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					The   Difference




           Knight Capital Group, Inc.   2005 Annual Report
Knight Capital Group, Inc. (Nasdaq: NITE) is a leading financial
services firm that provides comprehensive trade execution solutions
and asset management services. Our Asset Management business,
Deephaven Capital Management, is a global multi-strategy alternative
investment manager focused on delivering attractive risk-adjusted
returns with low correlation to the broader markets for institutions and
private clients. Our Global Markets business provides a broad range
of customized trade execution products and services across multiple
asset classes for broker-dealers, institutions and issuer companies. We
continually apply knowledge and innovation to the trading and asset
management processes to build lasting client partnerships through
consistent performance and superior client service. More information
about Knight can be found at www.knight.com.
Our    People           The financial markets are so automated, it is
easy to forget that behind the split-second executions are the people
who make those trades happen. At Knight, our people are the heart-
beat of our business. We are passionate about what we do, whether
it is putting minds together to help a client make a smart trading
decision, or building systems to improve trade execution quality and
reliability. Our clients first choose Knight because we are among
the very best at trade execution solutions and asset management
services. We will remain the first choice because we focus on turning
that initial trade or investment into a collaborative, person-to-person
relationship that keeps delivering true added value.
            Our Trading      Floor




            $1,882,163,698,431 total U.S. dollar volume traded in 2005




2 The Knight Difference
Knight 3
            Fellow        Knight Shareholder:
                                                                                 Thomas M. Joyce, Chairman & CEO



            The first step onto Knight’s trading floor is impressive. The sea of people
            and technology, and perhaps the scale of the room, have an immediate
            impact. But I believe it’s something else, something less tangible, that
            leaves the greatest impression. It’s the confidence, the energy, the passion.
            No floor on Wall Street is quite like ours.


            Turning the corner on results                                in the Asian and European books. In addition,
            The excitement on the trading floor is reflective of         Deephaven managers opportunistically shifted capital
            our experience in 2005 – excitement that grew as             from U.S. and European volatility and convertible
            the year progressed, as we improved our financial            positions to a heavier allocation in Japan, leading to
            performance, and as we added key businesses.                 outperformance in volatility-based portfolios.


            Our gratification was not immediate. We had a rough          However, more influential on earnings, both for
            start to 2005, with pre-tax operating earnings of            the year and going forward, were the sweeping
            $7.8 million in the first six months. But we dug in and      changes Knight enacted throughout our equities
            turned it around, finishing the full year with pre-tax       trading operations.
            operating earnings of $120.9 million (which included
            $55.9 million in gains from sales of strategic invest-       Changing the economics of equity trading
            ments), on revenues of $634.6 million. By comparison,        To determine what needed fixing, we first scrutinized
            Knight’s pre-tax operating earnings were $82.6 mil-          the entire equity business, which includes our broker-
            lion, on revenues of $625.8 million, in 2004.                dealer and institutional operations. During the second
                                                                         quarter, we restructured the segment to better recog-
            Our Asset Management business, Deephaven Capital             nize and meet the needs of our different clients, as
            Management, erased a first-half loss in a difficult          well as hone in on costs and benefits – down to each
            market and posted blended annual returns of 7.2%.            client, product and stock.
            Deephaven experienced strong results in the event-
            driven strategies and did well in credit-driven strategies   With regulatory changes and competitive pressures
            in the U.S., Europe and Asia. Although extreme stress        negatively impacting revenue capture, our broker-
            in convertible arbitrage, capital structure and volatility   dealer operations were struggling the most, but they
            trading challenged Deephaven in the first half, over         also held the greatest opportunity for improvement.
            the calendar year these strategies did well, particularly    From our review, we recognized the need to focus



4 The Knight Difference
on four areas: organization; electronic trading           In 2005, we also slashed costs across the board.
algorithms; execution quality; and client offering.       We reduced rebates by adjusting our broker-dealer
                                                          offering to emphasize profit sharing over fixed
Knight appointed a new broker-dealer leader,              rebate formulas.
Jim Smyth, who launched multiple initiatives.
We consolidated our Nasdaq and listed trading             We believe our ability to deliver consistently high
under one manager and placed electronic trading –         trade execution quality will always draw broker-
once a separate group of quantitative analysts and        dealers to Knight, even as we continue to adjust
technology professionals who develop trading              for the changing economics of the industry.
algorithms – into our broker-dealer business.
Then we started funneling a greater amount of             Creating choice around trade execution
our broker-dealer order flow into this algorithmic        We made more significant additions to our products
system, dramatically increasing our trading efficiency.   and services in this last year than we have in our
Today, more than 90% of our over-the-counter              history. Adding to our acquisition of soft dollar and
order flow and approximately 80% of our listed            directed brokerage firm Donaldson & Co. in 2003,
order flow is executed automatically.                     we completed two more acquisitions in 2005, and
                                                          we announced yet another in January 2006.
Automation means better execution quality for our
broker-dealer clients as measured by execution speed,     During our equities review, we recognized that
effective-over-quoted spread, price improvement and       electronic access to multiple markets is a natural fit
other statistics. It also means greater efficiency for    for Knight and a complement to our extensive voice-
our clients and for Knight. Not only have we improved     based institutional client offering. Our first 2005
trade execution quality across the board, we can          acquisition was Direct Trading Institutional, completed
quickly customize and adjust execution protocols          in June. Direct market access is one of the fastest-
based on specific client demands.                         growing parts of the institutional trading business,
                                                          especially among hedge funds. We like this Texas-
                                                          based firm because, similar to us, they back up their



A rising market helped boost Knight’s profitability in 2005. But the
dramatic turnaround we made in the second half of the year really
came down to hard decisions and a critical analysis of the economics
of the broker-dealer business.

                                                                                                                    Knight 5
                             Total Revenues                                  Pre-Tax Operating                                 Net Income
                             (in thousands)                                  Earnings*                                         (in thousands)
                                                                             (in thousands)




                                                    $634,623
                                         $625,750




                                                                                                   $120,910
                              $545,909




                                                                              $100,094




                                                                                                                                         $91,132
                                                                                         $82,638




                                                                                                                                                   $66,361
                                                                                                                               $38,073
                             03          04         05                       03          04        05                          03        04        05


                            *Pre-Tax Operating Earnings represent Income (loss) from continuing operations before Regulatory
                             charges and related matters, Writedown of assets and lease loss accrual and Income taxes.




            platform with great service. With Direct Trading                                       While much of Knight’s news in 2005 involved new
            Institutional we now also have significant futures                                     electronic access products, the sales and trading
            and options routing capabilities.                                                      business at the heart of our institutional offering
                                                                                                   steadily added clients and increased revenues and
            Next, by acquiring the assets of the ATTAIN ECN,                                       market share despite an environment in which our
                                                               sm
            renamed Direct Edge ECN, we avoided the time                                           clients saw mediocre trading opportunities. Under
            and cost of building the technology from scratch                                       the direction of Greg Voetsch, we’ve developed our
            and helped expedite the regulatory approval process.                                   business on client relationships, and in 2005 the
            Through this acquisition, which closed in October                                      distinction between Knight and our competitors
            2005, Knight instantly added an engine to execute                                      became even more clear. As many other firms cut
            limit orders to complement our strength executing                                      their sales traders and coverage, Knight stepped into
            market orders. We’ve been working since then to                                        the void with personalized service, and we continue
            enhance the ECN platform for capacity and rout-                                        to trade nearly every U.S. equity issue. The small-
            ing and make it available through Direct Trading                                       and mid-cap space remains our sweet spot, setting
            Institutional. With a widening dearth of liquidity                                     us apart. Our listed business has grown to approxi-
            alternatives in the market, we believe Direct Edge                                     mately 30% of our institutional revenues from a
            ECN will be an increasingly valuable execution venue.                                  25%-75% listed-Nasdaq split in 2004.


            With ECN and electronic access to equities, futures                                    Leveraging our strengths
            and options in place, we moved to add another asset                                    All of our acquisitions build upon Knight’s infra-
            class. In January 2006, Knight announced the pro-                                      structure and client base, and they will provide Knight
            posed acquisition of Hotspot FX, which offers an                                       with fee-based revenue streams without high capital
            ECN-based platform for spot foreign exchange                                           commitment requirements. More importantly, for our
            trading. Past and projected demand for foreign                                         clients, we’ve established a solid foundation to grow
            exchange trading is compelling, especially as more                                     a virtual exchange for trading across multiple asset
            institutions use FX to drive returns and not simply                                    classes – hence “Global Markets” replaces “Equity
            hedge currency risk. We believe the market will                                        Markets” to describe the business segment. In an
            continue to move toward electronic trading in FX,                                      increasingly fragmented market, Knight is an impor-
            just as it has in equities. The deal is expected to                                    tant, centralized source of liquidity. Now we’re also a
            close in the first half of 2006.                                                       source for access to a greater variety of asset classes.


6 The Knight Difference
In 2005, Knight expanded client touchpoints by broadening our business
beyond equities trading, opening electronic and ECN access to the markets,
and introducing technical research. In fact, we added more products and
services than in any other year in our history.


Deephaven continued its own diversification effort        take a different approach to how a research product
in 2005, using its investment expertise and opera-        is customized, distributed and priced.
tional structure for multiple strategies employed by
the original Deephaven Market Neutral Fund to capi-       Technical research is especially interesting as the
talize on growing demand for single-strategy funds.       trend toward unbundling products and services esca-
Last year, Deephaven introduced the Convertible           lates. Knight is the original, unbundled, full-service
Select, Credit Opportunities and Global Convertible       trade execution provider. Consolidation continues,
Opportunities funds, which join the Event Fund            and as exchange-ECN mergers have the potential
launched in 2004.                                         to raise the cost of trading, Knight stands out with
                                                          our competitive offering and client service.
The appeal of single-strategy funds is growing among
funds of funds, one of our largest client bases, which    At the celebration of Knight’s 10th anniversary in
are reallocating away from multi-strategy funds.          June 2005, we reflected on how much the company
Deephaven’s single-strategy products are helping to       has changed. We’ve expanded beyond our role as
retain assets and diversify cash flows with new client    a broker-dealer trade execution provider to become a
groups, particularly the pension and endowment            leader in institutional sales trading and asset manage-
funds that have been steadily increasing allocations to   ment as well. We’ve become more than a company
alternative investments.                                  built around trading and technology, to one that
                                                          places client service above all else.
When Knight wasn’t seeking strategic acquisitions and
growing from within, we were recruiting new addi-         Of course that first step onto the Knight trading floor
tions to the Knight family. Among the more visible        is exhilarating. We’re proud of the work we’ve done,
additions to our product line was Knight Research,        and we’re excited about where we’re going.
led by Institutional Investor-ranked technical analyst
Ralph Acampora. We always aim to provide guidance
to our clients about how to make the best trades
possible. Now, with Knight Research, we have even
                                                          Thomas M. Joyce
greater market insight to offer. In addition, as a        Chairman & CEO
newcomer to research, we can start from scratch and       March 14, 2006




                                                                                                                    Knight 7
            Our      Client Relationships

            Initially, our liquidity and scope of securities covered may bring broker-
            dealers, institutions and issuer companies to Knight, but we understand
            that order flow alone is not enough to keep them here. Our clients want
            to know that we’ll marshal all of our resources to help address any issues
            they may have. That there are people here with whom they have a rela-
            tionship, eager to provide direction and answer their questions. That in a
            difficult market environment or with a complicated trade, our traders, sales
            traders and relationship managers won’t rest until client needs are met.


           Network of more than
                                     600 broker-dealers and nearly 1,000                     institutional client partnerships


            Most broker-dealers and institutions have multiple trading relationships,
            and Knight is focused on staying consistently at the top of every list. We
            trade more U.S. equity securities than almost every competitor, and clients
            understand the value of this breadth. Specialized client service is what truly
            sets us apart.


            Whether it’s the head of the equity trading desk at a mutual fund, a
            member of an execution quality committee at an online broker-dealer, or
            the CEO of a regional brokerage firm, we want each client contact to
            be as proud to use and recommend Knight as we are to have them as
            clients. We understand that Knight’s performance every day reflects
            directly on our clients, and we take this responsibility very seriously.




8 The Knight Difference
We spend time  talking with our clients about trade execution
strategies. How to trade with less impact and with greater return.
How to trade faster. How to simply trade better.




                                                                     Knight 9
                       We useour knowledge, skill and innovation to meet client needs,
                       creating solutions where none exist and finding new ways to scale
                       common barriers to improve trade execution.




10 The Knight Difference
                         Our     Perspective

                         At Knight, trading is not a commodity. It is a science.


                         With a unique blend of order flow from broker-dealers and institutions, we
                         are a resource for those who seek clarity on the direction and momentum
                         of the market. Successful trade execution requires instinct as much as intel-
                         lect, and for our clients, we take what we see and feel to identify buy and
                         sell opportunities. The introduction of technical research to our offering
                         adds an important layer to the wealth of information we analyze for and
                         share with our clients.


                         Beyond pure trade execution, we help broker-dealers and institutions
                         navigate a dynamic business environment. Our clients face the very same
                         challenges we do, including new regulations that can change the way
                         business is done almost overnight. We make it our job to understand these
                         regulations, impart what we learn and create new approaches to manage
                         pressures, both structural and competitive.

Ability to make a market or trade in more than
                                                   16,000 U.S. equities
                         One of the most important things we’ve learned over the last few years
                         is that our clients want multiple points of access to multiple markets. We
                         continue to develop our top-notch institutional voice business with the
                         right hires and with valuable services that help our clients uncover ideas,
                         improve performance and increase efficiency. On top of that, we have
                         added an ECN, direct market access, options trading and, soon, electronic
                         foreign exchange. We are continually looking for the next new product
                         and service that will deliver true value to our clients.


                         On the regulatory front, we are active participants in market structure
                         debates, working to help shape industry trends and regulations. We study
                         the issues and make our opinions known to better serve the interests of
                         our shareholders and clients.




                                                                                                         Knight 11
                           Our    Market Insight




                           Knight’s tremendous broker-dealer and institutional volume provides a
                           unique vantage point and makes us a valuable source of information
                           for our clients. With the addition of Knight Research, we’ve combined
                           technical analysis of market momentum with our intrinsic understanding
                           of order flow. These are the key components that help investors determine
                           entry and exit points for trading stocks.


                           Technical research, which covers historical price, volume and market
                           psychology, is a perfect fit for Knight and our trade execution know-how.
                           Technical analysis differs greatly from fundamental analysis, which reviews
                           management, dividends, price-to-earnings ratios and other less quantita-
                           tive measures. While technical research is a new product for the company,
                           the Knight Research team comprises industry-recognized veterans.


                           From the start, the research team has maintained an open dialogue with
                           clients, and the full Knight Research package is based on their feedback.
                           What our clients want most of all is customizable content and delivery.

12 The Knight Difference
    Knight’s expertise in trade       execution and understanding of order flow
    dynamics has been combined with technical analysis of market momentum
    to help our clients determine the price at which to buy and sell.




Daily technical monitoring of more than
                                          1,500 stocks



                               Still in its early stages, Knight Research is designed to allow clients to choose
                               content based on time horizon and subject, from market caps to sectors to
                               single stocks. For example, a fund manager may choose to receive research
                               only on small-cap healthcare stocks, with a very short time horizon. Or a
                               buy-side analyst may want data regarding mid-cap stocks across the finan-
                               cial and technology sectors, with mid-to-long-term investment in mind.
                               Every piece of research is intended to lead to more informed trading.


                               The research is designed to be pushed directly to the client’s desktop or
                               PDA. It won’t sit on the web, waiting for the client to log in and access
                               it, nor will it be buried in a lengthy paper report. Knight’s technical
                               research, like all of our products and services, is built around our clients’
                               specific demands.


                               Whether it is analysis of historical data by our certified market technicians
                               or interpretations of that day’s trading environment from our floor, Knight
                               strives to provide relevant, actionable information to our clients.

                                                                                                                   Knight 13
           Our       Infrastructure

           Technology empowers Knight’s entire trading process, from executing trades
           and communicating up-to-the-millisecond information to our clients, to
           monitoring for compliance and managing our inventory of securities.


           Automation of more than
                                          90% of Nasdaq and 80% of listed order flow
           Our connectivity channels and web-based software make it easy for our
           clients to interface with us and the market. That’s the part of our technology
           that clients can see and use directly. It’s what they can’t see, the majority of
           our platform, that has the greatest impact on their execution quality as well
           as on our company’s performance. Knight has developed one of the best
           order management systems in the business. Our sophisticated desktops help
           traders and sales traders manage an abundance of information and auto-
           mate tasks, allowing them to find trading opportunities that may exist for
           mere fractions of seconds, and focus on the heart of the trade execution.


           Knight’s spirit of innovation prevails in technology, where we encourage
           employees to invent new and better ways to improve our operations. In
           keeping with the fast pace of our trading floor, the cycle from new idea
           to implementation is short. Few layers exist between the technology
           creators and the decision-makers.


           The relocation of the company’s headquarters in early 2005 provided an
           opportunity for us to upgrade multiple systems. Thanks to significant invest-
           ment in our operations, we boosted trade execution capacity, increased
           speed and fortified our infrastructure. Today, our trade execution quality
           is higher than ever and we’re more efficient than ever before. Greater
           automation helps us reduce trade execution and other transaction costs
           of trading on behalf of our clients.




14 The Knight Difference
Knight’s technological strength and flexible platform let us
                                                 new acquisitions,
quickly bolt on, improve and hit the ground running with
like our ECN and our direct market access product.




                                                                     Knight 15
At Knight, we continually use  knowledge and innovation to identify ways
to better serve our clients. We will always set the standard in client
service and want to be our clients’ first choice for trade execution solutions
and asset management services.
                  Our     Offerings

                  Asset Management
                  Deephaven Capital Management is an investment manager specializing in
                  alternative investment strategies. Founded in 1994, Deephaven employs
                  more than 120 people in Minneapolis, London and Hong Kong and invests
                  globally across multiple asset classes and strategies.


                  Deephaven combines a strong intellectual foundation, outstanding people,
                  technology and ever-improving processes to identify market opportunities.
                  We seek compelling risk/reward scenarios and look to capitalize on
                  such opportunities to deliver consistent and attractive risk-adjusted returns
                  for investors.


                  Deephaven pursues a broad range of global strategies, including credit-
                  and event-driven, fundamental security selection, quantitative and
                  volatility-driven. We believe that the optimal model for generating long-
                  term investment returns is dynamically allocating and reallocating capital
                  on a timely and flexible basis to those different geographies, asset classes,
                  strategies and market sectors which offer the best risk-adjusted returns
                  in changing and unpredictable markets. Adaptability and an opportunistic
                  approach to strategy implementation and trade execution are critical.


                  Deephaven serves a global clientele of private clients and institutional
                  investors, including corporate and public pensions, endowments, founda-
                  tions, insurance companies and other financial intermediaries.


Building
           ONE source for trade execution solutions across multiple asset classes
                  Global Markets
                  Global Markets provides a broad range of customized trade execution
                  products and services across multiple asset classes for broker-dealers,
                  institutions and issuer companies.


                  Our order flow, understanding of market momentum and seasoned
                  instincts allow us to provide clients with great market insight. We apply
                  this insight to every client interaction, helping devise trade execution
                  solutions that maximize performance and efficiency.


                  We work with our clients to understand and meet their needs, acting as
                  natural extensions of their trading desks.




                                                                                                  Knight 17
     Broker-Dealer Offering                                                          – #1 market maker in OTC Bulletin Board volume with
     Knight earned its position as a leading destination for order                     more than 44% of market share*
     flow by offering our broker-dealer clients the ability to                     *Source: AutEx, YTD results as of 12/31/05

     execute trades according to their customers’ needs.
     Sophisticated systems and trading algorithms allow us                         Capital Placement
     to make nearly instantaneous decisions on client orders,                      Knight Capital Partners, a division of Knight Capital
     exercising precise control over varied trade execution                        Markets, provides comprehensive capital placement
     parameters to help them achieve best execution.                               services for alternative investment managers, including
                                                                                   private equity funds, hedge funds and non-traditional
     • Consistently high execution quality, including speed,                       long-only strategy managers.
        at-or-better percentage and price              improvement*
     • Unparalleled strengths in small- and mid-cap stocks*                        Comprised of experienced professionals, this team has
     • Focus on client service                                                     established relationships with both general partners
     • Flexible platform customized according to specific                          and investment managers as well as with a broad cross
        client needs                                                               section of limited partner and institutional investors,
     • Reliable and redundant technology                                           including pension funds, endowments, banks, insurance
     *According to YTD averages of SEC 11Ac1-5. Data provided by the Transaction   companies, funds of funds and consultants.
      Auditing Group, Inc. (TAG) “Comparison Tool”

                                                                                   Knight Capital Partners will engage in fund-raising
Global Markets                                                                     assignments for a select group of experienced managers
                                                                                   representing diverse alternative investment strategies.
     Cash Equity Trading
     We make a market in or trade nearly every U.S. equity,
                                                                                   Client Commission Programs – Donaldson & Co.
     including Nasdaq National Market System (NMS), Nasdaq
                                                                                   Through Donaldson, a division of Knight Equity Markets,
     Small Cap, OTC Bulletin Board and Pink Sheets, as well
                                                                                   Knight offers comprehensive and highly competitive
     as NYSE- and AMEX-listed securities in the Nasdaq
                                                                                   client commission programs to the institutional
     InterMarket.sm With international trading expertise from
                                                                                   investment community throughout the U.S. for maxi-
     our international trading desk and London-based opera-
                                                                                   mized commission dollar usage and lower portfolio
     tions, Knight also provides trade executions in a large
                                                                                   management costs.
     number of international securities, servicing both ordinary
     and ADR execution requirements.
                                                                                   Clients can choose how to access our services: work with
                                                                                   a Knight sales trader for quality trade executions for over-
     Our teams are built around clients with a single point
                                                                                   the-counter and listed equities and program trading; or,
     of contact. Our trading floor is organized by industry
                                                                                   work directly with Donaldson for access to a multiple-
     sectors with specific expertise, such as biotechnology
                                                                                   broker panel of several well-known and respected firms
     within Healthcare; and semiconductors, hardware and
                                                                                   for trade execution.
     telecom within Technology.

                                                                                   • Customized programs structured to meet client needs
     • Make markets or trade in more than 16,000 equities
                                                                                   • Expert, personalized client service
     • Supply liquidity to a great number of small and
                                                                                   • Competitive ratios
        thinly-traded equities
                                                                                   • Access to independent third-party research
     • Largest market maker in listed securities in the third
                                                                                   • Ability to allocate commission dollars to one or
        market, 5.12% of all daily listed share volume*
                                                                                     multiple brokers
     • Market leader in OTC equities:
                                                                                   • Timely and accurate reconciliation and reporting
       – #2 market maker in Nasdaq volume with almost
          8% market share*
       – #1 market maker in Nasdaq Small Cap stocks with
          more than 32% market share*


18 The Knight Difference
Corporate Services
Non-traditional institutional trade execution needs,           Direct Edge ECN’s market participant identifiers are (EDGA)
including restricted stock transactions and issuer buy-        for NASD ADF and (EDGX) for Nasdaq Market Center.
backs, are supported by Corporate Services.
                                                               • Anonymity
Comprised of industry leaders with experience in all           • Competitive prices
aspects of trading, Corporate Services provides compre-        • Liquidity
hensive trade execution services to companies, their           • Market structure expertise
senior management and restricted stockholders. Clients         • Speed
have access to a full-service solution, including Knight’s     • Performance
liquidity, trade execution and market insight, and help
with completion of forms and filings.                          Electronic Foreign Exchange – Hotspot FX
                                                               In January 2006, Knight announced an agreement to
• Prospectus (S-3) sales                                       acquire Hotspot FX, which operates a leading spot FX
• Restricted share (Rule 144) sales and 10b5-1 programs        marketplace for institutions. Hotspot provides clients and
• Share repurchase programs                                    banks with access to electronic foreign exchange spot
• Strategic accumulations and disposals                        trade execution through an advanced, ECN-based platform.


