<PAGE>


--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                               -----------------

                                   FORM 10-K

   [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
       EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                      OR

   [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

                                   001-14223
                            Commission File Number

                               -----------------

                          KNIGHT TRADING GROUP, INC.
            (Exact name of registrant as specified in its charter)

                                   DELAWARE
        (State or other jurisdiction of incorporation or organization)

                                  22-3689303
                    (I.R.S. Employer Identification Number)

                525 Washington Boulevard, Jersey City, NJ 07310
             (Address of principal executive offices and zip code)

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

                               -----------------

          Securities registered pursuant to Section 12(b) of the Act:
                                     None.

          Securities registered pursuant to Section 12(g) of the Act:
                Shares of Class A Common Stock, $0.01 par value

   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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]

   The aggregate market value of the Class A Common Stock held by nonaffiliates
of the Registrant was approximately $    at March 28, 2001 based upon the
closing price for shares of the Registrant's Class A Common Stock as reported
by the National Market System of the Nasdaq Stock Market on that date. For
purposes of this calculation, affiliates are considered to be officers,
directors and holders of 10% or more of the outstanding common stock of the
Registrant.

   At March 28, 2001 the number of shares outstanding of the Registrant's Class
A Common Stock was 123,650,480 and there were no shares outstanding of the
Registrant's Class B Common Stock as of such date.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Definitive Proxy Statement relating to the Company's 2001 Annual Meeting to
be filed hereafter (incorporated into Part III hereof).


--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
<PAGE>

                          KNIGHT TRADING GROUP, INC.
                            FORM 10-K ANNUAL REPORT
                  For the Fiscal Year Ended December 31, 2000

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I
<C>      <S>                                                                        <C>

Item 1.  Business..................................................................  3
Item 2.  Properties................................................................ 14
Item 3.  Legal Proceedings......................................................... 14
Item 4.  Submission of Matters to a Vote of Security Holders....................... 15

PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters..... 15
Item 6.  Selected Financial Data................................................... 15
Item 7.  Management's Discussion and Analysis of Financial Condition and Results of
         Operations................................................................ 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................ 26
Item 8.  Financial Statements and Supplementary Data............................... 29
Item 9.  Changes in and Disagreements With Accountants on Accounting
         and Financial Disclosures................................................. 48

PART III

Item 10. Directors................................................................. 48
Item 11. Executive Compensation.................................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 48
Item 13. Certain Relationships and Related Transactions............................ 48

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 49
Exhibit Index...................................................................... 49
Signatures......................................................................... 50
</TABLE>

UNLESS OTHERWISE INDICATED, REFERENCES TO THE "COMPANY" MEAN KNIGHT TRADING
GROUP, INC. AND ITS SUBSIDIARIES.

                                       2
<PAGE>

   Except for historical information contained herein, the matters discussed in
this report contain certain forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
anticipated in such forward looking statements. Factors that may cause such
differences include, but are not limited to: the effect of client trading
patterns on Company revenues and earnings; computer system failures; the
effects of competitors' pricing, product and service decisions and intensified
competition; evolving regulation and changing industry customs and practices
adversely affecting the Company; adverse results of litigation; changes in
revenues and profit margin due to cyclical securities markets and interest
rates; and a significant downturn in the securities markets over a short period
of time or a sustained decline in securities prices and trading volumes.

PART I

Item 1. Business

Overview

   We are a leading wholesale market maker. Market makers hold themselves out
to execute trades by offering to buy or sell securities for their own account.
We have attained our leadership position by providing best execution services
to broker-dealer and institutional clients through our proprietary trading
methodology and sophisticated trading systems.
   Through our subsidiaries, we make markets in global equities and global
derivatives, and we operate an asset management business. Our subsidiary,
Knight Securities, L.P. ("KS"), is the leading market maker in Nasdaq
securities. Knight Capital Markets LLC ("KCM") holds the leading market
position in the Nasdaq Inter-Market, the over-the-counter market in
exchange-listed equity securities, primarily those listed on the New York Stock
Exchange ("NYSE") and the American Stock Exchange ("AMEX"). Knight Financial
Products LLC ("KFP") is a leading market maker in listed options on individual
equities, equity indices and fixed income futures instruments in the U.S. and
Europe. We also maintain an asset management business for institutional
investors and high net worth individuals through our Deephaven Capital
Management subsidiary.

