During the third quarter of 2004, Archipelago recorded two non-recurring items (a non-cash deemed dividend and an income tax benefit) in conjunction with the conversion to a "C" Corporation and the initial public offering of its common stock. Excluding these non-recurring items, diluted earnings per share would have been $0.21. A full reconciliation of these non-recurring items is included in the table entitled "Reconciliation of non-GAAP financial measures to GAAP measures."

Total revenues for the third quarter of 2004 were $127.1 million as compared to $126.9 million for the third quarter of 2003.

Jerry Putnam, Chairman and CEO of Archipelago commented, "Even as third quarter market wide share volumes decreased from those in the second quarter, Archipelago revenues remained steady from quarter to quarter due to the continued market share growth experienced by ArcaEx. The ability to organically grow this market share is a testament to the benefits our trading platform provides to the investment community and our ability to meet the changing demands of the market place with enhanced features and functionality."

Third Quarter Financial Highlights

Pre-tax income increased to $15.8 million for the third quarter of 2004, a $9.3 million improvement for the comparable period in 2003.

The third quarter 2004 results included two non-recurring items. A $(9.6) million non-cash deemed dividend for the value of additional shares of common stock issued to General Atlantic Partners in connection with Archipelago's initial public offering. In addition, Archipelago's income tax provision was a $1.3 million benefit primarily as a result of Archipelago's conversion from a Delaware limited liability company to a Delaware corporation on August 11, 2004.

Cost of revenues declined $10.8 million, or 12.3%, to $76.7 million for the third quarter of 2004 from $87.5 million for the same period in 2003. As a percentage of total revenues, cost of revenues declined to 6o 60.3% in the third quarter of 2004 from 68.9% in the third quarter of 2003.

Gross margins increased to $50.4 million for the third quarter of 2004 from $39.4 million for the third quarter of 2003, an increase of $11.0 million, or 27.9%. As a percentage of total revenues, gross margin increased to 39.7% for the third quarter of 2004 from 37.1% for the second quarter of 2004 and 31.1% for the third quarter of 2003.

Liquidity payments increased slightly to $47.5 million, or 37.3% of total revenues in the third quarter of 2004 from $42.8 million, or 33.7% of total revenues in the third quarter of 2003.

Clearance, brokerage and other transaction expenses declined to $8.9 million, or 7.0% of total revenues in the third quarter of 2004 from $16.0 million, or 12.6% of total revenues in the third quarter of 2003.

Indirect expenses increased to $35.6 million for the third quarter of 2004 from $33.2 million in the third quarter of 2003. Included in the third quarter 2004 results was a $5.8 million expense related to ArcaEx's recently launched sales and marketing campaign aimed at corporate America. Included in the third quarter 2003 results was a $4.6 million incremental depreciation expense for the early retirement of certain assets.

As of September 30, 2004, Archipelago had $172.9 million of cash and cash equivalents and no long-term debt obligations.

Third Quarter Volume Information

Total U.S. market volumes declined to 220.8 billion shares for the third quarter of 2004 from 235.8 billion shares for the same period a year ago. Clients executed 32.8 billion shares or 14.9% of total U.S. equity securities on ArcaEx during the third quarter of 2004 compared to 31.8 billion shares or 13.5% a year ago.

ArcaEx market share increased to 26.6% in Nasdaq-listed stocks from 25.5% in the second quarter of 2004 and 25.6% from the third quarter in 2003.

ArcaEx market share increased to 1.8% in NYSE-listed stocks from 1.5% in the second quarter of 2004 and 1.1% from the third quarter in 2003.

ArcaEx market share increased to 26.2% in AMEX-listed stocks from 22.2% in the second quarter of 2004 and 13.9% from the third quarter in 2003.

The internal match rate rose to 87.1% on ArcaEx compared to an internal match rate of 86.3% in the second quarter of 2004 and 82.2% in the third quarter a year ago.

Third Quarter Business Highlights

Archipelago Holdings, Inc. commenced its initial public offering of its common stock on August 12, 2004 and completed the offering on August 19, 2004 after the underwriters exercised their over-allotment option. Trading commenced on ArcaEx with a single-priced Dutch auction where all investors could see and participate in price formation.

In connection with pending litigation relating to Nasdaq's claims that Archipelago has improperly used the "Nasdaq" and "QQQ" trademarks in its advertising activities without entering into a license agreement, the court in the Southern District of New York granted Archipelago's motion to dismiss the Nasdaq Stock Market, Inc.'s common-law claims (but not Nasdaq's Lanham Act claims) and ruled that ArcaEx has the right to facilitate trading of the Nasdaq-100 Tracking stock, QQQ; and, that Nasdaq had no rights in the QQQ that would permit Nasdaq to restrict trading by ArcaEx through imposing a licensing regime.

The Circuit Court of Cook County, Illinois, dismissed with prejudice all claims against Archipelago Holdings, Inc., f/k/a Archipelago Holdings, LLC, and Archipelago Exchange, LLC (ArcaEx), in a lawsuit filed by Lewis Borsellino and I.M. Acquisitions, LLC on March 23, 2004.

Archipelago constructed a new website where investors, issuers, traders, and other industry watchers can access a broad, highly detailed range of ArcaEx-, market-wide and client-specific data. The data is primarily made available via the centerpiece of the new site: ArcaVision, a product that introduces a new level of real-time and historical information to meet the needs of this diverse audience.

In September 2004, ArcaEx launched its first brand recognition advertising campaign targeted at corporate America.