Direct Market Access – Direct Trading Institutional            When the acquisition closes, clients will have direct access
Through Direct Trading Institutional, Knight offers institu-   to neutral, anonymous and transparent marketplaces where
tions and hedge funds direct market access via an electronic   they can control their trade executions, and gain the poten-
platform designed to provide superior access to multiple       tial for price improvement and lower overall trading costs.
execution venues without the need for multiple systems
on the trading desk.                                           • High-speed, reliable trade executions
                                                                 on a fully electronic platform
• Posts orders directly to ECNs and Nasdaq’s                   • Anonymous
 SuperMontage, NYSE/AMEX and all domestic                      • Neutral
 options exchanges                                             • Transparent
• Utilizes all native order functionality of ECNs              • Direct access through multiple channels
 and exchanges                                                 • Opportunity for price improvement
• Makes available advanced algorithmic order types             • Liquidity in more than 24 currency pairs
• Reduces transaction and market impact costs
• Integrates options and futures capabilities                  Institutional Block Trading
• Provides access to an agency execution desk                  Knight provides block trading for NYSE, Nasdaq, interna-
                                                               tional (ordinaries and ADRs) and AMEX securities from
ECN – Direct Edge ECNsm                                        its institutional block desk. We offer our clients superior
Direct Edge ECN allows market participants to match            service, capital facilitation and access to our combined
trades in Nasdaq NMS and Nasdaq Small Cap securities by        broker-dealer and institutional order flow.
displaying their orders in either the Nasdaq Market Center
(SuperMontage) or NASD Alternative Display Facility (ADF).     We are a leader in trading listed securities in the third
                                                               market and can also execute through brokers on the floor.
As consolidation continues and ECNs merge with                 Our strength in small- and mid-cap Nasdaq securities is
exchanges, Direct Edge ECN provides market participants        unparalleled. With approximately 80% of our listed
another competitive alternative trade execution venue.         order flow and 90% of our Nasdaq order flow executed
Our goal is for Direct Edge ECN to offer enhanced              automatically, our traders and sales traders can focus on
trading flexibility, broadened access to liquidity, ano-       the complex trades and the market dynamics that impact
nymity and industry-leading order fulfillment rates at         our clients’ returns.
very competitive prices.


                                                                                                                           Knight 19
      • Depth and breadth of coverage                                               International Market Access
      • Access to substantial broker-dealer order flow                              Knight offers real-time sales and trading for broker-dealers
      • Tailored service and competitive commission rates                           and institutions in European and international markets
      • Electronic trading platform                                                 (ordinaries and ADRs) through our London-based trading
      • Capital facilitation in domestic and foreign markets                        operation and dedicated international trading desk in
                                                                                    Jersey City.
      Institutional Corporate Access
      As the largest market maker in small- and mid-cap                             As a member of the London Stock Exchange, Euronext N.V.
      securities, Knight is in a unique position to help establish                  and Deutsche Börse,* Knight offers clients broad market
      relationships between corporate management and our                            access to major European markets. Our sales traders
      institutional clients. Institutional Corporate Access focuses                 provide first-rate service and have the talent, capital facili-
      on companies with limited sell-side coverage within the                       tation and liquidity to make our clients’ trades happen.
      small- and mid-cap space.
                                                                                    • Comprehensive, unbundled execution services
      Because Knight does not provide fundamental                                   • Focus on trade execution quality
      research, Institutional Corporate Access is an unbiased                       • State-of-the-art trading technology and connectivity
      and unique platform for portfolio managers to meet                              using FIX, Bloomberg, Swift, ROR, Knight portal
      with corporate executives.                                                    • Tailored service and competitive commission rates
                                                                                    • Capital facilitation in foreign markets – Asia/Far East,
      We offer access to management across the U.S. and in                            Canada, Europe and Latin America
      Europe for cash equity securities.                                            *Exchange memberships as of March 14, 2006



      • Unbiased access to small- and mid-cap companies that                        Knight Match
        have limited or no sell-side analyst coverage                               Knight Match is an agency-only crossing network that
      • Organization and scheduling of one-on-one meetings                          enables our institutional clients to cross with our broker-
        with senior management of U.S., U.K. and European                           dealer order flow for cash equity securities.
        small- and mid-cap companies
      • Customized non-deal road shows, small group meetings                        Institutions can route orders directly to Knight Match for
        and issuer site visits                                                      passive, anonymous interaction with our broker-dealer
                                                                                    order flow, or orders can be routed to Knight’s program
      Institutional Sales Trading                                                   desk, which will manage the list of securities via Knight
      At Knight, institutional sales trading means attention to                     Match or in the marketplace.
      every order. Clients count on our experienced sales traders
      and traders to help them with execution solutions, such as                    • Unrivaled liquidity in small- and mid-cap stocks
      access to liquidity, maintaining anonymity and achieving                      • Agency-only crossing network
      minimal market impact.                                                        • Access to more than 75% of our broker-dealer order flow
                                                                                    • Direct access or via our program desk
      • Unrivaled liquidity created by substantial order flow in a
        wide breadth of securities, supported by capital facilitation               Portfolio Financing – S3 Partners
      • Market insight through experienced sales traders                            Knight offers portfolio financing and treasury funding
      • Industry-leading trade execution               quality*                     solutions for hedge funds through a strategic relationship
      • Established connectivity                                                    with S3 Partners (S3).*
      • Direct market access products
      • Tailored service and competitive commission rates                           S3 manages collateral on an agency basis and structures
      *According to YTD averages of SEC 11Ac1-5. Data provided by the Transaction   funding programs for hedge funds. These portfolio financing
       Auditing Group, Inc. (TAG) “Comparison Tool”
                                                                                    solutions allow hedge fund managers to increase their
                                                                                    own product sophistication and footprint with their prime



20 The Knight Difference
broker, creating an opportunity for the prime broker to                      • AMEX
deliver more product and flow to the hedge fund.                             • Knight Match (crossing with broker-dealer flow)
                                                                             • Knight sales traders and traders
S3’s services are designed to create greater transparency in                 • Bulletin Board and Pink Sheets issues
the securities finance market and enhanced portfolio returns.
                                                                             Research – Technical
• Lending longs                                                              Knight Research combines expertise from one of the most
• Re-financing securities borrowed                                           well-known teams on the Street. The team communicates
• Margin management                                                          actionable, relevant investment ideas – from intraday
• Prime broker optimization                                                  trading ideas to commentary on long-term trends across
• Cash management                                                            multiple asset classes – to add value to clients’ trade
*S3 Partners is an unaffiliated company that provides outsourced portfolio   executions and portfolios.
 financing for asset managers and hedge funds

                                                                             Knight’s proprietary technology will allow clients to cus-
Private Placement
                                                                             tomize research reports to receive only the information of
Through Knight Capital Markets, Private Placement can
                                                                             interest and need. For the first time, clients will be able
provide corporate finance and capital markets services
                                                                             to choose from several research products and tailor those
focused on mid-cap companies. We are committed to the
                                                                             reports. We also provide customized presentations to port-
long-term success of our clients through these services
                                                                             folio managers, analysts and traders through in-house
and through capital raising as placement agent for private
                                                                             teach-ins as well as market presentations.
placements for public and private companies.

                                                                             • More than 60 years of combined technical research
• Financial and strategic services
                                                                               experience
• Capital placement
                                                                             • Investment ideas across markets – equities, fixed income,
• Capital raising
                                                                               currencies and commodities
                                                                             • Range of investment horizons – from short-term to
Program Trading
                                                                               long-term
The combination of Knight’s liquidity, technology and
                                                                             • Tailored, in-house presentations and market discussions
client service sets our program trading apart. We analyze
                                                                             • Customizable distribution technology
every trade list of securities before trading begins to deter-
mine the strategy best suited to achieve client objectives.
                                                                                                                        Global Markets
We give each trade the attention it deserves, aiming to
help clients eliminate market impact.
                                                                             Special Situations
                                                                             Specializing in risk arbitrage execution strategies, Special
Knight’s internally developed program trading platform
                                                                             Situations is a valuable resource for the multi-strategist
provides our traders with the tools to handle complex
                                                                             interested in tapping our experience. Because we trade
trades. Dynamic sorting and monitoring alerts enable
                                                                             nearly every security, Knight can generally cover both
traders to focus on those stocks where human input is
                                                                             sides of every transaction.
more valuable than black box trading. We provide pre-
and post-trade reports so clients have trade cost estimates
                                                                             • Specializing in U.S. and Canadian merger activity
and can measure execution quality against any number of
                                                                             • Single-stock and spread executions in equities associated
benchmarks. Web access enables clients to view real-time
                                                                               with announced deals
executions versus benchmarks.
                                                                             • Ability to facilitate cross-border merger and acquisition
                                                                               when one entity is a U.S. company
Expansive order routing:
                                                                             • Focus on speculative merger and acquisition activity,
• Internally developed algorithms
                                                                               distressed equities and other special situations
• External algorithms (from Algorithm Trading Solutions)
                                                                             • Capital facilitation
• ECNs
                                                                             • Experienced merger arbitrage and equity trading from
• NYSE
                                                                               both the buy side and sell side
                                                                                                                                          Knight 21
           The science of trading. The standard of trust.
                                                        TM




22 The Knight Difference
Knight Capital Group, Inc.




2005 Financial Review
                   Selected Financial Data                                      24

                   Management’s Discussion and Analysis of                      26
                   Financial Condition and Results of Operations

                   Consolidated Quarterly Results (unaudited)                   43

                   Consolidated Statements of Financial Condition               44

                   Consolidated Statements of Operations                        45

                   Consolidated Statements of Changes in Stockholders’ Equity   46

                   Consolidated Statements of Cash Flows                        48

                   Notes to Consolidated Financial Statements                   49

                   Management’s Report on Internal Control                      64
                   Over Financial Reporting

                   Report of Independent Registered Public Accounting Firm      65

                   Management Team and Board of Directors                       67

                   Corporate Headquarters and Offices                           68
      Selected Financial                   Data



      The following selected consolidated financial data are qualified by the Consolidated Financial Statements of Knight Capital
      Group, Inc. (collectively “Knight” or the “Company”) and the Notes thereto included elsewhere in this document. The fol-
      lowing should be read in conjunction with the Consolidated Financial Statements and the discussion under Management’s
      Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this document. The
      Consolidated Statements of Operations Data for 2005, 2004 and 2003 and the Consolidated Statements of Financial
      Condition Data at December 31, 2005 and 2004 have been derived from our audited Consolidated Financial Statements
      included elsewhere in this document. The Consolidated Statements of Operations Data for 2002 and 2001 and the
      Consolidated Statements of Financial Condition Data at December 31, 2003, 2002 and 2001 are derived from
      Consolidated Financial Statements not included in this document.
      For the years ended December 31,                                           2005                     2004        2003         2002         2001
      (In thousands, except share and per share data)

      Consolidated Statements of Operations Data(1):
      Revenues
       Commissions and fees                                               $296,222               $276,011         $163,147     $ 75,599     $ 28,633
       Net trading revenue                                                 165,614                250,993          290,938      269,323      451,877
       Asset management fees                                                89,227                 77,658           57,903       34,510       36,757
       Interest and dividends, net                                           9,019                  4,647            3,657        5,357       16,505
       Investment income and other                                          74,541                 16,441           30,264       13,199        8,521
         Total revenues                                                    634,623                625,750          545,909      397,988      542,293

      Transaction-based expenses
        Execution and clearance fees                                         99,427               111,788          102,659       85,917       96,305
        Soft dollar and commission recapture                                 63,671                60,118            9,986        7,372        6,252
        Payments for order flow and ECN rebates                              21,220                36,632           32,179       36,306       52,482
          Total transaction-based expenses                                  184,318               208,538          144,824      129,595      155,039
      Revenues, net of transaction-based expenses                           450,305               417,212          401,085      268,393      387,254

      Other direct expenses
        Employee compensation and benefits                                  229,460               244,550          206,860      169,044      192,880
        Communications and data processing                                   32,513                28,896           27,992       31,077       42,017
        Professional fees                                                    19,555                14,915           10,993       16,384       13,461
        Depreciation and amortization                                        16,355                14,248           19,385       26,658       33,147
        Occupancy and equipment rentals                                      13,554                16,852           17,449       21,554       21,290
        Business development                                                  6,419                 8,269            7,160        6,852        9,580
        Writedown of assets and lease loss accrual                           10,055                 3,810           16,508       15,423       17,658
        Regulatory charges and related matters                                5,703                79,342                –            –            –
        International charges                                                     –                     –                –       31,221            –
        Other                                                                11,540                 6,844           11,152       13,771       14,289
          Total other direct expenses                                       345,154               417,726          317,499      331,984      344,322
      Income (loss) before income taxes, minority
        interest and discontinued operations                                105,151                       (514)     83,586      (63,591)      42,932
      Income tax expense (benefit)                                           38,912                      9,258      32,497      (20,139)      21,813
      Income (loss) before minority interest and
        discontinued operations                                             66,239                 (9,772)          51,089       (43,452)     21,119
      Minority interest in consolidated subsidiaries                             –                      –                –         5,101       6,477
      Net income (loss) from continuing operations                        $ 66,239               $ (9,772)        $ 51,089     $ (38,351)   $ 27,596
      Income (loss) from discontinued operations,
        net of tax                                                        $    122               $100,904         $ (13,016)   $ (4,886)    $ 8,747
      Net income (loss)                                                   $ 66,361               $ 91,132         $ 38,073     $ (43,237)   $ 36,343
      (1)   Certain prior year amounts have been reclassified to conform to current year presentation.




24 The Knight Difference
For the years ended December 31,                                           2005                    2004            2003             2002               2001
(In thousands, except share and per share data)

Basic earnings per share from
  continuing operations                                          $        0.64          $          (0.09)    $     0.46     $       (0.32)    $        0.22
Diluted earnings per share from
  continuing operations                                          $        0.62          $          (0.08)    $     0.43     $       (0.32)    $        0.22
Basic earnings per share from
  discontinued operations                                        $             –        $          0.90      $    (0.12)    $       (0.04)    $        0.07
Diluted earnings per share from
  discontinued operations                                        $           –          $          0.86      $    (0.11)    $       (0.04)    $        0.07
Basic earnings per share                                         $        0.64          $          0.81      $     0.34     $       (0.36)    $        0.29
Diluted earnings per share                                       $        0.62          $          0.77      $     0.32     $       (0.36)    $        0.29
Shares used in computation of
  basic earnings per share                                      103,455,791            112,423,158          112,023,419    120,771,786       123,796,181
Shares used in computation of
  diluted earnings per share                                    106,881,855            117,636,085          117,749,743    120,771,786       125,758,863



December 31,                                                               2005                    2004            2003              2002              2001
Consolidated Statements of
  Financial Condition Data:
Cash and cash equivalents                                        $ 230,591              $ 445,539            $ 249,998      $ 236,629         $ 344,553
Securities owned, held at clearing brokers,
  at market value                                                      380,367                254,473           201,239        143,357           417,071
Investment in Deephaven sponsored funds                                281,657                215,330           197,605        148,688            50,919
Assets within discontinued operations                                        –                      –         2,938,223      2,411,285         1,928,946
Total assets                                                         1,416,016              1,394,020         3,960,228      3,174,058         3,228,980
Securities sold, not yet purchased,
  at market value                                                     345,457                221,421            173,119            84,715           343,908
Liabilities within discontinued operations                                  –                      –          2,808,167         2,200,504         1,747,395
Total stockholders’ equity                                            823,448                851,202            787,096           753,832           831,667
(1)   Certain prior year amounts have been reclassified to conform to current year presentation.




                                                                                                                                                        Knight 25
      Management’s Discussion and Analysis of Financial Condition and Results of Operations



      Executive Overview                                               Expenses”) and (iii) income (loss) from continuing opera-
      We are a leading financial services firm that provides           tions before Regulatory charges and related matters and
      comprehensive trade execution solutions and asset                Writedown of assets and lease loss accrual and income
      management services. We continually apply knowledge              taxes (“Pre-Tax Operating Earnings”) of our segments
      and innovation to the trading and asset management               and on a consolidated basis (in millions):
      processes to build lasting client partnerships through                                                  2005     2004      2003
      consistent performance and superior client service.              Asset Management
      We have two operating business segments, Asset                   Revenues                             $ 89.8   $ 78.2    $ 58.4
      Management and Global Markets, as well as a                      Operating Expenses                     63.2     48.6      28.9
      Corporate segment.                                               Pre-Tax Operating Earnings             26.5     29.6      29.5
                                                                       Global Markets
      • Asset Management – Our Asset Management business,              Revenues                              470.7    531.0     459.0
        Deephaven Capital Management, is a global multi-strategy       Operating Expenses                    425.6    461.1     387.2
        alternative investment manager focused on delivering           Pre-Tax Operating Earnings             45.1     69.9      71.8
        attractive risk-adjusted returns with low correlation to the   Corporate
        broader markets for institutions and private clients. Assets   Revenues                               74.2     16.6      28.5
        under management were $2.9 billion as of December 31,          Operating Expenses                     24.9     33.5      29.7
        2005, down from $3.6 billion of assets under manage-           Pre-Tax Operating Earnings             49.3    (16.9)      (1.2)
                                                                       Consolidated
        ment as of December 31, 2004.
                                                                       Revenues                              634.6    625.8     545.9
      • Global Markets – We provide a broad range of custom-           Operating Expenses                    513.7    543.2     445.8
                                                                       Pre-Tax Operating Earnings           $120.9   $ 82.6    $100.1
        ized trade execution products and services across multiple
        asset classes for broker-dealers, institutions and issuer      Totals may not add due to rounding

        companies. We make a market or trade in nearly every
        U.S. equity security and provide trade executions in a         Consolidated revenues in 2005 increased $8.8 million, or
        large number of international securities.                      1% from 2004, while consolidated Operating Expenses
                                                                       decreased $29.5 million or 5% from 2004. Overall,
      The Company’s Corporate segment includes all corpo-              Consolidated Pre-Tax Operating Earnings increased
      rate overhead expenses and investment income earned              $38.3 million, or 46% from 2004, primarily attributable
      on strategic investments and our corporate investment in         to gains on the sales of our strategic investments within
      funds managed by the Asset Management segment (the               our Corporate segment. The changes in our Pre-Tax
      “Deephaven Funds”). Corporate overhead expenses pri-             Operating Earnings by our segments from 2004 to
      marily consist of compensation for certain senior executives     2005 are summarized as follows:
      and other individuals employed at the corporate holding
      company, legal and other professional expenses related to        • Asset Management – Our 2005 Pre-Tax Operating Earn-
      corporate matters, investor and public relations expenses          ings from Asset Management were down slightly from
      and directors’ and officers’ insurance.                            2004, primarily due to the impact of higher profitability-
                                                                         based compensation and other operating expenses,
      In the fourth quarter of 2004, the Company completed the           offset by slightly higher blended fund returns.
      sale of one of its business segments, Derivative Markets, to
      Citigroup Financial Products Inc. (“Citigroup”). In accordance   • Global Markets – Our 2005 Pre-Tax Operating Earnings
      with generally accepted accounting principles (“GAAP”),            from Global Markets were down 35% from 2004, pri-
      the results of this segment have been included within              marily due to greater competition for broker-dealer client
      discontinued operations for all periods presented. For a           order flow and reduced revenue capture metrics offset,
      further discussion of the sale of the Company’s Derivative         in part, by decreased losses incurred from our expanded
      Markets business, see Footnote 9 “Discontinued Operations”         London operation.
      included in the Consolidated Financial Statements con-
                                                                       • Corporate – The results from our Corporate segment
      tained elsewhere in this document.
                                                                         were positively impacted by realized gains from the sales
      The following table sets forth: (i) revenues, (ii) expenses        of our corporate equity investments in the International
      excluding Regulatory charges and related matters and               Securities Exchange, Inc. (“ISE”) and The Nasdaq Stock
      Writedown of assets and lease loss accrual (“Operating             Market, Inc. (“Nasdaq”), as well as slightly higher returns
                                                                         on our corporate investment in the Deephaven Funds.
26 The Knight Difference
A reconciliation of income (loss) from continuing opera-          also can be no assurance that we will be able to return
tions before income taxes in accordance with GAAP                 to the rates of revenue growth that we have experienced
(“Pre-Tax GAAP Income”) to Pre-Tax Operating Earnings             in the past or that we will be able to improve our operat-
and of total GAAP expenses to Operating Expenses is               ing results.
included elsewhere in this section.
                                                                  Trends
Certain Factors Affecting Results of Operations                   We believe that our continuing operations are currently
We have experienced, and expect to continue to experience,        impacted by the following trends that may affect our
significant fluctuations in operating results due to a variety    financial condition and results of operations.
of factors, including, but not limited to, introductions or
enhancements to trade execution services by us or our com-        • Over the past several years, the effects of market struc-
petitors; the value of our securities positions and our ability     ture changes, competition and market conditions have
to manage the risks attendant thereto; the volume of our            resulted in a decline in revenue capture per U.S. equity
market-making activities; the dollar value of securities            dollar value traded in our Global Markets operations.
traded; volatility in the securities markets; our market          • Retail broker-dealer participation in the equity markets
share with institutional and broker-dealer clients; the             has fluctuated over the past few years due to investor
performance, amount of, and volatility in, the results              sentiment, market conditions and a variety of other
of our quantitative market-making and program trading               factors. Retail transaction volumes may not be sustain-
portfolios; the performance of our international opera-             able and are not predictable.
tions; our ability to manage personnel, overhead and
other expenses, including our occupancy expenses under            • Broker-dealer clients continue to focus on statistics
our office leases and expenses and charges related to               measuring the quality of equity executions (including
our legal and regulatory proceedings; the strength of our           speed of executions and price improvement). In an
client relationships; changes in payments for order flow            effort to improve the quality of their executions as well
and clearing, execution and regulatory transaction costs;           as increase efficiencies, market-makers have increased
the level of assets under management and fund returns;              the level of automation within their operations. The
the addition or loss of executive management and asset              greater focus on execution quality has resulted in
management, sales and trading and technology profes-                greater competition in the marketplace, which has
sionals; legislative, legal and regulatory changes; legal           negatively impacted the revenue capture metrics of
and regulatory matters; geopolitical risk; the amount and           the Company and other market-making firms.
timing of capital expenditures, acquisitions and divesti-
tures; the integration, performance and operation of              • Market structure changes, competition and market
acquired businesses; the incurrence of costs associated             conditions have triggered an industry shift toward
with acquisitions and dispositions; investor sentiment;             market-makers charging explicit commissions or com-
technological changes and events; seasonality; competi-             mission equivalents to institutional clients for executions
tion and market and economic conditions. Such factors               in OTC securities. For the majority of our institutional client
may also have an impact on our ability to achieve our               orders, we currently charge explicit fees in the form of
strategic objectives, including, without limitation, increases      commissions or commission equivalents. In addition,
in our institutional market share and revenue capture in            institutional commission rates have fallen in the past
our Global Markets segment and increases in our fund                few years, and may continue to fall in the future.
returns and assets under management in our Asset Man-             • Due to regulatory scrutiny over the past several years relat-
agement segment. If demand for our services declines in             ing to equity sell-side research and the continued focus
either of our segments due to any of the above factors,             by investors on execution quality and overall transaction
and we are unable to adjust our cost structure on a timely          costs, more institutional clients allocate commissions to
basis, our operating results and strategic objectives could         broker-dealers based on the quality of executions. In the
be materially and adversely affected.                               past, institutional equity commissions were primarily allo-
As a result of the foregoing factors, period-to-period              cated to broker-dealers in exchange for either research
comparisons of our revenues and operating results are               or soft dollar and commission recapture programs.
not necessarily meaningful and such comparisons cannot
be relied upon as indicators of future performance. There


                                                                                                                                Knight 27
      Management’s Discussion and Analysis of Financial Condition and Results of Operations



      • There has been increased scrutiny of equity and option          We earn interest income from our cash held at banks
        market-makers, hedge funds and soft dollar practices by         and cash held in trading accounts at clearing brokers. The
        the regulatory and legislative authorities. New legislation     Company’s clearing agreements call for payment or receipt
        or modifications to existing regulations and rules could        of interest income, net of transaction-related interest
        occur in the future.                                            charged by clearing brokers for facilitating the settlement
                                                                        and financing of securities transactions. Net interest is
      • There has been consolidation among market centers               primarily affected by interest rates, the changes in cash
        over the past year, and several regional exchanges have         balances held at banks and clearing brokers and our level
        entered into joint ventures with broker-dealers to create       of securities positions in which we are long compared to
        their own alternative trading systems, (i.e. ECNs) and          our securities positions in which we are short.
        compete within the OTC and listed trading venues.
                                                                        Investment income and other income primarily represents
      • There has been a proliferation of alternative investment        income earned, net of losses, related to our corporate
        entities, which has had the effect of materially increasing     investment in the Deephaven Funds and our strategic
        competition for new investor assets.                            investments. Such income is primarily affected by the level
      Income Statement Items                                            of our corporate investments in our Deephaven Funds and
      The following section briefly describes the key components        rates of return earned by the Deephaven Funds as well as
      of, and drivers to, our significant revenues and expenses.        the performance and activity of our strategic investments.

