##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005



001-14223

Commission File Number



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KNIGHT CAPITAL GROUP, INC.

(Exact name of registrant as specified in its charter)



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DELAWARE

(State or other jurisdiction of incorporation or organization)



22-3689303

(I.R.S. Employer Identification Number)



545 Washington Boulevard, Jersey City, NJ 07310

(Address of principal executive offices and zip code)



Registrants telephone number, including area code: (201) 222-9400



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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark
whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)    Yes  x    No ̈



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes ̈No  x



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:



At November 1, 2005 the number of shares outstanding of the Registrants
Class A Common Stock was 102,418,323 and there were no shares outstanding of the Registrants Class B Common Stock as of such date.



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##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



FORM 10-Q
QUARTERLY REPORT



For the Quarter Ended
September 30, 2005



TABLE OF CONTENTS



|           |  |                                                                                       |  |   
|---------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I     |  | FINANCIAL INFORMATION:                                                                |  |   
|           |  |                                                                                      
|Item 1.    |  | Financial Statements                                                                  |  | 3 
|           |  |                                                                                      
|           |  | Consolidated Statements of Operations                                                 |  | 3 
|           |  |                                                                                      
|           |  | Consolidated Statements of Financial Condition                                        |  | 4 
|           |  |                                                                                      
|           |  | Consolidated Statements of Cash Flows                                                 |  | 5 
|           |  |                                                                                      
|           |  | Notes to Consolidated Financial Statements                                            |  | 6 
|           |  |                                                                                      
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 19
|           |  |                                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 34
|           |  |                                                                                      
|Item 4.    |  | Controls and Procedures                                                               |  | 35
|           |  |                                                                                      
|PART II    |  | OTHER INFORMATION:                                                                    |  |   
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 35
|           |  |                                                                                      
|Item 2.    |  | Changes in Securities and Use of Proceeds                                             |  | 37
|           |  |                                                                                      
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 37
|           |  |                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 37
|           |  |                                                                                      
|Item 5.    |  | Other Information                                                                     |  | 37
|           |  |                                                                                      
|Item 6.    |  | Exhibits                                                                              |  | 37
|           | 
|Signatures |  | 38                                                                                   



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------



KNIGHT CAPITAL GROUP, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                  |  |                                          |             |               |                                         |             |      |  |               |             |  |   |             |  
|----------------------------------------------------------------- |  | ---------------------------------------- | ----------- | ------------- | --------------------------------------- | ----------- | ---- |  | ------------- | ----------- |  | - | ----------- | -
|                                                                  |  | For the three months ended September 30, |             |               | For the nine months ended September 30, |            
|                                                                  |  | 2005                                     |             | 2004 Restated |                                         |             | 2005 |  | 2004 Restated |            
|REVENUES                                                          |  |                                          |             |               |                                         |             |      |  |               |             |  |   |             |  
|Commissions and fees                                              |  | $                                        | 74,860,136  |               | $                                       | 58,598,744  |      |  | $             | 212,998,365 |  | $ | 203,804,800 |  
|Net trading revenue                                               |  |                                          | 52,348,902  |               |                                         | 35,906,795  |      |  |               | 116,821,896 |  |   | 197,869,499 |  
|Asset management fees                                             |  |                                          | 41,983,284  |               |                                         | 6,804,928   |      |  |               | 67,900,813  |  |   | 28,843,815  |  
|Interest and dividends, net                                       |  |                                          | 1,763,330   |               |                                         | 1,198,974   |      |  |               | 6,319,167   |  |   | 2,828,891   |  
|Investment income and other                                       |  |                                          | 13,140,857  |               |                                         | (692,318    | )    |  |               | 29,286,211  |  |   | 6,825,746   |  
|                                                                  |  |                                          |             |               |                                         |             |      |  |               |             |  |   |             |  
|Total revenues                                                    |  |                                          | 184,096,509 |               |                                         | 101,817,123 |      |  |               | 433,326,452 |  |   | 440,172,751 |  
|                                                                  |  |                                          |             |               |                                         |             |      |  |               |             |  |   |             |  
|EXPENSES                                                          |  |                                          |             |               |                                         |             |      |  |               |             |  |   |             |  
|Employee compensation and benefits                                |  |                                          | 68,267,912  |               |                                         | 50,108,698  |      |  |               | 173,319,157 |  |   | 168,463,224 |  
|Execution and clearance fees                                      |  |                                          | 24,584,539  |               |                                         | 22,042,725  |      |  |               | 71,479,360  |  |   | 88,487,337  |  
|Soft dollar and commission recapture expense                      |  |                                          | 15,902,532  |               |                                         | 14,309,230  |      |  |               | 46,036,887  |  |   | 44,321,999  |  
|Communications and data processing                                |  |                                          | 7,969,419   |               |                                         | 7,867,254   |      |  |               | 23,934,639  |  |   | 21,583,633  |  
|Professional fees                                                 |  |                                          | 6,056,274   |               |                                         | 4,265,149   |      |  |               | 14,388,019  |  |   | 11,572,279  |  
|Depreciation and amortization                                     |  |                                          | 4,209,028   |               |                                         | 3,390,310   |      |  |               | 12,245,859  |  |   | 10,870,338  |  
|Payments for order flow                                           |  |                                          | 3,857,048   |               |                                         | 4,555,323   |      |  |               | 14,843,211  |  |   | 27,416,779  |  
|Occupancy and equipment rentals                                   |  |                                          | 3,238,952   |               |                                         | 4,144,040   |      |  |               | 10,186,066  |  |   | 12,880,850  |  
|Business development                                              |  |                                          | 1,616,485   |               |                                         | 2,053,578   |      |  |               | 4,617,599   |  |   | 5,921,960   |  
|Writedown of assets and lease loss accrual                        |  |                                          | 5,509,360   |               |                                         | 874,275     |      |  |               | 10,055,252  |  |   | 3,498,261   |  
|Regulatory charges and related matters                            |  |                                          |            |               |                                         |            |      |  |               | 2,000,000   |  |   | 79,200,000  |  
|Other                                                             |  |                                          | 2,784,784   |               |                                         | (820,487    | )    |  |               | 8,864,251   |  |   | 4,118,364   |  
|                                                                  |  |                                          |             |               |                                         |             |      |  |               |             |  |   |             |  
|Total expenses                                                    |  |                                          | 143,996,333 |               |                                         | 112,790,095 |      |  |               | 391,970,300 |  |   | 478,335,024 |  
|                                                                  |  |                                          |             |               |                                         |             |      |  |               |             |  |   |             |  
|Income (loss) from continuing operations before income taxes      |  |                                          | 40,100,176  |               |                                         | (10,972,972 | )    |  |               | 41,356,152  |  |   | (38,162,273 | )
|Income tax expense (benefit)                                      |  |                                          | 16,136,536  |               |                                         | (4,367,404  | )    |  |               | 16,988,471  |  |   | (5,936,961  | )
|                                                                  |  |                                          |             |               |                                         |             |      |  |               |             |  |   |             |  
|Net income (loss) from continuing operations                      |  |                                          | 23,963,640  |               |                                         | (6,605,568  | )    |  |               | 24,367,681  |  |   | (32,225,312 | )
|Income from discontinued operations, net of tax                   |  |                                          | 387,934     |               |                                         | 5,343,961   |      |  |               | 122,007     |  |   | 14,948,350  |  
|                                                                  |  |                                          |             |               |                                         |             |      |  |               |             |  |   |             |  
|Net income (loss)                                                 |  | $                                        | 24,351,574  |               | $                                       | (1,261,607  | )    |  | $             | 24,489,688  |  | $ | (17,276,962 | )
|                                                                  |  |                                          |             |               |                                         |             |      |  |               |             |  |   |             |  
|Basic earnings per share from continuing operations               |  | $                                        | 0.24        |               | $                                       | (0.06       | )    |  | $             | 0.23        |  | $ | (0.29       | )
|                                                                  |  |                                          |             |               |                                         |             |      |  |               |             |  |   |             |  
|Diluted earnings per share from continuing operations             |  | $                                        | 0.23        |               | $                                       | (0.06       | )    |  | $             | 0.23        |  | $ | (0.29       | )
|                                                                  |  |                                          |             |               |                                         |             |      |  |               |             |  |   |             |  
|Basic and diluted earnings per share from discontinued operations |  | $                                        |            |               | $                                       | 0.05        |      |  | $             |            |  | $ | 0.13        |  
|                                                                  |  |                                          |             |               |                                         |             |      |  |               |             |  |   |             |  
|Basic earnings per share                                          |  | $                                        | 0.24        |               | $                                       | (0.01       | )    |  | $             | 0.23        |  | $ | (0.15       | )
|                                                                  |  |                                          |             |               |                                         |             |      |  |               |             |  |   |             |  
|Diluted earnings per share                                        |  | $                                        | 0.23        |               | $                                       | (0.01       | )    |  | $             | 0.23        |  | $ | (0.15       | )
|                                                                  |  |                                          |             |               |                                         |             |      |  |               |             |  |   |             |  
|Shares used in computation of basic earnings per share            |  |                                          | 101,264,048 |               |                                         | 112,012,941 |      |  |               | 104,791,642 |  |   | 112,816,260 |  
|                                                                  |  |                                          |             |               |                                         |             |      |  |               |             |  |   |             |  
|Shares used in computation of diluted earnings per share          |  |                                          | 103,724,202 |               |                                         | 112,012,941 |      |  |               | 107,955,922 |  |   | 112,816,260 |  
|                                                                  |  |                                          |             |               |                                         |             |      |  |               |             |  |   |             |  



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



3



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##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)



|                                                                                                                                                                                                                                               |  |                    |               |   |                   |   |               |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------------- | - | ----------------- | - | ------------- | -
|                                                                                                                                                                                                                                               |  | September 30, 2005 |               |   | December 31, 2004 |  
|ASSETS                                                                                                                                                                                                                                         |  |                    |               |   |                   |   |               |  
|                                                                                                                                                                                                                                               |  |                   
|Cash and cash equivalents                                                                                                                                                                                                                      |  | $                  | 183,558,099   |   |                   | $ | 445,539,282   |  
|Securities owned, held at clearing brokers, at market value                                                                                                                                                                                    |  |                    | 376,380,649   |   |                   |   | 254,473,209   |  
|Receivable from brokers and dealers                                                                                                                                                                                                            |  |                    | 256,258,445   |   |                   |   | 244,881,065   |  
|Investment in Deephaven sponsored funds                                                                                                                                                                                                        |  |                    | 281,848,158   |   |                   |   | 215,329,959   |  
|Fixed assets and leasehold improvements at cost, less accumulated depreciation and amortization                                                                                                                                                |  |                    | 65,523,628    |   |                   |   | 54,382,503    |  
|Strategic investments                                                                                                                                                                                                                          |  |                    | 59,907,552    |   |                   |   | 29,266,796    |  
|Goodwill                                                                                                                                                                                                                                       |  |                    | 39,929,678    |   |                   |   | 19,182,248    |  
|Intangible assets, less accumulated amortization                                                                                                                                                                                               |  |                    | 30,500,694    |   |                   |   | 11,546,528    |  
|Other assets                                                                                                                                                                                                                                   |  |                    | 95,519,062    |   |                   |   | 119,418,725   |  
|                                                                                                                                                                                                                                               |  |                    |               |   |                   |   |               |  
|Total assets                                                                                                                                                                                                                                   |  | $                  | 1,389,425,965 |   |                   | $ | 1,394,020,315 |  
|                                                                                                                                                                                                                                               |  |                    |               |   |                   |   |               |  
|LIABILITIES & STOCKHOLDERS EQUITY                                                                                                                                                                                                             |  |                    |               |   |                   |   |               |  
|                                                                                                                                                                                                                                               |  |                   
|Liabilities                                                                                                                                                                                                                                    |  |                    |               |   |                   |   |               |  
|Securities sold, not yet purchased, at market value                                                                                                                                                                                            |  | $                  | 343,619,605   |   |                   | $ | 221,420,569   |  
|Payable to brokers and dealers                                                                                                                                                                                                                 |  |                    | 94,369,941    |   |                   |   | 88,480,788    |  
|Accrued compensation expense                                                                                                                                                                                                                   |  |                    | 95,506,562    |   |                   |   | 123,664,383   |  
|Accrued expenses and other liabilities                                                                                                                                                                                                         |  |                    | 75,119,665    |   |                   |   | 109,252,681   |  
|                                                                                                                                                                                                                                               |  |                    |               |   |                   |   |               |  
|Total liabilities                                                                                                                                                                                                                              |  |                    | 608,615,773   |   |                   |   | 542,818,421   |  
|                                                                                                                                                                                                                                               |  |                    |               |   |                   |   |               |  
|                                                                                                                                                                                                                                               |  |                   
|Stockholders equity                                                                                                                                                                                                                           |  |                    |               |   |                   |   |               |  
|Class A Common Stock, $0.01 par value, 500,000,000 shares authorized; 138,697,721 shares issued and 101,969,091 shares outstanding at
September 30, 2005 and 133,965,513 shares issued and 113,295,191 shares outstanding at December 31, 2004 |  |                    | 1,386,977     |   |                   |   | 1,339,655     |  
|Additional paid-in-capital                                                                                                                                                                                                                     |  |                    | 466,431,469   |   |                   |   | 427,451,712   |  
|Retained earnings                                                                                                                                                                                                                              |  |                    | 611,642,474   |   |                   |   | 587,152,786   |  
|Treasury stock, at cost; 36,728,630 shares at September 30, 2005 and 20,670,322 shares at December 31, 2004                                                                                                                                    |  |                    | (294,168,558  | ) |                   |   | (147,636,413  | )
|Accumulated other comprehensive income, net of tax                                                                                                                                                                                             |  |                    | 19,919,914    |   |                   |   |              |  
|Unamortized stock-based compensation                                                                                                                                                                                                           |  |                    | (24,402,084   | ) |                   |   | (17,105,846   | )
|                                                                                                                                                                                                                                               |  |                    |               |   |                   |   |               |  
|Total stockholders equity                                                                                                                                                                                                                     |  |                    | 780,810,192   |   |                   |   | 851,201,894   |  
|                                                                                                                                                                                                                                               |  |                    |               |   |                   |   |               |  
|Total liabilities and stockholders equity                                                                                                                                                                                                     |  | $                  | 1,389,425,965 |   |                   | $ | 1,394,020,315 |  
|                                                                                                                                                                                                                                               |  |                    |               |   |                   |   |               |  



