Knight’s strategy isn’t dependent upon a dramatic turn of market, economic or global events. Rather, Knight seeks to fine-tune its business model to make progress toward long-term profitability.       CHALLENGING MARKET ENVIRONMENT While Knight experienced tremendous internal change during 2002, the environment outside of Knight changed little. Investor confidence, which collapsed at the close of 2001, remained in a trough throughout 2002 and into 2003. The retail investors who once turned to the public equity markets to fund their futures abandoned stocks for cash. The Sarbanes-Oxley Act was a significant step toward enhancing corporate governance but has yet to rekindle investor trust. The action – or inaction, as it were – of institutional money managers reflected the disillusionment of their mutual and pension fund customers, as well as the lingering aftermath of the market’s burst bubble. Knight and its fellow market participants continued to struggle with declining dollar volumes and decimalization’s shrinking effect on spreads. As share values tumbled, share volume became an increasingly unreliable predictor of revenue. While volumes rose in OTC Bulletin Board stocks, where Knight handles the bulk of trading, these low-priced securities offered less revenue capture opportunity for the firm. For those who remain after the consolidation that is sweeping the industry, braving the market means encountering rising market fragmentation. Liquidity in Nasdaq stocks is increasingly divided among market participants using Nasdaq’s SuperMontageSM, exchanges with Unlisted Trading Privileges and ECNs. Knight has the connectivity to gather the liquidity necessary to complete trades for its clients, but not all participants utilize the same technology or fee structure. Accessing their liquidity is neither simple nor cost-effective. These are the same issues that plagued the securities industry in 2001, but a new challenge inserted itself into the mix during 2002. Geopolitical turmoil, exemplified by the tragic events of September 11th and the War on Terrorism, has pushed the markets into a state of instability not seen since the fall of 1990. Today, investor apprehension continues to be reflected in pressured market indices and erratic volume trends. PATHWAY TO PROFITABILITY Uncertainty. Low dollar volumes. Fragmentation. Consolidation. They’re all words the securities industry expects to use again and again through the coming year when describing the market environment. So Knight’s strategy, set forth by new management in the second half of 2002, isn’t dependent upon a dramatic turn of market, economic or global events. While Knight’s business model has been severely tested, the company believes fine-tuning rather than outright rejection of the model will bring the desired result: progress toward long-term profitability. A key step forward is the initiative to build an enhanced institutional business. Knight already has the trading platform, liquidity and capital commitment that make it a natural magnet for institutions with their specific demands for large block trading capabilities, discretion and low impact. In order to fully realize the potential of this business segment, Knight is building and enhancing products and tools and is adding experienced personnel to the institutional team. In light of market structure changes, the broker-dealer business must transition. The value of Knight’s most important strategic asset – liquidity – must be recognized and appropriately reflected through changes to pricing models and fee structures. In addition, Knight will continue to rationalize this business line through aggressive management of expenses, greater automation for trade execution and inventory management protocols, and reductions in payment for order flow, without sacrificing optimal service for its clients. Knight will continue to focus on expense management. It made deep cuts to its staff in 2002 and early 2003. The search for further efficiencies throughout all operations, including trading, technology, facilities and clearing, continues. Knight looks to address inefficiencies outside of its operations, as well, by actively supporting regulatory proposals designed to level the playing field for all market participants. And, as always, Knight protects its strong balance sheet. Ample cash and zero long-term debt remain a safety net within an increasingly complex setting.