      Revenues                                                          Transaction-based expenses
      Our revenues consist principally of Commissions and fees          Transaction-based expenses include transaction-based
      and Net trading revenue from U.S. securities trading and          variable expenses directly incurred in conjunction with
      market-making activities from Global Markets. Revenues            generating revenues and consist of Execution and clear-
      on transactions for which we charge explicit commissions          ance fees, Soft dollar and commission recapture expense,
      or commission equivalents, which include the majority of          and Payments for order flow and ECN rebates.
      our institutional client orders, are included within Com-         Execution and clearance fees primarily represent clear-
      missions and fees. Commissions and fees are primarily             ance fees paid to clearing brokers for equities transactions,
      affected by changes in our equity transaction volumes             transaction fees paid to Nasdaq and other exchanges and
      with institutional clients, changes in commission rates,          regulatory bodies, and execution fees paid to third parties,
      the growth of our soft dollar and commission recapture            primarily for executing trades in listed securities on the
      activity as well as by changes in fees earned for directing       New York Stock Exchange (“NYSE”) and American Stock
      trades to certain destinations for execution and from             Exchange (“AMEX”), and for executing orders through
      certain market data providers.                                    third party ECNs. Execution and clearance fees primarily
      Trading profits and losses on principal transactions are          fluctuate based on changes in equity trade and share
      included within Net trading revenue. These revenues               volume, clearance fees charged by clearing brokers
      are primarily affected by changes in the amount and               and fees paid to access ECNs, exchanges and certain
      mix of U.S. equity trade and share volumes, our revenue           regulatory bodies.
      capture, dollar value of equities traded, our ability to derive   Soft dollar and commission recapture expense represent
      trading gains by taking proprietary positions, changes            payments to institutions in connection with our soft dollar
      in our execution standards, volatility in the marketplace,        and commission recapture programs. Soft dollar and
      industry commission levels, our mix of broker-dealer and          commission recapture expense fluctuates based on U.S.
      institutional clients, and regulatory changes and evolving        equity share volume executed on behalf of institutions.
      industry customs and practices.
                                                                        Payments for order flow and ECN rebates represent pay-
      Asset management fees represent fees earned by                    ments to broker-dealer clients, in the normal course of
      Deephaven for sponsoring and managing the Deephaven               business, for directing to us their order flow in U.S. equities
      Funds. These fees consist of annual management fees,              and rebates for providing liquidity to our ECN, Direct Edge.
      calculated as fixed percentages of assets under manage-
      ment, and incentive fees, which, in general, are calculated
      as a percentage of the funds’ annual profits, if any.


28 The Knight Difference
Payments for order flow and ECN rebates fluctuate as we        our overall profitability. Compensation for employees
modify our rates and as our percentage of clients whose        engaged in sales activities is determined primarily based
policy is not to accept payments for order flow varies.        on a percentage of their gross revenues net of certain
Payments for order flow and ECN rebates also fluctuate         expenses including soft dollar and commission recapture
based on U.S. equity share volume, our profitability and       expenses, execution and clearance costs and overhead
the mix of market orders and limit orders.                     allocations. The majority of compensation in Asset Man-
                                                               agement is determined based on a profitability-based
Other direct expenses                                          formula, subject to certain minimum guaranteed payments.
Other direct expenses mostly consist of Employee compen-       Employee compensation and benefits expense fluctuates,
sation and benefits, Communications and data processing,       for the most part, based on changes in our revenues,
Professional fees, Depreciation and amortization and           profitability and the number of employees.
Occupancy and equipment rentals.
                                                               Communications and data processing expense primarily
Employee compensation and benefits expense, our largest        consists of costs for obtaining market data, telecommuni-
expense, primarily consists of salaries and wages paid to      cations services and systems maintenance.
all employees and profitability-based compensation, which
includes compensation paid to sales personnel and incen-
tive compensation paid to all other employees based on


Results of Operations
The following table sets forth the consolidated statements of operations data as a percentage of total revenues:
For the years ended December 31,                                                               2005      2004      2003
Revenues
 Commissions and fees                                                                          46.7%     44.1%      29.9%
 Net trading revenue                                                                           26.1%     40.1%      53.3%
 Asset management fees                                                                         14.1%     12.4%      10.6%
 Interest and dividends, net                                                                    1.4%      0.8%       0.7%
 Investment income and other                                                                   11.7%      2.6%       5.5%
   Total revenues                                                                             100.0%    100.0%     100.0%

Transaction-based expenses
  Execution and clearance fees                                                                 15.7%     17.9%     18.8%
  Soft dollar and commission recapture expense                                                 10.0%      9.6%      1.8%
  Payments for order flow and ECN rebates                                                       3.3%      5.9%      5.9%
    Total transaction-based expenses                                                           29.0%     33.3%     26.5%
Revenues, net of transaction-based expenses                                                    71.0%     66.7%     73.5%

Other direct expenses
 Employee compensation and benefits                                                            36.2%     39.1%     37.9%
 Communications and data processing                                                             5.1%      4.6%      5.1%
 Professional fees                                                                              3.1%      2.4%      2.0%
 Depreciation and amortization                                                                  2.6%      2.3%      3.6%
 Occupancy and equipment rentals                                                                2.1%      2.7%      3.2%
 Business development                                                                           1.0%      1.3%      1.3%
 Writedown of assets and lease loss accrual                                                     1.6%      0.6%      3.1%
 Regulatory charges and related matters                                                         0.9%     12.7%      0.0%
 Other                                                                                          1.8%      1.1%      2.1%
   Total other direct expenses                                                                 54.4%     66.8%     58.2%

Income (loss) from continuing operations before income taxes                                   16.6%      (0.1)%   15.3%
Income tax expense                                                                              6.1%       1.5%     6.0%
Net income (loss) from continuing operations                                                   10.5%      (1.6)%    9.4%
Income (loss) from discontinued operations, net of tax                                          0.0%     16.1%     (2.3)%
Net income                                                                                     10.5%     14.6%      7.0%
                                                                                                                          Knight 29
      Management’s Discussion and Analysis of Financial Condition and Results of Operations



      Years Ended December 31, 2005 and 2004
      Continuing Operations
      Revenues
      Asset Management
                                                                                                                                                      % of
      For the years ended December 31,                                                                               2005       2004    Change      Change
      Total Revenues from Asset Management (millions)                                                          $     89.8   $   78.2   $ 11.6         14.9%

      Average month-end balance of assets under management (millions)                                          $3,291.1  $2,963.5  $327.7             11.1%
      Annual fund return to investors*                                                                              7.2%      6.5%    0.6%             9.6%
      *Annual fund return represents the blended annual return across all assets under management in the Deephaven Funds.



      Total revenues from the Asset Management segment, which                             The average month-end balance of assets under manage-
      primarily consists of Asset management fees, increased                              ment increased to $3.3 billion in 2005, from $3.0 billion
      14.9% to $89.8 million in 2005, from $78.2 million in                               in 2004. The blended annual fund return across all assets
      2004. The increase is due to higher incentive fees as a                             under management for 2005 was 7.2%, up from 6.5%
      result of an increase in fund returns as well as higher                             in 2004.
      management fees due to the growth in the average
      month-end balance of assets under management.


      Global Markets
                                                                                                                                                     % of
      For the years ended December 31,                                                                              2005        2004   Change      Change
      Commissions and fees (millions)                                                                         $ 296.2       $ 276.0    $ 20.2           7.3%
      Net trading revenue (millions)                                                                            165.6         251.0      (85.4)       (34.0)%
      Interest and dividends, net (millions)                                                                      6.6           3.8        2.8         74.1%
      Investment income and other (millions)                                                                      2.2           0.2        2.0     1,180.8%
      Total Revenues from Global Markets (millions)                                                           $ 470.7       $ 531.0    $ (60.3)       (11.4)%

      U.S. equity dollar value traded ($ billions)                                                              1,882.2      1,730.7    151.5           8.8%
      U.S. equity trades executed (millions)                                                                      204.1        205.9       (1.8)       (0.9)%
      Nasdaq and Listed equity shares traded (billions)                                                           106.3        125.5     (19.2)      (15.3)%
      OTC Bulletin Board and Pink Sheet shares traded (billions)                                                  718.8      1,349.6   (630.8)       (46.7)%
      Average revenue capture per U.S. equity dollar value traded (bps)                                             1.8          2.5       (0.7)     (28.2)%



      Total revenues from our Global Markets segment, which                               the Company believes it is owed by a counterparty in
      primarily comprises Commissions and fees and Net trading                            a trading dispute (the “Dispute Reserve”). This reserve
      revenue from the domestic businesses, decreased 11.4%                               reduced net trading revenues by $6.5 million in 2004.
      to $470.7 million in 2005, from $531.0 million in 2004.
      Revenues in 2005 were positively impacted by Direct                                 Average revenue capture per U.S. equity dollar value traded
      Trading and Direct Edge, which were acquired in June                                was 1.8 basis points (“bps”) in 2005, down 28.2% from
      and October 2005, respectively, and higher dollar volumes,                          2.5 bps in 2004. Average revenue capture per U.S. equity
      offset by lower average revenue capture per U.S. equity                             dollar value traded is calculated as the total of net trading
      dollar value traded. Our revenue capture was impacted                               revenues plus institutional commissions and commission
      during 2005 by greater competition, regulatory changes                              equivalents (included in Commissions and fees), less certain
      and market conditions. Excluding the impact of Direct                               transaction-related regulatory fees (included in Execution
      Trading and Direct Edge, total revenues from Global                                 and clearance fees), (collectively “Core Equity Revenues”)
      Markets would have decreased 16.2% to $444.9 million                                divided by the total dollar value of the related equity trans-
      in 2005, from $531.0 million in 2004. In 2004, the Com-                             actions. We removed the impact of the Dispute Reserve
      pany recorded a reserve of $6.5 million against the amount                          of $6.5 million from our revenue capture calculation for
                                                                                          2004. Core Equity Revenues were $330.4 million and
                                                                                          $424.7 million in 2005 and 2004, respectively.
30 The Knight Difference
Corporate
                                                                                                                                % of
For the years ended December 31,                                                              2005        2004     Change     Change
Total Revenues from Corporate (millions)                                                   $ 74.2       $ 16.6      $57.5      346.4%

Average corporate investment balance in the Deephaven Funds (millions)                     $272.6       $216.9      $55.7       25.7%



Total revenues from the Corporate segment, which primar-                 39.1% in 2004. Excluding gains from the sales of our ISE
ily represents income from our corporate investments in the              and Nasdaq investments, Employee compensation and
Deephaven Funds and other strategic investments, increased               benefits as a percentage of total revenues increased slightly
to $74.2 million. In 2005, the Company sold 70% of its                   to 39.6% in 2005 from 39.1% in 2004. The number of
original equity ownership of the ISE and its entire Nasdaq               full time employees in our continuing operations increased
equity investment which resulted in pre-tax gains of                     to 720 employees at December 31, 2005, from 683
$34.2 million and $21.7 million, respectively. Excluding                 employees at December 31, 2004, primarily due to the
these gains on our strategic investments, total revenues                 acquisitions of Direct Trading and Direct Edge.
from the Corporate segment were $18.3 million in 2005,
up 10% from 2004. Income from our corporate invest-                      Communications and data processing expense increased
ments in the Deephaven Funds rose 28.0% to $16.3 mil-                    12.5% to $32.5 million in 2005, from $28.9 million in
lion in 2005 from $12.8 million in 2004. This increase was               2004. This increase was attributable to additional costs
due to a higher average investment balance and higher                    from Direct Trading and a general increase in technology
average returns on such investment.                                      and market data costs.

Transaction-based expenses                                               Depreciation and amortization expense increased 14.8%
Execution and clearance fees decreased 11.1% to                          to $16.4 million in 2005, from $14.2 million in 2004. This
$99.4 million in 2005, from $111.8 million in 2004. As                   increase was primarily due to purchases of fixed assets
a percentage of total revenue, Execution and clearance                   and leasehold improvements at our new facility at 545
fees decreased to 15.7% in 2005, from 17.9% in 2004.                     Washington Boulevard, Jersey City, N.J., as well as deprecia-
Execution and clearance fees were 17.2% of 2005 total                    tion and amortization related to Direct Trading and Direct
revenues excluding gains on the sales of our strategic                   Edge. Occupancy and equipment rentals expense decreased
investments. Execution and clearance fees fluctuate                      19.6% to $13.6 million in 2005, from $16.9 million in
based on changes in transaction volumes, regulatory                      2004, primarily due to lease loss accruals related to our
fees and efficiencies in processing the transactions.                    Jersey City, N.J. office locations.

Soft dollar and commission recapture expense increased                   Professional fees increased 31.1% to $19.6 million in 2005,
5.9% to $63.7 million in 2005, from $60.1 million in                     from $14.9 million in 2004. The increase in 2005 was pri-
2004, primarily due to the addition of the Direct                        marily due to an increase in legal expenses, which have
Trading business.                                                        fluctuated based on the activity relating to our various
                                                                         legal and regulatory proceedings, and consulting expenses.
Payments for order flow and ECN rebates decreased
42.1% to $21.2 million in 2005, from $36.6 million in                    Business development expense decreased to $6.4 million
2004. As a percentage of total revenue, Payments for                     in 2005, compared to $8.3 million in 2004. The primary
order flow and ECN rebates decreased to 3.3% in 2005,                    reason for the decrease was lower travel and entertain-
from 5.9% in 2004. The decrease on a dollar basis is                     ment costs.
primarily due to changes in our payment for order flow                   Other expenses increased to $11.5 million in 2005, com-
policies initiated in the second quarter of 2005.                        pared to $6.8 million in 2004. Other expenses in 2004
Other direct expenses                                                    included a benefit of approximately $3.0 million related
Employee compensation and benefits expense decreased                     to an adjustment to legal reserves established during
6.2% to $229.5 million in 2005, from $244.5 million in                   2003. Excluding the impact of this one-time adjustment
2004. As a percentage of total revenue, Employee com-                    in 2004, Other expenses increased 17% due to costs
pensation and benefits decreased to 36.2% in 2005 from                   associated with the move of our corporate headquarters,
                                                                         as well as higher general and administrative costs.


                                                                                                                                    Knight 31
      Management’s Discussion and Analysis of Financial Condition and Results of Operations



      During 2005, we incurred charges of $15.8 million, con-                             For a discussion of the $79.3 million charge for regulatory
      sisting of $10.1 million of writedowns of assets and lease                          and related matters, refer to Footnote 12 “Regulatory Charges
      loss accruals primarily related to the costs associated with                        and Related Matters” included in the Consolidated Finan-
      excess real estate capacity in our Jersey City, N.J. facilities,                    cial Statements contained elsewhere in this document.
      and $5.7 million related to charges for regulatory and
      related matters.                                                                    Our effective tax rate for 2005 from continuing opera-
                                                                                          tions of 37% differed from the federal statutory rate of
      During 2004, we incurred charges of $83.2 million, con-                             35% primarily due to non-deductible penalties related
      sisting of $79.3 million related to charges for regulatory                          to charges for regulatory and related matters and state
      and related matters and $3.8 million of writedowns of                               income taxes.
      assets and lease loss accruals primarily related to the costs
      associated with excess real estate capacity in Jersey City, N.J.


      Years Ended December 31, 2004 and 2003
      Continuing Operations
      Revenues
      Asset Management
                                                                                                                                                            % of
      For the years ended December 31,                                                                            2004            2003         Change     Change
      Total Revenues from Asset Management (millions)                                                       $     78.2      $     58.4     $      19.7      33.7%

      Average month-end balance of assets under management (millions)                                       $2,963.5  $1,359.4  $1,604.1                  118.0%
      Annual fund return to investors*                                                                           6.5%     13.9%     (7.4)%                (53.2)%
      *Annual fund return represents the blended annual return across all assets under management in the Deephaven Funds.



      Total revenues from the Asset Management segment, which                             The average month-end balance of assets under manage-
      primarily consists of Asset management fees, increased                              ment increased to $3.0 billion in 2004, from $1.4 billion
      33.7% to $78.2 million in 2004, from $58.4 million in                               in 2003. The blended annual fund return across all assets
      2003. The increase is due to higher management fees                                 under management for 2004 was 6.5%, down from 13.9%
      as a result of the growth in assets under management.                               in 2003.


      Global Markets
                                                                                                                                                            % of
      For the years ended December 31,                                                                             2004            2003        Change     Change
      Commissions and fees (millions)                                                                           $ 276.0         $ 163.2 $ 112.8             69.1%
      Net trading revenue (millions)                                                                              251.0           290.9   (39.9)           (13.7)%
      Interest and dividends, net (millions)                                                                        3.8             2.8      1.1            38.5%
      Investment income and other (millions)                                                                        0.2             2.1     (2.0)          (91.9)%
      Total Revenues from Global Markets (millions)                                                             $ 531.0         $ 459.0 $ 72.0              15.7%

      U.S. equity dollar value traded ($ billions)                                                               1,730.7         1,560.0         170.7     10.9%
      U.S. equity trades executed (millions)                                                                       205.9           181.3          24.6     13.5%
      Nasdaq and Listed equity shares traded (billions)                                                            125.5           138.1         (12.5)    (9.1)%
      OTC Bulletin Board and Pink Sheet shares traded (billions)                                                 1,349.6           305.3       1,044.3    342.0%
      Average revenue capture per U.S. equity dollar value traded (bps)                                              2.5             2.6          (0.2)    (6.8)%



      Total revenues from the Global Markets segment, which                               purchase of the Donaldson business in December 2003, an
      primarily comprises Commissions and fees and Net trading                            increase in our institutional revenues and higher volumes
      revenue from the domestic businesses, increased 15.7%                               in low-priced OTC Bulletin Board and Pink Sheet shares
      to $531.0 million in 2004, from $459.0 million in 2003.
      Revenues in 2004 were positively impacted by the

32 The Knight Difference
from broker-dealer clients offset, in part, by lower aver-               Average revenue capture per U.S. equity dollar value
age revenue capture per U.S. equity dollar value traded.                 traded was 2.5 bps in 2004, down 6.8% from 2.6 bps
Excluding the impact of Donaldson, total revenues from                   in 2003. Average revenue capture per U.S. equity dollar
Global Markets would have increased 2.2% to $463.0 mil-                  value traded is calculated as Core Equity Revenues divided
lion in 2004 compared to $452.9 million in 2003. In 2004,                by the total dollar value of the related equity transactions.
the Company recorded a reserve of $6.5 million against the               We removed the impact of the Dispute Reserve of $6.5 mil-
amount the Company believes it is owed by a counterparty                 lion within our revenue capture calculation for 2004. Core
in a trading dispute (the “Dispute Reserve”). This reserve               Equity Revenues were $424.7 million and $410.9 million
reduced net trading revenues by $6.5 million in 2004.                    in 2004 and 2003, respectively.


Corporate
                                                                                                                               % of
For the years ended December 31,                                                             2004        2003     Change     Change
Total Revenues from Corporate (millions)                                                   $ 16.6      $ 28.5     $(11.9)     (41.8)%

Average corporate investment balance in the Deephaven Funds (millions)                     $216.9      $183.5     $ 33.4       18.2%



Total revenues from the Corporate segment, which primar-                 Payments for order flow and ECN rebates increased 13.8%
ily represents income from our corporate investments in                  to $36.6 million in 2004, from $32.2 million in 2003. As
the Deephaven Funds, decreased 41.8%. Income from                        a percentage of total revenue, Payments for order flow
our corporate investments in the Deephaven Funds fell                    remained at 5.9% in both 2004 and 2003. The increase
46.7% to $12.8 million in 2004 from $23.9 million in                     on a dollar basis is primarily due to an increase in volumes
2003. This decrease is due to lower average returns on                   and changes in our payment for order flow policies.
our corporate investment offset, in part, by a higher
average investment balance.                                              Other direct expenses
                                                                         Employee compensation and benefits expense increased
Transaction-based expenses                                               18.2% to $244.5 million in 2004, from $206.9 million in
Execution and clearance fees increased 8.9% to $111.8 mil-               2003. As a percentage of total revenue, Employee com-
lion in 2004, from $102.7 million in 2003. As a percentage               pensation and benefits increased slightly to 39.1% in 2004
of total revenue, Execution and clearance fees decreased                 from 37.9% in 2003. The increase on a dollar basis was
to 17.9% in 2004, from 18.8% in 2003. The increase on                    primarily due to the increase in headcount, which was
a dollar basis was due to the increase in equity trades,                 impacted by the acquisition of Donaldson in December of
the increase in fees related to the London operations                    2003 and the expansion of the London operations, and
and the purchase of the Donaldson business offset, in                    higher profitability-based compensation within the Asset
part, by a reduction in clearance rates. The decrease as a               Management business segment. The number of full time
percentage of total revenue was primarily due to lower                   employees in our continuing operations increased to 683
clearance rates and higher revenues from Asset Man-                      employees at December 31, 2004, from 677 employees
agement, which has no similar execution and clearance                    at December 31, 2003.
fees, offset, in part, by a lower average revenue capture
metric in Global Markets.                                                Communications and data processing expense increased
                                                                         3.2% to $28.9 million in 2004, from $28.0 million in
Soft dollar and commission recapture expense increased                   2003. This increase was generally attributable to an
to $60.1 million in 2004, from $10.0 million in 2003. The                increase in technology and market data costs.
increase is primarily due to the purchase of the Donaldson
business on December 1, 2003.                                            Depreciation and amortization expense decreased 26.5%
                                                                         to $14.2 million in 2004, from $19.4 million in 2003. This
                                                                         decrease was primarily due to assets fully depreciating in the
                                                                         normal course of business, offset, in part, by the purchases




                                                                                                                                      Knight 33
      Management’s Discussion and Analysis of Financial Condition and Results of Operations



      of additional fixed assets during 2003 and 2004. Occu-             During 2003, we incurred charges of $16.5 million, pri-
      pancy and equipment rentals expense decreased 3.4%                 marily consisting of $9.6 million of a lease loss accrual
      to $16.9 million in 2004, from $17.4 million in 2003.              related to costs associated with excess real estate capa-
                                                                         city primarily in Jersey City, N.J. and $6.8 million related
      Professional fees increased 35.7% to $14.9 million in 2004,        to the writedown of our strategic investment in Nasdaq
      from $11.0 million in 2003. The increase in 2004 was pri-          to fair value.
      marily due to an increase in legal expenses, which have
      fluctuated based on the activity relating to our various legal     Our effective tax rate for 2004 from continuing operations
      and regulatory proceedings, and consulting expenses.               differs significantly from the federal statutory rate of 35%
                                                                         primarily due to non-deductible penalties related to charges
      Business development expense increased to $8.3 million             for regulatory and related matters and state income taxes.
      in 2004, compared to $7.2 million in 2003. The primary
      reason for the increase was higher travel and entertain-           Reconciliation of Total GAAP Expenses and
      ment costs relating to our focus on growing our institu-           Pre-Tax GAAP Income to Operating Expenses
      tional client base for the Global Markets segment.                 and Pre-Tax Operating Earnings, Respectively
                                                                         In an effort to provide additional information regarding
      Other expenses decreased to $6.8 million in 2004, com-             the Company’s results as determined by GAAP, the
      pared to $11.2 million in 2003. The decrease was due to a          Company also discloses certain non-GAAP information
      benefit of approximately $3.0 million related to an adjust-        which management believes provides useful information
      ment to legal reserves established during 2003. Excluding          to investors. Within this Annual Report, the Company has
      the impact of this one-time adjustment from both 2003              disclosed its Operating Expenses and its Pre-Tax Operating
      and 2004, Other expenses would have increased by 21%               Earnings to assist the reader in understanding the impact
      due to higher insurance, general and administrative costs.         of Writedown of assets and lease loss accrual and Regula-
      During 2004, we incurred charges of $83.2 million, primar-         tory charges and related matters on the Company’s annual
      ily consisting of $79.3 million related to charges for regula-     results for 2005, 2004 and 2003 by segment, thereby
      tory and related matters and $3.8 million of writedowns of         facilitating more useful period-to-period comparisons of
      assets and lease loss accruals primarily related to the costs      the Company’s continuing businesses. For additional infor-
      associated with excess real estate capacity in Jersey City, N.J.   mation related to segments, see Footnote 20 “Business
      For a discussion of the $79.3 million charge for regulatory        Segments” included in the Consolidated Financial State-
      and related matters, refer to Footnote 12 “Regulatory Charges      ments contained elsewhere in this document. Charts are
      and Related Matters” included in the Consolidated Finan-           presented in millions.
      cial Statements contained elsewhere in this document.