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



4



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##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                                                       |  |                                         |              |   |              |   |             |  
|---------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------------ | - | ------------ | - | ----------- | -
|                                                                                                                       |  | For the nine months ended September 30, |             
|                                                                                                                       |  | 2005                                    |              |   | 2004Restated |  
|Cash flows from operating activities                                                                                   |  |                                         |              |   |              |   |             |  
|Net income (loss)                                                                                                      |  | $                                       | 24,489,688   |   |              | $ | (17,276,962 | )
|Income from discontinued operations, net of tax                                                                        |  |                                         | 122,007      |   |              |   | 14,948,350  |  
|                                                                                                                       |  |                                         |              |   |              |   |             |  
|Income (loss) from continuing operations, net of tax                                                                   |  |                                         | 24,367,681   |   |              |   | (32,225,312 | )
|Adjustments to reconcile income (loss) from continuing operations, net of tax to net cash used in operating activities |  |                                         |              |   |              |   |             |  
|Depreciation and amortization                                                                                          |  |                                         | 12,245,859   |   |              |   | 10,870,338  |  
|Income tax benefit on stock awards exercised                                                                           |  |                                         | 4,862,396    |   |              |   | 5,134,485   |  
|Stock-based compensation                                                                                               |  |                                         | 9,965,376    |   |              |   | 9,144,843   |  
|Writedown of assets and lease loss accrual                                                                             |  |                                         | 10,055,252   |   |              |   | 3,498,261   |  
|Unrealized gain on strategic investments                                                                               |  |                                         | 708,178      |   |              |   |            |  
|(Increase) decrease in operating assets                                                                                |  |                                         |              |   |              |   |             |  
|Securities owned                                                                                                       |  |                                         | (121,907,440 | ) |              |   | (47,343,117 | )
|Receivable from brokers and dealers                                                                                    |  |                                         | (9,450,118   | ) |              |   | (59,193,729 | )
|Other assets                                                                                                           |  |                                         | 10,186,580   |   |              |   | (5,948,956  | )
|Increase (decrease) in operating liabilities                                                                           |  |                                         |              |   |              |   |             |  
|Securities sold, not yet purchased                                                                                     |  |                                         | 122,199,036  |   |              |   | 55,603,309  |  
|Payable to brokers and dealers                                                                                         |  |                                         | 5,889,153    |   |              |   | 67,548,200  |  
|Accrued compensation expense                                                                                           |  |                                         | (28,640,677  | ) |              |   | (12,221,904 | )
|Accrued expenses and other liabilities                                                                                 |  |                                         | (51,509,904  | ) |              |   | 75,597,998  |  
|                                                                                                                       |  |                                         |              |   |              |   |             |  
|Net cash (used in) provided by operating activities                                                                    |  |                                         | (11,028,628  | ) |              |   | 70,464,416  |  
|                                                                                                                       |  |                                         |              |   |              |   |             |  
|Cash flows from investing activities                                                                                   |  |                                         |              |   |              |   |             |  
|Purchases of fixed assets and leasehold improvements                                                                   |  |                                         | (23,150,560  | ) |              |   | (28,595,353 | )
|Investment in Deephaven sponsored funds                                                                                |  |                                         | (66,518,200  | ) |              |   | (8,726,915  | )
|Purchase of Direct Trading Institutional business, net of cash acquired                                                |  |                                         | (34,354,151  | ) |              |   |            |  
|Proceeds from (purchases of) strategic investments                                                                     |  |                                         | 2,308,016    |   |              |   | (5,738,199  | )
|                                                                                                                       |  |                                         |              |   |              |   |             |  
|Net cash used in investing activities                                                                                  |  |                                         | (121,714,895 | ) |              |   | (43,060,467 | )
|                                                                                                                       |  |                                         |              |   |              |   |             |  
|Cash flows from financing activities                                                                                   |  |                                         |              |   |              |   |             |  
|Stock options exercised                                                                                                |  |                                         | 16,903,069   |   |              |   | 13,103,668  |  
|Cost of common stock repurchased                                                                                       |  |                                         | (146,262,736 | ) |              |   | (46,696,406 | )
|Purchase of shares from minority investors in Knight Roundtable Europe Limited                                         |  |                                         |             |   |              |   | (2,500,000  | )
|                                                                                                                       |  |                                         |              |   |              |   |             |  
|Net cash used in financing activities                                                                                  |  |                                         | (129,359,667 | ) |              |   | (36,092,738 | )
|                                                                                                                       |  |                                         |              |   |              |   |             |  
|Decrease in cash and cash equivalents                                                                                  |  |                                         | (262,103,190 | ) |              |   | (8,688,789  | )
|Net cash provided by (used in) discontinued operations                                                                 |  |                                         | 122,007      |   |              |   | (31,318,777 | )
|Cash and cash equivalents at beginning of the year                                                                     |  |                                         | 445,539,282  |   |              |   | 249,997,693 |  
|                                                                                                                       |  |                                         |              |   |              |   |             |  
|Cash and cash equivalents at end of the year                                                                           |  | $                                       | 183,558,099  |   |              | $ | 209,990,127 |  
|                                                                                                                       |  |                                         |              |   |              |   |             |  
|Supplemental disclosure of cash flow information:                                                                      |  |                                         |              |   |              |   |             |  
|Cash paid for interest                                                                                                 |  | $                                       | 112,234      |   |              | $ | 323,019     |  
|                                                                                                                       |  |                                         |              |   |              |   |             |  
|Cash paid for income taxes                                                                                             |  | $                                       | 45,701,637   |   |              | $ | 26,653,232  |  
|                                                                                                                       |  |                                         |              |   |              |   |             |  
|Supplemental disclosure of noncash investing activities                                                                |  |                                         |              |   |              |   |             |  
|Goodwill                                                                                                               |  |                                         | 20,747,429   |   |              |   |             |  
|Intangible assets                                                                                                      |  |                                         | 20,000,000   |   |              |   |             |  
|Receivable from brokers and dealers                                                                                    |  |                                         | 1,927,262    |   |              |   |             |  
|Other net liabilities                                                                                                  |  |                                         | (8,320,540   | ) |              |   |             |  
|                                                                                                                       |  |                                         |              |   |              |   |             |  
|Cash paid for purchase of Direct Trading Institutional business, net of cash acquired                                  |  |                                         | 34,354,151   |   |              |   |             |  
|                                                                                                                       |  |                                         |              |   |              |   |             |  



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



5



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##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



SEPTEMBER 30, 2005

(Unaudited)



|1. | Organization and Description of the Business
|-- | --------------------------------------------



Knight Capital Group, Inc. and its subsidiaries (the Company) have two operating business segments, Asset Management and Equity Markets, and a
Corporate segment. The Companys operating business segments from continuing operations comprise the following operating subsidiaries:



Asset Management



| |  |  | Deephaven Capital Management LLC (Deephaven) is the investment manager and sponsor of the Deephaven investment funds (the Deephaven Funds). Deephaven also
has a U.K. registered investment advisor subsidiary, which is regulated by the Financial Services Authority (FSA) in the U.K., and a Hong Kong registered investment advisor subsidiary, which is regulated by the Securities and Futures
Commission in Hong Kong.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Equity Markets



| |  |  | Knight Equity Markets, L.P. (KEM) operates as a market maker in over-the-counter (OTC) equity securities, primarily those traded in the Nasdaq stock market
and on the OTC Bulletin Board (OTCBB). Additionally, in December 2003, KEM acquired the business of Donaldson & Co., Incorporated (Donaldson), a firm that offers soft dollar and commission recapture services. KEM is
a broker-dealer registered with the Securities and Exchange Commission (SEC) and is a member of the National Association of Securities Dealers (NASD), the National Stock Exchange and the Pacific Stock Exchange.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Knight Capital Markets LLC (KCM) operates as a market maker in the Nasdaq Intermarket, the over-the-counter market for New York Stock Exchange (NYSE)
and American Stock Exchange (AMEX) listed securities. KCM is a broker-dealer registered with the SEC and is a member of the NASD.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Knight Equity Markets International Limited (KEMIL) is a U.K. registered broker-dealer that provides execution services for European institutional and broker-dealer
clients in U.S. and European equities. KEMIL is regulated by the FSA and is a member of the London Stock Exchange and Euronext.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In June 2005, the Company acquired the business of Direct Trading Institutional, Inc., a privately held Texas-based firm specializing in providing institutions with direct access
trading through an advanced electronic platform. This business is now operated by Direct Trading Institutional, L.P. (DTI), a broker-dealer registered with the SEC and member of the NASD and National Futures Association.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In October 2005, the Company acquired the business of the ATTAIN ECN from Domestic Securities, Inc., a privately held company, and certain of its shareholders. The business,
operating under the name Direct Edge ECN LLC (Direct Edge) operates as a liquidity destination offering the ability to match trades in Nasdaq National Market and Nasdaq SmallCap securities by displaying orders in the Nasdaq Market Center
or the NASD Alternative Display Facility. Direct Edge is a broker-dealer registered with the SEC and is a member of the NASD.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Corporate segment includes all corporate overhead expenses and investment income earned on strategic investments and the corporate investment in the
Deephaven Funds. Corporate overhead expenses primarily consist of compensation for certain senior executives and other individuals employed at the corporate holding company, legal and other professional expenses related to corporate matters,
investor and public relations expenses and directors and officers insurance.



6



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##### Table of Contents

Discontinued Operations



The Company completed the sale of its Derivative Markets business to Citigroup Financial Products, Inc.
(Citigroup) for $237 million in cash as of the close of business on December 9, 2004. In accordance with generally accepted accounting principles (GAAP), the results of the Derivative Markets segment have been included
within discontinued operations for all periods presented. For a further discussion of the sale of the Companys Derivative Markets business and its associated accounting treatment, see Footnote 9 Discontinued Operations.



|2. | Significant Accounting Policies
|-- | -------------------------------



Basis of consolidation and form of presentation



The accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiaries and, in the opinion of management,
reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim period. All significant intercompany transactions and balances within continuing operations have been eliminated.
Certain footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations, although the Company believes that the disclosures are adequate to make the
information presented not misleading. The nature of the Companys business is such that the results of an interim period are not necessarily indicative of the results for the full year. These unaudited consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included in the Companys amended Annual Report on Form 10-K/A for the year ended December 31, 2004 as filed with the SEC.



Certain prior period amounts have been reclassified to conform to the current
period presentation.



Cash and cash equivalents



Cash and cash equivalents include money market accounts,
which are payable on demand, or short-term investments with an original maturity of less than 30 days. The carrying amount of such cash equivalents approximates their fair value due to the short-term nature of these instruments.



Market making and sales activities



Securities owned and securities sold, not yet purchased, which primarily
consist of listed and OTC equities, are carried at market value and are recorded on a trade date basis. Net trading revenue (trading gains, net of trading losses) and commissions (which includes commission equivalents earned on institutional client
orders) and related expenses are also recorded on a trade date basis.



Payments for order flow represent payments to broker-dealer clients for directing their order executions to the Company. Soft dollar and commission recapture expense represents payments to institutions in connection with soft dollar and
commission recapture programs. The Companys clearing agreements call for payment or receipt of interest income, net of interest expense, for facilitating the settlement and financing of securities transactions.



Asset management fees



The Company earns asset management fees for sponsoring and managing the
Deephaven Funds. Such fees are recorded monthly as earned and are calculated as a percentage of the Deephaven Funds monthly net assets, plus a percentage of a new high net asset value (the Incentive Allocation Fee), as defined, for
any six month period ended June 30th or December 31st. A new high net asset value is generally defined as the amount by which the net asset value of the Deephaven Funds exceeds the greater of either the highest previous net asset



7



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##### Table of Contents

value in the Deephaven Funds, or the net asset value at the time each investor made a purchase. The Incentive Allocation Fee may increase or decrease during
the year based on the performance of the Deephaven Funds. If Deephavens Market Neutral Fund, which contains the majority of assets under management, recognizes a loss in the second half of a calendar year, the Incentive Allocation Fee is
recalculated on an annual rather 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.



Estimated fair value of financial instruments



The Companys securities owned and securities sold, not yet purchased are carried at market value, which is estimated
using market quotations available from major securities exchanges, clearing brokers and dealers. Management estimates that the fair values of other financial instruments recognized on the Consolidated Statements of Financial Condition (including
receivables, payables and accrued expenses) approximate their carrying values, as such financial instruments are short-term in nature, bear interest at current market rates or are subject to frequent repricing.



Goodwill and intangible assets



The Company applies the provisions of Statement of Financial Accounting
Standards (SFAS) No. 142 Goodwill and Other Intangible Assets,which requires that goodwill and intangible assets with an indefinite useful life no longer be amortized, but instead, be tested for impairment annually or when
an event occurs or circumstances change that signify the existence of impairment. Other intangible assets are amortized over their useful lives.



Strategic investments



Strategic investments include equity ownership interests of less than 20% in financial services-related businesses and are accounted for under the equity
method or at fair value. The equity method of accounting is used for investments in limited partnerships and limited liability corporations. The fair value of investments, recorded in the Companys broker-dealer subsidiaries, for which a quoted
market or dealer price is not available for the size of our investment, is based on managements estimate. Among the factors considered by management in determining the fair value of investments are the cost of the investment, terms and
liquidity, developments since the acquisition of the investment, the sales price of recently issued securities, the financial condition and operating results of the issuer, earnings trends and consistency of operating cash flows, the long-term
business potential of the issuer, the quoted market price of securities with similar quality and yield that are publicly traded, and other factors generally pertinent to the valuation of investments. The fair value of these investments is subject to
a high degree of volatility and may be susceptible to significant fluctuations in the near term. Strategic investments are reviewed on an ongoing basis to ensure that the carrying values of the investments have not been impaired. If the Company
assesses that an impairment loss on the strategic investments has occurred due to declines in fair value or other market conditions, the investments are written down to its impairment value.



Investments that are classified as available-for-sale are reported at fair
value with unrealized gains and losses excluded from earnings and reported, net of applicable taxes, in Accumulated other comprehensive income, net of tax within Stockholders equity on the Consolidated Statements of Financial Condition.



Investments not recorded in the Companys broker-dealer
subsidiaries which do not have a readily determinable fair value, are recorded at amortized cost.



Treasury stock



The Company records its purchases of treasury stock at cost as a separate component of Stockholders equity. The Company obtains treasury stock
through purchases in the open market or through privately negotiated transactions.



8



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##### Table of Contents

Foreign currencies



The functional currency of the Companys consolidated foreign subsidiaries is the U.S. dollar. Assets and liabilities
in foreign currencies are translated into U.S. dollars using current exchange rates at the date of the Consolidated Statements of Financial Condition. Revenues and expenses are translated at average rates during the periods.



Depreciation, amortization and occupancy



Fixed assets are being depreciated on a straight-line basis over their
estimated useful lives of three to seven years. Leasehold improvements are being amortized on a straight-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 of the leases. The Company capitalizes certain costs associated with the acquisition or development of internal-use software and amortizes the software over its estimated useful life of three years, commencing
at the time the software is placed in service.



Writedown of
fixed assets



Writedowns of fixed assets are recognized
when it is determined that the fixed assets are impaired. The amount of the impairment writedown is determined by the difference between the carrying amount and the fair value of the fixed asset. In determining the impairment, an estimated fair
value is obtained through research and inquiry of the market. Fixed assets are reviewed for impairment on a quarterly basis.



Lease loss accrual



It is the Companys policy to identify excess real estate capacity and where applicable, accrue for such future costs. In determining the accrual, a
nominal cash flow analysis is performed for lease losses initiated prior to December 31, 2002, the effective date of SFAS No. 146 Accounting for Costs Associated with Exit or Disposal Activities, and costs related to the excess
capacity are accrued. For lease losses initiated after December 31, 2002, the Companys policy is to accrue future costs related to excess capacity using a discounted cash flow analysis.



Income taxes



The Company records deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. The
Company evaluates the recoverability of future tax deductions by assessing the adequacy of future expected taxable income from all sources, including reversal of temporary differences and forecasted operating earnings. Net deferred tax assets and
liabilities are included in Other assets and Accrued expenses and other liabilities, respectively, on the Consolidated Statements of Financial Condition.



Discontinued Operations



In accordance with SFAS No. 144, Accounting for the Disposal of Long-Lived Assets, the revenues and expenses associated with a separate
segment or reporting unit that has been disposed of through closure or sale are included within Income from discontinued operations, net of tax, on the Consolidated Statements of Operations for all periods presented.



Stock-based compensation



The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its stock options plans. As options are granted at the then market value, no compensation expense has been recognized for the fair
values of the options granted to employees.



9



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##### Table of Contents

Had compensation expense for the Companys options been determined based on the fair value at the
grant dates in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the Companys net income (loss) and earnings per share amounts for the three and nine months ended September 30, 2005 and 2004 would have
been as follows (in millions, except per share data):



|                                                                                    |  |                                  |      |   |                                 |   |       |      |  |   |      |   |  |   |       |  
|----------------------------------------------------------------------------------- |  | -------------------------------- | ---- | - | ------------------------------- | - | ----- | ---- |  | - | ---- | - |  | - | ----- | -
|                                                                                    |  | Three months ended September 30, |      |   | Nine months ended September 30, |  
|                                                                                    |  | 2005                             |      |   | 2004                            |   |       | 2005 |  |   | 2004 |  
|Net income (loss), as reported                                                      |  | $                                | 24.4 |   |                                 | $ | (1.3  | )    |  | $ | 24.5 |   |  | $ | (17.3 | )
|Pro forma compensation expense determined under fair value based method, net of tax |  |                                  | (1.1 | ) |                                 |   | (1.2  | )    |  |   | (4.1 | ) |  |   | (5.2  | )
|Pro forma net income (loss)                                                         |  |                                  | 23.3 |   |                                 |   | (2.4  | )    |  |   | 20.3 |   |  |   | (22.5 | )
|Basic earnings per share, as reported                                               |  |                                  | 0.24 |   |                                 |   | (0.01 | )    |  |   | 0.23 |   |  |   | (0.15 | )
|Diluted earnings per share, as reported                                             |  |                                  | 0.23 |   |                                 |   | (0.01 | )    |  |   | 0.23 |   |  |   | (0.15 | )
|Pro forma basic earnings per share                                                  |  |                                  | 0.23 |   |                                 |   | (0.02 | )    |  |   | 0.19 |   |  |   | (0.20 | )
|Pro forma diluted earnings per share                                                |  |                                  | 0.22 |   |                                 |   | (0.02 | )    |  |   | 0.19 |   |  |   | (0.20 | )



The Company records
the fair market value of restricted stock awards on the date of grant as unamortized stock-based compensation in Stockholders equity and amortizes the balance to compensation expense ratably over the vesting period.



Other



The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may
differ from those estimates.