   In 1993, in the midst of significant changes in the securities industry, our
founders developed a vision of the next-generation business model for market
making. The business model required a focus on client service, state-of-the-art
technology and operating efficiencies resulting from high trading volumes. In
1995, our founders' vision materialized with the acquisition of Trimark
Securities, Inc. (subsequently renamed KCM) and the establishment of KS.
Through KS, we make markets in approximately 9,100 equity securities in Nasdaq
and on the OTC Bulletin Board of the National Association of Securities
Dealers, Inc. ("NASD"). Through KCM, we make markets in the Nasdaq
Inter-Market.

   Since our inception in 1995, we have experienced significant growth in
market share. Our dedication to providing quality executions allowed us to
quickly expand our broker-dealer and institutional client base during the rapid
increase of on-line investing that occurred over the past five years. We have
maintained a strong market share in the markets in which we participate as
follows:

 . Based on data from The AutEx Group, a widely recognized industry reporting
   service that publishes daily trading volume and market share statistics
   reported by broker-dealer market makers, KS achieved a #1 market share
   ranking of volume in Nasdaq in February 1998. KS has continued to maintain
   this #1 ranking, despite the decline of the Nasdaq market since March 2000.
   The volume of Nasdaq shares traded by KS increased from 1.4 billion shares
   in the month of January 1998 to 6.4 billion shares in the month of December
   2000. However, our volumes have declined during the first quarter of 2001 as
   retail trading levels have fallen from 2000.

 . According to the NASD, KCM has held the #1 market share ranking in the
   trading of the over-the-counter market for NYSE-listed securities in the
   Nasdaq Inter-Market for over two years. KCM's trading volume of the
   over-the-counter market for NYSE-listed securities has increased from 342.9
   million shares in January 1998 to 1.0 billion shares in December 2000.
   During the same period, KCM's market share increased from

                                       3
<PAGE>

   2 9.5% to 44.4%. However, KCM's volumes and market share have declined
   during the first quarter of 2001 as retail trading levels have fallen from
   2000.

 . According to the NASD, KCM has also held the #1 market share ranking in the
   trading of the over-the-counter market for AMEX-listed securities in the
   Nasdaq Inter-Market for over two years. KCM's trading volume of the
   over-the-counter market for AMEX-listed securities has increased from 59.4
   million shares in January 1998 to 199.7 million shares in December 2000.
   During the same period, KCM decreased its market share from 64.8% to 47.2%.
   KCM's volumes and market share have declined during the first quarter of
   2001 as retail trading levels have fallen from 2000.

 . KFP's trading volume in listed options grew by over 300% in 2000, consistent
   with the growth in the overall options market. KFP's trading volume
   increased to 21.4 million option contracts in 2000 from 5.6 million option
   contracts in 1998. In 2000, KFP began specialist operations on the
   Philadelphia Stock Exchange and the Pacific Stock Exchange. Additionally,
   KFP became a founding participant on the newly launched International
   Securities Exchange. KFP also purchased the professional execution services
   business from Mesirow Financial, which was subsequently renamed Knight
   Execution Partners ("KEP").

   For the year ended December 31, 2000, we had revenues of $1,257 million, a
40% increase from 1999 revenues of $897 million. Our pro forma pre-tax income
grew to $418 million in 2000, a 33% increase over 1999 pre-tax income of $315
million. Additionally, in 2000, our return on equity was 38%, and our pre-tax
margins were 33%. In 2000, we executed 142.7 million trades and traded 112.1
billion shares, up from 90.7 million trades and 81.0 billion shares in the
prior year.

