closely with the SEC, Nasdaq intro-duced structural changes that improved prices forinvestors.

Nasdaq has empowered investors as never before.Today customers’ orders participate directly withthose of Market Makers. Specifically, investors’ limitorders are now displayed by Market Makers in theirquotes when they are priced better than the quoteof the Market Maker receiving the order. This givesinvestor limit orders greater visibility, making themmore likely to be executed.

Through Nasdaq technology and the new SECrules, the world of proprietary institutional tradingsystems has also been opened to all investors.Market Makers now display their most competitivequotes publicly as well as over proprietary elec-tronic trading systems. This enables investors totrade at the best prices that Market Makers offer.

Nasdaq will seek regulatory approval for a single,integrated order delivery and execution trading sys-tem to automate the features of the new SEC OrderHandling Rules to make their execution even moreefficient for investors and more convenient forother market participants. This advanced tradingsystem will allow investors to reach the best price,whether displayed by a Market Maker or privatetrading system.

Market Quality

1.75

1.50

1.25

1.00

.75

.50

.25

0

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Nasdaq Market Capitalization$ Trillions

15

Nasdaq, Market of Choice for Growth Companies

To compete intoday's global econ-o m y, companies

need prompt and effic i e n taccess to capital. Theymust constantly stayahead of the curv e —putting their capital towork to bring new prod-ucts to market—or fallbehind their more nimbleinternational competitors.In today's information-

driven economy, companies require capital toimplement the latest technology to create razor-edge efficiencies and instantaneous communication.

The Nasdaq Stock Market is a leading economicengine of capital formation. Over 85 percent ofnewly public domestic companies list their shareson Nasdaq, and a growing number of internationalgrowth companies are bypassing their home mar-kets, electing a U.S. distribution and a Nasdaq list-ing as the preferred choice for raising capital. Thereasons for this are clear.

First, Nasdaq is a securities market that is in tunewith the times. It capitalizes on computers andtelecommunications and electronic networks togather and provide market information in real timeto investors, broker/dealers, issuers, regulators, andother constituents around the world. Many technol-ogy companies list on Nasdaq because they relatewell to a market that is itself based on t e c h n o l o g y.

Second, The Nasdaq Stock Market employs a systemof competing Market Makers, securities firms that

openly compete with one another, on-line, for investororders. It is a system that works and works wellbecause it is efficient, timely, and competitive—theaverage Nasdaq company has 10 Market Makersworking for it. Also, the combined capital of multipleMarket Makers brings tremendous depth and liquidityto the market in a security. The sponsorship thatMarket Makers provide by linking issuers withinvestors through their retail distribution networks andr e s e a rch reports helps a security compete with thou-sands of other financial products for investor interest.

For Microsoft, The Nasdaq Stock Market has provento be an effective market in which to have our stocktrade. Nasdaq has established a reputation for growtharound the world and is associated with growth com-panies, the kind of "company" we like to keep. Sincegoing public on Nasdaq in 1986, our market capital-ization has grown to well over $100 billion.

A product of the Information Age, Nasdaq serv e sas a model for emerging stock markets around theworld that want to fit in with the 21st century.Nasdaq is, in fact, built out of the advanced tech-nology products of many of the companies whosestock is traded on it—companies, I like to think,that are helping to build the future.

Microsoft has traded its common stock on theNasdaq market ever since our initial public offering aswell as our recently issued preferred stock. Speakingfrom experience, I know Nasdaq has served us well.

Michael W. BrownChief Financial Offic e rMicrosoft Corporation

Making trading information accessible to all marketparticipants quickly and completely is Nasdaq’s corebusiness. Built totally out of telecommunications net-works and computers, Nasdaq’s Information Agetechnologies provide the fastest possible transmis-sion of market information. Transaction and volumei n f o rmation is disseminated instantaneously for thee n t i re market.