Restatement of financial
statements



On August 9, 2005, the Company filed
(i) an amended 2004 Annual Report on Form 10-K/A to reflect a correction in accounting for certain property lease transactions (the Lease Correction) and (ii) an amended Form 10-Q/A for the three months ended March 31,
2005 to reflect the Lease Correction and an adjustment to the Companys Receivables from and Payables to brokers and dealers. The following table isolates each of the restated amounts in the Companys Consolidated Statements of
Operations for the three and nine months ended September 30, 2004.



|                                                    |             |                                              |             |                       |                                              |   |             |   |  |                       |             |   |  |   |             |  
|--------------------------------------------------- | ----------- | -------------------------------------------- | ----------- | --------------------- | -------------------------------------------- | - | ----------- | - |  | --------------------- | ----------- | - |  | - | ----------- | -
|                                                    |             | For the three months endedSeptember 30, 2004 |             |                       | For the nine months ended September 30, 2004 |  
|                                                    | As restated |                                              |             | As originallyreported |                                              |   | As restated |   |  | As originallyreported |            
|Consolidated Statements of Operations               |             |                                              |             |                       |                                              |   |             |   |  |                       |             |   |  |   |             |  
|Expenses                                            |             |                                              |             |                       |                                              |   |             |   |  |                       |             |   |  |   |             |  
|Depreciation and amortization                       |             | $                                            | 3,390,310   |                       |                                              | $ | 3,338,134   |   |  | $                     | 10,870,338  |   |  | $ | 10,720,438  |  
|Occupancy and equipment rentals                     |             |                                              | 4,144,040   |                       |                                              |   | 3,981,784   |   |  |                       | 12,880,850  |   |  |   | 12,817,436  |  
|Loss from continuing operations before income taxes |             |                                              | (10,972,972 | )                     |                                              |   | (10,750,940 | ) |  |                       | (38,162,273 | ) |  |   | (37,938,113 | )
|Income tax (benefit)                                |             |                                              | (4,367,404  | )                     |                                              |   | (4,280,801  | ) |  |                       | (5,936,961  | ) |  |   | (5,831,980  | )
|Net loss from continuing operations                 |             |                                              | (6,605,568  | )                     |                                              |   | (6,470,139  | ) |  |                       | (32,225,312 | ) |  |   | (32,106,133 | )
|Net loss                                            |             |                                              | (1,261,607  | )                     |                                              |   | (1,126,178  | ) |  |                       | (17,276,962 | ) |  |   | (17,157,783 | )



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|3. | Securities Owned and Securities Sold, Not Yet Purchased
|-- | -------------------------------------------------------



Securities owned and securities sold, not yet purchased are carried at market value and consist of the following (in millions):



|                                    |  |                   |       |                  |   |      
|----------------------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                                    |  | September 30,2005 |       | December 31,2004
|Securities owned:                   |  |                   |       |                  |   |      
|Equities                            |  | $                 | 367.8 |                  | $ | 245.5
|U.S. government obligations         |  |                   | 8.6   |                  |   | 9.0  
|                                    |  |                   |       |                  |   |      
|                                    |  | $                 | 376.4 |                  | $ | 254.5
|                                    |  |                   |       |                  |   |      
|Securities sold, not yet purchased: |  |                   |       |                  |   |      
|Equities                            |  | $                 | 343.6 |                  | $ | 221.4
|                                    |  |                   |       |                  |   |      
|                                    |  | $                 | 343.6 |                  | $ | 221.4
|                                    |  |                   |       |                  |   |      



|4. | Receivable from and Payable to Brokers and Dealers
|-- | --------------------------------------------------



Amounts receivable from and payable to brokers and dealers consist of the following (in millions):



|                             |  |                   |       |                  |   |      
|---------------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                             |  | September 30,2005 |       | December 31,2004
|Receivable:                  |  |                   |       |                  |   |      
|Clearing brokers and other   |  | $                 | 143.9 |                  | $ | 145.4
|Securities failed to deliver |  |                   | 65.6  |                  |   | 64.5 
|Securities borrowed          |  |                   | 46.8  |                  |   | 35.0 
|                             |  |                   |       |                  |   |      
|                             |  | $                 | 256.3 |                  | $ | 244.9
|                             |  |                   |       |                  |   |      
|Payable:                     |  |                   |       |                  |   |      
|Clearing brokers and other   |  | $                 | 58.5  |                  | $ | 47.8 
|Securities failed to receive |  |                   | 35.9  |                  |   | 40.7 
|                             |  |                   |       |                  |   |      
|                             |  | $                 | 94.4  |                  | $ | 88.5 
|                             |  |                   |       |                  |   |      



|5. | Goodwill and Intangible Assets
|-- | ------------------------------



In June 2005, the Company tested for the impairment of goodwill and intangible assets and concluded that there was no impairment. The goodwill balance of
$39.9 million at September 30, 2005 relates to the Equity Markets segment. Goodwill is net of accumulated amortization of $21.9 million recorded through December 31, 2001, the effective date the Company adopted SFAS No. 142. Goodwill
increased by $20.7 million in June 2005, resulting from the purchase of DTIs business. In the first half of 2004, the Company acquired all of the ownership interests of the minority owners of Knight Roundtable Europe Limited (KREL)
(which is the Companys subsidiary that owns KEMIL) for $2.5 million, which was recorded as goodwill.



At September 30, 2005, the Company had intangible assets, net of accumulated amortization, of $30.5 million, all included within the Equity Markets
segment. Intangible assets increased by $20.0 million in June 2005, resulting from the purchase of DTIs business. Intangible assets are being amortized over the remaining useful lives, which have been determined to range from two to thirty
years and primarily represent client relationships.



In the
third quarter of 2005, the Company recorded amortization expense related to its intangible assets within its Equity Markets segment of $735,000. The estimated amortization expense relating to the intangible assets for each of the next five years
approximates $735,000 for the remainder of 2005, $2.9 million per year in 2006 and 2007, and $2.8 million per year from 2008 through 2009.



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The chart below summarizes the activity of the Companys Goodwill and Intangible assets, net of
accumulated amortization, for the nine months ended September 30, 2004 and 2005, respectively (in millions).



|                                                                         |  |                |      |                  |   |      |  
|------------------------------------------------------------------------ |  | -------------- | ---- | ---------------- | - | ---- | -
|                                                                         |  | Equity Markets |     
|                                                                         |  | Goodwill       |      | IntangibleAssets |  
|Balance at January 1, 2004                                               |  | $              | 16.7 |                  | $ | 12.0 |  
|Purchase of shares from minority investors in KREL and other intangibles |  |                | 2.5  |                  |   | 0.2  |  
|Amortization expense                                                     |  |                |     |                  |   | (0.5 | )
|                                                                         |  |                |      |                  |   |      |  
|Balance at September 30, 2004                                            |  | $              | 19.2 |                  | $ | 11.7 |  
|                                                                         |  |                |      |                  |   |      |  
|Balance at January 1, 2005                                               |  | $              | 19.2 |                  | $ | 11.5 |  
|Purchase of DTI business                                                 |  |                | 20.7 |                  |   | 20.0 |  
|Amortization expense                                                     |  |                |     |                  |   | (1.0 | )
|                                                                         |  |                |      |                  |   |      |  
|Balance at September 30, 2005                                            |  | $              | 39.9 |                  | $ | 30.5 |  
|                                                                         |  |                |      |                  |   |      |  



|6. | Investment in Deephaven Sponsored Funds and Strategic Investments
|-- | -----------------------------------------------------------------



The Companys wholly-owned subsidiary, Deephaven, is the investment manager and sponsor of the Deephaven Funds, which engages in various trading
strategies involving equities, debt instruments and derivatives. The underlying investments in the Deephaven Funds are carried at market value. Of the $3.4 billion of assets under management in the Deephaven Funds as of September 30, 2005, the
Company had a corporate investment of $281.8 million. Additionally, Other assets on the Consolidated Statements of Financial Condition at September 30, 2005 and December 31, 2004 included $22.6 million and $19.9 million, respectively, of
investments in the Deephaven Funds related to employee deferred compensation plans. In addition, certain officers, directors and employees of the Company had direct investments of approximately $4.2 million in the Deephaven Funds, in the aggregate,
as of September 30, 2005.



In connection with the sale of
the Derivative Markets business (see Footnote 9, Discontinued Operations) and in light of the reorganization of the Companys business segments, the Company transferred its investments in the International Securities Exchange
(ISE) and The Nasdaq Stock Market (Nasdaq), which were previously held by its broker-dealer subsidiaries, to a corporate investment holding company. During the first quarter of 2005, these equity investments became marketable
and, accordingly, were accounted for as equity securities under SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities and were classified as available-for-sale securities. On March 9, 2005, in conjunction
with the ISEs initial public offering, the Company sold approximately 30% of its original equity ownership of the ISE, having an original cost of $3.0 million, for $12.6 million resulting in a pre-tax gain of $9.6 million. There were no sales
of the ISE equity during the third quarter of 2005. As of September 30, 2005, the Company owned 1.7 million shares of common stock of the ISE, which had an aggregate fair value and amortized cost of $40.6 million and $6.9 million,
respectively.



During the second quarter of 2005, the Company
sold its Nasdaq equity investment, previously classified as available-for-sale, for $15.5 million. Based on an original cost of $7.4 million, the Company recognized a pre-tax gain of $8.1 million on the sale of this equity investment.



|7. | Significant Clients
|-- | -------------------



The Company considers significant clients to be clients who account for 10% or more of the total U.S. equity dollar value traded by the Company during the
period. One client accounted for approximately 12.0% and 10.6% of the Companys U.S. equity dollar value traded during the three and nine months ended September 30, 2005, respectively. Payments for order flow to this firm for U.S. equity
order flow for the three and nine months ended September 30, 2005 amounted to $1.3 million and $2.4 million, respectively.



12



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The Companys corporate investment in the Deephaven Funds of $281.8 million accounted for 8.3% of
total assets under management at September 30, 2005. One institutional investor accounted for more than 10% of the Deephaven Funds assets under management, with 10.6% at September 30, 2005.



|8. | Writedown of Assets and Lease Loss Accrual
|-- | ------------------------------------------



The Writedown of assets and lease loss accrual for the three months ended September 30, 2005 of $5.5 million related to the cost associated with
excess real estate capacity at our 545 Washington Boulevard facility in Jersey City, N.J. The Writedown of assets and lease loss accrual for the nine months ended September 30, 2005 was $10.1 million, which includes $4.5 million of costs
associated with excess real estate capacity and a writedown of fixed assets related to the move from the Companys 525 Washington Boulevard facility in Jersey City, N.J. during the second quarter of 2005 and an additional $5.5 million in costs
associated with excess real estate capacity at our 545 Washington Boulevard facility in Jersey City, N.J.



The Writedown of assets and lease loss accrual for the three months ended September 30, 2004 was $874,000, relating to the writedown of fixed assets
that are no longer actively used. The Writedown of assets and lease loss accrual for the nine months ended September 30, 2004 was $3.5 million, which includes $2.6 million of costs associated with excess real estate capacity at our 545
Washington Boulevard facility in Jersey City, N.J.



|9. | Discontinued Operations
|-- | -----------------------



Derivative Markets



The Company completed the sale of its Derivative Markets business to Citigroup for $237 million in cash as of the close of business on December 9,
2004. The final purchase price was subject to adjustment based on the final determination of the book value of the Derivative Markets segment at the time the deal closed. The final determination of book value occurred in the first quarter of 2005,
at which time the adjustment was recognized. The result of this adjustment and other expenses related to the sale resulted in a loss from discontinued operations, net of tax, of $266,000 in the first quarter of 2005. During the third quarter of
2005, the Company recorded additional income of $388,000, net of tax, relating to the Derivative Markets segment.



The decision to sell the Derivative Markets segment was based 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 accordance with SFAS No. 144,Accounting for the Disposal of Long-Lived Assets, the results of the Derivative Markets segment, the revenues
and expenses associated with these businesses as well as all costs associated with the sale transaction have been included in Income from discontinued operations, net of tax on the Consolidated Statements of Operations for all periods presented.



The revenues and results of operations of the discontinued
operations for the three and nine months ended September 30, 2005 and 2004 are summarized as follows (in millions):



|                                                |  |                            |     |                           |   |                   |  |                   |     |  |   |      
|----------------------------------------------- |  | -------------------------- | --- | ------------------------- | - | ----------------- |  | ----------------- | --- |  | - | -----
|                                                |  | For the three months ended |     | For the nine months ended
|                                                |  | September 30,2005          |     | September 30,2004         |   | September 30,2005 |  | September 30,2004
|Revenues                                        |  | $                          |    |                           | $ | 47.2              |  | $                 |    |  | $ | 137.0
|                                                |  |                            |     |                           |   |                   |  |                   |     |  |   |      
|Pre-tax income from discontinued operations     |  |                            | 0.7 |                           |   | 8.9               |  |                   | 0.2 |  |   | 25.1 
|Income tax expense                              |  |                            | 0.3 |                           |   | 3.6               |  |                   | 0.1 |  |   | 10.2 
|                                                |  |                            |     |                           |   |                   |  |                   |     |  |   |      
|Income from discontinued operations, net of tax |  | $                          | 0.4 |                           | $ | 5.3               |  | $                 | 0.1 |  | $ | 14.9 
|                                                |  |                            |     |                           |   |                   |  |                   |     |  |   |      



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|10. | Commitments and Contingent Liabilities
|--- | --------------------------------------



In the ordinary course of business, the nature of the Companys business subjects it to claims, lawsuits, regulatory examinations and other
proceedings. 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 material
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 although they might be material to the operating results for any particular period, depending, in
part, upon operating results for that period.



The Company
leases office space under noncancelable operating leases. Certain office leases contain fixed escalation clauses. Rental expense from continuing operations under the office leases was $2.0 million and $2.8 million for the three months ended
September 30, 2005 and September 30, 2004, respectively. For the nine months ended September 30, 2005 and September 30, 2004, rental expense from continuing operations was $6.9 million and $7.7 million, respectively.



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 September 30, 2005, future minimum rental commitments under all noncancelable office, computer and
equipment leases (Operating Leases), and guaranteed employment contracts longer than one year (Other Obligations) were as follows (in millions):



|                                      |  |                 |       |                  |   |       |  |   |      
|------------------------------------- |  | --------------- | ----- | ---------------- | - | ----- |  | - | -----
|                                      |  | OperatingLeases |       | OtherObligations |   | Total
|Three months ending December 31, 2005 |  | $               | 3.8   |                  | $ |      |  | $ | 3.8  
|Year ending December 31, 2006         |  |                 | 10.4  |                  |   | 24.6  |  |   | 35.0 
|Year ending December 31, 2007         |  |                 | 9.9   |                  |   | 2.0   |  |   | 11.9 
|Year ending December 31, 2008         |  |                 | 9.7   |                  |   | 0.6   |  |   | 10.3 
|Year ending December 31, 2009         |  |                 | 9.3   |                  |   |      |  |   | 9.3  
|Thereafter through October 31, 2021   |  |                 | 111.6 |                  |   |      |  |   | 111.6
|                                      |  |                 |       |                  |   |       |  |   |      
|                                      |  | $               | 154.8 |                  | $ | 27.3  |  | $ | 182.1
|                                      |  |                 |       |                  |   |       |  |   |      



During the normal
course of business, the Company collateralizes certain leases, employment agreements or other contractual obligations through letters of credit or segregated funds held in escrow accounts. As of September 30, 2005, the Company has provided an
$8.0 million letter of credit, collateralized by U.S. Treasury Bills, as a guarantee for one of the Companys lease obligations.



The Company entered into long-term employment contracts with the senior management team of Deephaven (the Deephaven managers). These
employment agreements, which became effective on January 1, 2004, are for three-year terms and include an option for renewal by the Deephaven managers through 2009 under certain circumstances. Pursuant to the terms of a simultaneously executed
option agreement between the Company and the Deephaven managers, in the event of a change of control of the Company during the initial three-year employment term, the Deephaven managers would have the option (the Option) to obtain a 51%
interest in Deephaven in exchange for the termination of their employment contracts and associated profit-sharing bonuses and other employee profit-sharing plans, which in the aggregate range from 42% to 50% of the pre-tax, pre-profit sharing
profits of Deephaven during the term of the agreements, subject to meeting certain annual guaranteed amounts. If a change of control of the Company were to occur, and if the Deephaven managers exercised the Option, the Company would retain a 49%
interest in Deephaven. In addition, during the life of the Option, the agreements provide that the Company may not sell Deephaven without the approval of the Deephaven managers.



14



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In May 2005, the Company announced that it had reached an agreement to acquire, for cash, the business of
the ATTAIN ECN, an alternative trading system that operates an electronic communications network (ECN) for the trading of Nasdaq securities. In October 2005, the Company closed the transaction. The business operates under the name of
Direct Edge ECN LLC.



|11. | Regulatory Charges and Related Matters
|--- | --------------------------------------



In June 2005, Deephaven and a former Deephaven employee received Wells Notices from the staff of the SECs Division of Enforcement. The Wells Notice
to Deephaven indicates that the staff is considering recommending that the Commission bring a civil injunctive action against Deephaven alleging that it violated anti-fraud provisions of the securities laws in connection with trading activity
associated with certain Private Investments in Public Equities (PIPEs) during the period from June 1, 1999 through March 2004. The Wells Notice also indicates that the staff may seek an injunction, civil penalties, and disgorgement
(including prejudgment interest). A Wells Notice from the SEC affords recipients an opportunity to present information and defenses in response to the SECs Division of Enforcement staff prior to the staff making its formal recommendation to
the Commission on whether any action should be authorized. Deephaven has submitted its initial response to the Wells Notice. During the second quarter of 2005, the Company recorded a $2.0 million, pre-tax, charge relating to the PIPEs matter,
included in Regulatory charges and related matters on the Consolidated Statements of Operations.



In March 2004, Knight Securities L.P. (KSLP, now known as KEM) received Wells Notices from the staffs of the SECs Division of
Enforcement and from NASDs Department of Market Regulation. On July 7, 2004, the Company announced that KSLP had reached an agreement in principle with the staffs of the SEC and NASD to settle the investigations covered by these Wells
Notices, which remained subject to the drafting of settlement papers and final approval by the SEC and NASD. On December 16, 2004, the Company announced that KSLP concluded its settlement with the SEC and NASD (collectively the
Settlement).