International Expansion

   In March 2001, we finalized our first closing for a pan-European market
making venture with 19 broker-dealers and banks from Europe and the United
States. Our partners in the initial closing of Knight Roundtable Europe
Limited, which consist of a diverse group of leading pan-European and U.S.
securities firms, banks and broker-dealers, have contributed a total of $27.6
million. This amount has been matched by us and we have also contributed to the
venture our UK broker-dealer, Knight Securities International, Ltd. ("KSIL").
Following this closing, our ownership in Knight Roundtable Europe Limited
stands at approximately 85%. Additional closings are anticipated, and, upon
completion, our partners could collectively own up to 30% of the venture. We
believe Knight Roundtable Europe Limited will further establish our
international presence by leveraging technology and the Company's trading
methodologies to provide best execution solutions for European investors in
pan-European and U.S. equities.

   In the third quarter of 2000 we established a joint venture operation with
Nikko Securities Co., Ltd. to provide wholesale market-making services in
Japanese equity securities. The new entity, called Knight Securities Japan Ltd.
("KSJ"), is registered as a securities firm in accordance with Japanese
Securities and Exchange Law. We own 60% of this joint venture. KSJ began
trading Jasdaq equity securities in December 2000. Ultimately, the new
operation expects to expand its market-making services to stocks traded on
additional Japanese equity markets. We also expect to form a consortium of
securities firms, broker-dealers and banks.

Merger with Arbitrade Holdings LLC

   On November 17, 1999, we entered into an Agreement and Plan of Merger with
Arbitrade Holdings LLC ("Arbitrade"), an options market maker and asset manager
with operations in the U.S. and Europe, and its members. On January 12, 2000,
we completed our acquisition of Arbitrade and subsequently renamed its options
market-making subsidiary, KFP. The Arbitrade transaction, which was accounted
for as a pooling of interests, resulted in a newly formed parent holding
company that issued shares on a tax-free basis to holders of our Class A Common
Stock and to the owners of Arbitrade. Following the transaction, the Company
and Arbitrade became subsidiaries of the new parent holding company, which
assumed the name "Knight Trading Group, Inc." and became the publicly traded
Nasdaq company under the same ticker symbol-NITE. This reorganization resulted
in the automatic exchange of shares of our Class A Common Stock for shares of
Class A Common Stock of the new parent holding company, on a one-for-one basis.

                                       4
<PAGE>

   Upon completion of the Arbitrade transaction, Arbitrade members received
10,505,001 shares of newly-issued Class A Common Stock of the new parent
holding company. Such shares of Class A Common Stock represented approximately
8.6% of the outstanding stock of the new parent at that time. The number of
shares received by the Arbitrade members was calculated based on an exchange
ratio which was determined through arms-length negotiation. The foregoing
summary is qualified in its entirety by reference to the Merger Agreement, a
copy of which was filed as an exhibit to the Company's Form 8-K filed with the
SEC on January 12, 2000.

Industry Background

   During recent years, the U.S. market for equity securities has experienced
dramatic growth in trading volumes. The average daily volume of securities
traded in Nasdaq increased from 225.0 million shares in December 1992 to 2.2
billion shares in December 2000. The average daily volume of securities traded
on the NYSE increased from 222.2 million shares in December 1992 to 1.2 billion
shares in December 2000. During this period, the average daily trading volume
in the OTC market for exchange-listed securities has also increased
significantly. The increase in trading volume has resulted from a number of
factors, including:

 . increased cash flows into equity-based mutual funds;

 . historic high returns in U.S. equity markets;

 . the emergence and rapid growth of on-line discount brokers;

 . technological innovations, like the emergence of the Internet; and

 . reduced transaction costs

   The retail brokerage business has been impacted by advances in technology
that have provided new and inexpensive means for individual investors to access
and participate in the market for equity securities. For example, the Internet
has facilitated individual investors' access to market information and has
significantly reduced transaction costs. The proliferation of Internet brokers
has resulted in dramatically lowered commissions charged for trading
securities. While handling an increasing number of trades for a wide range of
securities, Internet brokers also provide more immediate access to the
marketplace than many other retail brokers. Additionally, mutual funds and
other institutional investors are also demanding better execution of their
trades and are seeking to reduce trading costs. The Internet brokerage business
model and the demands of institutional investors have forced traditional
brokers to change their approach to their business and seek ways to manage
increased trading volumes while providing improved trade execution and reducing
costs.