Recently Nasdaq used advanced technology toi n c rease significantly the level of market inform a t i o navailable to the individual investor. Nasdaq appliedthe most sophisticated Web development tech-niques and supporting technology to create one ofthe most extensive, yet easily navigableI n t e rnet sites deliverings e c u r i t i e s

i n f o rmation. Popular since its inception, the NasdaqWorld Wide Web site ( w w w . n a s d a q . c o m ) is curre n t-ly one of the most active electronic information cen-ters for investors in the world.

Nasdaq launched its Internet site to provide timely,institutional-quality market information to the generalpublic. The site offers stock quotes, index values,and the latest wire service company and businessnews stories. It also features a free portfolio trackingservice to enable investors to construct and followthe perf o rmance of a portfolio of Nasdaq, New Yo r kStock Exchange, and American Stock Exchangesecurities on the Nasdaq Web site.

Using Technology to Inform Investors

16

Market IntegrityAn honest market is important to both investorsand companies. To promote market integrity,Nasdaq works closely with its affiliate, NASDRegulation, to maintain effective surveillance anda rigorous examination and enforcement pro g r a m .

Nasdaq re q u i res its listed companies to meet ani n c reasingly demanding set of initial listing andmaintenance standards, including financial criteriapertaining to assets and earnings, trading criteriarelating to public float and share price, and corpo-rate governance criteria.

To enhance market integrity, Nasdaq re c e n t l yboosted the financial and minimum price criteriare q u i red for a company to begin or continue trad-ing on its market. Nasdaq also extended its NasdaqNational Market corporate governance re q u i re m e n t sto The Nasdaq SmallCap MarketS M c o m p a n i e s .

To strengthen enforcement of companies’ compli-ance with Nasdaq’s listing and maintenance stan-dards, Nasdaq recently created a new unit dedicatedto examining the accuracy of pertinent inform a t i o nthat corporations re p o r t .

17

18

Fair Ma r k ets Throug hEffective Re gu la t ion

Regulation makes a valuable contribution to thequality of the markets Nasdaq operates and tothe securities industry in general by fostering fairand equitable competition for capital for all par-ticipants. Regulation facilitates capital form a t i o nby giving investors confidence to enter the mar-ket and invest their money.

Securities regulation in the United States todayis designed to ensure that investors have time-ly, accurate, and complete market and pro d u c ti n f o rmation to make informed investmentdecisions as well as prompt access

to the marketplace for the best execution oftheir orders. Regulation also protects the intere s t sof investors by monitoring business practices and trading activity for fair dealing and by swiftlydetecting and disciplining participants who violate the rules. The NASD carries out theseregulatory responsibilities through its subsidiary,NASD Regulation, Inc.

19

Enhancing Markets Through Regulation

For over 50 years, the NASD has set and enforc e dhigh standards of professional conduct in the U.S.securities industry. According to SEC statistics, ineach of the past five years, the NASD has bro u g h ttwice as many disciplinary actions against securitiesfirms and their professionals as all other U.S. self-regulatory organizations combined.

N A S D Regulation writes rules to protect the publicand obtains broad comment on those rules, fro mboth industry and non-industry. NASDR e g u l a t i o nresponds to more than 5,000 customer complaintsannually, examines over 3,000 firms, handles morethan 5,000 arbitration cases, teaches compliance to theindustry, provides continuing education, and adminis-ters more than 260,000 qualification examinations.

Due to the scope of the NASD’s regulatory re s p o n s i b i l i-ties and the breadth of its membership, the U.S.C o n g ress has repeatedly broadened the NASD’s re g u l a-

tory mandate. Over the years, these additional re s p o n-sibilities have included the regulation of the municipalsecurities activities of broker/dealers and, more re c e n t l y ,member firms’ activities in government securities. Aspart of a regulatory program for government securities,during the past year the NASD introduced a new quali-fication examination for the sale of these issues .

NASD Regulation has strengthened its enforc e m e n tp rogram as the securities industry has gro w n .

Regulatory personnel increased 9 percent and disci-plinary actions brought by NASD Regulation are up

12 percent over last year. Also, NASD Regulation has

recently proposed expanding its Public DisclosureP rogram—which makes available, for investor pro t e c-

tion, a wide range of employment, criminal, civil-judgment, disciplinary, and arbitration information on

b rokers—to include, among other things, pending

customer complaints and arbitrations.