The terms of the Settlement provided
that KSLP disgorge $41.1 million in institutional trading profits, and pay approximately $13.2 million in interest and $25.0 million in penalties, for a total of $79.3 million, which is recorded as Regulatory charges and related matters on the
Consolidated Statements of Operations. The Company did not record a tax benefit for the $25.0 million penalty. The amount was paid in full in the fourth quarter of 2004.



|12. | Comprehensive Income
|--- | --------------------



Comprehensive income includes net income (loss) and changes in equity except those resulting from investments by, or distributions to, stockholders.
Comprehensive income is as follows:



|                                                                                  |  |                                  |      |   |                                 |   |      |      |  |      |      |  |   |       |  
|--------------------------------------------------------------------------------- |  | -------------------------------- | ---- | - | ------------------------------- | - | ---- | ---- |  | ---- | ---- |  | - | ----- | -
|                                                                                  |  | Three months ended September 30, |      |   | Nine months ended September 30, |  
|                                                                                  |  | 2005                             |      |   | 2004                            |   |      | 2005 |  | 2004 |     
|Net income (loss)                                                                 |  | $                                | 24.4 |   |                                 | $ | (1.3 | )    |  | $    | 24.5 |  | $ | (17.3 | )
|                                                                                  |  |                                  |      |  
|Other comprehensive income, net of tax:                                           |  |                                  |      |   |                                 |   |      |      |  |      |      |  |   |       |  
|Net unrealized (losses) gains on investment securities held as available-for-sale |  |                                  | (1.8 | ) |                                 |   |     |      |  |      | 19.9 |  |   |      |  
|                                                                                  |  |                                  |      |   |                                 |   |      |      |  |      |      |  |   |       |  
|Total comprehensive income (loss), net of tax                                     |  | $                                | 22.6 |   |                                 | $ | (1.3 | )    |  | $    | 44.4 |  | $ | (17.3 | )
|                                                                                  |  |                                  |      |   |                                 |   |      |      |  |      |      |  |   |       |  



Other comprehensive
income, net of tax, represents net unrealized (losses) gains on the Companys strategic investment in the ISE.



15



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##### Table of Contents

|13. | Earnings per Share
|--- | ------------------



Basic earnings per common share (EPS) has been calculated by dividing net income by the weighted average shares of Class A Common Stock
outstanding during each respective period. Diluted EPS reflects the potential reduction in EPS using the treasury stock method to reflect the impact of common stock equivalents if stock awards such as stock options and restricted stock were
exercised or converted into Class A Common Stock.



The
following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three and nine months ended September 30, 2005 and 2004 (in millions, except for share and per share data):



|                                                          |  |                                          |      |                     |   |                     |  |   |                     |   |  |   |             |  
|--------------------------------------------------------- |  | ---------------------------------------- | ---- | ------------------- | - | ------------------- |  | - | ------------------- | - |  | - | ----------- | -
|                                                          |  | For the three months ended September 30, |     
|                                                          |  | 2005                                     |      | 2004                |  
|                                                          |  | Numerator / net income                   |      | Denominator /shares |   | Numerator /net loss |  |   | Denominator /shares |  
|Net income (loss) and shares used in basic calculations   |  | $                                        | 24.4 |                     |   | 101,264,048         |  | $ | (1.3                | ) |  |   | 112,012,941 |  
|Effect of dilutive stock-based awards                     |  |                                          |     |                     |   | 2,460,154           |  |   |                    |   |  |   |            |  
|                                                          |  |                                          |      |                     |   |                     |  |   |                     |   |  |   |             |  
|Net income (loss) and shares used in diluted calculations |  | $                                        | 24.4 |                     |   | 103,724,202         |  | $ | (1.3                | ) |  |   | 112,012,941 |  
|                                                          |  |                                          |      |                     |   |                     |  |   |                     |   |  |   |             |  
|Basic earnings per share                                  |  |                                          |      |                     | $ | 0.24                |  |   |                     |   |  | $ | (0.01       | )
|                                                          |  |                                          |      |                     |   |                     |  |   |                     |   |  |   |             |  
|Diluted earnings per share                                |  |                                          |      |                     | $ | 0.23                |  |   |                     |   |  | $ | (0.01       | )
|                                                          |  |                                          |      |                     |   |                     |  |   |                     |   |  |   |             |  
|                                                          | 
|                                                          |  | For the nine months ended September 30,  |     
|                                                          |  | 2005                                     |      | 2004                |  
|                                                          |  | Numerator /net income                    |      | Denominator /shares |   | Numerator /net loss |  |   | Denominator /shares |  
|Net income (loss) and shares used in basic calculations   |  | $                                        | 24.5 |                     |   | 104,791,642         |  | $ | (17.3               | ) |  |   | 112,816,260 |  
|Effect of dilutive stock-based awards                     |  |                                          |     |                     |   | 3,164,280           |  |   |                    |   |  |   |            |  
|                                                          |  |                                          |      |                     |   |                     |  |   |                     |   |  |   |             |  
|Net income (loss) and shares used in diluted calculations |  | $                                        | 24.5 |                     |   | 107,955,922         |  | $ | (17.3               | ) |  |   | 112,816,260 |  
|                                                          |  |                                          |      |                     |   |                     |  |   |                     |   |  |   |             |  
|Basic earnings per share                                  |  |                                          |      |                     | $ | 0.23                |  |   |                     |   |  | $ | (0.15       | )
|                                                          |  |                                          |      |                     |   |                     |  |   |                     |   |  |   |             |  
|Diluted earnings per share                                |  |                                          |      |                     | $ | 0.23                |  |   |                     |   |  | $ | (0.15       | )
|                                                          |  |                                          |      |                     |   |                     |  |   |                     |   |  |   |             |  



For the three and nine
months ended September 30, 2004, 3.9 million and 5.6 million shares of common stock equivalents, respectively, were not included in the calculation of weighted average shares for diluted earnings per share. The Company incurred losses
during these periods and the effect of their inclusion would be anti-dilutive.



|14. | Stock-Based Compensation
|--- | ------------------------



The Company has established the Knight Capital Group, Inc. 1998 Long Term Incentive Plan, the Knight Capital Group, Inc. 1998 Nonemployee Director Stock
Option Plan and the Knight Capital Group, Inc. 2003 Equity Incentive Plan (collectively, the Plans). The purpose of the Plans is to provide long-term incentive compensation to employees and directors of the Company. The Plans are
administered by the Compensation Committee of the Companys Board of Directors, and allow for the grant of options, restricted stock and restricted stock units (collectively, the awards), as defined by the Plans. In addition, the
Plans limit the number of awards that may be granted to a single individual and the Plans also limit the number of shares of restricted stock or restricted stock units that may be awarded.



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##### Table of Contents

The Companys policy is to grant options for the purchase of shares of Class A Common Stock at
not less than market value, which the Plans define as the average of the high and low sales prices on the date prior to the grant date. Options generally vest over a three or four-year period and expire on the fifth or tenth anniversary of the grant
date, pursuant to the terms of the agreements. Restricted stock awards generally vest over three years. The Company has the right to fully vest employees in their awards upon retirement and in certain other circumstances.



The Company did not grant any restricted shares under the Plans during the
third quarter of 2005 as stock-based compensation. At September 30, 2005, the Company had 3.1 million restricted shares outstanding, in aggregate, both under and outside of the Plans. The Company recognizes compensation expense for the fair
values of the restricted shares of Class A Common Stock granted to employees over the vesting period. For the three months ended September 30, 2005 and 2004, the Company recorded compensation expense relating to restricted shares of $3.2
million and $2.4 million, respectively, and $10.0 million and $6.8 million for the nine months ended September 30, 2005 and 2004, respectively, all of which has been included in Employee compensation and benefits on the Consolidated Statements
of Operations.



|15. | Income Taxes
|--- | ------------



The Company and its subsidiaries file a consolidated federal income tax return as well as combined state income tax returns in certain jurisdictions. In
other jurisdictions, the Company and its subsidiaries file separate company state income tax returns.



The following table reconciles the U.S. federal statutory income tax (benefit) rate to the Companys actual income tax (benefit) rate:



|                                                                                      |  |                                          |   |  |                                         |    |  |      |   |  |       |   
|------------------------------------------------------------------------------------- |  | ---------------------------------------- | - |  | --------------------------------------- | -- |  | ---- | - |  | ----- | --
|                                                                                      |  | For the three months ended September 30, |   |  | For the nine months ended September 30, |   
|                                                                                      |  | 2005                                     |   |  | 2004                                    |    |  | 2005 |   |  | 2004  |   
|U.S. federal statutory income tax (benefit) rate                                      |  | 35.0                                     | % |  | (35.0                                   | %) |  | 35.0 | % |  | (35.0 | %)
|U.S. state and local income tax (benefit) rate, net of U.S. federal income tax effect |  | 4.6                                      | % |  | (3.4                                    | %) |  | 4.8  | % |  | (1.9  | %)
|Nondeductible charges                                                                 |  | 0.2                                      | % |  | 3.5                                     | %  |  | 1.3  | % |  | 24.4  | % 
|Other, net                                                                            |  | 0.4                                      | % |  | (4.9                                    | %) |  | 0.0  | % |  | (3.1  | %)
|                                                                                      |  |                                          |   |  |                                         |    |  |      |   |  |       |   
|Effective income tax (benefit) rate                                                   |  | 40.2                                     | % |  | (39.8                                   | %) |  | 41.1 | % |  | (15.6 | %)
|                                                                                      |  |                                          |   |  |                                         |    |  |      |   |  |       |   



|16. | Business Segments
|--- | -----------------



The Company currently has two operating business segments within continuing operations, Equity Markets and Asset Management, and a Corporate segment. The
Equity Markets segment primarily represents the businesses that provide comprehensive trade execution services in U.S. equities. The Asset Management segment consists of investment management and sponsorship of the Deephaven Funds. The Corporate
segment includes all corporate overhead expenses and investment income earned on strategic investments and the Companys corporate investment in the Deephaven Funds. Corporate overhead expenses primarily consist of compensation for certain
senior executives and other individuals employed at the corporate holding company, legal and other professional expenses relating to corporate matters, investor and public relations expenses and directors and officers insurance.



In 2004, the Company sold one of its business segments,
Derivative Markets. The revenues and expenses associated with Derivative Markets have been included within Income from discontinued operations, net of tax on the Consolidated Statements of Operations for all periods presented. For a discussion of
discontinued operations, see Footnote 9, Discontinued Operations.



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##### Table of Contents

The Companys revenues, income (loss) from continuing operations before income taxes and total
assets by segment are summarized below (amounts in millions):



|                                                             |  |                |         |   |                 |   |      |           |  |   |                   |   |  |   |         |  
|------------------------------------------------------------ |  | -------------- | ------- | - | --------------- | - | ---- | --------- |  | - | ----------------- | - |  | - | ------- | -
|                                                             |  | Equity Markets |         |   | AssetManagement |   |      | Corporate |  |   | ConsolidatedTotal |  
|For the three months ended September 30, 2005:               |  |                |         |   |                 |   |      |           |  |   |                   |   |  |   |         |  
|Revenues                                                     |  | $              | 129.4   |   |                 | $ | 42.3 |           |  | $ | 12.4              |   |  | $ | 184.1   |  
|Income from continuing operations before income taxes        |  |                | 19.1    |   |                 |   | 15.7 |           |  |   | 5.3               |   |  |   | 40.1    |  
|Total assets                                                 |  |                | 1,001.1 |   |                 |   | 64.0 |           |  |   | 324.3             |   |  |   | 1,389.4 |  
|                                                             |  |                |         |  
|For the three months ended September 30, 2004:               |  |                |         |   |                 |   |      |           |  |   |                   |   |  |   |         |  
|Revenues                                                     |  | $              | 95.4    |   |                 | $ | 6.8  |           |  | $ | (0.4              | ) |  | $ | 101.8   |  
|(Loss) from continuing operations before income taxes        |  |                | (3.3    | ) |                 |   | (0.5 | )         |  |   | (7.2              | ) |  |   | (11.0   | )
|Total assets1                                                |  |                | 858.7   |   |                 |   | 27.1 |           |  |   | 242.3             |   |  |   | 1,128.2 |  
|                                                             |  |                |         |  
|                                                             |  | Equity Markets |         |   | AssetManagement |   |      | Corporate |  |   | ConsolidatedTotal |  
|For the nine months ended September 30, 2005:                |  |                |         |   |                 |   |      |           |  |   |                   |   |  |   |         |  
|Revenues                                                     |  | $              | 335.9   |   |                 | $ | 68.3 |           |  | $ | 29.2              |   |  | $ | 433.3   |  
|Income from continuing operations before income taxes        |  |                | 12.1    |   |                 |   | 17.9 |           |  |   | 11.4              |   |  |   | 41.4    |  
|Total assets                                                 |  |                | 1,001.1 |   |                 |   | 64.0 |           |  |   | 324.3             |   |  |   | 1,389.4 |  
|                                                             |  |                |         |  
|For the nine months ended September 30, 2004:                |  |                |         |   |                 |   |      |           |  |   |                   |   |  |   |         |  
|Revenues                                                     |  | $              | 404.4   |   |                 | $ | 28.9 |           |  | $ | 6.8               |   |  | $ | 440.2   |  
|(Loss) income from continuing operations before income taxes |  |                | (28.3   | ) |                 |   | 7.3  |           |  |   | (17.2             | ) |  |   | (38.2   | )
|Total assets1                                                |  |                | 858.7   |   |                 |   | 27.1 |           |  |   | 242.3             |   |  |   | 1,128.2 |  

---

|1 | Total assets at September 30, 2004 do not include Assets within discontinued operations of $3.1 billion.
|- | --------------------------------------------------------------------------------------------------------



18



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



On August 9, 2005, the Company filed (i) an amended 2004 Annual Report on Form 10-K/A to reflect a correction in
accounting for certain property lease transactions (the Lease Correction) and (ii) an amended Form 10-Q/A for the three months ended March 31, 2005 to reflect the Lease Correction and an adjustment to the Companys Receivables from
and Payables to brokers and dealers. As applicable, this Item 2 has been revised to reflect these changes.



The following discussion of our results of operations should be read in conjunction with our consolidated financial statements and notes thereto included
in our amended Annual Report on Form 10-K/A for the year ended December 31, 2004 as filed with the Securities and Exchange Commission (SEC). This discussion contains forward-looking statements that involve risks and uncertainties,
including those discussed in our Form 10-K/A. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth elsewhere in this
document and in our Form 10-K/A.



Certain statements contained
in this Quarterly Report on Form 10-Q, including without limitation, those under Managements Discussion and Analysis of Financial Condition and Results of Operations herein (MD&A), Quantitative and Qualitative
Disclosures About Market Risk in Part I, Item 3, and Legal Proceedings in Part II, Item 1, and the documents incorporated by reference, may constitute forward-looking statements. These forward-looking statements are not
historical facts, and are based on current expectations, estimates and projections about the Companys industry, managements beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and
beyond our control. Accordingly, readers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict including, without
limitation, risks associated with the costs and integration, performance and operation of the businesses being acquired by the Company. Since such statements involve risks and uncertainties, the actual results and performance of the Company may turn
out to be materially different from the results expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking 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 this report. Readers should carefully review the risks
and uncertainties under Certain Factors Affecting Results of Operations within MD&A herein, Risks Affecting our Business in the Companys Annual Report on Form 10-K/A, and those described in other reports or
documents the Company files from time to time with the SEC. This discussion should be read in conjunction with the Companys consolidated financial statements and the notes thereto contained in this report.



Executive Overview



The Company currently has two operating segments, Asset Management and
Equity Markets, and a Corporate segment.



| |  |  | Asset ManagementWe operate an asset management business for institutions and high-net-worth individuals. Assets under management were $3.4 billion as of
September 30, 2005, down slightly from $3.5 billion of assets under management as of September 30, 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Equity MarketsWe are a leading execution specialist providing comprehensive trade execution services to institutional and broker-dealer clients, offering capital
commitment and access to a deep pool of liquidity across the depth and breadth of the U.S. equity markets.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Companys Corporate segment includes all corporate overhead expenses and investment income earned on strategic investments and our corporate
investment in funds managed by the Asset Management segment (the Deephaven Funds). Corporate overhead expenses primarily consist of compensation for certain senior



19



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##### Table of Contents

executives and other individuals employed at the corporate holding company, legal and other professional expenses related to corporate matters, investor and
public relations expenses and directors and officers insurance.



In the fourth quarter of 2004, the Company completed the sale of one of its segments, Derivative Markets, to Citigroup Financial Products, Inc. (Citigroup). In accordance with generally accepted accounting
principles (GAAP), the results of this segment have been included within discontinued operations for all periods presented. The final purchase price was subject to adjustment based on the final determination of the book value of the
Derivative Markets business at the time the deal closed. The results of this adjustment and other expenses related to the sale is included in Income from discontinued operations, net of tax on the Consolidated Statements of Operations included in
Part I, Item 1 Financial Statements of this document. For a more detailed discussion of the sale of the Companys Derivative Markets business, please see Footnote 9 Discontinued Operations also included in Part I,
Item 1 Financial Statements of this document.