      Total GAAP Expenses to Operating Expenses
                                                                                              Asset        Global
      For the year ended December 31, 2005                                              Management        Markets Corporate        Total
        Transaction-based Expenses                                                             $ –        $184.3       $ –       $184.3
        Other Direct Expenses                                                                   69.0       251.3        24.9      345.2
      Total GAAP Expenses                                                                       69.0       435.6        24.9      529.5
        Writedown of assets and lease loss accrual                                                 –       (10.0)          –      (10.0)
        Regulatory charges and related matters                                                  (5.7)          –           –       (5.7)
      Operating Expenses                                                                       $63.2      $425.6       $24.9     $513.7

                                                                                               Asset       Global
      For the year ended December 31, 2004                                               Management       Markets    Corporate      Total
        Transaction-based Expenses                                                             $ –        $208.5       $ –       $208.5
        Other Direct Expenses                                                                   48.6       335.7        33.5      417.7
      Total GAAP Expenses                                                                       48.6       544.2        33.5      626.3
        Writedown of assets and lease loss accrual                                                 –         (3.8)         –        (3.8)
        Regulatory charges and related matters                                                     –        (79.3)         –       (79.3)
      Operating Expenses                                                                       $48.6      $461.1       $33.5     $543.2




34 The Knight Difference
                                                                                      Asset       Global
For the year ended December 31, 2003                                            Management       Markets    Corporate      Total
  Transaction-based Expenses                                                         $ –         $144.8       $    –    $144.8
  Other Direct Expenses                                                               28.9        258.9         29.7     317.5
Total GAAP Expenses                                                                   28.9        403.7         29.7     462.3
  Writedown of assets and lease loss accrual                                             –         (16.5)          –      (16.5)
Operating Expenses                                                                   $28.9       $387.2       $ 29.7    $445.8


Pre-Tax GAAP Income to Pre-Tax Operating Earnings
                                                                                     Asset       Global
For the year ended December 31, 2005                                           Management       Markets Corporate         Total
Pre-tax GAAP Income                                                                  $20.8       $ 35.1       $ 49.3    $105.2
Writedown of assets and lease loss accrual                                               –         10.0            –      10.0
Regulatory charges and related matters                                                 5.7            –            –       5.7
Pre-tax Operating Earnings                                                           $26.5       $ 45.1       $ 49.3    $120.9

                                                                                      Asset       Global
For the year ended December 31, 2004                                            Management       Markets    Corporate      Total
Pre-tax GAAP Income                                                                  $29.6       $ (13.2)     $(16.9)   $ (0.5)
Writedown of assets and lease loss accrual                                               –           3.8           –       3.8
Regulatory charges and related matters                                                   –          79.3           –      79.3
Pre-tax Operating Earnings                                                           $29.6       $ 69.9       $(16.9)   $ 82.6

                                                                                      Asset       Global
For the year ended December 31, 2003                                            Management       Markets    Corporate      Total
Pre-tax GAAP Income                                                                  $29.5       $ 55.3       $ (1.2)   $ 83.6
Writedown of assets and lease loss accrual                                               –         16.5            –      16.5
Pre-tax Operating Earnings                                                           $29.5       $ 71.8       $ (1.2)   $100.1



Liquidity and Capital Resources
Historically, we have financed our business primarily through   The Company has previously disclosed its intent to pursue
cash generated by operations, as well as the proceeds from      selective acquisitions of (or possible joint ventures with)
our stock issuances and, in 2004, from the proceeds of the      complementary businesses primarily in the markets in which
sale of our Derivative Markets segment. As of December 31,      our Global Markets and Asset Management segments
2005, we had $1.4 billion in assets related to our continu-     operate. We expect to fund the purchase price of any such
ing operations, 59% of which consisted of cash or assets        acquisition with our current cash position or, in some cases,
readily convertible into cash, principally receivables from     through the issuance of the Company’s stock. In this regard,
brokers and dealers and securities owned. Receivables           we have already undertaken several selective acquisitions.
from brokers and dealers include interest bearing cash          In April 2005, the Company announced that it had reached
balances held with clearing brokers, including, or net of,      an agreement to acquire, for cash, the business of Direct
amounts related to securities transactions that have not        Trading Institutional, Inc. (now operating as Direct Trading),
yet reached their contracted settlement date, which is          a privately held firm specializing in providing institutions
generally within three business days of the trade date.         with direct market access trading through an advanced
Securities owned principally consist of equity securities       electronic platform. The transaction closed in June 2005
that trade in Nasdaq, on the OTC Bulletin Board and on          with a $40 million initial cash payment. The acquisition of
the NYSE and AMEX markets. At December 31, 2005,                the business of Direct Trading contains a two-year contin-
the Company had net current assets, which consists of           gency from the date of closing for additional consideration
net assets readily convertible into cash, of approximately      based on the profitability of the business. Additionally, in
$248.2 million. Additionally, our corporate investment in       May 2005, the Company announced that it had reached
the Deephaven Funds was $281.7 million at December 31,          an agreement to acquire, for cash, the business of the
2005. The majority of this investment can be liquidated         ATTAIN ECN, an alternative trading system that operates
upon request to Deephaven subject to a ninety-day writ-
ten notification period and monthly redemption limits.



                                                                                                                            Knight 35
      Management’s Discussion and Analysis of Financial Condition and Results of Operations



      an electronic communications network (ECN) for the trad-      support of the development and growth of our business.
      ing of Nasdaq securities. The transaction closed in October   Our corporate investment in the Deephaven Funds increased
      2005, and currently operates under the name Direct Edge       by $66.3 million, $17.7 million and $48.9 million during
      ECN. The acquisition of Direct Edge ECN also contains a       2005, 2004 and 2003, respectively.
      four-year contingency from the business date of closing
      for additional consideration based on meeting certain         Capital expenditures related to continuing operations
      revenue and client retention metrics. In January 2006, the    were $25.7 million, $40.2 million and $6.4 million during
      Company agreed to acquire Hotspot FX, Inc., an industry-      2005, 2004 and 2003, respectively. Capital expenditures
      leading electronic foreign exchange marketplace that          in 2005 and 2004 primarily represented purchases of
      provides access to electronic foreign exchange spot trade     leaseholds and other fixed assets related to the buildout
      executions through an advanced ECN-based platform,            of our new headquarters at 545 Washington Boulevard
      for approximately $77.5 million in cash. The acquisition      in Jersey City, N.J.
      is expected to close shortly and is subject to customary      At its October 18, 2005 meeting, the Board of Directors
      closing conditions. No assurance can be given with            authorized an additional increase in the size of the Com-
      respect to the operational business effect of these trans-    pany’s stock repurchase program from $320 million to
      actions or the timing, likelihood or business effect of any   $345 million. The Company repurchased 15.9 million
      possible transaction.                                         shares during 2005 for $145.1 million under this stock
      As discussed elsewhere in this document, we sold our          repurchase program. Through December 31, 2005,
      Derivative Markets business for approximately $237 mil-       the Company had repurchased 37.6 million shares for
      lion in cash as of the close of business on December 9,       $295.9 million under its stock repurchase program. The
      2004. The final purchase price was subject to adjustment      Company may repurchase shares in the open market or
      based on the final determination of the book value of the     through privately negotiated transactions, depending on
      Derivative Markets business at the time the deal closed.      prevailing market conditions, alternative uses of capital
      The result of this adjustment and other expenses related      and other factors. The Company cautions that there are
      to the sale resulted in additional income of $122,000,        no assurances that any further repurchases may actually
      net of tax, in 2005.                                          occur. The Company had approximately 103.0 million
                                                                    shares of Class A Common Stock outstanding as of
      Income (loss) from continuing operations before income        December 31, 2005.
      taxes was $105.2 million, ($514,000) and $83.6 million
      for 2005, 2004 and 2003, respectively. Included in these      Our U.S. registered broker-dealers are subject to regula-
      amounts were certain non-cash expenses such as depreci-       tory requirements intended to ensure the general financial
      ation and amortization and certain non-cash writedowns.       soundness and liquidity of broker-dealers and requiring the
      Depreciation expense from continuing operations was           maintenance of minimum levels of net capital, as defined
      $14.6 million, $13.6 million, and $19.3 million in 2005,      in SEC Rule 15c3-1. These regulations also prohibit a
      2004 and 2003, respectively. Amortization expense from        broker-dealer from repaying subordinated borrowings,
      continuing operations, which related to intangible assets,    paying cash dividends, making loans to its parent, affiliates
      was $1.8 million, $605,000 and $48,000 during 2005,           or employees, or otherwise entering into transactions
      2004 and 2003, respectively. Non-cash writedowns from         which would result in a reduction of its total net capital to
      continuing operations were $800,000, $1.2 million and         less than 120% of its required minimum capital. Moreover,
      $6.8 million during 2005, 2004 and 2003, respectively,        broker-dealers are required to notify the SEC and NASD
      primarily related to costs associated with fixed assets       prior to repaying subordinated borrowings, paying divi-
      no longer actively being used and impaired strategic          dends and making loans to its parent, affiliates or employ-
      investments.                                                  ees, or otherwise entering into transactions, which, if
                                                                    executed, would result in a reduction of 30% or more of
      Purchases, net of proceeds, from strategic investments        its excess net capital (net capital less minimum require-
      and acquisitions related to our continuing operations         ment). The SEC has the ability to prohibit or restrict such
      were $31.0 million, $11.5 million and $14.0 million           transactions if the result is detrimental to the financial
      during 2005, 2004 and 2003, respectively. Strategic           integrity of the broker-dealer. Additionally, our foreign
      investments and acquisition expenditures primarily relate     registered broker-dealers are subject to capital adequacy
      to outside investments and acquisitions of businesses in      requirements of their respective regulatory authorities.


36 The Knight Difference
The following table sets forth the net capital levels and                         cash resources will be sufficient to meet our anticipated
requirements for the following significant broker-dealer                          working capital and capital expenditure requirements for
subsidiaries at December 31, 2005, as filed in their                              at least the next 12 months.
respective regulatory filings (in millions):
                                                                                  Contractual Obligations
                                                        Minimum         Excess
                                                Net          Net           Net
                                                                                  In connection with its operating activities, the Company
Entity                                       Capital      Capital       Capital   enters into certain contractual obligations. The Company’s
KEM                                           $99.1              $6.1   $93.0     future cash payments associated with its contractual obli-
KCM                                            34.4               3.3    31.1     gations pursuant to its operating leases and guaranteed
                                                                                  employment contracts longer than one year as of
We have no long-term debt at December 31, 2005 nor do                             December 31, 2005 are summarized below (in millions):
we currently have any material long-term debt commit-
ments for 2006. We currently anticipate that available


Payments due in:
                                                                                                                     Thereafter through
                                                                                   2006    2007-2008     2009-2010    October 31, 2021      Total
Operating lease obligations1                                                      $11.1        $21.2        $19.6              $110.1     $162.0
Other obligations1                                                                 26.5         24.3          8.0                   –       58.8
Total                                                                             $37.6        $45.5        $27.6              $110.1     $220.8
(1)   See Footnote 11 to the Consolidated Financial Statements



Off-Balance Sheet Arrangements                                                    ness operated by Knight Financial Products LLC and Knight
As of December 31, 2005, we did not have any off-balance                          Execution Partners LLC to Citigroup for approximately
sheet arrangements, as defined in Item 303(a)(4)(ii) of                           $237.0 million in cash, subject to an adjustment based on
SEC Regulation S-K.                                                               the final determination of the book value of the Derivative
                                                                                  Markets business at the time the deal closed. The result of
Effects of Inflation                                                              this adjustment and other expenses related to the sale
Because the majority of the Company’s assets are liquid                           resulted in additional income of $122,000, net of tax,
in nature, they are not significantly affected by inflation.                      during 2005. The decision to sell the Derivative Markets
However, the rate of inflation may affect the Company’s                           segment was based on a review of the overall options
expenses, such as employee compensation, office leasing                           industry, the capital and risk required to maintain this busi-
costs and communications expenses, which may not be                               ness successfully and the business’ role in the Company’s
readily recoverable in the prices of the services offered by                      long-term strategy. The net income (loss) included in our
the Company. To the extent inflation results in rising inter-                     Income (loss) from discontinued operations, net of taxes,
est rates and has other adverse effects on the securities                         on the Consolidated Statements of Operations, excluding
markets, it may adversely affect the Company’s financial                          the gain on the sale in 2004 of $80.0 million, was approxi-
position and results of operations.                                               mately $122,000, $21.0 million and ($10.9 million) for the
Subsequent Event                                                                  years ended 2005, 2004 and 2003, respectively.
In January 2006, the Company agreed to acquire Hotspot                            Due to changes in market structure, the withdrawal of
FX, Inc., an industry-leading electronic foreign exchange                         Nasdaq Japan, poor market conditions and limited market-
marketplace that provides access to electronic foreign                            making opportunities in Japan, Knight Securities Japan’s
exchange spot trade executions through an advanced                                (“KSJ”) original business plan was significantly impaired
ECN-based platform, for approximately $77.5 million in                            and its operations ceased on May 2, 2003. After the cessa-
cash. The acquisition is expected to close shortly and is                         tion of trading, the Company and Nikko Cordial Group
subject to customary closing conditions.                                          liquidated KSJ. The losses, net of tax, included in Loss from
Discontinued Operations                                                           discontinued operations from the KSJ business on the
As of the close of business on December 9, 2004, the                              Consolidated Statements of Operations were approxi-
Company sold substantially all of the assets and certain of                       mately $2.1 million for the year ended 2003.
the liabilities that comprised the Derivatives Markets busi-
                                                                                                                                                Knight 37
      Management’s Discussion and Analysis of Financial Condition and Results of Operations



      Critical Accounting Policies                                     Goodwill of $47.7 million as of December 31, 2005 is all
      The preparation of financial statements in conformity            related to our Global Markets segment. Goodwill is related
      with GAAP requires management to make estimates and              to the purchases of our listed equities market-maker, KCM,
      assumptions. We believe that, of our significant account-        the business of Donaldson, the shares of the minority
      ing policies, the following policies involve a higher degree     investors in Knight Roundtable Europe Limited, our subsi-
      of judgment.                                                     diary that owns KEMIL, and the businesses now operating
                                                                       as Direct Trading and Direct Edge. During our annual test
      Lease Loss Accrual – It is the Company’s policy to identify      for impairment done in the second quarter of 2005,
      excess real estate capacity and where applicable, accrue         excluding Direct Trading and Direct Edge, we determined
      against such future costs. In determining the accrual, a         that these assets were not impaired. Direct Edge was pur-
      nominal cash flow analysis is performed for lease losses         chased in October 2005 and Direct Trading was purchased in
      initiated prior to December 31, 2002, the effective date         June 2005; therefore, these businesses were not included
      SFAS No. 146 Accounting for Costs Associated with Exit           in our impairment test performed in the second quarter of
      or Disposal Activities, and costs related to the excess          2005. However, the Company believes there is no impair-
      capacity are accrued. For lease losses initiated after           ment of these assets at December 31, 2005. As part of our
      December 31, 2002, the Company’s policy is to accrue             test for impairment, we considered the profitability of the
      future costs related to excess capacity using a discounted       applicable reporting unit, an assessment of fair value of
      cash flow analysis.                                              the reporting unit based on various valuation methodolo-
      The Company incurred an additional $10.1 million of              gies, as well as the overall market value of the Company,
      Writedown of assets and lease loss accruals in 2005. A           compared to the Company’s book value.
      loss of $5.5 million is related to the lease loss accrual on     Intangible assets, less accumulated amortization, of
      a portion of our lease at 545 Washington Boulevard in            $29.8 million as of December 31, 2005 are attributable to
      Jersey City, N.J., encompassing approximately 78,000             our Global Markets segment. Substantially all of the intan-
      square feet, all of which is unoccupied. The Company             gible assets, net of accumulated amortization, resulted
      engaged a real estate broker to sub-lease this excess            from the purchase of the business of Donaldson, which
      space, but to date our efforts to sub-let this space have        represents $10.8 million of the balance, and the Direct
      not been successful. This accrual was derived from               Trading business, which represents $18.8 million of the
      assumptions and estimates based on lease terms of an             balance. These assets, which primarily consist of customer
      anticipated sub-lease agreement, which assumed a sub-            relationships, are being amortized on a straight-line basis
      lease would commence in the beginning of 2007, antici-           over their useful lives, which we have determined to range
      pated market prices along the Jersey City waterfront and         from two to thirty years. During our annual test for impair-
      estimated up-front costs, including broker fees and build-       ment done in June 2005, excluding Direct Trading, we
      out allowances. We continually monitor the market and            determined that there was no impairment of these intan-
      space to assess the reasonableness of our applicable             gible assets. Direct Trading was purchased in June 2005;
      assumptions.                                                     therefore this business was not included in our impairment
      A loss of $3.7 million is related to the lease loss accrual on   test performed in the second quarter of 2005. However,
      the excess real estate capacity at our former headquarters       the Company believes there is no impairment of these
      at 525 Washington Boulevard, Jersey City, N.J. The lease         intangible assets at December 31, 2005.
      on this location ends in April 2006 and we abandoned             Strategic Investments – Investments include ownership
      this location in the second quarter of 2005.                     interests of less than 20% in financial services-related busi-
      Impairment of Goodwill and Intangible Assets – The useful        nesses, which are accounted for under the equity method
      lives of goodwill and intangible assets are determined upon      or at fair value. The equity method of accounting is used
      acquisition. Intangible assets are amortized over their          for investments in limited partnerships and limited liability
      respective lives. Goodwill and the useful lives of intangible    corporations. The fair value of investments, recorded in
      assets are tested for impairment, at a minimum, on an            the Company’s broker-dealer subsidiaries, for which a
      annual basis, or when an event occurs or circumstances
      change that signify the existence of impairment.




38 The Knight Difference
quoted market or dealer price is not available for the           which the net asset value of the particular Deephaven
size of our investment is based on management’s esti-            fund exceeds the greater of either the highest previous net
mate. Among the factors considered by management in              asset value in that Deephaven fund or the net asset value
determining the fair value of investments are the cost of        at the time each investor in that fund made his purchase.
the investment, terms and liquidity, developments since          The Incentive Allocation Fee may increase or decrease dur-
the acquisition of the investment, the sales price of recently   ing the year based on the performance of the Deephaven
issued securities, the financial condition and operating         Funds and the level of assets under management. If
results of the issuer, earnings trends and consistency of        Deephaven’s Market Neutral Fund, which contains
operating cash flows, the long-term business potential           approximately 50% of the assets under management
of the issuer, the quoted market price of securities with        by Deephaven, recognizes a loss in the second half of a
similar quality and yield that are publicly traded, and other    calendar year, the Incentive Allocation Fee is recalculated
factors generally pertinent to the valuation of investments.     on an annual rather than a semi-annual basis. As such, the
The fair value of these investments is subject to a high         Incentive Allocation Fee may be negative for certain periods,
degree of volatility and may be susceptible to significant       but not lower than zero on a year-to-date basis.
fluctuations in the near term.
                                                                 Writedown of Fixed Assets – Writedowns of fixed
Investments that are classified as available-for-sale are        assets are recognized when it is determined that the
reported at fair value with unrealized gains and losses          fixed assets are impaired. The amount of the impairment
excluded from earnings and reported, net of applicable           is determined by the difference between the carrying
taxes, in Accumulated other comprehensive income, net            amount and the fair value of the fixed asset. In determin-
of tax within Stockholders’ Equity on the Consolidated           ing the impairment, an estimated fair value is obtained
Statements of Financial Condition. Investments not               through research and inquiry of the market. Fixed assets
recorded in the Company’s broker-dealer subsidiaries,            are reviewed for impairment on a quarterly basis.
which do not have a readily determinable fair value, are
recorded at amortized cost.                                      Other Estimates – The preparation of financial statements
                                                                 in conformity with GAAP requires management
Strategic investments are reviewed on an ongoing basis           to make certain estimates and assumptions. In addition
to ensure that the carrying values of the investments have       to the estimates that we make in connection with
not been impaired. If the Company assesses that an               accounting for the items noted above, the use of esti-
impairment loss on a strategic investment has occurred           mates is also important in determining provisions for
due to declines in fair value or other market conditions,        potential losses that may arise from litigation, regulatory
the investment is written down to its impairment value.          proceedings and tax audits.
As of December 31, 2005, the Company reviewed its
strategic investments for impairment and determined              A portion of our Employee compensation and benefits
that an impairment loss had not occurred.                        expense on the Consolidated Statements of Operations
                                                                 represents discretionary bonuses, generally determined
Market-Making Activities – Securities owned and                  at year end and paid in the subsequent months. Among
securities sold, not yet purchased, which primarily consist      many factors, discretionary bonus accruals, in general,
of listed and OTC stocks, are carried at market value and        are influenced by the Company’s overall performance
are recorded on a trade date basis. Market value is esti-        and competitive industry compensation levels. Therefore,
mated daily using market quotations available from major         for each interim period, we accrue an amount based on
securities exchanges and dealers.                                this analysis.