   Market makers provide trade executions by offering to buy securities from,
or sell securities to, broker-dealers and institutional investors.
Market-making firms that have elected to make a market in a security display
the price at which they are willing to bid, meaning buy, or ask, meaning sell,
these securities and adjust their bid and ask prices in response to the forces
of supply and demand for each security. Market makers are either a department
within larger, diversified securities firms or independent businesses. The
internal market-making departments of securities firms often are limited in
their ability to handle significant trading volumes in a broad range of
securities. Most discount brokers and on-line brokers do not have internal
market-making functions and, accordingly, rely entirely on third party market
makers for trade execution.

   A market maker typically acts as principal and derives most of its revenues
from the difference between the price paid when a security is bought and the
price received when that security is sold. In the past, market makers relied on
the spreads between bid and ask prices to ensure profitability and built cost
structures based on these spreads. However, changes in regulations governing
the securities industry and, to a lesser extent, the quoting of sixteenths
rather than eighths of a dollar, have dramatically reduced average spreads.
Implemented in January 1997, the SEC's Limit Order Display Rule requires the
display or execution of client orders to buy or sell stock at a particular
price, commonly referred to as limit orders, that (1) are priced better than a
market maker's quote or (2) in certain circumstances add to the size associated
with the market maker's quote when the market maker is at the best price in the
market. The Limit Order Display Rule enables investors to advertise directly
their trading interest to the market, allowing them to compete with market
maker quotes and affect the size of bid-ask spreads.

                                       5
<PAGE>

Additional regulations adopted by the NASD require market makers to fill a
client's limit order before their own trades. Since the implementation of the
Limit Order Display Rule and the move to trading in sixteenths of a dollar,
Nasdaq and NYSE spreads have each significantly decreased. We expect spreads to
decline further with the introduction of decimal trading on Nasdaq and the
various exchanges. Trading in decimal prices commenced in NYSE and AMEX listed
securities in January 2001, and based on initiatives taken by the SEC, we
anticipate that decimal pricing will commence in Nasdaq markets in April 2001.
This date is subject to possible delay due to technological constraints.

   In this new narrower spread environment, maintaining profitability has
become extremely difficult for many traditional market makers. At the same
time, market makers have become subject to an increasing demand for better
execution standards and improved customer service. To meet these demands and
remain competitive, market makers have been forced to reexamine their
traditional spread-based approach to market-making and to make extensive
technological and human resource investments. To leverage these large
investments and to remain profitable, market makers must execute a larger
volume of trades and maintain increased inventory positions. However, the
significant increases in trading volumes are only a benefit for the market
maker if its cost per trade is lower than its revenues per trade and if the
market maker is able to manage the risks associated with larger inventory
positions.

   While large volumes of trading provide an opportunity to spread fixed costs
over a larger number of trades, net profit per trade in the industry has
significantly declined. In addition, significant volatility in equity markets,
particularly in Internet and technology stocks, has led to significant
fluctuations in the profitability in trading such stocks for market makers. In
response to tightening spreads and increasing volatility in the equity markets,
market makers need to seek new trading methodologies to identify and take
advantage of the profit opportunities represented by each trade. These market
makers also need to increase the number of buy and sell orders that they
receive, commonly referred to as order flow. This increased order flow will, in
turn, provide increased trading profit opportunities. These market makers
require efficient and sophisticated systems and risk management practices and
personnel with the requisite expertise to deliver superior trade execution and
client service, while handling increased order flow and maintaining low cost
per trade.