The following table sets forth the revenues and expenses excluding Regulatory charges and related matters and Writedown of assets and lease loss accrual (Operating Expenses) and income (loss) from continuing operations before
Regulatory charges and related matters and Writedown of assets and lease loss accrual and income taxes (Pre-Tax Operating Earnings) of our segments and on a consolidated basis (in millions):



|                           |  |                                         |       |      |                                        |       |      |  |      |       |  |   |       |  
|-------------------------- |  | --------------------------------------- | ----- | ---- | -------------------------------------- | ----- | ---- |  | ---- | ----- |  | - | ----- | -
|                           |  | For the three months endedSeptember 30, |       |      | For the nine months endedSeptember 30, |      
|                           |  | 2005                                    |       | 2004 |                                        |       | 2005 |  | 2004 |      
|Equity Markets             |  |                                         |       |      |                                        |       |      |  |      |       |  |   |       |  
|Revenues                   |  | $                                       | 129.4 |      | $                                      | 95.4  |      |  | $    | 335.9 |  | $ | 404.4 |  
|Operating Expenses         |  |                                         | 104.8 |      |                                        | 97.8  |      |  |      | 313.8 |  |   | 350.0 |  
|                           |  |                                         |       |      |                                        |       |      |  |      |       |  |   |       |  
|Pre-Tax Operating Earnings |  |                                         | 24.6  |      |                                        | (2.4  | )    |  |      | 22.1  |  |   | 54.4  |  
|                           |  |                                         |       |      |                                        |       |      |  |      |       |  |   |       |  
|Asset Management           |  |                                         |       |      |                                        |       |      |  |      |       |  |   |       |  
|Revenues                   |  |                                         | 42.3  |      |                                        | 6.8   |      |  |      | 68.3  |  |   | 28.9  |  
|Operating Expenses         |  |                                         | 26.5  |      |                                        | 7.3   |      |  |      | 48.3  |  |   | 21.6  |  
|                           |  |                                         |       |      |                                        |       |      |  |      |       |  |   |       |  
|Pre-Tax Operating Earnings |  |                                         | 15.7  |      |                                        | (0.5  | )    |  |      | 20.0  |  |   | 7.3   |  
|                           |  |                                         |       |      |                                        |       |      |  |      |       |  |   |       |  
|Corporate                  |  |                                         |       |      |                                        |       |      |  |      |       |  |   |       |  
|Revenues                   |  |                                         | 12.4  |      |                                        | (0.4  | )    |  |      | 29.2  |  |   | 6.8   |  
|Operating Expenses         |  |                                         | 7.1   |      |                                        | 6.8   |      |  |      | 17.8  |  |   | 24.0  |  
|                           |  |                                         |       |      |                                        |       |      |  |      |       |  |   |       |  
|Pre-Tax Operating Earnings |  |                                         | 5.3   |      |                                        | (7.2  | )    |  |      | 11.3  |  |   | (17.2 | )
|                           |  |                                         |       |      |                                        |       |      |  |      |       |  |   |       |  
|Consolidated               |  |                                         |       |      |                                        |       |      |  |      |       |  |   |       |  
|Revenues                   |  |                                         | 184.1 |      |                                        | 101.8 |      |  |      | 433.3 |  |   | 440.2 |  
|Operating Expenses         |  |                                         | 138.5 |      |                                        | 111.9 |      |  |      | 379.9 |  |   | 395.6 |  
|                           |  |                                         |       |      |                                        |       |      |  |      |       |  |   |       |  
|Pre-Tax Operating Earnings |  | $                                       | 45.6  |      | $                                      | (10.1 | )    |  | $    | 53.4  |  | $ | 44.5  |  
|                           |  |                                         |       |      |                                        |       |      |  |      |       |  |   |       |  



Total revenues from
continuing operations for the three months ended September 30, 2005 increased 80.8% from the comparable period in 2004, while Operating Expenses from continuing operations increased 23.7%. Pre-Tax Operating Earnings increased to earnings of
$45.6 million for the three months ended September 30, 2005, from a loss of $10.1 million in the comparable period in 2004. Our Asset Management segment was positively impacted by higher returns on the Deephaven Funds. Our Equity Markets
segment benefited from higher equity dollar volume as well as the acquisition of the business of Direct Trading Institutional, Inc. (now operated as Direct Trading Institutional, L.P. (DTI)), a privately held firm specializing in
providing institutions with direct access trading. The results from our Corporate segment were positively impacted by the higher returns on our corporate investment in the Deephaven Funds.



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##### Table of Contents

Total revenues from continuing operations for the nine months ended September 30, 2005 decreased
1.6% from the comparable period in 2004, while Operating Expenses from continuing operations decreased 4.0%. Pre-Tax Operating Earnings increased to $53.4 million for the nine months ended September 30, 2005, from $44.5 million in the
comparable period in 2004. Our Asset Management segment was positively impacted by higher fund returns and a higher average amount of assets under management. Our Equity Markets segment was affected by greater competition for broker-dealer client
order flow and reduced revenue capture statistics. The results from our Corporate segment were positively impacted by the gain on the sale of our equity investment in Nasdaq and a portion of our equity investment in the International Securities
Exchange, Inc. (ISE) as well as by higher returns on our corporate investment in the Deephaven Funds.



A reconciliation of GAAP income (loss) from continuing operations before income taxes (Pre-Tax GAAP Income) to Pre-Tax Operating Earnings and
of total GAAP expenses to Operating Expenses is included elsewhere in this section.



Certain Factors Affecting Results of Operations



We have experienced, and expect to continue to experience, significant fluctuations in operating results due to a variety of factors, including, but not limited to, introductions or enhancements to market-making services by us or our
competitors; the value of our securities positions and our ability to manage the risks attendant thereto; the equity market volumes; the dollar value of securities traded; volatility in the securities markets; our market share with institutional and
broker-dealer clients; the performance of our international operations; our ability to manage personnel, overhead and other expenses, including our occupancy expenses under our office leases and legal fees related to our legal proceedings and other
matters; the strength of our client relationships; the amount of, and volatility in, the results of our quantitative market-making and program trading portfolios; changes in payments for order flow rates and clearing costs; the addition or loss of
executive management and asset management, equity sales and trading and technology professionals; legislative, legal and regulatory changes; legal and regulatory matters; geopolitical risk; the amount and timing of capital expenditures and
divestitures; the incurrence of costs associated with acquisitions and dispositions; the integration, performance and operation of acquired businesses; investor sentiment; the level of assets under management and fund returns; technological changes
and events; seasonality; competition; and market and economic conditions. Such factors may also have an impact on our ability to achieve our strategic objectives, including, without limitation, increases in our institutional market share and revenue
capture in our Equity Markets segment and increases in our fund returns and assets under management in our Asset Management segment. If demand for our services declines in either of our segments due to any of the above factors, and we are unable to
adjust our cost structure on a timely basis, our operating results and strategic objectives could be materially and adversely affected.



As a result of the foregoing factors, period-to-period comparisons of our revenues and operating results are not necessarily meaningful and such
comparisons cannot be relied upon as indicators of future performance. There also can be no assurance that we will be able to return to the rates of revenue growth that we have experienced in the past or that we will be able to improve our operating
results.



Trends



We believe that our continuing operations are currently impacted by the
following trends that may affect our financial condition and results of operations.



| |  |  | Over the past three years, the effects of market structure changes, competition and market conditions have resulted in a decline in revenue capture per U.S. equity dollar value
traded in our Equity Markets operations.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Retail broker-dealer participation in the equity markets has fluctuated over the past few years due to investor sentiment, market conditions and a variety of other factors. Retail
transaction volumes may not be sustainable and are not predictable.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Broker-dealer clients continue to focus on statistics measuring the quality of equity executions (including speed of executions and price improvement). In an effort to improve the
quality of their executions as well as increase efficiencies, market makers have increased the level of automation within their operations. The greater focus on execution quality has resulted in greater competition in the marketplace, which has
negatively impacted the revenue capture metrics of the Company and other market-making firms.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Market structure changes, competition and market conditions have triggered an industry shift toward market makers charging explicit commissions or commission equivalents to
institutional clients for executions in OTC securities. For the majority of our institutional client orders, we currently charge an explicit fee in the form of commissions or commission equivalents. In addition, institutional commission rates have
fallen in the past few years, and this may continue in the future.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Due to regulatory scrutiny over the past two years relating to equity sell-side research and the continued focus by investors on execution quality and overall transaction costs,
more institutional clients allocate commissions to broker-dealers based on the quality of executions. In the past, institutional equity commissions were primarily allocated to broker-dealers in exchange for either research or soft dollar and
commission recapture programs.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Market structure changes, competition and market conditions have resulted in the recent announcement of two significant mergers amongst U.S. market centers. This consolidation may
result in greater competition in the future.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | There has been increased scrutiny of market makers, hedge funds and soft dollar practices by the regulatory and legislative authorities, including regulation related to the
registration of hedge funds. New legislation or modifications to existing regulations and rules could occur in the future.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | There has been a growing trend among institutions to allocate more of their assets to hedge fund investments. This has influenced the growth in the hedge fund industry and may
result in greater competition in the future.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Income
Statement Items



The following section briefly
describes the key components of, and drivers to, our significant revenues and expenses from continuing operations.



Revenues



Our revenues consist principally of Commissions and fees and Net trading revenue from U.S. securities trading and market-making activities from Equity
Markets. Revenues on transactions for which we charge explicit commissions or commission equivalents, which includes the majority of our institutional client orders, are included within Commissions and fees. Commissions and fees are primarily
affected by changes in our equity transaction volumes with institutional clients, changes in commission rates, the growth of our soft dollar and commission recapture activity as well as by changes in fees earned for directing trades to certain
destinations for execution. We also receive fees for providing certain information to market data providers and for directing trades to certain destinations for execution.



Trading profits and losses on principal transactions are included within Net trading revenue. These revenues are primarily
affected by changes in the amount and mix of U.S. equity trade and share volumes, our revenue capture, dollar value of equities traded, our ability to derive trading gains by taking proprietary positions, changes in our execution standards,
volatility in the marketplace, industry commission levels, our mix of broker-dealer and institutional clients, and regulatory changes and evolving industry customs and practices.



Asset management fees represent fees earned by Deephaven Capital Management LLC (Deephaven) for sponsoring and
managing the Deephaven Funds. These fees consist of annual management fees, calculated as



22



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##### Table of Contents

fixed percentages of assets under management, and incentive fees, which, in general, are calculated as a percentage of the funds annual returns. Such
fees are primarily affected by the rates of return earned on the Deephaven Funds and changes in the amount of assets under management.



We earn interest income from our cash held at banks and cash held in trading accounts at clearing brokers. The Companys clearing agreements call for
payment or receipt of interest income, net of transaction-related interest charged by clearing brokers for facilitating the settlement and financing of securities transactions. Net interest is primarily affected by interest rates, the changes in
cash balances held at banks and clearing brokers and our level of securities positions in which we are long compared to our securities positions in which we are short.



Investment income and other income primarily represents income earned, net of losses, related to our corporate investment in
the Deephaven Funds and our strategic investments. Such income is primarily affected by the rates of return earned by the Deephaven Funds as well as the performance and activity of our strategic investments.



Expenses



Our operating expenses largely consist of Employee compensation and
benefits, Execution and clearance fees, Soft dollar and commission recapture payments and Payments for order flow. Employee compensation and benefits expense fluctuates, for the most part, based on changes in our revenues, our profitability and the
number of employees. Execution and clearance fees primarily fluctuate based on changes in equity trade and share volume, clearance fees charged by clearing brokers and fees paid to access ECNs, exchanges and certain regulatory bodies. Soft dollar
and commission recapture payments fluctuate based on U.S. equity share volume executed on behalf of institutions. Payments for order flow fluctuate based on U.S. equity share volume, profitability, the mix of market orders and limit orders, the mix
of orders received from broker-dealers and institutions who accept payments for order flow and changes in our payment for order flow rates.



Employee compensation and benefits expense primarily consists of salaries and wages paid to all employees and profitability-based compensation, which
includes compensation paid to sales personnel and incentive compensation paid to all other employees based on our overall profitability. Compensation for employees engaged in sales activities is determined primarily based on a percentage of their
gross revenues net of certain expenses including soft dollar and commission recapture expenses, execution and clearance costs and overhead allocations. The majority of compensation in Asset Management is determined by a profitability-based formula,
subject to certain minimum guaranteed payments.



Execution and
clearance fees primarily represent clearance fees paid to clearing brokers for equities transactions, transaction fees paid to Nasdaq and other regional exchanges and regulatory bodies and execution fees paid to third parties, primarily for
executing trades in listed securities on the New York Stock Exchange (NYSE) and American Stock Exchange (AMEX), and for executing orders through ECNs.



Soft dollar and commission recapture expense represent payments to institutions in connection with our soft dollar and
commission recapture programs.



Payments for order flow
represent payments to broker-dealer clients, in the normal course of business, for directing to us their order flow in U.S. equities. Payments for order flow fluctuate as we modify our payment rates and as the percentage of clients whose policy is
not to accept payments for order flow varies.



23



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##### Table of Contents

Three Months Ended September 30, 2005 and 2004



Continuing Operations



Revenues



|                                                                |  |                                          |         |   |      |   |         |        |  |   |             |   |  |       |  
|--------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------- | ------ |  | - | ----------- | - |  | ----- | -
|                                                                |  | For the three months ended September 30, |        
|                                                                |  | 2005                                     |         |   | 2004 |   |         | Change |  |   | % of Change |  
|Total Revenues from Asset Management (in millions)              |  | $                                        | 42.3    |   |      | $ | 6.8     |        |  | $ | 35.5        |   |  | 521.5 | %
|                                                                |  |                                          |         |   |      |   |         |        |  |   |             |   |  |       |  
|Average month-end balance of assets under management (millions) |  | $                                        | 3,374.6 |   |      | $ | 3,415.5 |        |  | $ | (40.9       | ) |  | -1.2  | %
|Quarterly fund return to investors*                             |  |                                          | 5.5     | % |      |   | -0.5    | %      |  |   | 5.9         | % |  | NM    |  

---

|* | Quarterly fund return represents the blended quarterly return across all assets under management in the Deephaven Funds
|- | -----------------------------------------------------------------------------------------------------------------------

NM - Not meaningful



Total revenues from the Asset Management segment, which primarily consists of Asset management fees, increased to $42.3 million for the three months ended
September 30, 2005, from $6.8 million for the comparable period in 2004. The increase is primarily due to higher incentive fees as a result of the increase in fund returns. The average month-end balance of assets under management was
approximately $3.4 billion for the three months ended September 30, 2005 and 2004. The blended quarterly fund return across all assets under management for the three months ended September 30, 2005 was a gain of 5.5%, up from a loss of
0.5% for the comparable period in 2004.



|                                                                  |  |                                          |       |      |   |       |        |  |   |             |   |  |        |  
|----------------------------------------------------------------- |  | ---------------------------------------- | ----- | ---- | - | ----- | ------ |  | - | ----------- | - |  | ------ | -
|                                                                  |  | For the three months ended September 30, |      
|                                                                  |  | 2005                                     |       | 2004 |   |       | Change |  |   | % of Change |  
|Commissions and fees (millions)                                   |  | $                                        | 74.9  |      | $ | 58.6  |        |  | $ | 16.3        |   |  | 27.8   | %
|Net trading revenue (millions)                                    |  |                                          | 52.3  |      |   | 35.9  |        |  |   | 16.4        |   |  | 45.8   | %
|Interest and dividends, net (millions)                            |  |                                          | 1.9   |      |   | 1.0   |        |  |   | 0.8         |   |  | 82.0   | %
|Investment income and other (millions)                            |  |                                          | 0.4   |      |   | (0.1  | )      |  |   | 0.5         |   |  | -433.5 | %
|                                                                  |  |                                          |       |      |   |       |        |  |   |             |   |  |        |  
|Total Revenues from Equity Markets (millions)                     |  | $                                        | 129.4 |      | $ | 95.4  |        |  | $ | 34.0        |   |  | 35.6   | %
|                                                                  |  |                                          |       |      |   |       |        |  |   |             |   |  |        |  
|U.S equity dollar value traded ($ billions)                       |  |                                          | 467.7 |      |   | 333.1 |        |  |   | 134.6       |   |  | 40.4   | %
|U.S. equity trades executed (millions)                            |  |                                          | 50.8  |      |   | 41.6  |        |  |   | 9.2         |   |  | 22.1   | %
|Nasdaq and Listed equity shares traded (billions)                 |  |                                          | 25.7  |      |   | 22.5  |        |  |   | 3.2         |   |  | 14.0   | %
|OTC Bulletin Board and Pink Sheet shares traded (billions)        |  |                                          | 131.7 |      |   | 294.2 |        |  |   | (162.5      | ) |  | -55.2  | %
|Average revenue capture per U.S. equity dollar value traded (bps) |  |                                          | 2.0   |      |   | 2.2   |        |  |   | (0.2        | ) |  | -8.6   | %



Total revenues from
our Equity Markets segment, which primarily comprises Commissions and fees and Net trading revenue from our domestic businesses, increased 35.6% to $129.4 million for the three months ended September 30, 2005, from $95.4 million for the
comparable period in 2004. The increase in revenues was primarily the result of higher dollar volumes traded, which increased 40.4% compared to the three months ended September 30, 2004, and the acquisition of DTI at the end of the second
quarter offset, in part, by a decrease in revenue capture per U.S. equity dollar value traded.