Asset Management Fees – Deephaven earns asset man-               We estimate and accrue for potential losses that may arise
agement fees for sponsoring and managing the Deephaven           out of litigation, regulatory proceedings and tax audits to
Funds. These fees are recorded monthly as earned and             the extent that such losses are probable and can be esti-
are calculated as a percentage of each Deephaven Fund’s          mated in accordance with SFAS No. 5 Accounting for
monthly net assets, plus a percentage of a new high net          Contingencies. Significant judgment is required in making
asset value (the “Incentive Allocation Fee”), as defined, for    these estimates and our final liabilities may ultimately be
any six month period ended June 30th or December 31st.
A new high net asset value is defined as the amount by



                                                                                                                           Knight 39
      Management’s Discussion and Analysis of Financial Condition and Results of Operations



      materially different. Our total liability accrued with respect   unrecognized compensation cost at the date of retire-
      to litigation and regulatory proceedings is determined on a      ment. For stock-based payments issued after the adoption
      case-by-case basis and represents an estimate of probable        of SFAS No. 123-R the Company will apply a non-
      losses based on, among other factors, the progress of            substantive vesting period approach whereby expense
      each case, our experience with and industry experience           is accelerated for those employees that receive awards
      with similar cases and the opinions and views of internal        and are eligible to retire prior to the award vesting. The
      and external legal counsel. Given the inherent difficulty        impact of this change in the vesting approach would not
      of predicting the outcome of our litigation and regulatory       have had a material impact on the results of operations for
      matters, particularly in cases or proceedings in which           the periods presented herein.
      substantial or indeterminate damages or fines are sought,
      or where cases or proceedings are in the early stages, we        Quantitative and Qualitative Disclosures
      cannot estimate losses or ranges of losses for cases or          About Market Risk
      proceedings where there is only a reasonable possibility         Market Risk
      that a loss may be incurred.                                     Our market-making and trading activities expose our
                                                                       capital to significant risks. These risks include, but are
      Recently Issued Accounting Standards                             not limited to, absolute and relative price movements,
      In December 2004, the FASB issued a revision to                  price volatility and changes in liquidity, over which we
      SFAS No. 123 Accounting for Stock-Based Compensation,            have virtually no control.
      SFAS No. 123-R, Share-Based Payment. SFAS No. 123-R
      focuses primarily on transactions in which an entity             For working capital purposes, we invest in money market
      exchanges its equity instruments for employee services.          funds, commercial paper and government securities or
      SFAS No. 123-R eliminates the intrinsic value method             maintain interest-bearing balances in our trading accounts
      under Accounting Principles Board No. 25 as an alternative       with clearing brokers, which are classified as cash and cash
      method of accounting for stock-based awards. Addi-               equivalents and receivable from clearing brokers, respec-
      tionally SFAS No. 123-R clarifies SFAS No. 123’s guidance        tively, in the Consolidated Statements of Financial
      in several areas including measuring fair value, classifying     Condition. These other amounts do not have maturity
      an award as equity or as a liability and attributing com-        dates or present a material market risk, as the balances
      pensation cost to reporting periods. In April 2005, the SEC      are short-term in nature and subject to daily repricing.
      delayed the effective date for SFAS No. 123-R until the first    Our cash and cash equivalents held in foreign currencies
      fiscal year beginning after June 15, 2005. The Company           are subject to the exposure of foreign currency fluctua-
      plans to adopt the provisions of this statement, using the       tions. These balances are monitored daily, and are not
      “modified prospective method” for its first quarter of           material to the Company’s overall cash position.
      2006. We do not expect the adoption of this statement            In Global Markets, we employ automated proprietary
      to have a greater effect on our financial condition, results     trading and position management systems that provide
      of operations or cash flows than the pro forma effect in         real-time, on-line position management and inventory
      2005 as disclosed in Footnote 2 “Significant Accounting          control. We monitor our risks by reviewing trading positions
      Policies” included in the Consolidated Financial Statements      and their appropriate risk measures. We have established
      contained elsewhere in this document.                            a system whereby transactions are monitored by senior
      Prior to the adoption of SFAS No. 123-R the Company              management on a real-time basis as are individual and
      applied a nominal vesting approach for employee stock-           aggregate dollar and inventory position totals and real-time
      based compensation awards with retirement eligible               profits and losses. The management of trading positions
      provisions. Under the nominal vesting approach, the              is enhanced by review of mark-to-market valuations and
      Company recognized compensation cost over the vesting            position summaries on a daily basis.
      period and, if the employee retired before the end of the
      vesting period, the Company recognized any remaining




40 The Knight Difference
In the normal course of our equities market-making busi-           a $2.7 million loss and a $2.4 million loss as of December 31,
ness, we maintain inventories of exchange-listed and               2005 and 2004, respectively, due to the offset of losses in
OTC equity securities. The fair value of these securities          long positions with gains in short positions. The following
at December 31, 2005 and 2004 was $372.0 million                   table illustrates, for the period indicated, our average, high-
and $245.5 million, respectively, in long positions and            est and lowest month-end inventory at market value (based
$345.5 million and $221.4 million, respectively, in short          on both the aggregate and the net of the long and short
positions. The potential change in fair value, using a             positions of trading securities from our OTC and listed
hypothetical 10% decline in prices, is estimated to be             market-making business) (in millions).


                                                               2005                       2004                       2003
                                                     Aggregate            Net    Aggregate           Net    Aggregate            Net
                                                        of Long      of Long       of Long      of Long       of Long       of Long
                                                      and Short    and Short     and Short    and Short     and Short     and Short
                                                       Positions    Positions     Positions    Positions     Positions     Positions
Average month-end                                      $700.3         $32.6        $525.8        $27.9        $336.4        $ 9.1
Highest month-end                                       874.8          46.2         627.5         74.5         485.1          32.4
Lowest month-end                                        496.9          10.6         411.4          1.2         200.2         (32.1)


As of December 31, 2005, we had a $281.7 million corpo-            Deephaven monitors its trading risks by reviewing trading
rate investment in the Deephaven Funds, $222.1 million of          positions and their appropriate risk measures. We have
which was invested in the Market Neutral Fund. The general         established a system whereby transactions are monitored
objective of market neutral investment strategies is to seek       by management and an independent risk control func-
to capture mispricings or spreads between related capital          tion, as are individual and aggregate dollar and inventory
instruments. Within the Market Neutral Fund, Deephaven             position totals and profits and losses by strategy. The
employs a variety of market neutral investment strategies,         management of trading positions is enhanced by review
including convertible arbitrage, event arbitrage, relative         of mark-to-market valuations and position summaries.
value equity and distressed debt. Because the primary              There can be no assurances that any of the Deephaven
basis of the Deephaven Funds’ market neutral strategy is           Funds’ strategy will be successful in achieving either their
endeavoring to capture mispricings or spreads between              risk control or its profit objectives.
related instruments, rather than attempting to predict or
follow absolute price movements, the performance of the            Operational Risk
Market Neutral Fund is intended to be substantially non-           Operational risk relates to the risk of loss arising from
correlated with the general debt and equity markets, as            inadequate or failed internal processes, people or systems
well as with a number of other non-traditional investment          and from external events, or external trading, custody, or
strategies. However, there will be unhedged credit risk            lending relationships that are important to Deephaven’s
in the convertible arbitrage portfolio and that part of            business. Operational risk can arise from many factors
the portfolio will have some correlation to credit spreads.        ranging from routine processing errors to potentially costly
Market neutral trading strategies also involve other               incidents arising, for example, from major systems failures.
substantial risks, for example, the disruption in historical       The Company incurs operational risk across all of its busi-
pricing relationships and the risk of a tightening of dealer       ness activities, including revenue generating activities as
credit, forcing the premature liquidation of positions. The        well as support functions. Legal and compliance risk is
Deephaven Funds also utilize leverage, to the extent avail-        included in the scope of operational risk and is discussed
able and deemed by Deephaven to be consistent with the             on the next page under “Legal Risk.”
Funds’ risk/reward objectives, in an attempt to increase
returns while maintaining strict risk controls.




                                                                                                                                 Knight 41
      Management’s Discussion and Analysis of Financial Condition and Results of Operations



      Primary responsibility for the management of operational           Legal Risk
      risk lies with the business segments and supporting func-          Legal risk includes the risk of non-compliance with applica-
      tions. The business segments maintain controls designed            ble legal and regulatory requirements and standards. Legal
      to manage and mitigate operational risk for existing activi-       risk also includes contractual and commercial risk such as
      ties. In addition, as new products and business activities         the risk that a counterparty’s performance obligations will
      are developed, operational risks are identified and controls       be unenforceable. The Company is generally subject to
      are designed to mitigate the identified risks.                     extensive regulation in the different jurisdictions in which
                                                                         it conducts its business. The Company has established
      Disaster recovery plans are in place for critical facilities and   procedures based on legal and regulatory requirements
      resources and redundancies are built into the systems as           that are designed to foster compliance with applicable
      deemed appropriate. The Company has also established               statutory and regulatory requirements. The Company also
      policies, procedures and technologies to protect its               has established procedures that are designed to require
      computer and other assets from unauthorized access.                that the Company’s policies relating to conduct, ethics
                                                                         and business practices are followed.




42 The Knight Difference
Consolidated Quarterly                     Results (unaudited)



The following table sets forth certain unaudited consolidated quarterly statement of operations data for 2005 and 2004.
In the opinion of management, this unaudited information has been prepared on substantially the same basis as the con-
solidated financial statements appearing elsewhere in this document and includes all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the unaudited consolidated quarterly data. The unaudited consolidated
quarterly data should be read in conjunction with the audited consolidated financial statements and notes thereto appear-
ing elsewhere in this document. The results of any quarter are not necessarily indicative of results for any future period.
                                                     Dec. 31,       Sept. 30,       Jun. 30,         Mar. 31,       Dec. 31,       Sept. 30,        Jun. 30,       Mar. 31,
Quarter Ended*                                         2005            2005            2005            2005           2004            2004            2004           2004

(in thousands, except per share amounts)
Revenues
  Commissions and fees                           $ 83,223       $ 74,860        $ 68,022         $ 70,116       $ 72,206       $ 58,599 $ 68,569               $ 76,638
  Net trading revenue                              48,792         52,349          27,051           37,422         53,122         35,907   61,235                100,728
  Asset management fees                            21,326         41,983           8,037           17,881         48,814          6,805    8,107                 13,932
  Interest and dividends, net                       2,700          1,763           2,216            2,340          1,819          1,199      772                    858
  Investment income and other                      45,255         13,141           6,347            9,799          9,618           (692)   1,354                  6,164
     Total revenues                               201,297        184,097         111,673          137,557        185,579        101,818  140,037                198,320
Transaction-based expenses
  Execution and clearance fees                       27,947          24,585         23,348           23,547         23,301         22,043           28,682         37,762
  Soft dollar and commission
     recapture expense                               17,634          15,903         14,650           15,485         15,796         14,309           14,237         15,776
  Payments for order flow                             6,377           3,857          3,582            7,404          9,215          4,555            9,843         13,018
     Total transaction-based expenses                51,958          44,344         41,580           46,435         48,312         40,907           52,762         66,556
Revenues, net of
  transaction-based expenses                       149,338        139,752           70,093           91,121      137,267           60,911           87,275      131,764

Other direct expenses
   Employee compensation and benefits                56,140          68,268         48,194           56,857         76,086         50,109           53,250         65,104
   Communications and data processing                 8,578           7,969          8,151            7,814          7,313          7,867            6,963          6,754
   Professional fees                                  5,167           6,056          4,550            3,776          3,357          4,258            3,951          3,353
   Depreciation and amortization                      4,109           4,209          3,734            4,302          3,377          3,390            3,561          3,920
   Occupancy and equipment rentals                    3,368           3,239          2,830            4,123          3,960          4,151            4,388          4,352
   Business development                               1,801           1,616          1,708            1,293          2,347          2,054            1,825          2,043
   Writedown of assets and
      lease loss accrual                                    –         5,509          4,546                 –           312             874           2,624               –
   Regulatory charges and
      related matters                                 3,703               –          2,000                –            142              –           79,200              –
   Other                                              2,677           2,785          3,426            2,654          2,725           (820)           2,190          2,750
      Total other direct expenses                    85,543          99,652         79,139           80,820         99,619         71,883          157,952         88,276
Income (loss) from continuing
   operations before income taxes                    63,795          40,100         (9,045)          10,301         37,648         (10,972)        (70,677)        43,488
Income tax expense (benefit)                         21,924          16,137         (3,430)           4,281         15,194          (4,367)        (19,080)        17,511
Net income (loss) from
   continuing operations                             41,871          23,964         (5,616)           6,020         22,454          (6,605)        (51,597)        25,977
Income (loss) from discontinued
   operations, net of tax                                 –          388               –               (266)  85,954              5,344      3,737     5,868
Net income (loss)                     $              41,871     $ 24,352        $ (5,616) $           5,754 $108,408           $ (1,261) $ (47,860) $ 31,845
Earnings per share from
  continuing operations                          $      0.41    $       0.23    $     (0.05) $          0.05    $     0.19     $      (0.06) $       (0.46) $         0.21
Earnings per share from
  discontinued operations                        $          –   $          – $            –      $         –    $     0.74     $      0.05     $      0.03     $      0.05
Earnings per share                               $      0.41    $       0.23    $     (0.05) $          0.05    $     0.94     $      (0.01) $       (0.42) $         0.26

*Certain prior quarter amounts have been reclassified to conform to current year presentation.




                                                                                                                                                                        Knight 43
      Consolidated Statements of Financial                           Condition



      December 31,                                                                                        2005               2004

      Assets
        Cash and cash equivalents                                                               $ 230,591,067     $ 445,539,282
        Securities owned, held at clearing brokers, at market value                               380,366,778       254,473,209
        Receivable from brokers and dealers                                                       229,828,734       244,881,065
        Investment in Deephaven sponsored funds                                                   281,656,753       215,329,959
        Fixed assets and leasehold improvements, at cost, less accumulated depreciation
           and amortization of $99,757,958 in 2005 and $101,365,529 in 2004                         67,656,533        54,382,503
        Strategic investments                                                                       31,896,425        29,266,796
        Goodwill                                                                                    47,682,880        19,182,248
        Intangible assets, less accumulated amortization of $2,434,573 in 2005
           and $653,472 in 2004                                                                     29,773,442        11,546,528
        Other assets                                                                               116,563,732       119,418,725
              Total assets                                                                      $1,416,016,344    $1,394,020,315
      Liabilities and Stockholders’ Equity
      Liabilities
         Securities sold, not yet purchased, at market value                                    $ 345,457,499     $ 221,420,569
         Payable to brokers and dealers                                                            35,102,415        88,480,788
         Accrued compensation expense                                                             117,763,834       123,664,383
         Accrued expenses and other liabilities                                                    94,244,447       109,252,681
                Total liabilities                                                                 592,568,195       542,818,421
      Commitments and contingent liabilities (Notes 11 and 18)
      Stockholders’ equity
         Class A Common Stock, $0.01 par value;
            Shares authorized: 500,000,000 in 2005 and 2004;
            Shares issued: 139,745,722 in 2005 and 133,965,513 in 2004;
            Shares outstanding: 102,966,359 in 2005 and 113,295,191 in 2004                          1,397,457          1,339,655
         Additional paid-in capital                                                                473,945,690       427,451,712
         Retained earnings                                                                         653,513,691       587,152,786
         Treasury stock, at cost; 36,779,363 shares in 2005 and 20,670,322 shares in 2004         (294,652,742)     (147,636,413)
         Accumulated other comprehensive income, net of tax                                         10,350,387                  –
         Unamortized stock-based compensation                                                      (21,106,334)       (17,105,846)
                Total stockholders’ equity                                                         823,448,149       851,201,894
                Total liabilities and stockholders’ equity                                      $1,416,016,344    $1,394,020,315

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




44 The Knight Difference
Consolidated Statements of Operations




For the years ended December 31,                                                                     2005              2004               2003

Revenues
  Commissions and fees                                                                    $296,221,767      $276,010,852       $163,147,122
  Net trading revenue                                                                      165,614,332       250,992,997        290,937,517
  Asset management fees                                                                     89,226,578        77,658,193         57,903,057
  Interest and dividends, net                                                                9,019,081         4,647,059          3,657,050
  Investment income and other                                                               74,541,327        16,441,253         30,264,016
     Total revenues                                                                        634,623,085       625,750,354        545,908,762

Transaction-based expenses
  Execution and clearance fees                                                                 99,426,667       111,787,940        102,658,908
  Soft dollar and commission recapture expense                                                 63,670,978        60,117,556          9,985,651
  Payments for order flow and ECN rebates                                                      21,220,284        36,632,317         32,178,913
     Total transaction-based expenses                                                         184,317,929       208,537,813        144,823,472

Revenues, net of transaction-based expenses                                                   450,305,156       417,212,541        401,085,290

Other direct expenses
   Employee compensation and benefits                                                      229,459,520       244,549,546        206,860,453
   Communications and data processing                                                       32,512,930        28,896,451         27,991,441
   Professional fees                                                                        19,554,523        14,914,772         10,993,116
   Depreciation and amortization                                                            16,354,746        14,247,699         19,384,902
   Occupancy and equipment rentals                                                          13,553,631        16,852,358         17,449,489
   Business development                                                                      6,418,984          8,268,973         7,159,726
   Writedown of assets and lease loss accrual                                               10,055,252          3,810,453        16,507,981
   Regulatory charges and related matters                                                    5,703,428        79,341,732                  –
   Other                                                                                    11,540,764          6,844,285        11,151,856
      Total other direct expenses                                                          345,153,778       417,726,269        317,498,964
Income (loss) from continuing operations before income taxes                               105,151,378           (513,728)       83,586,326
Income tax expense                                                                          38,912,480          9,258,157        32,496,651
Net income (loss) from continuing operations                                                66,238,898         (9,771,885)       51,089,675
Income (loss) from discontinued operations, net of tax                                         122,007       100,903,791        (13,016,202)
Net income                                                                                $ 66,360,905      $ 91,131,906       $ 38,073,473
Basic earnings per share from continuing operations                                       $          0.64   $         (0.09)   $          0.46
Diluted earnings per share from continuing operations                                     $          0.62   $         (0.08)   $          0.43
Basic earnings per share from discontinued operations                                     $             –   $          0.90    $         (0.12)
Diluted earnings per share from discontinued operations                                   $             –   $          0.86    $         (0.11)
Basic earnings per share                                                                  $          0.64   $          0.81    $          0.34
Diluted earnings per share                                                                $          0.62   $          0.77    $          0.32
Shares used in computation of basic earnings per share                                        103,455,791       112,423,158        112,023,419
Shares used in computation of diluted earnings per share                                      106,881,855       117,636,085        117,749,743

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




                                                                                                                                           Knight 45
      Consolidated Statements of Changes                            in Stockholders‘ Equity




      For the years ended                                                    Class A Common Stock                           Treasury Stock
      December 31, 2003, 2004 and 2005                                      Shares                Amount           Shares                    Amount
      Balance, January 1, 2003                                     124,705,287                  $1,247,053    (6,847,467)             $ (35,423,292)
      Net Income                                                             –                           –             –                          –
      Loss recognized on translation
         adjustment, net of taxes                                            –                           –             –                           –
      Common stock repurchased                                               –                           –    (6,413,521)               (34,297,186)
      Stock options exercised                                        2,598,861                      25,989             –                           –
      Income tax benefit – stock awards exercised                            –                           –             –                           –
      Stock-based compensation                                         882,912                       8,829       184,483                     925,220
      Balance, December 31, 2003                                   128,187,060                   1,281,871   (13,076,505)                (68,795,258)
      Net Income                                                             –                           –             –                           –
      Common stock repurchased                                               –                           –    (7,593,817)               (78,841,155)
      Stock options exercised                                        4,527,202                      45,272             –                           –
      Income tax benefit – stock awards exercised                            –                           –             –                           –
      Stock-based compensation                                       1,251,251                      12,512             –                           –
      Balance, December 31, 2004                                   133,965,513                   1,339,655   (20,670,322)              (147,636,413)
      Net Income                                                             –                           –             –                           –
      Unrealized gains on available-for-sale
         securities, net of taxes                                            –                           –             –                          –
      Common stock repurchased                                               –                           –   (16,109,041)              (147,016,329)
      Stock options exercised                                        3,952,173                      39,522             –                          –
      Income tax benefit – stock awards exercised                            –                           –             –                          –
      Stock-based compensation                                       1,828,036                      18,280             –                          –
      Balance, December 31, 2005                                   139,745,722                  $1,397,457   (36,779,363)             $(294,652,742)

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




46 The Knight Difference
                                                     Accumulated
    Additional                      Unamortized            Other
      Paid-In          Retained      Stock-based   Comprehensive
      Capital          Earnings    Compensation          Income            Total
$340,211,426     $457,956,771     $ (6,791,533)    $ (3,368,885)   $753,831,540
           –       38,073,473                –                –      38,073,473

           –                 –               –       3,368,885        3,368,885
           –                 –               –               –      (34,297,186)
  14,977,298                 –               –               –       15,003,287
   7,433,289                 –               –               –        7,433,289
   8,275,392            (9,364)     (5,517,463)              –        3,682,614
 370,897,405      496,020,880      (12,308,996)              –      787,095,902
           –       91,131,906                –               –       91,131,906
           –                 –               –               –      (78,841,155)
  27,163,276                 –               –               –       27,208,548
  11,392,768                 –               –               –       11,392,768
  17,998,263                 –      (4,796,850)              –       13,213,925
 427,451,712      587,152,786      (17,105,846)              –      851,201,894
           –       66,360,905                –               –       66,360,905

           –                –                –      10,350,387       10,350,387
           –                –                –               –     (147,016,329)
  22,477,438                –                –               –       22,516,960
   6,625,852                –                –               –        6,625,852
  17,390,688                –       (4,000,488)              –       13,408,480
$473,945,690     $653,513,691     $(21,106,334)    $10,350,387     $823,448,149




                                                                             Knight 47
      Consolidated Statements of Cash                       Flows



      For the years ended December 31,                                                                                     2005    2004 Revised*        2003 Revised*

      Cash flows from operating activities
            Net income                                                                                        $ 66,360,905        $ 91,131,906      $ 38,073,473
            Income (loss) from discontinued operations, net of taxes                                               122,007         100,903,791       (13,016,202)
      Income (loss) from continuing operations, net of taxes                                                    66,238,898          (9,771,885)       51,089,675
      Adjustments to reconcile income (loss) from continuing operations,
         net of taxes to net cash provided by operating activities
            Depreciation and amortization                                                                         16,354,746        14,247,699           19,384,902
            Income tax benefit on stock awards exercised                                                           6,625,852        11,392,768             7,433,289
            Stock-based compensation                                                                              13,408,873        10,003,722             2,787,656
            Deferred income taxes                                                                                  3,000,067         (8,509,592)          (1,561,197)
            Deferred rent                                                                                            620,714          3,793,700           (1,630,241)
            Writedown of assets and lease loss accrual                                                            10,055,252          3,810,453          16,507,981
            Unrealized gain on strategic investments                                                                 747,993                  –                    –
            Operating activities from discontinued operations                                                        122,007        43,529,819           41,817,556
      (Increase) decrease in operating assets
            Securities owned                                                                                    (125,893,569)      (53,234,639)      (57,861,893)
            Receivable from brokers and dealers                                                                   16,979,593       (39,861,433)     (142,691,409)
            Other assets                                                                                          (7,249,671)      (11,535,788)       16,042,436
      Increase (decrease) in operating liabilities
            Securities sold, not yet purchased                                                                   124,036,930        48,301,776           88,403,414
            Payable to brokers and dealers                                                                       (53,378,373)       61,667,776            (2,121,212)
            Accrued compensation expense                                                                          (6,113,996)       29,029,978           43,755,914
            Accrued expenses and other liabilities                                                               (33,005,836)      (16,678,380)            5,966,344
               Net cash provided by operating activities                                                          32,549,480        86,185,974           87,323,215
      Cash flows from investing activities
      Proceeds from sale of Derivative Markets business                                                                    –       230,380,605                     –
      Investing activities from discontinued operations                                                                    –                  –          14,777,110
      Purchases of fixed assets and leasehold improvements                                                       (25,657,084)       (40,184,593)          (6,405,411)
      Investment in Deephaven sponsored funds                                                                    (66,326,795)       (17,724,890)        (48,917,063)
      Proceeds from (purchases of) strategic investments                                                          14,092,906         (8,967,094)          (2,604,114)
      Purchase of businesses, net of cash acquired                                                               (45,107,353)                 –         (11,373,570)
               Net cash (used in) provided by investing activities                                              (122,998,326)      163,504,028          (54,523,048)
      Cash flows from financing activities
      Stock options exercised                                                                                    22,516,960          27,192,742        14,865,537
      Cost of common stock repurchased                                                                         (147,016,329)        (78,841,155)      (34,297,186)
      Purchase of shares from minority investors in Knight Roundtable Europe Limited                                      –           (2,500,000)               –
               Net cash used in financing activities                                                           (124,499,369)        (54,148,413)      (19,431,649)
      (Decrease) increase in cash and cash equivalents                                                         (214,948,215)       195,541,589         13,368,518
      Cash and cash equivalents at beginning of the year                                                        445,539,282        249,997,693       236,629,175
      Cash and cash equivalents at end of the year                                                            $ 230,591,067       $445,539,282      $249,997,693
      Supplemental disclosure of cash flow information:
            Cash paid for interest                                                                            $    576,361        $    339,231      $    123,893
            Cash paid for income taxes                                                                        $ 52,563,496        $ 26,917,732      $ 21,391,344
      Supplemental disclosure of noncash investing activities
            Goodwill                                                                                          $ 28,500,631                          $     869,583
            Intangible assets                                                                                   20,000,000                            11,300,000
            Fixed assets                                                                                         3,000,000                                      –
            Other assets                                                                                                 –                              5,714,261
            Receivable from brokers and dealers                                                                  1,927,262                              6,497,124
            Accrued compensation expense                                                                                 –                             (2,280,533)
            Other net liabilities                                                                               (8,320,540)                          (10,726,865)
               Cash paid for purchase of business, net of cash acquired                                       $ 45,107,353                          $ 11,373,570
      *Amounts have been revised to separately disclose discontinued operations. See Note 2 “Significant Accounting Policies.”