The Knight Trading Group Solution

   We are committed to providing a superior execution methodology that
emphasizes automated execution and rule compliance, real-time information
access to clients and pricing plus liquidity advantages based upon our
willingness to commit capital. While most of our trades are automatically
executed electronically, automatic execution is highly dependent on the
determination and manual entry of bid-ask prices by traders. Furthermore, our
trading revenues depend significantly on the management of inventory by our
skilled and experienced trading professionals. The main elements of our
solution include:

 .    Superior Execution and Enhanced Liquidity. We have implemented a variety
     of best execution practices that provide our clients with significantly
     enhanced liquidity. These practices include the following, but do not
     address a decimalized environment. In such case, these practices may
     change:

   KS

--KS guarantees to provide automated, electronic executions at the unlocked,
     uncrossed National Best Bid or Offer (NBBO) or better in approximately
     3,400 Nasdaq issues in which it makes markets for market and marketable
     limit orders (exclusive of short sales) up to 2,000 shares, regardless of
     quote size.

--KS guarantees to price improve retail market and marketable limit orders
     (exclusive of short sales) representing the first 250,000 shares received
     before 9:25 a.m. (ET) in all Nasdaq issues for which KS makes markets at a
     fixed rate of  1/64 per share where the first unlocked, uncrossed NBBO has
     a spread greater than  1/32, regardless of order imbalances.

--KS guarantees to execute market and marketable limit orders (exclusive of
     short sales) representing the first 250,000 shares received no later than
     ten (10) minutes before the commencement of trading at the mid-point price
     of the first unlocked, uncrossed NBBO in all Nasdaq new issues (IPOs) for
     which KS intends to make markets, regardless of order imbalances.

                                       6
<PAGE>

--KS  guarantees to provide automated price improvement of 1/16th of a point to
      retail market orders, between 100 and 499 shares inclusive, for Nasdaq
      stocks in the S&P 500, when the unlocked, uncrossed NBBO spread is equal
      to or greater than 1/8th of a point.

   KCM

--KCM provides execution services in every NYSE- and AMEX-listed equity
      security.

--KCM accepts all orders that can be sent to a primary exchange, i.e., short
      sales, all or none, stop orders, etc.

--KCM offers liquidity enhancement for market orders in most listed S&P 500
      stocks at the NBBO regardless of the quote's size.

--KCM not only guarantees the client's market order to receive the best price
      available on any exchange or by any competing market maker, but also
      frequently delivers that price for many more shares than advertised.

--KCM offers various services such as limit order protection (based on the
      primary exchange price) and price improvement guarantees.

   All of the Company's guaranteed and automated execution protocols are
predicated upon the existence of normal market conditions. We reserve the right
at our sole discretion to reduce, modify, suspend, or cancel any of our
automated order handling protocols, including automated price improvement and
automatic execution, without prior notice on a stock by stock or client by
client basis, when periods of extreme or unusual market conditions exist, risk
management protocols so dictate, attempts are made to circumvent our automated
executions size limitations, or we otherwise deem it appropriate. Our net
trading revenue, which represents trading gains net of trading losses, is
primarily affected by changes in equity trade and share volumes and option
contract volume, our ability to derive trading gains by taking proprietary
positions, changes in execution standards, volatility in the marketplace and by
regulatory changes and evolving industry customs and practices.

 .     Sophisticated Trading Technology. We rely on sophisticated technology to
      facilitate our market-making activities. KS, KSIL and KSJ use the
      BRASS(R) trading system under license from SunGard Trading Systems
      (formerly known as Automated Securities Clearance). BRASS(R) is used by
      over 260 market makers. KS is one of a small number of BRASS(R) users to
      run BRASS(R) on its own computers with its own personnel, while other
      market makers, and our KSIL and KSJ subsidiaries, use SunGard Trading
      Systems as a service bureau. KCM employs a TCAM/Appletree trading system.
      KFP has developed its own proprietary trading system. We have made
      significant investments in our technology platform and infrastructure
      since our inception. All of our trading systems are augmented by software
      applications that enable the processing of a large volume of order flow
      efficiently, without diminishing speed of execution. Our equity
      market-making systems are designed to process up to 1.5 million trades
      per day. This capacity assumes an even distribution of trading activity
      throughout the day; however, our systems may experience processing delays
      during peak volume periods that result from heavy trading activity. In
      the fourth quarter of 2000 we handled an average of 539,000 trades per
      day and on April 4, 2000 we set our daily equity trade record by
      executing 1,049,000 equity trades. We continue to invest in technology to
      enhance further our processing capability.