Average revenue capture per U.S. equity dollar value traded was 2.0 basis points (bps) for the third quarter of 2005, down 8.6% from 2.2 bps in the third quarter of 2004. Average revenue capture per U.S.
equity dollar value traded is calculated as the total of net trading revenues less certain transaction-related regulatory fees (included in Execution and clearance fees) and institutional commissions and commission equivalents (included in
Commissions and fees), (collectively, Core Equity Revenues) divided by the total dollar value of the related equity transactions. Core Equity Revenues were $92.1 million and $71.7 million for the three months ended September 30,
2005 and 2004, respectively.



24



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##### Table of Contents

|                                                                       |  |                                          |       |      |   |       |        |  |             |      |  |      |  
|---------------------------------------------------------------------- |  | ---------------------------------------- | ----- | ---- | - | ----- | ------ |  | ----------- | ---- |  | ---- | -
|                                                                       |  | For the three months ended September 30, |      
|                                                                       |  | 2005                                     |       | 2004 |   |       | Change |  | % of Change |     
|Total Revenues from Corporate (millions)                               |  | $                                        | 12.4  |      | $ | (0.4  | )      |  | $           | 12.8 |  | NM   |  
|                                                                       |  |                                          |       |      |   |       |        |  |             |      |  |      |  
|Average corporate investment balance in the Deephaven Funds (millions) |  | $                                        | 278.7 |      | $ | 206.7 |        |  | $           | 72.0 |  | 34.8 | %

---

NM - Not meaningful



Total revenues from the Corporate segment, which primarily represents income
from our corporate investment in the Deephaven Funds and other strategic investments, increased $12.8 million. Income from our corporate investment in the Deephaven Funds increased to a gain of $14.6 million for the three months ended
September 30, 2005, from a loss of $1.6 million for the comparable period in 2004.



Expenses



Employee
compensation and benefits expense increased 36.2% to $68.3 million for the three months ended September 30, 2005, from $50.1 million for the comparable period in 2004. As a percentage of total revenue, employee compensation and benefits
decreased to 37.1% for the three months ended September 30, 2005, from 49.2% in the comparable period in 2004. The increase on a dollar basis was primarily due to the increase in overall profitability. Our number of full time employees within
our continuing operations increased to 699 at September 30, 2005, from 675 full time employees at September 30, 2004, primarily due to the acquisition of DTI. In addition, we incurred severance costs of $1.9 million and $870,000 for the
three months ended September 30, 2005 and 2004, respectively.



Execution and clearance fees increased 11.5% to $24.6 million for the three months ended September 30, 2005, from $22.0 million for the comparable period in 2004. As a percentage of total revenue, execution and clearance fees decreased
to 13.4% for the three months ended September 30, 2005, from 21.6% in the comparable period in 2004. Execution and clearance fees fluctuate based on changes in transaction volumes, regulatory fees and efficiencies in processing the
transactions. As a percentage of revenues, execution and clearance fees decreased primarily due to higher asset management revenues, which have no associated execution and clearance fees.



Payments for order flow decreased 15.3% to $3.9 million for the three months ended September 30, 2005, from $4.6
million for the comparable period in 2004. As a percentage of total revenue, payments for order flow decreased to 2.1% for the three months ended September 30, 2005, from 4.5% for the comparable period in 2004. The decrease on a dollar basis
and as a percentage of total revenue was primarily due to changes in our payment for order flow rates. Soft dollar and commission recapture expense increased 11.1% to $15.9 million for the three months ended September 30, 2005, from $14.3
million for the comparable period in 2004.



Communications and
data processing expense increased slightly to $8.0 million for the three months ended September 30, 2005, from $7.9 million for the comparable period in 2004.



Depreciation and amortization expense increased 24.1% to $4.2 million for the three months ended September 30, 2005,
from $3.4 million for the comparable period in 2004. This increase was primarily due to the amortization of intangible assets related to the purchase of the business of DTI as well as additional depreciation and amortization expense related to new
fixed assets and leasehold improvements at our new corporate headquarters at 545 Washington Boulevard in Jersey City, N.J.



Occupancy and equipment rentals expense decreased 21.8% to $3.2 million for the three months ended September 30, 2005, from $4.1 million for the
comparable period in 2004. This decrease was primarily attributable to the lease loss accruals recorded during the second quarter of 2005 related to our move from 525 Washington Boulevard into our new facility at 545 Washington Boulevard in Jersey
City, N.J.



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##### Table of Contents

Professional fees increased to $6.1 million for the three months ended September 30, 2005, from $4.3
million for the comparable period in 2004. The increase in 2005 was primarily due to increases in consulting expenses and legal expenses, which have fluctuated based on the activity surrounding our various legal and regulatory matters.



Business development expense decreased to $1.6 million for the three
months ended September 30, 2005, from $2.1 million for the comparable period in 2004. The primary reasons for the decrease were lower advertising and travel and entertainment costs.



Other expenses increased to $2.8 million for the three months ended September 30, 2005, from a benefit of $820,000 for
the comparable period in 2004. This increase was due to a one-time benefit, in the comparable period in 2004, of approximately $3.0 million related to an adjustment to legal reserves. Excluding this one-time benefit, Other expenses would have
increased 27.8% due to an increase in administrative and other costs relating to the move to our new headquarters at 545 Washington Boulevard, Jersey City, N.J.



During the three months ended September 30, 2005, a charge of $5.5 million was incurred related to our Equity Markets segment. This charge
consisted of a lease loss accrual related to excess real estate capacity at our 545 Washington Boulevard facility in Jersey City, N.J. During the three months ended September 30, 2004, a charge of $874,000 was incurred related to our Equity
Markets segment. This charge related to the writedown of fixed assets that were no longer actively used.



Our effective income tax rates, from continuing operations, of 40.2% and 39.8% for the three months ended September 30, 2005 and 2004, respectively,
differ from the federal statutory income tax rate of 35% due primarily to state income taxes and nondeductible charges.



Discontinued Operations



As of the close of business on December 9, 2004, the Company sold substantially all of the assets and certain of the liabilities that comprised the
Derivative Markets segment operated by Knight Financial Products LLC and Knight Execution Partners LLC to Citigroup for approximately $237 million in cash. The final purchase price was subject to adjustment based on the final determination of book
value of the Derivative Markets business at the time the deal closed. The decision to sell the Derivative Markets business was based 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. The Company recognized a small after-tax gain of $388,000 related to its former Derivative Markets business in the three months ended September 30, 2005. The Income from
discontinued operations, net of tax on the Consolidated Statements of Operations was $5.3 million for the three months ended September 30, 2004. For a further discussion of the sale of the Companys Derivative Markets business, please see
Footnote 9 Discontinued Operations included in Part I, Item 1 Financial Statements of this document.



Nine Months Ended September 30, 2005 and 2004



Continuing Operations



Revenues

|                                                                |  |                                         |         |   |      |   |         |        |  |   |             |   |  |       |  
|--------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ---- | - | ------- | ------ |  | - | ----------- | - |  | ----- | -
|                                                                |  | For the nine months ended September 30, |        
|                                                                |  | 2005                                    |         |   | 2004 |   |         | Change |  |   | % of Change |  
|Total Revenues from Asset Management (millions)                 |  | $                                       | 68.3    |   |      | $ | 28.9    |        |  | $ | 39.4        |   |  | 136.0 | %
|                                                                |  |                                         |         |   |      |   |         |        |  |   |             |   |  |       |  
|Average month-end balance of assets under management (millions) |  | $                                       | 3,372.2 |   |      | $ | 2,756.4 |        |  | $ | 615.8       |   |  | 22.3  | %
|Year-to-date fund return to investors*                          |  |                                         | 5.2     | % |      |   | 1.6     | %      |  |   | 3.6         | % |  | 225.0 | %

---

|* | Year-to-date fund return represents the blended year-to-date return across all assets under management in the Deephaven Funds
|- | -----------------------------------------------------------------------------------------------------------------------------



26



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##### Table of Contents

Total revenues from the Asset Management segment, which primarily consists of Asset management fees,
increased 136.0% to $68.3 million for the nine months ended September 30, 2005, from $28.9 million for the comparable period in 2004. The increase is primarily due to higher incentive fees as a result of an increase in fund returns as well as
higher management fees due to the growth in assets under management. The blended year-to-date fund return across all assets under management for the nine months ended September 30, 2005 was a gain of 5.2%, up from a gain of 1.6% for the
comparable period in 2004. The average month-end balance of assets under management increased to $3.4 billion for the nine months ended September 30, 2005, from $2.8 billion for the comparable period in 2004.



|                                                                  |  |                                         |         |      |   |         |  |   |             |   |  |       |  
|----------------------------------------------------------------- |  | --------------------------------------- | ------- | ---- | - | ------- |  | - | ----------- | - |  | ----- | -
|                                                                  |  | For the nine months ended September 30, |        
|                                                                  |  | 2005                                    |         | 2004 |   | Change  |  |   | % of Change |  
|Commissions and fees (millions)                                   |  | $                                       | 213.0   |      | $ | 203.8   |  | $ | 9.2         |   |  | 4.5   | %
|Net trading revenue (millions)                                    |  |                                         | 116.8   |      |   | 197.9   |  |   | (81.0       | ) |  | -41.0 | %
|Interest and dividends, net (millions)                            |  |                                         | 3.7     |      |   | 2.5     |  |   | 1.2         |   |  | 48.2  | %
|Investment income and other (millions)                            |  |                                         | 2.4     |      |   | 0.3     |  |   | 2.1         |   |  | 780.3 | %
|                                                                  |  |                                         |         |      |   |         |  |   |             |   |  |       |  
|Total Revenues from Equity Markets (millions)                     |  | $                                       | 335.9   |      | $ | 404.4   |  | $ | (68.6       | ) |  | -17.0 | %
|                                                                  |  |                                         |         |      |   |         |  |   |             |   |  |       |  
|U.S equity dollar value traded ($ billions)                       |  |                                         | 1,384.1 |      |   | 1,254.5 |  |   | 129.6       |   |  | 10.3  | %
|U.S. equity trades executed (millions)                            |  |                                         | 151.8   |      |   | 150.2   |  |   | 1.6         |   |  | 1.0   | %
|Nasdaq and Listed equity shares traded (billions)                 |  |                                         | 80.2    |      |   | 92.7    |  |   | (12.5       | ) |  | -13.5 | %
|OTC Bulletin Board and Pink Sheet shares traded (billions)        |  |                                         | 581.5   |      |   | 990.6   |  |   | (409.1      | ) |  | -41.3 | %
|Average revenue capture per U.S. equity dollar value traded (bps) |  |                                         | 1.7     |      |   | 2.6     |  |   | (0.8        | ) |  | -31.7 | %



Total revenues from
our Equity Markets segment, which primarily comprises Commissions and fees and Net trading revenue from our domestic businesses, decreased 17.0% to $335.9 million for the nine months ended September 30, 2005, from $404.4 million for the
comparable period in 2004. The decrease in revenues was primarily the result of lower revenue capture per U.S. equity dollar value traded and lower share volumes.



Average revenue capture per U.S. equity dollar value traded was 1.7 bps for the first nine months of 2005, down 31.7% from
2.6 bps in the first nine months of 2004. We attribute the decrease in average revenue capture per U.S. equity dollar value traded to an increase in competition over the past year and market conditions. Core Equity Revenues were $241.3 million and
$320.1 million for the nine months ended September 30, 2005 and 2004, respectively.



|                                                                       |  |                                         |       |      |   |        |  |             |      |  |       |  
|---------------------------------------------------------------------- |  | --------------------------------------- | ----- | ---- | - | ------ |  | ----------- | ---- |  | ----- | -
|                                                                       |  | For the nine months ended September 30, |      
|                                                                       |  | 2005                                    |       | 2004 |   | Change |  | % of Change |     
|Total Revenues from Corporate (millions)                               |  | $                                       | 29.2  |      | $ | 6.8    |  | $           | 22.4 |  | 328.0 | %
|                                                                       |  |                                         |       |      |   |        |  |             |      |  |       |  
|Average corporate investment balance in the Deephaven Funds (millions) |  | $                                       | 270.9 |      | $ | 218.7  |  | $           | 52.2 |  | 23.9  | %



Total revenues from
the Corporate segment, which primarily represents income from our corporate investment in the Deephaven Funds and other strategic investments, increased $22.4 million. The increase is primarily due to gains on the sale of our equity investments in
Nasdaq and the ISE as well as our corporate investment in the Deephaven Funds. On March 9, 2005, in conjunction with the ISEs initial public offering, the Company sold approximately 30% of its original equity ownership in the ISE. As a
result of the transaction, the Company recognized a pre-tax gain of $9.6 million. The Company also recognized a pre-tax gain of $5.9 million from our investments in Nasdaq. Income from our corporate investment in the Deephaven Funds increased to a
gain of $11.5 million for the nine months ended September 30, 2005, from a gain of $3.8 million for the comparable period in 2004. The increase is due to higher average returns on a larger average corporate investment balance.



27



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##### Table of Contents

Expenses



Employee compensation and benefits expense increased 2.9% to $173.3 million for the nine months ended September 30, 2005, from $168.5 million for
the comparable period in 2004. As a percentage of total revenue, employee compensation and benefits increased to 40.0% for the nine months ended September 30, 2005, from 38.3% in the comparable period in 2004. The increase on a dollar basis was
primarily due to the increase in profitability within the Asset Management segment as well as an increase in the number of employees within our continuing operations. Our number of full time employees within our continuing operations increased to
699 at September 30, 2005, from 675 full time employees at September 30, 2004, primarily due to the acquisition of DTI. In addition, we incurred severance costs of $5.8 million and $2.9 million for the nine months ended September 30,
2005 and 2004, respectively.



Execution and clearance fees
decreased 19.2% to $71.5 million for the nine months ended September 30, 2005, from $88.5 million for the comparable period in 2004. As a percentage of total revenue, execution and clearance fees decreased to 16.5% for the nine months ended
September 30, 2005, from 20.1% for the comparable period in 2004. Execution and clearance fees fluctuate based on changes in transaction volumes, regulatory fees and efficiencies in processing the transactions. The decrease as a percentage of
total revenue was primarily due to higher asset management fees, which have no associated execution and clearance fees.



Payments for order flow decreased 45.9% to $14.8 million for the nine months ended September 30, 2005, from $27.4 million for the comparable period
in 2004. As a percentage of total revenue, payments for order flow decreased to 3.4% for the nine months ended September 30, 2005, from 6.2% for the comparable period in 2004. The decrease on a dollar basis was primarily due to changes in our
payment for order flow rates. Soft dollar and commission recapture expense increased 3.9% to $46.0 million for the nine months ended September 30, 2005, from $44.3 million for the comparable period in 2004.



Communications and data processing expense increased 10.9% to $23.9 million
for the nine months ended September 30, 2005, from $21.6 million for the comparable period in 2004. This increase was primarily attributable to an increase in technology costs related to our Equity Markets segment.



Depreciation and amortization expense increased 12.7% to $12.2 million for
the nine months ended September 30, 2005, from $10.9 million for the comparable period in 2004. This increase was primarily due to additional depreciation and amortization expense related to new fixed assets and leasehold improvements at our
new corporate headquarters at 545 Washington Boulevard in Jersey City, N.J. as well as the amortization of intangible assets related to the purchase of the business of DTI.



Occupancy and equipment rentals expense decreased 20.9% to $10.2 million for the nine months ended September 30, 2005,
from $12.9 million for the comparable period in 2004. This decrease was primarily attributable to the lease loss accruals recorded during the second quarter of 2005 related to our move from 525 Washington Boulevard into our new facility at 545
Washington Boulevard in Jersey City, N.J. and a $750,000, pre-tax, one-time benefit relating to a reduction of certain lease obligations at our former London office site.



Professional fees increased to $14.4 million for the nine months ended September 30, 2005, from $11.6 million for the
comparable period in 2004. The increase in 2005 was primarily due to an increase in consulting and legal expenses, which have fluctuated based on the activity surrounding our various legal and regulatory matters.



Business development expense decreased to $4.6 million for the nine months
ended September 30, 2005, from $5.9 million for the comparable period in 2004. The primary reasons for the decrease were lower travel and entertainment costs.



Other expenses increased to $8.9 million for the nine months ended September 30, 2005, from $4.1 million for the
comparable period in 2004. This increase was primarily due to a one-time benefit, in the comparable period in 2004, of approximately $3.0 million related to an adjustment to legal reserves. Excluding this one-time benefit, Other expenses would have
increased 24.5% due to administrative and other costs relating to the move to our new headquarters at 545 Washington Boulevard in Jersey City, N.J.