20

Setting and Enforcing High Standard s

21

R e d e fining Self-RegulationThe success of securities regulation in the UnitedStates owes much to self-regulatory organizationslike the NASD that enable industry professionalsto participate in formulating rules of fair businesspractice and market operation and in promotingcompliance with those rules as well as securitieslaws.

In an industry that innovates quickly, whosep roducts and services can be technically complex,the participation of securities professionals isimportant. Because of their day-to-day involve-ment in the securities business, securities practi-tioners are in a position to provide reliable infor-mation and expert insight. From experience, theyhelp identify new products or services re q u i r i n gspecial regulation, current business practices call-ing for revised rules, and what re g u l a t o r ya p p roaches will be most eff e c t i v e .

Self-regulation works well because of the ethicalcommitment and economic interest that industryprofessionals have in effective regulation andbecause of effective SEC oversight. Securitiesprofessionals want their industry to enjoy a repu-tation for fair dealing, for its very future dependsupon customer satisfaction and repeat business.

To make the regulatory system even more eff e c-tive in the United States as we approach a newcentury, the NASD is making a major additionalinvestment in self-regulation. What will notchange is the NASD’s reliance on the participation

of hundreds of industry volunteers who serve onthe boards of the organization and its advisoryand disciplinary committees. The industry’s ownexpertise and sense of fairness have contributede n o rmously in helping create rules that pro t e c tinvestors and in achieving a high level of compli-ance with those rules.

While industry participation in the process is vitalto the success of self-regulation, the NASD hastaken steps to balance this industry voice withg reater public re p resentation and with other pro-fessional expertise. In particular, the NASD Boardof Governors is now composed of a majority ofnon-industry re p resentatives.

The NASD’s regulatory subsidiary, NASDRegulation, has also strengthened the role ofpublic participation in the decision-makingp rocess by soliciting public comment on signifi-cant proposed rules before they are filed withthe SEC. In addition, to better balance thee n f o rcement process, professional staff willd e t e rmine when to institute a disciplinary pro-ceeding. Also, staff members with legal expertisewill serve as hearing officers and chair discipli-nary panels with two other members from thei n d u s t r y .

22

NASD Regulation believes that one of the moste ffective ways to protect individual investors is toinvolve them more in the regulatory process andp rovide them with information essential to makingsound decisions about brokers and investment alter-natives. To do this, NASD Regulation is continuallyenhancing its investor outreach pro g r a m .

The foundation of this program is the NASDRegulation Web site (www.nasdr.com), pro v i d i n ginvestors with timely regulatory information, and theon-line ability to request disciplinary histories of bro-kers, file complaints, and comment on proposed rules.

The NASD Regulation Web site is complemented

by the NASD’s Individual Investor Services site(www.investor.nasd.com), which offers trainingon investment basics, guidance on working witha broker, market research, a financial calculatorto analyze investment performance, and a calen-

dar of investor events. In addition, the NASDpublishes an investor newsletter, makes presenta-tions and provides information at investorforums, and airs public service announcementson investor protection over television and radio

in English and Spanish.

Reaching Out to Investors

23

Advantages and Challenges of Te c h n o l o g y

The development of technological systems toenhance regulatory capabilities using the latesti n f o rmation technologies will continue to be oneof the NASD’s top priorities.

For instance, the NASD has under developmentseveral systems to detect late-trade reporting, pric-ing/size conventions, and market participant

coordination.

P e rhaps the most challenging are afor future regulatory surveillance

is cyberspace itself. NASDRegulation has begun

surveilling the

World Wi d eWeb for on-

line invest-ment scams

and viola-

tive conductby its mem-

bers and oth-ers. In the com-

ing year, NASD

Regulation will implement an automated systemthat will greatly increase the range, speed, and

early warning capabilities of our surveillance. Thefield examination program will also be expanded

to provide greater coverage of members’ use ofthe Internet in their businesses.