 .     Superior Trading Methods. Our net trading revenues are dependent on our
      ability to evaluate and act rapidly on market trends and to manage risk
      successfully. Our methodology focuses on the dynamic, real-time analysis
      of market activity and price movements, which enables us to manage risk
      better. Throughout the business day, we continually analyze our trading
      positions in individual securities and monitor our short and long
      positions and our aggregate profits and losses. Management uses this
      information to assess market trends and adjust its trading strategy on a
      real-time basis in an effort to maximize its trading profits.

 .     Commitment to Highest Quality Client Service. We are committed to
      providing the highest quality client service. We believe that our highly
      skilled, experienced and entrepreneurial workforce can effectively
      address the needs of our clients. We have over 120 experienced employees
      involved in client service. Our client service group is dedicated to
      handling orders greater than the automated execution size and ensuring
      consistent quality of execution.

                                       7
<PAGE>

   Throughout 2000 and 1999, KS maintained its #1 market share ranking as
published by The AutEx Group. KS's share volumes, as compiled by us, and our
market share, compiled from data reported by the NASD, are as follows:

<TABLE>
<CAPTION>
                                                 NASD OTC
                                              Bulletin Board
                  Nasdaq Share  Percentage of and Other OTC  Percentage of
                     Volume      the market    Share Volume   the market
                    (per the      (per the       (per the      (per the
     Month Ended   Company)*        NASD)        Company)        NASD)
     ----------- -------------- ------------  -------------- ------------
                 (in thousands)               (in thousands)
     <S>         <C>            <C>           <C>            <C>

     2000

     December...      4,381,802         7.29%      2,849,764        25.43%
     November...      3,669,478         7.11       2,192,909        25.39
     October....      4,096,220         6.95       2,107,123        24.36
     September..      3,623,396         7.85       2,197,756        25.38
     August.....      3,678,047         8.41       2,367,929        26.49
     July.......      3,397,534         8.28       1,703,357        24.96
     June.......      3,695,814         8.48       1,851,812        23.17
     May........      3,287,882         8.20       1,668,242        20.48
     April......      3,867,611         8.49       2,352,712        20.78
     March......      6,123,099         9.44       6,575,857        18.00
     February...      4,866,435        10.71       8,560,755        27.86
     January....      4,260,922         9.85       7,466,560        29.58

     1999

     December...      4,491,100        11.30%      4,150,515        27.33%
     November...      4,002,437        11.00       3,639,610        29.06
     October....      2,680,756         9.26       1,842,901        24.23
     September..      2,646,433         9.82       1,601,810        23.97
     August.....      2,496,024         9.78       2,148,911        24.82
     July.......      2,738,455        10.46       2,334,654        25.87
     June.......      2,326,839         9.34       2,752,638        26.68
     May........      2,323,029         9.99       3,267,537        27.07
     April......      2,981,933        10.16       3,485,738        24.69
     March......      2,466,752         9.36       1,791,757        23.84
     February...      2,041,634         9.39       1,934,942        26.67
     January....      2,432,428         9.62       1,425,306        23.50
</TABLE>
*  includes Nasdaq National Market and Nasdaq Small Cap Market

                                       8
<PAGE>

   KCM's market share is based on statistics provided by the NASD.


