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 16: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK As a market maker of OTC and listed stocks and listed options contracts, the majority of the Company’s securities transactions are conducted as principal with broker-dealer and institutional counterparties primarily located in the United States. The Company clears all of its securities transactions through clearing brokers. Accordingly, a substantial portion of the Company’s credit exposures are concentrated with its clearing brokers.The clearing brokers can rehypothecate the securities held on behalf of the Company. Additionally, pursuant to the terms of the agreement between the Company and the clearing brokers, the clearing brokers have the right to charge the Company for losses that result from a counterparty’s failure to fulfill its contractual obligations. As the right to charge the Company has no maximum amount and applies to all trades executed through the clearing broker, the Company believes there is no maximum amount assignable to this right. At December 31, 2002, the Company has recorded liabilities of approximately $2.0 million with regard to this right. The Company has the ability to pursue collection from or performance with regard to this right. The Company’s policy is to monitor the credit standing of the clearing brokers and all counterparties with which it conducts business. Securities sold, not yet purchased represent obligations to purchase such securities (or underlying securities) at a future date. The Company may incur a loss if the market value of the securities subsequently increases. Derivative contracts are financial instruments whose value is based upon the value of the underlying asset, index, reference rate or a combination of these factors. The Company uses derivative financial instruments as part of its options market-making and trading business and its overall risk management process. These financial instruments, which generally include exchange-traded options, options on futures and futures contracts, expose the Company to varying degrees of market and credit risk.The Company records its derivative-trading activities at market value, and unrealized gains and losses are recognized currently. In November 2002, the FASB issued FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which requires the Company to disclose information about obligations under certain guarantee arrangements. FIN 45 defines a guarantee as a contract that contingently requires the Company to pay a guaranteed party based on: (a) changes in an underlying asset, liability or equity security of the guaranteed party, or (b) a third party’s failure to perform under a specified agreement. The Company considers written put and call options to be guarantees under FIN 45. In addition to the contracts described above, there are certain derivative contracts to which the Company is a counterparty that meet the characteristics of a guarantee under FIN 45. These derivatives are recorded on the Statements of Financial Condition at fair value. These contracts include written put options that may require the Company to purchase assets from the option holder at a specified price by a specified date in the future. The total intrinsic value of these derivatives that the Company deems to be guarantees was approximately $7.5 billion at December 31, 2002.The Company reduces its exposures to these contracts by entering into offsetting transactions, or by entering into contracts that hedge the market risk related to these contracts. Upon the retirement of Mr. Irvin Kessler, the former chief executive officer of Deephaven, as of December 31, 2001, the Company entered into a consulting agreement with Mr. Kessler. In order to maintain Mr. Kessler’s relationships with the Deephaven Fund investors and maintain Mr. Kessler’s continued investment in the Deephaven Fund, the Company agreed to provide Mr. Kessler with a full recourse collateralized loan of $25.0 million. On June 13, 2002, the Company entered into loan and security documents with Mr. Kessler providing for such a loan. The loan matures on March 31, 2003, and is callable at the discretion of the Company at any time, such prepayment to be made no later than 120 days after notice to Mr. Kessler of such demand for prepayment. The Company has no other loans to any former or current officers or directors.