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


48 The Knight Difference
Notes to Consolidated Financial Statements



Note 1: Organization and Description of the Business            access trading through an advanced electronic platform.
Knight Capital Group, Inc. and its subsidiaries (the            This business is now operated by Direct Trading Institutional,
“Company”) have two operating business segments,                L.P. (“Direct Trading”), a broker-dealer registered with
Asset Management and Global Markets, as well as a               the SEC and member of the NASD and the NFA.
Corporate segment. The Company’s operating business
                                                               • In October 2005, the Company acquired the business
segments from continuing operations comprise the
                                                                 of the ATTAIN ECN from Domestic Securities, Inc., a
following operating subsidiaries:
                                                                 privately held company, and certain of its shareholders.
Asset Management                                                 The business, operating under the name Direct Edge
• Deephaven Capital Management LLC (“Deephaven”) is              ECN LLC (“Direct Edge”) operates as an electronic
  the investment adviser to and sponsor of the Deephaven         communications network (“ECN”). Direct Edge is a
  investment funds (the “Deephaven Funds”). Deephaven            liquidity destination offering the ability to match trades
  also has a U.K. registered investment adviser subsidiary,      in Nasdaq National Market and Nasdaq Small Cap securi-
  which is regulated by the Financial Services Authority         ties by displaying orders in the Nasdaq Market Center or
  (“FSA”) in the U.K., and a Hong Kong registered invest-        the NASD Alternative Display Facility. Direct Edge is a
  ment adviser subsidiary, which is regulated by the Hong        broker-dealer registered with the SEC and is a member
  Kong Securities and Futures Commission.                        of the NASD.

Global Markets                                                 The Corporate segment includes all corporate overhead
• Knight Equity Markets, L.P. (“KEM”) operates as a            expenses and investment income earned on strategic
  market-maker in over-the-counter (“OTC”) equity              investments and the corporate investment in the Deephaven
  securities, primarily those traded in The Nasdaq Stock       Funds. Corporate overhead expenses primarily consist of
  Market and on the OTC Bulletin Board (“OTCBB”).              compensation for certain senior executives and other indi-
  Additionally, in December 2003, KEM acquired the busi-       viduals employed at the corporate holding company, legal
  ness of Donaldson & Co., Incorporated (“Donaldson”),         and other professional expenses related to corporate
  a firm that offers soft dollar and commission recapture      matters, investor and public relations expenses and
  services. KEM is a broker-dealer registered with the         directors’ and officers’ insurance.
  Securities and Exchange Commission (“SEC” or “Com-
                                                               Discontinued Operations
  mission”) and is a member of the National Association
                                                               The Company completed the sale of its Derivative Markets
  of Securities Dealers (“NASD”), the National Stock
                                                               business to Citigroup Financial Products Inc. (“Citigroup”)
  Exchange, the Pacific Stock Exchange and the
                                                               for $237 million in cash as of the close of business on
  National Futures Association (“NFA”).
                                                               December 9, 2004. In accordance with generally accepted
• Knight Capital Markets LLC (“KCM”) operates as a             accounting principles (“GAAP”), the results of the
  market-maker in the Nasdaq Intermarket™, the over-           Derivative Markets segment have been included within
  the-counter market for New York Stock Exchange (“NYSE”)      discontinued operations for all periods presented. For a
  and American Stock Exchange (“AMEX”) listed securities.      further discussion of the sale of the Company’s Derivative
  KCM is a broker-dealer registered with the SEC and is a      Markets business and its associated accounting treatment,
  member of the NASD.                                          see Footnote 9 “Discontinued Operations.”

• Knight Equity Markets International Limited (“KEMIL”)        Note 2: Significant Accounting Policies
  is a U.K. registered broker-dealer that provides execution   Basis of consolidation and form of presentation
  services for predominately European institutional and        The accompanying consolidated financial statements
  broker-dealer clients in U.S., European and international    include the accounts of the Company and its subsidiaries.
  equities. KEMIL is authorized and regulated by the FSA       All significant intercompany transactions and balances
  and is a member of the London Stock Exchange,                have been eliminated.
  Euronext and Deutsche Börse.
                                                               Certain prior year amounts have been reclassified to
• In June 2005, the Company acquired the business of           conform to the current year presentation.
  Direct Trading Institutional, Inc., a privately held firm
  specializing in providing institutions with direct market



                                                                                                                          Knight 49
      Notes to Consolidated Financial Statements



      Cash and cash equivalents                                      Estimated fair value of financial instruments
      Cash and cash equivalents include money market                 The Company’s securities owned and securities sold, not yet
      accounts, which are payable on demand, or short-term           purchased are carried at market value, which is estimated
      investments with an original maturity of less than             using market quotations available from major securities
      30 days. The carrying amount of such cash equivalents          exchanges, clearing brokers and dealers. Management
      approximates their fair value due to the short-term            estimates that the fair values of other financial instruments
      nature of these instruments.                                   recognized on the Consolidated Statements of Financial
                                                                     Condition (including receivables, payables and accrued
      Market-making and sales activities                             expenses) approximate their carrying values, as such finan-
      Securities owned and securities sold, not yet purchased,       cial instruments are short-term in nature, bear interest at
      which primarily consist of listed and OTC equities, are        current market rates or are subject to frequent repricing.
      carried at market value and are recorded on a trade date
      basis. Net trading revenue (trading gains, net of trading      Goodwill and intangible assets
      losses) and commissions (which includes commission             The Company applies the provisions of Statement of
      equivalents earned on institutional client orders) and         Financial Accounting Standards (“SFAS”) No. 142, Good-
      related expenses are also recorded on a trade date basis.      will and Other Intangible Assets, which requires that
                                                                     goodwill and intangible assets with an indefinite useful
      Payments for order flow and ECN rebates represent pay-         life no longer be amortized, but instead, be tested for
      ments to broker-dealer clients for directing their order       impairment annually or when an event occurs or circum-
      executions to the Company. Soft dollar and commission          stances change that signify the existence of impairment.
      recapture expense represents payments to institutions          Other intangible assets are amortized on a straight line
      in connection with soft dollar and commission recapture        basis over their useful lives.
      programs. The Company’s clearing agreements call for
      payment or receipt of interest income, net of interest         Strategic investments
      expense, for facilitating the settlement and financing         Strategic investments include equity ownership interests of
      of securities transactions.                                    less than 20% in financial services-related businesses and
                                                                     are accounted for under the equity method or at fair value.
      Asset management fees                                          The equity method of accounting is used for investments
      Deephaven earns asset management fees for sponsoring           in limited partnerships and limited liability corporations.
      and managing the Deephaven Funds. Such fees are recorded       The fair value of investments, recorded in the Company’s
      monthly as earned and are calculated as a percentage of        broker-dealer subsidiaries, for which a quoted market or
      the Deephaven Funds’ monthly net assets, plus a percent-       dealer price is not available for the size of the Company’s
      age of a new high net asset value (the “Incentive Allocation   investment, is based on management’s estimate. Among
      Fee”), as defined, for any six month period ended June 30th    the factors considered by management in determining the
      or December 31st. A new high net asset value is generally      fair value of investments are the cost of the investment,
      defined as the amount by which the net asset value of the      terms and liquidity, developments since the acquisition of the
      Deephaven Funds exceeds the greater of either the highest      investment, the sales price of recently issued securities,
      previous net asset value in the Deephaven Funds or the         the financial condition and operating results of the issuer,
      net asset value at the time each investor made a purchase.     earnings trends and consistency of operating cash flows,
      The Incentive Allocation Fee may increase or decrease dur-     the long-term business potential of the issuer, the quoted
      ing the year based on the performance of the Deephaven         market price of securities with similar quality and yield that
      Funds. If Deephaven’s Market Neutral Master Fund, which        are publicly traded, and other factors generally pertinent to
      contains approximately 50% of assets under management,         the valuation of investments. The fair value of these invest-
      recognizes a loss in the second half of a calendar year, the   ments is subject to a high degree of volatility and may be
      Incentive Allocation Fee is recalculated on an annual rather   susceptible to significant fluctuations in the near term.
      than a semi-annual basis. As such, the Incentive Allocation
      Fee may be negative for certain periods, but not lower
      than zero on a year-to-date basis.




50 The Knight Difference
Investments that are classified as available-for-sale are          of the leases. The Company capitalizes certain costs associ-
reported at fair value with unrealized gains and losses            ated with the acquisition or development of internal-use
excluded from earnings and reported, in Accumulated                software and amortizes the software over its estimated
other comprehensive income, net of tax within Stock-               useful life of three years, commencing at the time the
holders’ equity on the Consolidated Statements of                  software is placed in service.
Financial Condition. Investments not recorded in the
Company’s broker-dealer subsidiaries which do not                  Writedown of fixed assets
have a readily determinable fair value, are recorded               Writedowns of fixed assets are recognized when it is
at amortized cost.                                                 determined that the fixed assets are impaired. The amount
                                                                   of the impairment writedown is determined by the differ-
Strategic investments are reviewed on an ongoing basis             ence between the carrying amount and the fair value of
to ensure that the carrying values of the investments have         the fixed asset. In determining the impairment, an esti-
not been impaired. If the Company assesses that an impair-         mated fair value is obtained through research and inquiry
ment loss on a strategic investment has occurred due to            of the market. Fixed assets are reviewed for impairment
declines in fair value or other market conditions, the             on a quarterly basis.
investment is written down to impairment value.
                                                                   Lease loss accrual
Treasury stock                                                     It is the Company’s policy to identify excess real estate
The Company records its purchases of treasury stock at cost        capacity and where applicable, accrue for such future
as a separate component of Stockholders’ equity. The Com-          costs. In determining the accrual, a nominal cash flow
pany obtains treasury stock through purchases in the open          analysis is performed for lease losses initiated prior to
market or through privately negotiated transactions.               December 31, 2002, the effective date of SFAS No. 146
                                                                   Accounting for Costs Associated with Exit or Disposal
Foreign currencies                                                 Activities, and costs related to the excess capacity are
The functional currency of the Company’s foreign subsidiaries      accrued. For lease losses initiated after December 31,
is the U.S. dollar. Assets and liabilities in foreign currencies   2002, the Company’s policy is to accrue future costs
are translated into U.S. dollars using current exchange rates      related to excess capacity using a discounted cash
at the date of the Consolidated Statements of Financial            flow analysis.
Condition. Revenues and expenses are translated at aver-
age rates during the periods. Gains or losses resulting from       Income taxes
foreign currency transactions are included in Investment           The Company records deferred tax assets and liabilities for
income and other on the Company’s Consolidated                     the expected future tax consequences of temporary differ-
Statements of Operations. Prior to its liquidation, Knight         ences between the financial reporting and tax bases of
Securities Japan’s (“KSJ”) functional currency was the             assets and liabilities and measures them using the enacted
Japanese yen. The foreign exchange gains and losses                tax rates and laws that will be in effect when such differ-
resulting from the translation of the financial statements         ences are expected to reverse. The Company evaluates
of KSJ were included within a separate component of                the recoverability of future tax deductions by assessing
Stockholders’ equity until KSJ’s liquidation. As discussed         the adequacy of future expected taxable income from all
in Footnote 9 “Discontinued Operations,” in the second             sources, including reversal of temporary differences and
quarter of 2003, KSJ ceased its operations, and its results,       forecasted operating earnings. Net deferred tax assets
including the effects of translation, are included with            and liabilities are included in Other assets and Accrued
Income (loss) from discontinued operations, net of tax             expenses and other liabilities, respectively, on the
on the Consolidated Statements of Operations.                      Consolidated Statements of Financial Condition.

Depreciation, amortization and occupancy                           Discontinued operations
Fixed assets are being depreciated on a straight-line basis        In accordance with SFAS No. 144, Accounting for the
over their estimated useful lives of three to seven years.         Disposal of Long-Lived Assets, the revenues and expenses
Leasehold improvements are being amortized on a straight-          associated with a separate segment or reporting unit that
line basis over the shorter of the life of the related office
lease or the expected useful life of the assets. The Company
records rent expense on a straight-line basis over the lives



                                                                                                                               Knight 51
      Notes to Consolidated Financial Statements



      has been disposed of through closure or sale are included           The Company records the fair market value of restricted
      within Income (loss) from discontinued operations, net of           awards on the date of grant as unamortized stock-based
      tax, on the Consolidated Statements of Operations for all           compensation in Stockholders’ equity and amortizes
      periods presented.                                                  the balance to compensation expense ratably over the
                                                                          vesting period.
      We have revised our 2004 and 2003 Consolidated State-
      ments of Cash Flows to separately disclose the operating            The Company plans on adopting SFAS No. 123-R, Share-
      and investing portions of the cash flows attributable to our        Based Payment, using the “modified prospective method”
      discontinued operations. We had previously reported these           for its first quarter of 2006. We do not expect the adoption
      amounts on a combined basis.                                        of this statement to have a greater effect on our financial
                                                                          condition, results of operations or cash flows than the pro
      Stock-based compensation                                            forma effect in 2005 as disclosed in the table above.
      The Company applies Accounting Principles Board
      Opinion No. 25, Accounting for Stock Issued to                      Prior to the adoption of SFAS No. 123-R the Company
      Employees (“APB 25”) and related interpretations in                 applied a nominal vesting approach for employee stock-
      accounting for its stock option plans. As options are               based compensation awards with retirement eligible
      granted at the then market value, no compensation                   provisions. Under the nominal vesting approach, the
      expense has been recognized for the fair values of the              Company recognized compensation cost over the vest-
      options granted to employees.                                       ing period and, if the employee retired before the end
                                                                          of the vesting period, the Company recognized any
      Had compensation expense for the Company’s options                  remaining unrecognized compensation cost at the date
      been determined based on the fair value at the grant                of retirement. For stock-based payments issued after the
      dates in accordance with SFAS No. 123, Accounting for               adoption of SFAS No. 123-R the Company will apply a
      Stock-Based Compensation, the Company’s net income                  non-substantive vesting period approach whereby expense
      and earnings per share amounts for the years ended                  is accelerated for those employees that receive awards
      December 31, 2005, 2004 and 2003, respectively, would               and are eligible to retire prior to the award vesting. The
      have been as follows (in millions, except per share data):          impact of this change in the vesting approach would not
                                              2005     2004      2003     have had a material impact on the results of operations
      Net income, as reported                $66.4    $91.1     $38.1     for the periods presented herein.
      Pro forma compensation expense
        determined under fair value based                                 Other
        method, net of tax                    (5.5)     (6.7)     (9.4)   The preparation of financial statements in conformity
      Pro forma net income                    60.8     84.4      28.7     with GAAP requires management to make estimates and
      Basic earnings per share,
                                                                          assumptions that affect the reported amounts of assets
        as reported                           0.64     0.81      0.34
      Diluted earnings per share,
                                                                          and liabilities and disclosure of contingent assets and
        as reported                           0.62     0.77      0.32     liabilities at the date of the financial statements and the
      Pro forma basic earnings per share      0.59     0.75      0.26     reported amounts of revenues and expenses during
      Pro forma diluted earnings per share    0.57     0.72      0.24     the reporting period. Actual results may differ from
                                                                          those estimates.
      The fair value of each option granted is estimated as of
      its respective grant date using the Black-Scholes option-
      pricing model with the following assumptions:

                                              2005    2004      2003
      Dividend yield                           0.0%    0.0%      0.0%
      Expected volatility                     40.0%   40.0%     65.0%
      Risk-free interest rate                  3.5%    3.8%      3.0%
      Expected life (in years)                 3.5     4.0       4.0




52 The Knight Difference
Note 3: Securities Owned and Securities Sold,                 at December 31, 2005, related to the Global Markets busi-
Not Yet Purchased                                             ness segment. Goodwill is net of accumulated amortization
Securities owned and securities sold, not yet purchased       of $21.9 million recorded through December 31, 2001,
are carried at market value and consist of the following      the effective date the Company adopted SFAS No. 142.
(in millions):                                                Goodwill increased by $28.5 million in 2005 resulting from
                                                              the purchase of the businesses now operating as Direct
December 31,                                  2005     2004
                                                              Trading and Direct Edge.
Securities owned:
  Equities                                $372.0     $245.5   At December 31, 2005, the Company had intangible
  U.S. government obligations                8.4        9.0   assets, net of accumulated amortization, of $29.8 million,
                                          $380.4     $254.5   all included within the Global Markets business segment.
                                                              Substantially all of the intangible assets, net of accumu-
Securities sold, not yet purchased:
                                                              lated amortization, resulted from the purchases of the
  Equities                                $345.5     $221.4
                                                              Donaldson business, which represents $10.8 million of
                                          $345.5     $221.4
                                                              the balance, and the Direct Trading business, which repre-
                                                              sents $18.8 million of the balance. These amounts primarily
Note 4: Receivable from/Payable to Brokers
                                                              represent customer relationships. The carrying value of
and Dealers
                                                              these intangible assets is being amortized on a straight-
At December 31, 2005 and 2004, amounts receivable
                                                              line basis over the remaining estimated useful lives, which
from and payable to brokers and dealers consist of the
                                                              we have determined to range from two to thirty years.
following (in millions):
                                                              In 2005, the Company recorded amortization expense
December 31,                                  2005     2004
Receivable:
                                                              related to its intangible assets of $1.8 million. The esti-
 Clearing brokers and other               $182.0     $145.4   mated amortization expense relating to the intangible
 Securities failed to deliver               42.1       64.5   assets for each of the next five years approximates
 Deposits for securities borrowed            5.7       35.0   $2.9 million for the next two years and $2.8 million
                                          $229.8     $244.9   in the next three years thereafter.

Payable:                                                      The chart below summarizes the activity of the Company’s
  Clearing brokers and other              $  0.9     $ 47.8   Goodwill and Intangible assets, net of accumulated amor-
  Securities failed to receive              34.2       40.7   tization, from continuing operations, for 2004 and 2005
                                          $ 35.1     $ 88.5   (in millions):
                                                                                                             Global Markets
In 2004, the Company established a full reserve of                                                                   Intangible
$6.5 million against a receivable from a trading counter-                                                 Goodwill       Assets
party related to a trading dispute. This dispute is now       Balance at January 1, 2004                    $16.7       $12.0
the subject of an NASD arbitration claim filed by KEM.        Other goodwill and intangibles                  2.5          0.2
                                                              Amortization expense                              –         (0.6)
Note 5: Goodwill and Intangible Assets                        Balance at December 31, 2004                   19.2        11.5
Goodwill and intangible assets with indefinite useful         Purchase of Direct Trading business            20.7        20.0
lives are tested for impairment annually or when an event     Purchase of ATTAIN ECN business                 7.8            –
                                                              Amortization expense                              –         (1.8)
occurs or circumstances change that signify the existence
                                                              Balance at December 31, 2005                  $47.7       $29.8
of impairment. As part of the test for impairment, the
Company considers the profitability of the respective seg-
                                                              The acquisition of the business of Direct Trading contains
ment or reporting unit, an assessment of the fair value
                                                              a two-year contingency from the date of closing for addi-
of the respective segment or reporting unit as well as the
                                                              tional consideration based on profitability of the business.
overall market value of the Company compared to its
                                                              The acquisition of Direct Edge also contains a four-year
net book value.
                                                              contingency from the date of closing for additional con-
In June 2005, the Company tested for the impairment of        sideration based on meeting certain revenue and client
goodwill and intangible assets and concluded that there       retention metrics.
was no impairment. The goodwill balance of $47.7 million


                                                                                                                            Knight 53
      Notes to Consolidated Financial Statements



      Note 6: Investment in Deephaven-Sponsored Funds                  the Company sold its entire Nasdaq equity investment
      and Strategic Investments                                        during 2005 for $36.9 million. Based on an adjusted cost
      The Company’s wholly-owned subsidiary, Deephaven, is the         of $15.2 million, the Company recognized a pre-tax gain of
      investment adviser and sponsor of the Deephaven Funds,           $21.7 million on the Nasdaq sale. The gains on the sales
      which engage in various trading strategies involving equities,   of the ISE and Nasdaq investments are included in Invest-
      debt instruments and derivatives. The underlying invest-         ment income and other on the Company’s Consolidated
      ments in the Deephaven Funds are carried at market value.        Statements of Operations.
      Of the $2.9 billion and $3.6 billion of assets under manage-
                                                                       Note 7: Significant Clients
      ment in the Deephaven Funds as of December 31, 2005 and
      2004, respectively, the Company had corporate investments        The Company considers significant clients to be those
      of $281.7 million and $215.3 million, respectively. Addi-        institutions who account for 10% or more of the total
      tionally, Other assets on the Consolidated Statements of         U.S. equity dollar value traded by the Company during
      Financial Condition at December 31, 2005 and December 31,        the period. One client accounted for approximately 10.7%
      2004 included $17.2 million and $19.9 million, respectively,     of the Company’s U.S. equity dollar value traded during
      of investments in the Deephaven Funds related to employee        2005. Payments for order flow to this firm for U.S. equity
      deferred compensation plans. In addition, certain officers,      order flow amounted to $3.4 million during 2005.
      directors and employees of the Company had direct invest-        The Company’s corporate investment in the Deephaven
      ments of approximately $3.7 million and $5.2 million in the      Funds of $281.7 million as of December 31, 2005,
      Deephaven Funds, in the aggregate, as of December 31, 2005       accounted for 9.8% of total assets under management
      and 2004, respectively.                                          as of December 31, 2005. One institutional investor
      Included in Investment income and other on the Company’s         accounted for 10.1% of the Deephaven Funds’ assets
      Consolidated Statements of Operations is income from             under management as of December 31, 2005.
      the Company’s corporate investments in the Deephaven             Note 8: Writedown of Assets and Lease Loss Accrual
      Funds of $16.3 million, $12.8 million and $23.9 million
                                                                       Writedown of assets and lease loss accrual from continuing
      for the years ended December 31, 2005, 2004 and
                                                                       operations during 2005, 2004 and 2003 were $10.1 million,
      2003, respectively.
                                                                       $3.8 million, and $16.5 million, respectively. The charges
      In connection with the sale of the Derivative Markets            in 2005 consist of $4.5 million of costs associated with
      business (see Footnote 9, “Discontinued Operations”)             excess real estate capacity and a writedown of fixed assets
      and in light of the reorganization of the Company’s busi-        related to the move from the Company’s 525 Washington
      ness segments, the Company transferred its investments           Boulevard facility in Jersey City, N.J., and an additional
      in the International Securities Exchange, Inc. (“ISE”) and       $5.5 million in costs associated with excess real estate
      The Nasdaq Stock Market, Inc. (“Nasdaq”), which were             capacity at our 545 Washington Boulevard facility in
      previously held by its broker-dealer subsidiaries, to a cor-     Jersey City, N.J. The charges in 2004 consist of $3.8 million
      porate investment holding company. During the first quarter      of costs associated with excess real estate capacity, primarily
      of 2005, these equity investments became marketable and,         in Jersey City, N.J. The charges in 2003 primarily consist
      accordingly, were accounted for as equity securities under       of $9.6 million of lease loss accruals related to costs asso-
      SFAS No. 115 Accounting for Certain Investments in Debt          ciated with excess real estate capacity, primarily in Jersey
      and Equity Securities and were classified as available-for-      City, N.J., and $6.8 million related to the writedown of
      sale securities. In conjunction with the ISE’s initial public    our strategic investment in Nasdaq to fair value.
      and secondary offerings, the Company sold approximately
                                                                       Note 9: Discontinued Operations
      70% of its original equity investment in the ISE during
      2005 for $41.1 million. Based on an original cost of             Derivative Markets
      $6.9 million, the Company recognized a pre-tax gain of           The Company completed the sale of its Derivative Markets
      $34.2 million. As of December 31, 2005, the Company              business to Citigroup for approximately $237 million in
      owned 743,000 shares of common stock of the ISE,                 cash as of the close of business on December 9, 2004. The
      which had an aggregate fair value and amortized cost             decision to sell the Derivative Markets segment was based
      of $20.4 million and $2.9 million, respectively. In addition,    on a review of the overall options industry, the capital and
                                                                       risk required to maintain this business successfully and the
                                                                       business’ role in the Company’s long-term strategy. In


