Note 1: Organization and Description of the Business Note 2: Significant Accounting Policies Note 3: Securities Owned and Securities Sold, Not Yet Purchased Note 4: Receivable From/Payable to Brokers and Dealers Note 5: Goodwill and Intangible Assets Note 6: Investment in Deephaven Sponsored Fund Note 7: Significant Customers Note 8: International Charges Note 9: Writedown of Assets and Lease Loss Accrual Note 10: Fixed Assets and Leasehold Improvements Note 11: Commitments and Contingent Liabilities Note 12: Earnings Per Share Note 13: Employee Benefit Plan Note 14: Income Taxes Note 15: Long-Term Incentive Plans Note 16: Financial Instruments With Off-Balance Sheet Risk and Concentrations of Credit Risk Note 17: Net Capital Requirements Note 18: Subsequent Events Note 19: Business Segments Note 20: Condensed Financial Statements of Knight Trading Group, Inc. (Parent Only) Note 11: COMMITMENTS AND CONTINGENT LIABILITIES The nature of the Company’s business subjects it to claims, lawsuits, regulatory examinations and other proceedings in the ordinary course of business.The results of these matters cannot be predicted with certainty. There can be no assurance that these matters will not have a material adverse effect on the Company’s results of operations in any future period and a substantial judgment could have a material adverse impact on the Company’s financial condition and results of operations. However, it is the opinion of management, after consultation with legal counsel that, based on information currently available, the ultimate outcome of these matters will not have a material adverse impact on the business, financial condition or operating results of the Company. The Company leases office space under noncancelable operating leases. The office leases contain certain escalation clauses whereby the rental commitments may be increased if certain conditions are satisfied and specify yearly adjustments to the lease amounts based on annual adjustments to the Consumer Price Index. Rental expense under the office leases was as follows:     The Company leases certain computer and other equipment under noncancelable operating leases. In addition, the Company has entered into guaranteed employment contracts with certain of its employees. As of December 31, 2002, future minimum rental commitments under all noncancelable office leases, and computer and equipment leases, guaranteed employment contracts longer than one year and other commitments (“Other Obligations”) were as follows:     During the normal course of business, the Company collaterizes certain leases, employment agreements or other contractual obligations through letters of credit or segregated funds held in escrow accounts. As of December 31, 2002, the Company has provided an $11.0 million letter of credit, collateralized by U.S. Treasury Bills, as a guarantee for one of the Company’s lease obligations. In addition, the Company has agreed to provide letters of credit or maintain escrow accounts, if requested, to collateralize employment contracts in an aggregate amount of approximately $10.1 million. As of December 31, 2002, the Company has $3.2 million in an escrow account to collateralize such obligations. The Company has an agreement with one of its subsidiaries’ clearing brokers, obligating the Company to generate and pay clearing fees totaling a minimum of $12.0 million during an 18-month period from the commencement of clearing services, which is expected to commence within the next three months. At December 31, 2002, KSJ, a joint venture operation of which the Company owns 60%, has one daylight overdraft facility with a Japanese financial institution for 2 billion yen.The intraday credit facility is used to facilitate the daily gross settlement of securities transactions and bear market rates of interest in Japan. In January 2002, KSJ entered into a 5 billion yen daylight overdraft facility with an affiliate of Nikko Cordial Group, the owner of the remaining 40% interest in the joint venture. Pursuant to the terms of the loan contract, both the Company and Nikko are required to guarantee liabilities arising from the overdraft facility in their respective percentages of ownership.This overdraft facility expired in February 2003 and has not been renewed. The Company has agreements with the International Securities Exchange, L.L.C. (the “ISE”) to purchase Class A and Class B membership interests of ISE with a total purchase price of approximately $28.5 million.The ISE demutualized on May 31, 2002 and as a result, the Company received shares of the ISE representing both equity interest and trading rights. In accordance with the purchase agreement, the Company made an initial payment at the time of the closing with further periodic payments to be made in the future based on a fixed dollar amount per contract traded. As the ISE has a call option on the memberships, the Company capitalizes the exchange memberships at a fixed dollar amount per contract traded. As of December 31, 2002, the Company had capitalized $4,272,500 of Equity Interest (Class A) and $8,991,842 of Trading Rights (Class B).These amounts are included in Strategic investments and Other assets, respectively, on the Statements of Financial Condition. The Company is not obligated to make future payments; however, the Company would forfeit its equity interest and its trading rights if it failed to meet its minimum payment obligations under the contract.