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During the nine months ended September 30, 2005, we recorded charges of $12.1 million. These charges
consisted of $5.5 million of a lease loss accrual related to excess real estate capacity at our 545 Washington Boulevard facility in Jersey City, N.J. and $4.5 million of lease loss accrual related to our move from 525 Washington Boulevard into our
new facility at 545 Washington Boulevard in Jersey City, N.J. within our Equity Markets segment and $2.0 million of Regulatory charges and related matters within our Asset Management segment. During the nine months ended September 30, 2004, we
recorded charges of $82.7 million within our Equity Markets segment. These charges primarily consisted of $79.2 million of Regulatory charges and related matters and $2.6 million of lease loss accrual related to the cost associated with our excess
real estate capacity at our 545 Washington Boulevard facility in Jersey City, N.J. For a discussion of the Regulatory charges and related matters, refer to Footnote 11 in the Consolidated Financial Statements included in Part I, Item 1
Financial Statements of this document.



Our
effective income tax rates, from continuing operations, of 41.1% and 15.6% for the nine months ended September 30, 2005 and 2004, respectively, differ from the federal statutory income tax rate of 35% due primarily to state income taxes
and nondeductible charges.



Discontinued Operations



The Income from discontinued operations, net of tax on the Consolidated
Statements of Operations was $122,000 and $14.9 million for the nine months ended September 30, 2005 and 2004, respectively. For a further discussion of the sale of the Companys Derivative Markets business, please see Footnote 9
Discontinued Operations included in Part I, Item 1 Financial Statements of this document.



Reconciliation of Total GAAP Expenses and Pre-Tax GAAP Income to Operating Expenses and Pre-Tax Operating Earnings, Respectively



In an effort to provide additional information regarding the Companys
results as determined by GAAP, the Company also discloses certain non-GAAP information which management believes provides useful information to investors. Within this Form 10-Q, the Company has disclosed its Operating Expenses and Pre-Tax
Operating Earnings to assist the reader in understanding the impact of the Regulatory charges and related matters and the Writedown of assets and lease loss accrual on the Companys quarterly and year-to-date results for 2005 and 2004 by
segment, thereby facilitating more useful period-to-period comparisons of the Companys continuing businesses. For additional information related to segments, please see Footnote 16 Business Segments included within Part I, Item I
Financial Statements of this document. Charts are presented in millions.



Total GAAP Expenses to Operating Expenses



|                                           |  |                                               |       |   |                                               |   |      |           |  |       |      |  |                |       |   |            |   |           |   |       |   |      |  |   |      |  |   |       |  
|------------------------------------------ |  | --------------------------------------------- | ----- | - | --------------------------------------------- | - | ---- | --------- |  | ----- | ---- |  | -------------- | ----- | - | ---------- | - | --------- | - | ----- | - | ---- |  | - | ---- |  | - | ----- | -
|                                           |  | For the three months ended September 30, 2005 |       |   | For the three months ended September 30, 2004 |  
|                                           |  | Equity Markets                                |       |   | Asset Mgmt                                    |   |      | Corporate |  | Total |      |  | Equity Markets |       |   | Asset Mgmt |   | Corporate |   | Total |  
|Total GAAP Expenses                        |  | $                                             | 110.3 |   |                                               | $ | 26.5 |           |  | $     | 7.1  |  | $              | 144.0 |   |            | $ | 98.7      |   |       | $ | 7.3  |  | $ | 6.8  |  | $ | 112.8 |  
|                                           |  |                                               |       |   |                                               |   |      |          
|Writedown of assets and lease loss accrual |  |                                               | (5.5  | ) |                                               |   |     |           |  |       |     |  |                | (5.5  | ) |            |   | (0.9      | ) |       |   |     |  |   |     |  |   | (0.9  | )
|                                           |  |                                               |       |   |                                               |   |      |           |  |       |      |  |                |       |   |            |   |           |   |       |   |      |  |   |      |  |   |       |  
|Operating Expenses                         |  | $                                             | 104.8 |   |                                               | $ | 26.5 |           |  | $     | 7.1  |  | $              | 138.5 |   |            | $ | 97.8      |   |       | $ | 7.3  |  | $ | 6.8  |  | $ | 111.9 |  
|                                           |  |                                               |       |   |                                               |   |      |           |  |       |      |  |                |       |   |            |   |           |   |       |   |      |  |   |      |  |   |       |  
|                                           |  |                                              
|                                           |  | For the nine months ended September 30, 2005  |       |   | For the nine months ended September 30, 2004  |  
|                                           |  | Equity Markets                                |       |   | Asset Mgmt                                    |   |      | Corporate |  | Total |      |  | Equity Markets |       |   | Asset Mgmt |   | Corporate |   | Total |  
|Total GAAP Expenses                        |  | $                                             | 323.8 |   |                                               | $ | 50.3 |           |  | $     | 17.8 |  | $              | 391.9 |   |            | $ | 432.7     |   |       | $ | 21.6 |  | $ | 24.0 |  | $ | 478.3 |  
|                                           |  |                                               |       |   |                                               |   |      |          
|Regulatory charges and related matters     |  |                                               |      |   |                                               |   | (2.0 | )         |  |       |     |  |                | (2.0  | ) |            |   | (79.2     | ) |       |   |     |  |   |     |  |   | (79.2 | )
|Writedown of assets and lease loss accrual |  |                                               | (10.0 | ) |                                               |   |     |           |  |       |     |  |                | (10.0 | ) |            |   | (3.5      | ) |       |   |     |  |   |     |  |   | (3.5  | )
|                                           |  |                                               |       |   |                                               |   |      |           |  |       |      |  |                |       |   |            |   |           |   |       |   |      |  |   |      |  |   |       |  
|Operating Expenses                         |  | $                                             | 313.8 |   |                                               | $ | 48.3 |           |  | $     | 17.8 |  | $              | 379.9 |   |            | $ | 350.0     |   |       | $ | 21.6 |  | $ | 24.0 |  | $ | 395.6 |  
|                                           |  |                                               |       |   |                                               |   |      |           |  |       |      |  |                |       |   |            |   |           |   |       |   |      |  |   |      |  |   |       |  



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Pre-Tax GAAP Income to Pre-Tax Operating Earnings



|                                           |  |                                               |      |                                               |   |           |  |       |      |                |   |      |            |   |       |           |  |   |       |   |  |   |       |   |  |   |       |  
|------------------------------------------ |  | --------------------------------------------- | ---- | --------------------------------------------- | - | --------- |  | ----- | ---- | -------------- | - | ---- | ---------- | - | ----- | --------- |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                           |  | For the three months ended September 30, 2005 |      | For the three months ended September 30, 2004 |  
|                                           |  | Equity Markets                                |      | Asset Mgmt                                    |   | Corporate |  | Total |      | Equity Markets |   |      | Asset Mgmt |   |       | Corporate |  |   | Total |  
|Pre-Tax GAAP Income (Loss)                 |  | $                                             | 19.1 |                                               | $ | 15.7      |  | $     | 5.3  |                | $ | 40.1 |            | $ | (3.3  | )         |  | $ | (0.5  | ) |  | $ | (7.2  | ) |  | $ | (11.0 | )
|                                           |  |                                               |      |                                               |   |           |  |      
|Writedown of assets and lease loss accrual |  |                                               | 5.5  |                                               |   |          |  |       |     |                |   | 5.5  |            |   | 0.9   |           |  |   |      |   |  |   |      |   |  |   | 0.9   |  
|                                           |  |                                               |      |                                               |   |           |  |       |      |                |   |      |            |   |       |           |  |   |       |   |  |   |       |   |  |   |       |  
|Pre-Tax Operating Earnings                 |  | $                                             | 24.6 |                                               | $ | 15.7      |  | $     | 5.3  |                | $ | 45.6 |            | $ | (2.4  | )         |  | $ | (0.5  | ) |  | $ | (7.2  | ) |  | $ | (10.1 | )
|                                           |  |                                               |      |                                               |   |           |  |       |      |                |   |      |            |   |       |           |  |   |       |   |  |   |       |   |  |   |       |  
|                                           |  |                                              
|                                           |  | For the nine months ended September 30, 2005  |      | For the nine months ended September 30, 2004  |  
|                                           |  | Equity Markets                                |      | Asset Mgmt                                    |   | Corporate |  | Total |      | Equity Markets |   |      | Asset Mgmt |   |       | Corporate |  |   | Total |  
|Pre-Tax GAAP Income (Loss)                 |  | $                                             | 12.1 |                                               | $ | 17.9      |  | $     | 11.3 |                | $ | 41.4 |            | $ | (28.3 | )         |  | $ | 7.3   |   |  | $ | (17.2 | ) |  | $ | (38.2 | )
|                                           |  |                                               |      |                                               |   |           |  |      
|Regulatory charges and related matters     |  |                                               |     |                                               |   | 2.0       |  |       |     |                |   | 2.0  |            |   | 79.2  |           |  |   |      |   |  |   |      |   |  |   | 79.2  |  
|Writedown of assets and lease loss accrual |  |                                               | 10.0 |                                               |   |          |  |       |     |                |   | 10.0 |            |   | 3.5   |           |  |   |      |   |  |   |      |   |  |   | 3.5   |  
|                                           |  |                                               |      |                                               |   |           |  |       |      |                |   |      |            |   |       |           |  |   |       |   |  |   |       |   |  |   |       |  
|Pre-Tax Operating Earnings                 |  | $                                             | 22.1 |                                               | $ | 20.0      |  | $     | 11.3 |                | $ | 53.4 |            | $ | 54.4  |           |  | $ | 7.3   |   |  | $ | (17.2 | ) |  | $ | 44.5  |  
|                                           |  |                                               |      |                                               |   |           |  |       |      |                |   |      |            |   |       |           |  |   |       |   |  |   |       |   |  |   |       |  

- Totals may not add due to roundings.



Liquidity and Capital Resources



Historically, we have financed our business primarily through cash generated by operations, as well as the proceeds from our stock issuances and, in 2004,
from the proceeds from the sale of our Derivative Markets segment. As of September 30, 2005, we had $1.4 billion in assets, 59% of which consisted of cash or assets readily convertible into cash, principally receivables from brokers and dealers
and securities owned. Receivables from brokers and dealers include interest bearing cash balances held with clearing brokers, including, or net of, amounts related to securities transactions that have not yet reached their contracted settlement
date, which is generally within three business days of the trade date. Securities owned principally consist of equity securities that trade in Nasdaq, on the OTC Bulletin Board and on the NYSE and AMEX markets. At September 30, 2005, the
Company had net current assets, which consist of net assets readily convertible into cash, of approximately $207.6 million. Additionally, our corporate investment in the Deephaven Funds was $281.8 million at September 30, 2005. The majority of
this investment can be liquidated upon request subject to a ninety-day written notification period and monthly redemption limits, or immediately by invoking our rights as the general partner of the Deephaven Funds.



The Company has previously disclosed its intent to pursue selective
acquisitions of (or possible joint ventures with) complementary businesses primarily in the markets in which our Equity Markets and Asset Management segments operate. We expect to fund the purchase price of any such acquisition with our current cash
position or, in some cases, through the issuance of the Companys stock. In April 2005, the Company announced that it had reached an agreement to acquire, for cash, the business of Direct Trading Institutional, Inc. (now operating as DTI), a
privately held firm specializing in providing institutions with direct access trading through an advanced electronic platform. The transaction subsequently closed in June 2005 with a $40 million initial cash payment. Additionally, in May 2005, the
Company announced that it had reached an agreement to acquire, for cash, the business of the ATTAIN ECN, an alternative trading system that operates an electronic communications network (ECN) for the trading of Nasdaq securities. The transaction
subsequently closed in October 2005. No assurance can be given with respect to the business effect of these transactions or the timing, likelihood or business effect of any other possible transaction.



As discussed elsewhere in this document, we sold our Derivative Markets
business for approximately $237 million in cash as of the close of business on December 9, 2004. The final purchase price was subject to



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adjustment based on the final determination of the book value of the Derivative Markets business at the time the deal closed. The final purchase price, in
addition to other expenses related to the sale, was finalized in the first quarter of 2005.



Income (loss) from continuing operations before income taxes was $40.1 million and ($11.0 million) for the three months ended September 30, 2005 and 2004, respectively. Included in these amounts were certain
non-cash expenses such as depreciation and amortization. Depreciation expense from continuing operations was $3.5 million and $3.2 million for the three months ended September 30, 2005 and 2004, respectively. Amortization expense from
continuing operations, which related to intangible assets, was $735,000 and $155,000 for the three months ended September 30, 2005 and 2004, respectively. Non-cash writedowns from continuing operations consisted of $874,000 for the three months
ended September 30, 2004. There were no non-cash writedowns for the three months ended September 30, 2005.



Net proceeds from (purchases of) strategic investments were $674,000 and ($332,000) for the three months ended September 30, 2005 and 2004,
respectively. Our corporate investment in the Deephaven Funds increased by $54.6 million for the three months ended September 30, 2005 compared to a decrease of $1.6 million during the three months ended September 30, 2004. The change in
the balance of our corporate investment in the Deephaven Funds for the three months ended September 30, 2005 primarily relates to the Companys additional investment of $40.0 million made on July 1, 2005, as well as a positive return
on our investments of $14.6 million. The change in the balance of our corporate investment in the Deephaven Funds for the three months ended September 30, 2004 related to a loss on our investments of $1.6 million.



Capital expenditures related to our continuing operations were $5.2 million
and $19.3 million during the three months ended September 30, 2005 and 2004, respectively. Capital expenditures primarily relate to the purchase of leaseholds and other fixed assets related to the buildout of our new headquarters at 545
Washington Boulevard in Jersey City, N.J. We began the process of moving our Jersey City, N.J. offices to 545 Washington Boulevard during the first quarter of 2005 and completed the move by the end of the second quarter of 2005.



At its October 18, 2005 meeting, the Board of Directors authorized an
additional increase in the size of the Companys stock repurchase program from $320 million to $345 million. The Company repurchased 5.3 million shares during the third quarter of 2005 for a total cost of $43.9 million. Through
September 30, 2005, the Company had repurchased 37.6 million shares for $295.9 million under its stock repurchase program. The Company may repurchase shares in the open market or through privately negotiated transactions, depending
on prevailing market conditions, alternative uses of capital and other factors. The Company cautions that there are no assurances that any further repurchases may actually occur. The Company had approximately 102.0 million shares
of Class A Common Stock outstanding as of September 30, 2005.



As U.S. registered broker-dealers, Knight Equity Markets, L.P. (KEM), Knight Capital Markets LLC (KCM) and Direct Trading Institutional, L.P. (DTI) are subject to regulatory requirements intended to
ensure the general financial soundness and liquidity of broker-dealers and requiring the maintenance of minimum levels of net capital, as defined in SEC Rule 15c3-1. These regulations also prohibit a broker-dealer from repaying subordinated
borrowings, paying cash dividends, making loans to its parent, affiliates or employees, or otherwise entering into transactions which would result in a reduction of its total net capital to less than 120.0% of its required minimum capital. Moreover,
broker-dealers, including KEM, KCM and DTI, are required to notify the SEC prior to repaying subordinated borrowings, paying dividends and making loans to its parent, affiliates or employees, or otherwise entering into transactions, which, if
executed, would result in a reduction of 30.0% or more of its excess net capital (net capital less minimum requirement). The SEC has the ability to prohibit or restrict such transactions if the result is detrimental to the financial integrity of the
broker-dealer. Additionally, Knight Equity Markets International Ltd. (KEMIL) is subject to capital adequacy requirements of the Financial Services Authority in the United Kingdom. The following table sets forth the net capital levels
and requirements for the following significant broker-dealer subsidiaries at September 30, 2005, as filed in their respective regulatory filings (in millions):



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|       |  |             |      |                     |   |                    |  |   |     
|------ |  | ----------- | ---- | ------------------- | - | ------------------ |  | - | ----
|Entity |  | Net Capital |      | Minimum Net Capital |   | Excess Net Capital
|KEM    |  | $           | 82.8 |                     | $ | 5.5                |  | $ | 77.3
|KCM    |  |             | 34.9 |                     |   | 1.0                |  |   | 33.9
|KEMIL  |  |             | 20.4 |                     |   | 6.8                |  |   | 13.6
|DTI    |  |             | 5.5  |                     |   | 0.9                |  |   | 4.6 



We have no long-term
debt at September 30, 2005 nor do we currently have any material long-term debt commitments for the rest of 2005. We currently anticipate that available cash resources and credit facilities will be sufficient to meet our anticipated working
capital and capital expenditure requirements for at least the next 12 months.



Off-Balance Sheet Arrangements



As of
September 30, 2005, we did not have any off-balance sheet arrangements, as defined in Item 303 (a) (4) (ii) of SEC Regulation S-K.



Critical Accounting Policies



The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. We believe that, of our significant
accounting policies, the following policies involve a higher degree of judgment.