54 The Knight Difference
accordance with SFAS No. 144, Accounting for the Disposal                                                                    2003
of Long-Lived Assets, the results of the Derivative Markets                                                 Derivative          Global
                                                                                                             Markets       Markets (KSJ)      Total
segment, the revenues and expenses associated with
                                                                    Revenues                                 $147.1             $ 0.9      $148.1
these businesses as well as all costs associated with the           Pre-tax (loss) from
sale transaction have been included in Income (loss) from             discontinued operations
discontinued operations, net of tax on the Consolidated               before minority interest               $ (17.4)           $(16.1)    $ (33.6)
Statements of Operations for all periods presented. The             Minority interest in losses
                                                                      of KSJ                                         –             6.5         6.5
final purchase price of approximately $237 million in cash,
                                                                    Pre-tax (loss) from
was subject to adjustment based on the final determina-               discontinued operations                   (17.4)             (9.7)    (27.1)
tion of the book value of the Derivative Markets segment            Income tax (benefit)                         (6.5)             (7.6)    (14.1)
at the time the deal closed. The result of this adjustment          (Loss) from discontinued
and other expenses related to the sale resulted in addi-              operations, net of tax                 $ (10.9)           $ (2.1)    $ (13.0)
tional income of $122,000, net of tax, in 2005. For the
year ended December 31, 2004, the net gain on the                   The Loss from discontinued operations, net of tax for
sale of the Derivative Markets business of $80 million is           2003 includes $7.6 million in income tax benefits related
included in Income (loss) from discontinued operations,             to cumulative losses at KSJ. As tax benefits could not be
net of tax.                                                         recognized until there were offsetting profits or the com-
                                                                    mencement of the liquidation process, no tax benefit
Global Markets – Knight Securities Japan                            had previously been accrued. Additionally, included in
On March 31, 2003, the Company and its joint venture                the loss from the Derivative Markets business in 2003 is
partner, Nikko Cordial Group, announced that Knight                 $18.5 million, net of tax, in charges primarily related to
Securities Japan (“KSJ”) would cease its operations. KSJ’s          the impairment of intangible assets.
business plan was significantly impaired due to changes in
market structure, the withdrawal of Nasdaq Japan, poor              Note 10: Fixed Assets and Leasehold Improvements
market conditions and limited market-making opportuni-              Fixed assets and leasehold improvements comprise the
ties in Japan. As a result, trading operations ceased at KSJ        following (in millions):
on May 2, 2003. After the cessation of trading, the parties
                                                                                                            Depreciation
liquidated KSJ, and all charges related to this liquidation         December 31,                                 Period           2005       2004
were incurred during the second quarter of 2003.                    Computer hardware
                                                                      and software                              3 years   $ 93.2           $ 90.1
The revenues and results of operations of the discontinued          Leasehold improvements                 Life of Lease*   57.0             47.4
operations for 2005, 2004, and 2003 are summarized as               Telephone systems                           5 years      8.7              7.6
follows (in millions):                                              Furniture and fixtures                      7 years      6.0              7.0
                                                                    Trading systems                             5 years      0.4              1.8
                                                             2005   Equipment                                   5 years      2.1              1.8
                                                       Derivative                                                          167.4            155.7
                                                         Markets
                                                                    Less-Accumulated
Revenues                                                 $     –      depreciation and
Pre-tax gain on sale of Derivative Markets business,                  amortization                                               99.8       101.4
  net of transaction-related costs                       $   0.2                                                               $ 67.7      $ 54.4
Income tax expense                                           0.1
Income from discontinued operations, net of tax          $   0.1    *Shorter of Life of Lease or Useful Life of Assets


                                                           2004     Note 11: Commitments and Contingent Liabilities
                                                       Derivative   In the ordinary course of business, the nature of the
                                                        Markets
Revenues                                                 $176.8
                                                                    Company’s business subjects it to claims, lawsuits, regula-
Pre-tax income from discontinued operations,                        tory examinations and other proceedings. The results of
  before sale of business                                $ 35.5     these matters cannot be predicted with certainty. There
Pre-tax gain on sale of Derivative Markets business,                can be no assurance that these matters will not have a
  net of transaction-related costs                        128.5
                                                                    material adverse effect on the Company’s results of opera-
Pre-tax income from discontinued operations               164.0
                                                                    tions in any future period and a material judgment could
Income tax expense                                         63.1
Income from discontinued operations, net of tax          $100.9



                                                                                                                                               Knight 55
      Notes to Consolidated Financial Statements



      have a material adverse impact on the Company’s financial         on January 1, 2004, are for three-year terms, the first of
      condition and results of operations. However, it is the opin-     which ends on December 31, 2006. The agreements include
      ion of management, after consultation with legal counsel          an option for renewal by the Deephaven managers through
      that, based on information currently available, the ultimate      2009 under certain circumstances. Pursuant to the terms
      outcome of these matters will not have a material adverse         of a simultaneously executed option agreement between
      impact on the business, financial condition or operating          the Company and the Deephaven managers, in the event
      results of the Company although they might be material            of a change of control of the Company during the initial
      to the operating results for any particular period, depend-       three-year employment term, the Deephaven managers
      ing, in part, upon operating results for that period.             would have the option (the “Option”) to obtain a 51%
                                                                        interest in Deephaven in exchange for the termination of
      The Company leases office space under noncancelable               their employment contracts and associated profit-sharing
      operating leases. Certain office leases contain fixed             bonuses and other employee profit-sharing plans, which
      rent escalation clauses. Rental expense, from continuing          in the aggregate range from 42% to 50% of the pre-tax,
      operations, under the office leases was $9.2 million,             pre-profit sharing profits of Deephaven during the term of
      $10.4 million and $9.9 million in 2005, 2004 and 2003,            the agreements, subject to meeting certain annual guaran-
      respectively, and is included in Occupancy and equipment          teed amounts. If a change of control of the Company were
      rentals on the Consolidated Statements of Operations.             to occur, and if the Deephaven managers exercised the
      The Company leases certain computer and other equipment           Option, the Company would retain a 49% interest in
      under noncancelable operating leases. In addition, the Com-       Deephaven. In addition, during the life of the Option,
      pany has entered into guaranteed employment contracts             the agreements provide that the Company may not sell
      with certain of its employees. As of December 31, 2005,           Deephaven without the approval of the Deephaven
      future minimum rental commitments under all noncancel-            managers.
      able office, computer and equipment leases (“Operating            Note 12: Regulatory Charges and Related Matters
      Leases”), and guaranteed employment contracts longer
                                                                        In June 2005, Deephaven announced that it and a former
      than one year (“Other Obligations”) were as follows
                                                                        Deephaven employee had received Wells Notices from the
      (in millions):
                                                                        staff of the Division of Enforcement of the SEC. The Wells
      Lease & Contract Obligations                                      Notice to Deephaven indicated that the staff was consider-
                                      Operating      Other              ing recommending that the Commission bring a civil
                                         Leases Obligations     Total
                                                                        injunctive action against Deephaven alleging that Deephaven
      Year ending December 31, 2006    $ 11.1       $26.5     $ 37.6
                                                                        violated the anti-fraud provisions of the securities laws in
      Year ending December 31, 2007      10.7        13.3       24.0
                                                                        connection with trading activity associated with certain
      Year ending December 31, 2008      10.5        11.0       21.5
      Year ending December 31, 2009      10.1         8.0       18.1    Private Investments in Public Equities (“PIPEs”). On
      Year ending December 31, 2010       9.5           –        9.5    February 9, 2006, Deephaven announced that it had
      Thereafter through                                                submitted an offer of settlement to the staff of the SEC,
        October 31, 2021                110.1           –      110.1    which the staff has agreed to recommend to the Com-
                                       $162.0       $58.8     $220.8    mission, to resolve the investigation covered by the Wells
                                                                        Notice received by Deephaven. The offer of settlement is
      During the normal course of business, the Company                 subject to final agreement on the settlement papers and
      collateralizes certain leases or other contractual obliga-        final approval by the SEC. Under the terms of the offer
      tions through letters of credit or segregated funds held in       of settlement, Deephaven would disgorge approximately
      escrow accounts. As of December 31, 2005, the Company             $2.7 million, pay approximately $343,000 in pre-judgment
      has provided an $8.0 million letter of credit, collateralized     interest and pay approximately $2.7 million as a civil penalty.
      by U.S. Treasury Bills, as a guarantee for one of the             During 2005, the Company recorded a $5.7 million pre-
      Company’s lease obligations.                                      tax charge relating to this matter, included in Regulatory
                                                                        charges and related matters on the Consolidated State-
      The Company entered into long-term employment
                                                                        ments of Operations. The Company did not record a tax
      contracts with the members of the senior management
                                                                        benefit for the $2.7 million penalty.
      team of Deephaven (the “Deephaven managers”) in 2003.
      These employment agreements, which became effective



56 The Knight Difference
On December 16, 2004, Knight Securities L.P., (“KSLP,” now                    and pay approximately $13.2 million in interest and
known as KEM) concluded a settlement with the SEC and                         $25.0 million in penalties, for a total of $79.3 million,
NASD (the “Settlement”). The Settlement resolved the                          which is recorded as Regulatory charges and related
matters for which KSLP received Wells Notices in March                        matters on the Consolidated Statements of Operations.
2004 from the staffs of the SEC and NASD but did not                          These amounts were paid in full in the fourth quarter of
address Wells Notices received by certain former employ-                      2004. The Company did not record a tax benefit for the
ees of KSLP. The terms of the Settlement provided that                        $25.0 million penalty.
KSLP disgorge $41.1 million in institutional trading profits,


Note 13: Comprehensive Income
Comprehensive income includes net income and changes                          Other comprehensive income, net of tax, represents net
in equity except those resulting from investments by, or                      unrealized gains on the Company’s strategic investment
distributions to, stockholders. Comprehensive income is                       in the ISE for 2005.
as follows (in millions):


For the years ended December 31,                                                                                       2005       2004      2003
Net income                                                                                                        $66.4         $91.1      $38.1
Other comprehensive income, net of tax:
  Foreign currency translation loss adjustment                                                                        –             –        3.4
  Net unrealized gains on investment securities held as available-for-sale                                         10.4             –          –
Total comprehensive income, net of tax                                                                            $76.7         $91.1      $41.4



Note 14: Earnings per Share
Basic earnings per common share (“EPS”) has been calcu-                       The following is a reconciliation of the numerators and
lated by dividing net income by the weighted-average shares                   denominators of the basic and diluted earnings per share
of Class A Common Stock outstanding during each respec-                       computations for the years ended December 31, 2005,
tive period. Diluted EPS reflects the potential reduction in                  2004 and 2003 (in millions, except per share data):
EPS using the treasury stock method to reflect the impact
of common share equivalents if stock awards such as stock
options and restricted stock were exercised or converted
into common stock.


For the years ended December 31,                                             2005                       2004                      2003
                                                                Numerator/ Denominator/      Numerator/ Denominator/     Numerator/ Denominator/
                                                                net income       shares      net income       shares     net income       shares
Income and shares used in basic calculations                         $66.4           103.5      $91.1         112.4           $38.1       112.0
Effect of dilutive stock-based awards                                    –             3.4          –           5.2               –         5.7
Income and shares used in diluted calculations                       $66.4           106.9      $91.1         117.6           $38.1       117.7

Basic earnings per share                                                            $ 0.64                   $ 0.81                      $ 0.34

Diluted earnings per share                                                          $ 0.62                   $ 0.77                      $ 0.32




                                                                                                                                              Knight 57
      Notes to Consolidated Financial Statements



      Note 15: Employee Benefit Plan                                    Included within Nondeductible charges in the preceding
      The Company sponsors 401(k) profit sharing plans (the             chart is the effect of the $2.7 million and $25.0 million
      “Plans”) in which substantially all of its employees are          penalties in 2005 and 2004, respectively, related to the
      eligible to participate. Under the terms of the Plans,            regulatory charges described in Footnote 12, for which
      the Company is required to make annual contributions              no tax benefit was recorded.
      to the Plans equal to 100% of the contributions made
                                                                        Deferred income taxes reflect the net tax effects of
      by its employees, up to annual limits. The total expense,
                                                                        temporary differences between the financial reporting
      from continuing operations, recognized with respect to
                                                                        and tax bases of assets and liabilities and are measured
      the Plans and included in Employee compensation and
                                                                        using the enacted tax rates and laws that will be in effect
      benefits on the Consolidated Statements of Operations,
                                                                        when such differences are expected to reverse. Significant
      was as follows (in millions):
                                                                        components of the Company’s deferred tax assets and
      For the years ended December 31,                                  liabilities at December 31, 2005, 2004 and 2003 are as
      2005                                                      $3.3    follows (in millions):
      2004                                                       3.5
      2003                                                       3.1                                          2005     2004      2003
                                                                        Deferred tax assets:
      Note 16: Income Taxes                                               Employee compensation and
                                                                            benefit plans                   $ 14.8    $ 13.1    $ 4.0
      The Company and its subsidiaries file a consolidated                Fixed assets and other
      federal income tax return as well as combined state                   amortizable assets                 3.3      9.7        8.3
      income tax returns in certain jurisdictions. In other               Reserves                             8.9      8.4        9.2
      jurisdictions, the Company and its subsidiaries file                Valuation of investments             0.3      2.7        2.8
      separate company state income tax returns.                          State net operating loss
                                                                            carryforwards, net of federal
                                                                            tax benefit                        3.0      3.3        2.7
      The provision for income taxes consists of (in millions):
                                                                          U.K. net operating
                                           2005      2004       2003        loss carryforwards               27.8      27.1      24.3
      Current:                                                            Less: Valuation allowance
       U.S. federal                       $38.1    $15.2      $28.9         on U.K. net operating
                                                                            loss carryforwards               (27.8)    (27.1)    (24.3)
       U.S. state and local                (2.2)     2.6        5.2
                                                                        Total deferred tax assets             30.3      37.2      27.0
                                           35.9     17.8       34.1
                                                                        Deferred tax liabilities
      Deferred:
                                                                          Valuation of investments            14.1      10.9       9.2
       U.S. federal                         1.3      (6.5)      (0.9)
                                                                        Net deferred tax assets             $ 16.2    $ 26.3    $ 17.8
       U.S. state and local                 1.7      (2.0)      (0.7)
                                            3.0      (8.5)      (1.6)
      Provision for income taxes          $38.9    $ 9.3      $32.5     At December 31, 2005, the Company had state net
                                                                        operating loss carryforwards for tax purposes, up to
      The preceding table does not reflect the tax effects of           approximately $101.7 million. These state net operating
      unrealized gains on available for sale securities and             loss carryforwards expire between 2011 and 2012. The
      translation adjustments. The tax effect of these items is         Company also had U.K. net operating loss carryforwards
      recorded directly in Stockholders’ equity. Stockholders’          of approximately $92.8 million which may be carried
      equity decreased by $7.1 million and $2.2 million in 2005         forward indefinitely. The Company has recorded a
      and 2003, respectively, as a result of these tax effects.         valuation allowance for the full amount of these
                                                                        U.K. tax loss carryforwards.
      The following table reconciles the provision to the U.S.
      federal income tax (benefit) at statutory rate (in millions):     Note 17: Long-Term Incentive Plans
                                           2005      2004       2003    The Company has established the Knight Capital Group, Inc.
      U.S. federal income tax (benefit)                                 1998 Long-Term Incentive Plan, the Knight Capital Group,
        at statutory rate                 $36.8     $(0.2)    $29.3     Inc. 1998 Nonemployee Director Stock Option Plan and
      U.S. state and local income tax                                   the Knight Capital Group, Inc. 2003 Equity Incentive Plan
        (benefit), net of U.S. federal
        income tax effect                  (0.3)      0.3       2.9
                                                                        (collectively, the “Plans”). The purpose of the Plans is to
      Nondeductible charges                 1.5       9.6       1.0     provide long-term incentive compensation to employees
      Other, net                            0.9      (0.4)     (0.7)    and directors of the Company. The Plans are administered
      Income tax expense                  $38.9     $ 9.3     $32.5     by the Compensation Committee of the Company’s Board

58 The Knight Difference
of Directors, and allow for the grant of options, restricted     The Company’s policy is to grant options for the purchase
stock and restricted stock units (collectively, the “awards”),   of shares of Class A Common Stock at not less than market
as defined by the Plans. The maximum number of shares            value, which the Plans define as the average of the high and
of Class A Common Stock reserved for the grant of                low sales prices on the date prior to the grant date. Options
awards under the Plans is now 37,819,000, subject to             generally vest over a three- or four-year period and expire
adjustment, of which, 6,045,806 are available for grant          on the fifth or tenth anniversary of the grant date, pursuant
at December 31, 2005. In addition, the Plans limit the           to the terms of the agreements. Restricted stock awards
number of options or shares that may be granted to a             generally vest over three years. The Company has the
single individual and the Plans also limit the number of         right to fully vest employees in their option grants and
shares of restricted stock that may be awarded.                  awards upon retirement and in certain other circumstances.
                                                                 The following is a reconciliation of option activity for the
                                                                 Plans for 2005 and 2004, and a summary of options
                                                                 outstanding and exercisable at December 31, 2005:


                                                                                       2005                         2004
                                                                                            Weighted-                      Weighted-
                                                                                             Average                        Average
                                                                               Number of     Exercise        Number of      Exercise
                                                                                 Options        Price          Options          Price
Outstanding at January 1                                                    16,787,884        $ 9.20       19,525,279        $ 8.39
Granted at market value                                                      3,092,814          9.30         2,526,021        10.31
Exercised                                                                   (3,952,173)         5.70        (4,527,202)        6.01
Surrendered                                                                 (2,689,698)        19.11          (736,214)       11.16
Outstanding at December 31                                                  13,238,827        $ 8.26       16,787,884        $ 9.20

Vested at December 31                                                         8,735,568       $ 7.76       10,297,784        $10.42

Available for future grants at December 31*                                   6,045,806                     8,259,980

Weighted-average fair value of grants during the year
 (at market value, based on Black-Scholes)                                                    $ 4.03                         $ 4.57
*Represents both options and awards available for grant


                                                                            Options Outstanding                Options Exercisable
                                                                                Weighted-
                                                                                  Average     Weighted-                   Weighted-
                                                                                Remaining       Average        Number      Average
Range of                                                         Outstanding Contractual        Exercise   Exercisable     Exercise
Exercise Prices                                                   at 12/31/05         Life         Price   at 12/31/05        Price
$ 3.64 – $ 4.22                                                   2,421,601          2.01       $ 4.16      2,420,614        $ 4.16
$ 4.43 – $ 5.97                                                   3,597,415          1.65         5.59      3,290,694          5.63
$ 6.06 – $ 8.85                                                   2,249,759          5.19         7.39      1,256,239          7.13
$ 9.20 – $13.85                                                   3,988,512          8.44        10.12        857,586         10.54
$13.90 – $29.66                                                     813,040          3.11        17.86        741,935         18.20
$30.44 – $71.38                                                     168,500          3.12        45.56        168,500         45.56



The Company applies APB 25 and related interpretations           The Company granted a total of 1,828,036 restricted shares
in accounting for its stock option plans. As options are         of Class A Common Stock, net of all cancelled restricted
granted at the then market value, no compensation                shares, to certain current employees of the Company under
expense has been recognized for the fair values of the           the Plans in 2005. At December 31, 2005, the Company
options granted to employees.                                    had 3,016,703 restricted shares outstanding, in aggregate,
                                                                 both under and outside of the Plans. The Company recog-
                                                                 nizes compensation expense for the fair values of the

                                                                                                                                     Knight 59
      Notes to Consolidated Financial Statements



      restricted shares of Class A Common Stock granted to             Note 19: Net Capital Requirements
      employees ratably over the vesting period. The restricted        Our U.S. registered broker-dealers are subject to the SEC’s
      stock requires future service as a condition of the vesting      Uniform Net Capital Rule, which requires the maintenance
      of the underlying shares of common stock. In 2005, the           of minimum net capital. Additionally, our foreign registered
      Company recorded compensation expense, from con-                 broker-dealers are subject to capital adequacy requirements
      tinuing operations, of $13.4 million for its outstanding         of their respective regulatory authorities. As of December 31,
      restricted shares. This amount has been included in              2005, our significant broker-dealer subsidiaries, KEM and
      Employee compensation and benefits in the                        KCM, were in compliance with their capital adequacy
      Consolidated Statements of Operations.                           requirements. The following table sets forth their net
                                                                       capital levels and requirements at December 31, 2005,
      Note 18: Financial Instruments with Off-Balance
                                                                       as filed in their respective regulatory filings (in millions):
      Sheet Risk and Concentrations of Credit Risk
      As a market-maker of equities, the majority of the                                                          Minimum     Excess
                                                                                                           Net         Net       Net
      Company’s securities transactions are conducted as princi-       Entity                           Capital     Capital   Capital
      pal or riskless principal with broker-dealer and institutional   KEM                               $99.1        $6.1    $93.0
      counterparties primarily located in the United States. The       KCM                                34.4         3.3     31.1
      Company clears the majority of its securities transactions
      through clearing brokers. Foreign transactions are settled       Note 20: Business Segments
      pursuant to a global custody and clearing agreement with         The Company currently has two operating business
      a major U.S. bank. Substantially all of the Company’s credit     segments, Global Markets and Asset Management, and a
      exposures are concentrated with its clearing brokers and         Corporate segment. The Global Markets segment primarily
      the bank (the “clearing agents”). These clearing agents          represents the businesses that provide comprehensive trade
      may re-hypothecate certain securities held on behalf of          execution services in U.S. equities. The Asset Management
      the Company. Additionally, pursuant to the terms of the          segment consists of investment management and sponsor-
      agreement between the Company and the clearing agents,           ship of the Deephaven Funds. The Corporate segment
      the clearing agents have the right to charge the Company         includes all corporate overhead expenses and investment
      for all losses that result from a counterparty’s failure to      income earned on strategic investments and the Company’s
      fulfill its contractual obligations. The Company has the         corporate investment in the Deephaven Funds. Corporate
      ability to pursue collection from or performance with regard     overhead expenses primarily consist of compensation for
      to this right. The Company’s policy is to monitor the credit     certain senior executives and other individuals employed
      standing of the clearing brokers and all counterparties          at the corporate holding company, legal and other profes-
      with which it conducts business.                                 sional expenses relating to corporate matters, investor
                                                                       and public relations expenses and directors’ and officers’
      Securities sold, not yet purchased represent obligations
                                                                       insurance.
      to purchase such securities (or underlying securities) at a
      future date. The Company may incur a loss if the market          In 2004, the Company sold one of its business segments,
      value of the securities subsequently increases.                  Derivative Markets. The revenues and expenses associated
                                                                       with Derivative Markets have been included within Income
      The Company currently has no loans to any former or
                                                                       (loss) from discontinued operations, net of tax on the
      current executive officers or directors.
                                                                       Consolidated Statements of Operations for all periods
                                                                       presented. For a discussion of discontinued operations as
                                                                       well as a breakout of discontinued operations by business
                                                                       segment, see Footnote 9, “Discontinued Operations.”




60 The Knight Difference
The Company’s revenues, income (loss) from continuing                                      segment are summarized below (in millions).
operations before income taxes and total assets by

                                                                                                                 Asset         Global                    Consolidated
                                                                                                           Management         Markets      Corporate             Total
For the year ended December 31, 2005:
  Revenues                                                                                                         $89.8      $470.7          $ 74.2           $ 634.6
  Income from continuing operations before income taxes1                                                            20.8        35.1            49.3              105.2
  Total assets                                                                                                      82.4       996.1           337.5            1,416.0
For the year ended December 31, 2004:
  Revenues                                                                                                         $78.2      $531.0          $ 16.6           $ 625.8
  (Loss) income from continuing operations before income taxes2                                                     29.6        (13.2)          (16.9)              (0.5)
  Total assets                                                                                                      76.8       797.9           519.3            1,394.0
For the year ended December 31, 2003:
  Revenues                                                                                                         $58.4      $459.0          $ 28.5           $ 545.9
  Income (loss) from continuing operations before income taxes3                                                     29.5        55.3             (1.2)             83.6
  Total assets4                                                                                                     39.6       706.7           275.6            1,022.0
(1)   Income from continuing operations before income taxes for December 31, 2005 includes $10.1 million in Writedown of assets and lease loss accrual
      (described in Footnote 8) and $5.7 million in Regulatory charges and related matters (described in Footnote 12).
(2)   (Loss) income from continuing operations before income taxes for December 31, 2004 includes $3.8 million in Writedown of assets and lease loss accrual
      (described in Footnote 8) and $79.3 million in Regulatory charges and related matters (described in Footnote 12).
(3)   Income (loss) from continuing operations before income taxes for December 31, 2003 includes $16.5 million in Writedown of assets and lease loss accrual
      (described in Footnote 8).
(4)   Total assets does not include Assets within discontinued operations of $2.94 billion at December 31, 2003.