C o n c u r rent to thistechnology initia-

tive, NASDR e g u l a t i o nbegan aninvestor edu-cation pro-gram re g a r d-

ing the use ofi n f o rm a t i o n

obtained from theI n t e rnet for investment

purposes. NASD Regulation alsoc l a r i fied for member firms and

their brokers the appropriate use ofe l e c t ronic media for communicating

with customers.

NASD Regulation will continue to monitor theI n t e rnet closely for its use in securities investingand respond promptly with any necessary rules orsurveillance systems.

In all its activities, NASD Regulation will fulfill itscommitment to investor protection. It will re g u l a t ee ffectively and will be responsive to the needs ofi n v e s t o r s .

24

NASD Board of Govern o r s

From Left to Right: R. Brian Williamson; John H. Biggs; E. David Coolidge, III; Frank G. Zarb; Daniel P. Tully; Elaine L. Chao;James Dimon; Donald J. Kirk; Bert C. Roberts, Jr.; Charles B. Johnson. Not present for photo: Nancy Kassebaum Baker.

National Association of Securities Dealers, Inc.1735 K Street, NWWashington, DC 20006-1500 Telephone: (202) 728-8000Inquiries: (301) 590-6500Fax: (202) 293-6260

NASD Financial Center33 Whitehall StreetNew York, NY 10004-2193Telephone: (212) 858-4000Fax: (212) 509-8436

NASD/NASD Regulation, Inc.1390 Piccard DriveRockville, MD 20850Telephone: (301) 590-6500

N A S D5 Choke Cherry RoadRockville, MD 20850Telephone: (301) 417-6868Fax: (301) 417-6540

NASD Operations Center9513 Key West Av e n u eRockville, MD 20850-3389Telephone: (301) 590-6500Fax: (301) 590-6705

NASD/The Nasdaq Stock Market, Inc.15201 Diamondback Dr.Rockville, MD 20850Telephone: (301) 590-6500

The Nasdaq Stock Market, Inc.1735 K Street, NWWashington, DC 20006-1500Telephone: (202) 496-2500Fax: (202) 496-2696

The Nasdaq Stock Market, Inc.33 Whitehall StreetNew York, NY 10004-2193Telephone: (212) 858-4000Fax: (212) 858-3980

The Nasdaq Stock Market, Inc.2500 Sandhill RoadSuite 220Menlo Park, CA 94025Telephone: (415) 233-2000Fax: (415) 233-2099

Nasdaq International, Inc.Durrant House8/13 Chiswell StreetLondon EC1Y 4XY United KingdomTelephone:

(011-44-171) 825-5501Fax: (011-44-171) 374-4488

Nasdaq Data Center80 Merritt BoulevardTrumbull, CT 06611Telephone: (203) 385-4500Fax: (203) 385-6503

Main NASD Offic e s

World Wide Web Internet Sitesw w w. n a s d . c o mw w w. n a s d a q . c o m

w w w. n a s d r. c o mw w w. i n v e s t o r. n a s d . c o m

w w w. n a s d a q n e w s . c o mw w w.nimi.com

Frank G. ZarbC h a i rman, Chief Executive Offic e rand Pre s i d e n tNational Association of SecuritiesDealers, Inc.

Nancy Kassebaum BakerWashington, DC

John H. BiggsTeachers Insurance AnnuityAssociation/College Retire m e n tEquity Fund

Elaine L. ChaoThe Heritage Foundation

E. David Coolidge, IIIWilliam Blair & Company, L.L.C.

James DimonSmith Barney, Inc.

Charles B. JohnsonFranklin Resources, Inc.

Donald J. KirkColumbia University Graduate School of Business

Bert C. Roberts, Jr.MCI Communications Corporation

Daniel P. TullyMerrill Lynch & Co., Inc. (re t i re d )

R. Brian WilliamsonGerrard Group Plc

®

1735 K Street, NWWashington, DC 20006-1500Telephone: (202) 728-8000Inquiries: (301) 590-6500

Telex: 5106016777FAX: (202) 293-6260

www.nasd.com