Lease Loss AccrualIt is the Companys policy to identify excess real estate capacity and where applicable, accrue for such future costs. In determining the accrual, a nominal cash flow
analysis is performed for lease losses initiated prior to December 31, 2002, the effective date of SFAS No. 146 Accounting for Costs Associated with Exit or Disposal Activities, and costs related to the excess capacity are accrued.
For lease losses initiated after December 31, 2002, the Companys policy is to accrue future costs related to excess capacity using a discounted cash flow analysis. Based on the results of an analysis of the current accrual and market
conditions, which was performed during the period, an additional accrual, related to excess real estate capacity at our location at 545 Washington Boulevard in Jersey City, New Jersey, of $5.5 million was recorded in the third quarter of 2005. The
majority of the lease loss accrual charges taken to date are related to a portion of our lease at 545 Washington Boulevard in Jersey City, New Jersey, encompassing approximately 78,000 square feet, all of which is unoccupied. The Company engaged a
real estate broker in order to sub-lease this excess space based on an assessment of our real estate needs. The analysis of our accrual was derived from assumptions and estimates based on lease terms of projected sub-lease agreements, which assumed
a sub-lease will have commenced at the beginning of 2007, anticipated market prices along the Jersey City waterfront and estimated up-front costs, including broker fees and build out allowances. We continually monitor the market and space to assess
the reasonableness of our applicable assumptions.



Impairment of Goodwill and Intangible AssetsThe useful lives of goodwill and intangible assets are determined upon acquisition. Intangible assets are amortized over their respective lives. Goodwill and the useful lives of
intangible assets are tested for impairment, at a minimum, on an annual basis, or when an event occurs or circumstances change that signify the existence of impairment.



Our Goodwill of $39.9 million as of September 30, 2005, related to our Equity Markets segment. During our annual tests
for impairment done in June 2005, it was determined that these assets were not impaired. As part of our test for impairment, we considered the profitability of the applicable reporting unit, an assessment of fair value of the reporting unit based on
various valuation methodologies, as well as the overall market value of the Company, compared to the Companys book value.



Our Intangible assets, less accumulated amortization, of $30.5 million as of September 30, 2005, related to our Equity Markets segment. These assets,
which primarily consist of client relationships, are being amortized on a straight-line basis over their useful lives, which have been determined to range from two to thirty years. During our annual tests for impairment done in June 2005, it was
determined that there was no impairment to these intangible assets.



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Strategic InvestmentsInvestments include ownership interests of less than 20% in financial
services-related businesses, which are accounted for under the equity method or at fair value. The equity method of accounting is used for investments in limited partnerships and limited liability corporations. The fair value of investments,
recorded in the Companys broker-dealer subsidiaries, for which a quoted market or dealer price is not available for the size of our investment is based on managements estimate. Among the factors considered by management in determining
the fair value of investments are the cost of the investment, terms and liquidity, developments since the acquisition of the investment, the sales price of recently issued securities, the financial condition and operating results of the issuer,
earnings trends and consistency of operating cash flows, the long-term business potential of the issuer, the quoted market price of securities with similar quality and yield that are publicly traded, and other factors generally pertinent to the
valuation of investments. The fair value of these investments is subject to a high degree of volatility and may be susceptible to significant fluctuations in the near term. Strategic investments are reviewed on an ongoing basis to ensure that the
carrying values of the investments have not been impaired. If the Company assesses that an impairment loss on the strategic investments has occurred due to declines in fair value or other market conditions, the investments are written down to its
impairment value. As of September 30, 2005, the Company reviewed the strategic investment for impairment and determined that an impairment loss had not occurred.



Investments that are classified as available-for-sale are reported at fair value with unrealized gains and losses excluded
from earnings and reported, net of applicable taxes, in Accumulated other comprehensive income, net of tax within Stockholders Equity on the Consolidated Statements of Financial Condition.



Investments not recorded in the Companys broker-dealer subsidiaries
which do not have a readily determinable fair value, are recorded at amortized cost.



Market-Making ActivitiesSecurities owned and securities sold, not yet purchased, which primarily consist of listed and OTC stocks, are carried at market value and are recorded on a trade date basis.
Market value is estimated daily using market quotations available from major securities exchanges and dealers.



Asset Management FeesThe Company earns asset management fees for sponsoring and managing the Deephaven Funds. Such fees are recorded monthly
as earned and are calculated as a percentage of the Deephaven Funds monthly net assets, plus a percentage of a new high net asset value (the Incentive Allocation Fee), as defined, for any six month period ended June 30th or
December 31st. A new high net asset value is defined as the amount by which the net asset value of the Deephaven Funds exceeds the greater of either the highest previous net asset value in the Deephaven Funds or the net asset value at the time
each investor made his purchase. The Incentive Allocation Fee may increase or decrease during the year based on the performance of the Deephaven Funds. If Deephavens Market Neutral Fund, which contains the majority of the assets under
management, recognizes a loss in the second half of a calendar year, the Incentive Allocation Fee is recalculated on an annual rather 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.



Writedown of Fixed
AssetsWritedowns of fixed assets are recognized when it is determined that the fixed assets are impaired. The amount of the impairment is determined by the difference between the carrying amount and the fair value of the fixed asset. In
determining the impairment, an estimated fair value is obtained through research and inquiry of the market. Fixed assets are reviewed for impairment on a quarterly basis.



Other EstimatesThe preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results may differ from those estimates. In addition to the estimates noted in this section, the Company uses estimates in determining compensation and benefits expense for interim periods and in determining provisions for potential
losses that may arise from litigation and regulatory proceedings.



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A portion of our Employee compensation and benefits expense on the Consolidated Statements of Operations
represents discretionary bonuses, generally determined at year end and paid in the subsequent months. Among many factors, discretionary bonus accruals, in general, are influenced by the Companys overall performance and competitive industry
compensation levels. Therefore, for each interim period, we accrue an amount based on this analysis.



We estimate and accrue for potential losses that may arise out of litigation and regulatory proceedings to the extent that such losses are probable and
can be estimated in accordance with SFAS No. 5 Accounting for Contingencies. The amount accrued is determined on a case-by-case basis and represents an estimate of probable losses based on, among other factors, the progress of each case,
our experience with and industry experience with similar cases and the opinions and views of legal counsel. As such, the total amount accrued may be materially different from the final outcome of such matters. For more information on our legal and
regulatory matters, see Legal Proceedings in Part I, Item 3 of the Companys amended Annual Report on Form 10-K/A and Part II, Item 1 included in this document.



Recently Issued Accounting Standards



In December 2004, the FASB issued a revision to SFAS No. 123 Accounting for Stock-Based Compensation, SFAS No. 123-R, Share-Based
Payment. SFAS No. 123-R focuses primarily on transactions in which an entity exchanges its equity instruments for employee services. SFAS No. 123-R eliminates the intrinsic value method under Accounting Principles Board No. 25 as
an alternative method of accounting for stock-based awards. Additionally SFAS No. 123-R clarifies SFAS No. 123s guidance in several areas including measuring fair value, classifying an award as equity or as a liability and
attributing compensation cost to reporting periods. In April 2005, the SEC amended the effective date of compliance for FAS 123-R. This statement is effective for the fiscal year that begins after June 15, 2005. The Company plans on adopting
the provisions of this statement for 2006. The Company currently applies APB 25 and related interpretations in accounting for its stock options plans.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



Our market-making and trading activities expose our capital to significant risks. These risks include, but are not limited to, absolute and relative price
movements, price volatility and changes in liquidity, over which we have virtually no control.



For working capital purposes, we invest in money market funds, commercial paper and government securities or maintain interest-bearing balances in our trading accounts with clearing brokers, which are classified as
cash and cash equivalents and receivable from clearing brokers, respectively, in the Consolidated Statements of Financial Condition. These other amounts do not have maturity dates or present a material market risk, as the balances are short-term in
nature and subject to daily repricing. Our cash and cash equivalents held in foreign currencies are subject to the exposure of foreign currency fluctuations. These balances are monitored daily, and are not material to the Companys overall cash
position.



In Equity Markets, we employ automated proprietary
trading and position management systems that provide real-time, on-line position management and inventory control. We monitor our risks by reviewing trading positions and their appropriate risk measures. We have established a system whereby
transactions are monitored by senior management on a real-time basis as are individual and aggregate dollar and inventory position totals and real-time profits and losses. The management of trading positions is enhanced by review of mark-to-market
valuations and position summaries on a daily basis.



In the
normal course of our equities market-making business, we maintain inventories of exchange-listed and OTC equity securities. The fair value of these securities at September 30, 2005 and 2004 was $367.8 million and $238.5 million, respectively,
in long positions and $330.3 million and $228.7 million, respectively, in short



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positions. The potential change in fair value, using a hypothetical 10.0% decline in prices, is estimated to be a $3.8 million loss and a $1.0 million loss
as of September 30, 2005 and 2004, respectively, due to the offset of gains in short positions with the losses in long positions.



As of September 30, 2005, we had a $281.8 million corporate investment in the Deephaven Funds, $218.5 million of which was invested in the Market
Neutral Fund. The general objective of market neutral investment strategies is to capture mispricings or spreads between related capital instruments. Within the Market Neutral Fund, Deephaven employs a variety of market neutral investment
strategies, including convertible arbitrage, event arbitrage, relative value equity and distressed debt. Because the primary basis of the Deephaven Funds market neutral strategy is capturing mispricings or spreads between related instruments,
rather than attempting to predict or follow absolute price movements, the performance of the Market Neutral Fund is expected to be substantially non-correlated with the general debt and equity markets, as well as with a number of other
non-traditional investment strategies. However, there will be unhedged credit risk in the convertible arbitrage portfolio and that part of the portfolio will have some correlation to credit spreads. Market neutral trading strategies also involve
other substantial risks such as the disruption in historical pricing relationships and the risk of a tightening of dealer credit, forcing the premature liquidation of positions. The Deephaven Funds also utilize leverage, to the extent available and
deemed by Deephaven to be consistent with the Funds risk/reward objectives, in an attempt to increase returns while maintaining strict risk controls.



The Deephaven Funds employ automated proprietary trading and position management systems that provide position management and inventory control. We
monitor our risks by reviewing trading positions and their appropriate risk measures. We have established a system whereby transactions are monitored by management and an independent risk control function, as are individual and aggregate dollar and
inventory position totals and profits and losses by strategy. The management of trading positions is enhanced by review of mark-to-market valuations and position summaries. There can be no assurances that the Deephaven Funds strategy will be
successful in achieving either its risk control or its profit objectives.



Item 4. Controls and Procedures



As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Companys management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the design and operation of these disclosure controls and procedures were effective. There have not been any changes in the Companys internal control over financial reporting (as such term is defined in Rule 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934) during the last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial
reporting.



PART II OTHER INFORMATION



Item 1. Legal Proceedings



From time to time, we and certain of our past and present officers, directors and employees have been named as parties to legal actions, securities arbitrations, administrative claims and regulatory reviews and
investigations arising in connection with the conduct of our businesses. We are also subject to several of these matters at the present time. Although there can be no assurances, at this time the Company believes, based on information currently
available, that the outcome of each of the matters will not have a material adverse effect on the consolidated financial condition of the Company, although they might be material to operating results for any particular period, depending, in part,
upon operating results for that period.



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Legal



Short Selling Litigation:



During the third quarter of 2005, the following development occurred in the action entitled ATSI v. The Shaar Fund, Ltd., et al., described in the
Companys Annual Report on Form 10-K/A for the year ended December 31, 2004:



On or about September 8, 2005, the Court entered an amended judgment certifying the matter for appeal pursuant to Federal Rule of Civil Procedure 54(b). Plaintiffs filed a notice of appeal on or about
September 20, 2005.



KEM Trading Dispute Arbitration:



The following developments occurred in the KEM Trading
Dispute Arbitrationdescribed in the Companys Annual Report on Form 10-K/A for the year ended December 31, 2004:



In the action pending in New York Supreme Court, on or about August 12, 2005, the court granted KEMs motion to dismiss the declaratory judgment
action brought by the customer of KEMs counterparty involved in the KEM Trading Dispute Arbitration. On or about August 16, 2005, judgment was entered against that customer, and on or about September 13, 2005, that customer filed a
notice of appeal from that dismissal. In the KEM Trading Dispute Arbitration, on or about October 21, 2005, KEMs counterparty asserted claims in the nature of an interpleader against its customer and KEM, requesting the panel determine
the rights to the disputed dividends.



Other Litigation:



The following developments occurred in the actions entitled
Last Atlantis Capital LLC et al. v. Chicago Board Options Exchange, Inc. et al. and Rule v. Chicago Board Options Exchange, Inc. et al , both as described in the Companys Annual Report on Form 10-K/A for the year ended
December 31, 2004:



On or about October 5, 2005, the
Court entered an order permitting the plaintiffs in Last Atlantis to file a second amended complaint, including adding two new plaintiffs, one of whom is the plaintiff in Rule. The same plaintiffs counsel has recently filed two
additional, substantially identical cases on behalf of other plaintiffs, and has indicated his intention to transfer, as related, these cases to the same judge hearing Last Atlantis. Plaintiffs counsel has also indicated his intention,
once that transfer is accomplished, to file a consolidated amended complaint on behalf of all plaintiffs.



Regulatory



The Company owns subsidiaries including regulated broker-dealers that are subject to extensive oversight under federal, state and applicable international
laws as well as SRO rules. Changes in market structure and the need to remain competitive require constant changes to our systems and order handling procedures. The Company makes these changes while continuously endeavoring to comply with many
complex laws and rules. Compliance, surveillance or trading issues, common in the securities industry, and which are monitored or reported to the SEC or SROs, are reviewed in the ordinary course of business by our primary regulators, the SEC and the
NASD. The Company, as a major order flow execution destination, is named from time to time in, or is asked to respond to a number of regulatory matters brought by SROs that arise from its trading activity. The Company is currently the subject of
various regulatory reviews and investigations. In some instances, these matters may rise to an SEC or SRO disciplinary action and/or civil or administrative action.



For further information on Legal Proceedings, see the section entitled Legal Proceedings, in Part I, Item 3
of our Annual Report on Form 10-K/A for the year ended December 31, 2004.



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Item 2. Changes in Securities and Use of Proceeds



The following table contains information about our purchases of our Class A Common Stock during the third quarter of 2005:



|                                       |  |                                 |  |                             |      |                                                                                  |           |                                                                                       |   |           
|-------------------------------------- |  | ------------------------------- |  | --------------------------- | ---- | -------------------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------------------- | - | ----------
|Period(1)                              |  | Total Number ofShares Purchased |  | Average PricePaid per Share |      | Total Number of Shares Purchased as Part ofPubliclyAnnouncedPlans orPrograms (2) |           | Approximate Dollar Valueof Shares That May Yet BePurchased Under the Plansor Programs
|July 1, 2005 - July 31, 2005           |  | 372,684                         |  | $                           | 8.11 |                                                                                  | 372,500   |                                                                                       | $ | 64,977,676
|August 1, 2005 - August 31, 2005       |  | 3,604,000                       |  |                             | 8.23 |                                                                                  | 3,604,000 |                                                                                       |   | 35,305,111
|September 1, 2005 - September 30, 2005 |  | 1,350,097                       |  |                             | 8.54 |                                                                                  | 1,316,000 |                                                                                       |   | 24,059,900
|                                       |  |                                 |  |                             |      |                                                                                  |           |                                                                                       |   |           
|Total                                  |  | 5,326,781                       |  |                             | 8.30 |                                                                                  | 5,292,500 |                                                                                       |   |           
|                                       |  |                                 |  |                             |      |                                                                                  |           |                                                                                       |   |           

---

|(1) | As a matter of policy, the Company does not repurchase its Class A Common Stock during
self-imposed closed window periods.
|--- | ----------------------------------------------------------------------------------------------------------------------------

|(2) | On April 4, 2002, the Companys Board of Directors announced the authorization of a
stock repurchase program, which allowed for the purchase of Class A Common Stock up to a total amount of $35 million. This repurchase program was increased by an aggregate of $310 million to a total of $345 million by resolutions of the
Companys Board of Directors adopted on July 16, 2002, May 12, 2003, April 20, 2004, August 8, 2004, April 19, 2005 and October 18, 2005, respectively. The Company may repurchase shares in the
open market or through privately negotiated transactions, depending on prevailing market conditions, alternative use of capital and other factors. The repurchase program has no set expiration or termination date.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 3. Defaults Upon Senior Securities



None.



Item 4. Submission of Matters to a Vote of Security Holders



None.



Item 5. Other Information



None.



Item 6. Exhibits



|            |   |  |                                                                                                                                                                                                                                                                        
|----------- | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |  | Exhibit                                                                                                                                                                                                                                                                
|            |  
|10.24       | * |  | Separation Agreement, effective as of September 6, 2005, between Knight Equity Markets, L.P. and Derek N. Stein. (Incorporated herein by reference to Exhibit 10.1 to Knights Current
Report on Form 8-K (Commission file number 001-14223), dated September 9, 2005).
|            |  
|31.1        |   |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                     
|            |  
|31.2        |   |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                     
|            |  
|32.1        |   |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                      
|            |  
|32.2        |   |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                      

---

|* | Management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Jersey City, State of New Jersey, on
this 1st day of November, 2005.



|                           |  |                                                  
|-------------------------- |  | -------------------------------------------------
|KNIGHT CAPITAL GROUP, INC.
|                           | 
|By:                        |  | /s/ THOMAS M. JOYCE                              
|                           |  | Chairman of the Board and Chief Executive Officer
|                           | 
|By:                        |  | /s/ JOHN B. HOWARD                               
|                           |  | Chief Financial Officer                          
|                           |  | (Chief Accounting Officer)                       



38