Note 21: Subsequent Events
In January 2006, the Company agreed to acquire Hotspot
FX, Inc., an industry-leading electronic foreign exchange
marketplace that provides access to electronic foreign
exchange spot trade executions through an advanced
ECN-based platform, for approximately $77.5 million in
cash. The acquisition is expected to close shortly and is
subject to customary closing conditions.




                                                                                                                                                                      Knight 61
      Notes to Consolidated Financial Statements



      Note 22: Condensed Financial Statements of                                             Condition, Operations and Cash Flows for the Company
      Knight Capital Group, Inc. (parent only)                                               on an unconsolidated basis.
      Presented below are the Condensed Statements of Financial

      Statements of Financial Condition
      Knight Capital Group, Inc. (parent only)
      December 31,                                                                                                               2005            2004
      Assets
       Cash and cash equivalents                                                                                      $   19,631,035     $207,502,727
       Securities owned, at market value                                                                                   8,355,588        8,895,742
       Investments in subsidiaries, equity method                                                                        844,461,203      660,175,749
       Investments in Deephaven sponsored funds                                                                          116,515,653       59,666,741
       Strategic investments                                                                                              11,418,453        9,682,070
       Other assets                                                                                                       18,960,399       28,320,343
         Total assets                                                                                                 $1,019,342,331     $974,243,372

      Liabilities and Stockholders’ Equity
      Liabilities
        Accrued compensation expense                                                                                  $   12,907,113     $ 21,423,293
        Accrued expenses and other liabilities                                                                             2,605,237        2,539,649
        Payable to subsidiaries                                                                                          155,473,111       52,964,083
        Income taxes payable                                                                                              24,908,721       46,114,453
          Total liabilities                                                                                              195,894,182      123,041,478
          Total stockholders’ equity                                                                                     823,448,149      851,201,894
          Total liabilities and stockholders’ equity                                                                  $1,019,342,331     $974,243,372
      The accompanying notes are an integral part of these condensed financial statements.




      Statements of Operations
      Knight Capital Group, Inc. (parent only)
      For the years ended December 31,                                                                              2005          2004           2003
      Revenues
       Equity in earnings of subsidiaries                                                                    $58,523,089 $ 87,523,708     $27,119,304
       Corporate management fees                                                                              24,260,604   29,445,158      24,432,677
       Investment income and other                                                                             8,635,792    7,359,866      17,029,237
         Total revenues                                                                                       91,419,485 124,328,732       68,581,218

      Expenses
        Compensation expense                                                                                  14,326,736     22,175,453  20,279,738
        Professional fees                                                                                      6,512,269      4,873,597   3,840,406
        Business development                                                                                     460,384      2,001,365   2,218,373
        Other                                                                                                  4,792,445      4,498,769   3,552,477
          Total expenses                                                                                      26,091,834     33,549,184  29,890,994
      Income before income taxes                                                                              65,327,651     90,779,548  38,690,224
      Income tax (benefit) expense                                                                            (1,033,254)      (352,358)    616,751
      Net income                                                                                             $66,360,905 $   91,131,906 $38,073,473
      The accompanying notes are an integral part of these condensed financial statements.




62 The Knight Difference
Statements of Cash Flows
Knight Capital Group, Inc. (parent only)
For the years ended December 31,                                                                              2005            2004              2003
Cash flows from operating activities
Net income                                                                                          $ 66,360,905     $ 91,131,906      $ 38,073,473
Adjustments to reconcile net income to net cash provided by operating activities
   Equity in earnings of subsidiaries                                                                 (58,523,089)    (87,523,708)       (27,119,304)
   Amortization                                                                                            40,000          23,333                  –
   Stock-based compensation                                                                             2,850,848       2,932,288          1,193,725
   Income tax credit from stock options exercised                                                       6,625,852      11,392,768          7,433,289
(Increase) decrease in operating assets
   Securities owned                                                                                       540,154       2,250,099          1,723,427
   Receivable from subsidiaries                                                                                 –      45,627,072        (45,898,322)
   Income taxes receivable                                                                                      –               –         22,327,416
   Other assets                                                                                         9,319,551     (28,144,909)        25,891,868
Increase (decrease) in operating liabilities
   Accrued compensation expense                                                                        (8,516,180)      7,951,750          2,759,123
   Accrued expenses and other liabilities                                                                  65,588         256,199           (418,469)
   Payable to subsidiaries                                                                            102,509,028      54,370,363        (10,232,621)
   Income taxes payable                                                                               (21,205,732)     36,992,313          9,122,140
     Net cash provided by operating activities                                                        100,066,925     137,259,474         24,855,745
Cash flows from investing activities
Investment in Deephaven sponsored funds                                                               (56,848,912)     (23,499,375)      112,520,639
(Purchases of) proceeds from strategic investments                                                     (1,736,383)       (6,924,733)         (532,379)
Dividends received from subsidiaries                                                                   38,994,784     138,349,426         58,810,327
Capital contributions to subsidiaries                                                                (143,848,737)     (13,512,219)     (176,141,254)
     Net cash (used in) provided by investing activities                                             (163,439,248)      94,413,099         (5,342,667)
Cash flows from financing activities
Stock options exercised                                                                                22,516,960    27,192,742           15,003,287
Cost of common stock repurchased                                                                     (147,016,329)  (78,841,155)         (34,297,186)
     Net cash used in financing activities                                                           (124,499,369)  (51,648,413)         (19,293,899)
(Decrease) increase in cash and cash equivalents                                                     (187,871,692) 180,024,160               219,179
Cash and cash equivalents at beginning of the year                                                    207,502,727    27,478,567           27,259,388
Cash and cash equivalents at end of the year                                                        $ 19,631,035 $207,502,727 $           27,478,567
Supplemental disclosure of cash flow information:
   Cash paid for interest                                                                           $    576,361     $    189,241      $    106,353
   Cash paid for income taxes                                                                       $ 52,563,496     $ 26,917,732      $ 21,391,344
The accompanying notes are an integral part of these condensed financial statements.




Knight Capital Group, Inc. (parent only)                                               B. Income taxes
Notes to Condensed Financial Statements                                                As stated in Footnote 16, the Company and its subsidiaries
A. General                                                                             file a consolidated federal income tax return as well as
The condensed financial statements of Knight Capital                                   combined state income tax returns in certain jurisdictions.
Group, Inc. (parent only; the “Parent Company”) should                                 In other jurisdictions, the Company and its subsidiaries
be read in conjunction with the Consolidated Financial                                 file separate state income tax returns. As such, both
Statements of the Company and the notes thereto.                                       federal and state income taxes are accrued at the
                                                                                       subsidiary level and are included in Equity in earnings
                                                                                       (losses) of subsidiaries on the Condensed Financial
                                                                                       Statements. Income tax expense included on the
                                                                                       Condensed Financial Statements represents only the
                                                                                       income taxes attributable to the Parent Company.



                                                                                                                                                   Knight 63
      Management‘s Report on Internal Control Over Financial Reporting



      Knight Capital Group Inc.’s (“Knight”) management is           Because of its inherent limitations, internal control over
      responsible for establishing and maintaining adequate          financial reporting may not prevent or detect misstate-
      internal control over financial reporting. Internal control    ments. Projections of any evaluation of effectiveness to
      over financial reporting is defined in Rule 13a-15(f) and      future periods are subject to the risks that controls may
      15d-15(f) under the Securities Exchange Act of 1934, as        become inadequate because of changes in conditions, or
      amended, as a process designed by, or under the super-         that the degree of compliance with the policies or proce-
      vision of, the company’s principal executive and principal     dures may deteriorate.
      financial officers and effected by the company’s board of
      directors, management and other personnel to provide           Management assessed the effectiveness of Knight’s internal
      reasonable assurance regarding the reliability of financial    control over financial reporting as of December 31, 2005.
      reporting and the preparation of financial statements for      In making this assessment, management used the criteria
      external purposes in accordance with generally accepted        set forth by the Committee of Sponsoring Organizations
      accounting principles and includes those policies and          of the Treadway Commission in Internal Control –
      procedures that:                                               Integrated Framework.

      • pertain to the maintenance of records that, in reasonable    Based on our assessment, Knight’s management has
        detail, accurately and fairly reflect the transactions and   concluded that, as of December 31, 2005, internal
        dispositions of the assets of Knight;                        control over financial reporting is effective.

      • provide reasonable assurance that transactions are           Knight management’s assessment of the effectiveness
        recorded as necessary to permit preparation of finan-        of the Company’s internal control over financial report-
        cial statements in accordance with generally accepted        ing as of December 31, 2005 has been audited by
        accounting principles, and that receipts and expendi-        PricewaterhouseCoopers LLP, an independent registered
        tures of the company are being made only in                  public accounting firm, as stated in their report which
        accordance with authorizations of management                 appears herein.
        and directors of Knight; and

      • provide reasonable assurance regarding prevention
        or timely detection of unauthorized acquisition, use
        or disposition of the company’s assets that could have
        a material effect on the financial statements.




64 The Knight Difference
Report of Independent            Registered Public Accounting Firm



To the Board of Directors and Stockholders of                   Internal control over financial reporting
Knight Capital Group, Inc.                                      Also, in our opinion, management’s assessment, included
We have completed integrated audits of Knight Capital           in Management’s Report on Internal Control Over Financial
Group, Inc.’s 2005 and 2004 consolidated financial state-       Reporting appearing on page 64, that the Company main-
ments and of its internal control over financial reporting      tained effective internal control over financial reporting
as of December 31, 2005, and an audit of its 2003 con-          as of December 31, 2005, based on criteria established
solidated financial statements in accordance with the           in Internal Control – Integrated Framework issued by
standards of the Public Company Accounting Oversight            the Committee of Sponsoring Organizations of the Tread-
Board (United States). Our opinions on Knight Capital           way Commission (COSO), is fairly stated, in all material
Group, Inc.’s 2005, 2004, and 2003 consolidated finan-          respects, based on those criteria. Furthermore, in our
cial statements and on its internal control over financial      opinion, the Company maintained, in all material respects,
reporting as of December 31, 2005, based on our audits,         effective internal control over financial reporting as of
are presented below.                                            December 31, 2005, based on criteria established in
                                                                Internal Control – Integrated Framework issued by COSO.
Consolidated financial statements                               The Company’s management is responsible for maintain-
In our opinion, the consolidated financial statements           ing effective internal control over financial reporting and
listed in the accompanying index present fairly, in all         for its assessment of the effectiveness of internal control
material respects, the financial position of Knight Capital     over financial reporting. Our responsibility is to express
Group, Inc. and its subsidiaries (the “Company”) at             opinions on management’s assessment and on the effec-
December 31, 2005 and 2004, and the results of their            tiveness of the Company’s internal control over financial
operations and their cash flows for each of the three years     reporting based on our audit. We conducted our audit
in the period ended December 31, 2005 in conformity with        of internal control over financial reporting in accordance
accounting principles generally accepted in the United States   with the standards of the Public Company Accounting
of America. These financial statements are the responsi-        Oversight Board (United States). Those standards require
bility of the Company’s management. Our responsibility is       that we plan and perform the audit to obtain reasonable
to express an opinion on these financial statements based       assurance about whether effective internal control over
on our audits. We conducted our audits of these statements      financial reporting was maintained in all material respects.
in accordance with the standards of the Public Company          An audit of internal control over financial reporting
Accounting Oversight Board (United States). Those stan-         includes obtaining an understanding of internal control
dards require that we plan and perform the audit to obtain      over financial reporting, evaluating management’s assess-
reasonable assurance about whether the financial state-         ment, testing and evaluating the design and operating
ments are free of material misstatement. An audit of            effectiveness of internal control, and performing such
financial statements includes examining, on a test basis,       other procedures as we consider necessary in the circum-
evidence supporting the amounts and disclosures in the          stances. We believe that our audit provides a reasonable
financial statements, assessing the accounting principles       basis for our opinions.
used and significant estimates made by management,
and evaluating the overall financial statement presenta-
tion. We believe that our audits provide a reasonable
basis for our opinion.




                                                                                                                        Knight 65
      Report of Independent             Registered Public Accounting Firm



      A company’s internal control over financial reporting is a       Because of its inherent limitations, internal control over
      process designed to provide reasonable assurance regard-         financial reporting may not prevent or detect misstate-
      ing the reliability of financial reporting and the preparation   ments. Also, projections of any evaluation of effectiveness
      of financial statements for external purposes in accordance      to future periods are subject to the risk that controls may
      with generally accepted accounting principles. A company’s       become inadequate because of changes in conditions, or
      internal control over financial reporting includes those         that the degree of compliance with the policies or proce-
      policies and procedures that (i) pertain to the maintenance      dures may deteriorate.
      of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of
      the company; (ii) provide reasonable assurance that trans-       PricewaterhouseCoopers LLP
      actions are recorded as necessary to permit preparation of       New York, New York
      financial statements in accordance with generally accepted       March 14, 2006
      accounting principles, and that receipts and expenditures
      of the company are being made only in accordance with
      authorizations of management and directors of the
      company; and (iii) provide reasonable assurance regarding
      prevention or timely detection of unauthorized acquisition,
      use, or disposition of the company’s assets that could have
      a material effect on the financial statements.




66 The Knight Difference
Management Team and Board of Directors



As of March 14, 2006


Management Team                                                                    Board of Directors

Thomas M. Joyce*                                                                   Thomas M. Joyce
Chairman & Chief Executive Officer                                                 Chairman & Chief Executive Officer,
                                                                                   Knight Capital Group, Inc.
Business Segments
Asset Management                                                                   Charles V. Doherty 1,2,3
                                                                                   Lead Director,
Colin J. Smith                                                                     Knight Capital Group, Inc.
Deephaven Capital Management                                                       Retired Managing Director,
                                                                                   Madison Advisory Group
Global Markets
James P. Smyth*                                                                    William L. Bolster 1,3
Broker-Dealer                                                                      Retired Co-Chairman & Chief Executive Officer,
                                                                                   CNBC International
Gregory C. Voetsch*
Institutional                                                                      Gary R. Griffith 1,2
                                                                                   Independent Financial Consultant
Disciplines
Leonard J. Amoruso                                                                 Robert M. Lazarowitz 1,3
Compliance                                                                         Former Executive Vice President,
                                                                                   Knight Capital Group, Inc.
Bronwen Bastone
Human Resources                                                                    Thomas C. Lockburner 1,2
                                                                                   Retired Audit Partner,
John B. Howard*                                                                    Deloitte & Touche LLP
Accounting & Finance
                                                                                   James T. Milde 1,3
Thomas M. Merritt*                                                                 Senior Vice President & Chief Information Officer,
Legal                                                                              United Rentals, Inc.

Steven J. Sadoff                                                                   Rodger O. Riney 1,3
Technology                                                                         President,
                                                                                   Scottrade, Inc.
Margaret E. Wyrwas
Corporate Communications & Investor Relations
                                                                                   1   Member, Nominating and Corporate Governance Committee

                                                                                   2   Member, Finance and Audit Committee

* These executive officers are required under Section 16(a) of the Exchange Act    3   Member, Compensation Committee
  to file reports of ownership and changes in ownership on Forms 3, 4 and 5
  with the Securities and Exchange Commission (“SEC”) and the Nasdaq Stock
  Market. Further detail is available in Knight Capital Group, Inc.’s 2005 proxy
  filing with the SEC, also located on our website at www.knight.com.




                                                                                                                                               Knight 67
      Corporate Headquarters and Offices



      Corporate Headquarters            Global Markets                    509 Madison Avenue
      545 Washington Boulevard                                            Suite 2002
      Jersey City, New Jersey 07310     2859 Paces Ferry Road             New York, NY 10022
      Telephone: 201.222.9400           Atlanta, Georgia 30339            Telephone: 212.284.9927
      Fax: 201.557.6853                 Telephone: 800.438.4284           Fax: 212.284.9928
      Toll Free: 800.544.7508           Fax: 770.333.9050
                                        Telephone: 800.222.4891           100 Manhattanville Road




                                                                                                                Concept and Design: www.crittgraham.com Copywriting: Margaret E. Wyrwas, Kara A. Fitzsimmons, Margaret K. Morley, Molly K. McDowell Photography: George Lange Printing: ACME Printing Co. LLC
                                        Fax: 770.333.1096                 Purchase, New York 10577
      Asset Management                                                    Telephone: 914.251.5800
                                        200 State Street, Suite 11B       Fax: 914.251.5812
      Deephaven Capital Management      Boston, Massachusetts 02109       Toll Free: 800.677.8746
                                        Telephone: 617.912.3200
      Main Office                       Fax: 617.912.3250                 One Independence Plaza
      130 Cheshire Lane, Suite 102      Toll Free: 800.771.8099           280 Highway 35
      Minnetonka, Minnesota 55305                                         Red Bank, New Jersey 07701
      Telephone: 952.249.5700           225 West Washington Street        Telephone: 732.747.3461
      Fax: 952.249.5320                 Suite 300                         Fax: 732.747.3462
                                        Chicago, Illinois 60606
      Suite 5603, The Center            Telephone: 312.553.8305           One Market Street
      99 Queens Road, Central           Fax: 312.553.8345                 Spear Tower, Suite 1810
      Hong Kong                         Toll Free: 800.279.7695           San Francisco, California 94105
      Telephone: 852.3555.6000                                            Telephone: 415.541.3920
      Fax: 852.3555.6111                990 Stewart Avenue, Suite 620     Fax: 415.896.6139
                                        Garden City, New York 11530       Toll Free: 866.612.7095
      6 Gracechurch Street, 1st Floor   Telephone: 866.202.1095
      London, EC3V 0AT                  Fax: 516.214.5296                 4699 Old Ironsides Drive, Suite 300
      United Kingdom                                                      Santa Clara, California 95054
      Telephone: 44.20.7469.1900        600 East Las Colinas Boulevard    Telephone: 408.855.0800
      Fax: 44.20.7469.1850              Suite 2222                        Fax: 408.492.1290
                                        Irving, Texas 75039
                                        Telephone: 800.421.9955           Regus Business Centre
                                        Fax: 972.865.0400                 Water Garden II
                                                                          1601 Cloverfield Boulevard
                                        545 Washington Boulevard          2nd Floor, South Tower, Suite 2058
                                        Jersey City, New Jersey 07310     Santa Monica, California 90404
                                        Telephone: 201.222.9400           Telephone: 415.541.3920
                                        Fax: 201.557.6853                 Fax: 310.828.2661
                                        Toll Free: 800.544.7508

                                        Guildhall House
                                        81-87 Gresham Street, 4th Floor
                                        London, EC2V 7NQ
                                        United Kingdom
                                        Telephone: 44.20.7997.2200
                                        Fax: 44.20.7997.2220




68 The Knight Difference
Annual Meeting                                               Outside Counsel
The 2006 Annual Meeting will take place at 1:00 p.m. EDT     Skadden, Arps, Slate, Meagher & Flom LLP
on Wednesday, May 10, 2006, at Knight’s Corporate            4 Times Square
Headquarters, 545 Washington Boulevard, Jersey City,         New York, New York 10036
New Jersey 07310.                                            www.skadden.com

Common Stock                                                 Consolidated Subsidiaries
The Class A Common Stock is listed in the Nasdaq National    For a list of our regulated broker-dealer subsidiaries,
Market System under the symbol “NITE.” Public trading        please refer to our Annual Report on SEC Form 10-K.
of the Company’s Class A Common Stock commenced on
July 8, 1998. The Company’s common stock underwent a         Transfer Agent and Registrar
2-for-1 stock split on May 14, 1999, at the close of busi-   Mellon Investor Services LLC
ness. The current CUSIP number is 499005 10 6.               P.O. Box 3315
                                                             South Hackensack, New Jersey 07606-1915
Dividend Policy                                              800.851.9677
The Company has never declared or paid a cash dividend       www.melloninvestor.com
on its Class A Common Stock.

Corporate Website                                            Knight Capital Group, Inc. provides its offerings through its Asset
                                                             Management and Global Markets business segments. Services
www.knight.com                                               offered by Knight’s Asset Management business are provided by
                                                             Deephaven Capital Management LLC, a registered investment
                                                             adviser with the U.S. Securities and Exchange Commission (SEC).
Publications
                                                             Securities and services for the Global Markets business are offered
Copies of the Annual Report, the Annual Report on            by Knight’s regulated broker-dealer subsidiaries duly registered with
SEC Form 10-K, Quarterly Reports on SEC Form 10-Q,           the SEC, which are: Knight Capital Markets LLC (member National
                                                             Association of Securities Dealers (NASD) and Securities Investor
Current Reports on SEC Form 8-K, Forms 3, 4 and 5            Protection Corporation (SIPC)); Knight Equity Markets, L.P. (member
filed on behalf of directors and executive officers, Proxy   NASD, SIPC, National Stock Exchange, Pacific Stock Exchange and the
Statements, press releases and general information are       National Futures Association (NFA)); Direct Edge ECN LLC (member
                                                             NASD and SIPC); and Direct Trading Institutional, L.P. (member NASD,
available through the corporate website, by calling          SIPC and NFA). Securities and services are also provided by Knight
Investor and Shareholder Relations at 201.356.1723,          Equity Markets International Limited (member London Stock
                                                             Exchange, Euronext and Deutsche Börse, and regulated by the
or by writing Investor and Shareholder Relations at the
                                                             Financial Services Authority in the U.K.).
Corporate Headquarters address.
                                                             Unless the context otherwise requires, the “Company,” “Knight,” “We,” or
                                                             “Our” shall mean Knight Capital Group, Inc. and its consolidated subsidiaries.
Contact Information
Analyst, Investor, Media and Public Relations inquiries      Certain statements contained in this annual report, including without limitation,
                                                             those under “Management’s Discussion and Analysis of Financial Condition and
should be directed to Margaret Wyrwas, Senior Managing       Results of Operations” (MD&A) and statements containing the words “believes,”
Director, Corporate Communications & Investor Relations,     “intends,” “expects,” “anticipates” and words of similar import, may constitute
                                                             forward-looking statements as defined in the Private Securities Litigation Report
by writing to the Corporate Headquarters address, or by      Act of 1995. These forward-looking statements are not historical facts and are
calling 201.557.6954. Media inquiries may be directed to     based on current expectations, estimates and projections about the Company’s
                                                             industry, management’s beliefs and certain assumptions made by management,
Kara Fitzsimmons, Vice President, Corporate Communications
                                                             many of which, by their nature, are inherently uncertain and beyond our control.
at 201.356.1523. Public Relations inquiries may be           Accordingly, readers are cautioned that any such forward-looking statements are
directed to Greta Morley, Vice President, Marketing          not guarantees of future performance and are subject to certain risks, uncertain-
                                                             ties and assumptions that are difficult to predict including, without limitation,
Communications & Public Relations at 201.557.6948.           risks associated with the costs and integration, performance and operation of
Investor and Shareholder inquiries may be directed           businesses recently acquired, or being acquired, by the Company. Since such
                                                             statements involve risks and uncertainties, the actual results and performance
to Investor and Shareholder Relations, by writing to the     of the Company may turn out to be materially different from the results
Corporate Headquarters address, or by calling                expressed or implied by such forward-looking statements. Given these uncertain-
                                                             ties, readers are cautioned not to place undue reliance on such forward-looking
201.356.1723.                                                statements. Unless otherwise required by law, the Company also disclaims any
                                                             obligation to update its view of any such risks or uncertainties or to announce
                                                             publicly the result of any revisions to the forward-looking statements made in
Independent Auditor
                                                             this report. Readers should carefully review the risks and uncertainties detailed
PricewaterhouseCoopers LLP                                   under “Certain Factors Affecting Results of Operations” in the MD&A herein
300 Madison Avenue                                           and in other reports or documents the Company files from time to time with
                                                             the Securities and Exchange Commission. This discussion should be read in
New York, New York 10017                                     conjunction with the Company’s Consolidated Financial Statements and the
www.pwc.com                                                  Notes thereto contained in this report.
The science of trading. The standard of trust.           TM




Corporate Headquarters
545 Washington Boulevard, Jersey City, New Jersey 07310
Telephone: 201.222.9400 Fax: 201.557.6853 Toll Free: 800.544.7508
Nasdaq: NITE
www.knight.com

				
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