<TABLE>
<CAPTION>
                                   Nasdaq Inter-Market Volume in
            ---------------------------------------------------------------------------
                   NYSE-listed Securities                AMEX-listed Securities
            ------------------------------------- -------------------------------------
                                Percentage                            Percentage
              Actual Share       of Total           Actual Share       of Total
                 Volume        Market Share            Volume        Market Share
Month Ended (per the Company) (per the NASD) Rank (per the Company) (per the NASD) Rank
----------- ----------------- -------------  ---- ----------------- -------------  ----
             (in thousands)                        (in thousands)
<S>         <C>               <C>            <C>  <C>               <C>            <C>

2000

December...         1,706,130         44.44%    1           275,113         47.23%    1
November...         1,390,149         39.68     1           207,453         40.64     1
October....         1,705,502         44.73     1           215,492         50.80     1
September..         1,481,456         42.88     1           187,327         54.59     1
August.....         1,502,646         42.02     1           196,967         64.66     1
July.......         1,423,374         42.27     1           162,152         63.74     1
June.......         1,483,229         39.72     1           171,947         62.25     1
May........         1,339,223         40.35     1           164,623         57.66     1
April......         1,411,490         44.35     1           222,335         53.56     1
March......         1,925,755         46.24     1           339,839         64.12     1
February...         1,514,948         46.03     1           310,291         72.34     1
January....         1,628,928         45.53     1           243,403         69.75     1

1999

December...         1,788,540         46.62%    1           221,055         71.14%    1
November...         1,532,737         45.53     1           151,589         63.18     1
October....         1,315,366         43.38     1           130,091         54.27     1
September..         1,113,662         42.54     1           137,644         56.04     1
August.....         1,132,051         42.10     1           139,916         62.85     1
July.......         1,179,969         43.98     1           131,108         68.31     1
June.......         1,135,648         42.13     1           126,183         58.56     1
May........         1,205,532         44.58     1           133,948         67.53     1
April......         1,422,670         45.31     1           158,074         67.26     1
March......         1,346,064         43.82     1           149,563         65.19     1
February...         1,041,342         41.89     1           115,705         65.83     1
January....         1,089,872         42.70     1           107,789         67.56     1
</TABLE>

Clients

   Our clients include national and regional full-service broker-dealers,
discount brokers, institutional investors and electronic communication
networks. We believe that Knight Trading Group is the largest execution
destination for all equity transactions originated on the Internet.

   The fastest growing component of our revenue comes from institutional
investors. Our institutional investors include mutual funds, investment
advisors, pension plan sponsors, trusts and endowments. We intend to continue
growing our institutional sales force to support our growing institutional
client base.

   In 2000, our largest client accounted for 11.6% of our equity order flow as
measured in share volume. No other client accounted for over 10% of our equity
order flow as measured in share volume.

Marketing

   We seek to increase our market share through television and print
advertising, advertising on our Web site and a public relations program. Our
marketing focuses on advertising our execution services in publications

                                       9
<PAGE>

targeted at the securities industry. In addition, we have a quarterly program
of targeted mailings to existing and potential broker-dealer and institutional
clients.

   We also market aggressively through one-on-one meetings with clients and
potential clients, and continuous communications with existing clients. Our
marketing strategy is to continue to differentiate Knight Trading Group from
competitors by enhancing its reputation and brand as the provider of highest
quality execution solutions and liquidity with superior customer service.

   We also sponsor the Knight Senior Advisory Committee, which is a committee
of senior securities industry professionals that meet to discuss operational
procedures, strategic direction and their trading partnership with us. During
these meetings, we attempt to enhance communications between firms and address
our clients' concerns, questions and ideas.

Clearing Arrangements

   In October 1999, KS began clearing all of its trades through Broadcourt
Clearing Corp., a subsidiary of Merrill Lynch & Co. The contract between the
parties will remain in effect until terminated by either party upon sixty days'
prior written notice or upon thirty days' written notice in certain limited
circumstances. KSIL clears through Merrill Lynch International, also a
subsidiary of Merrill Lynch & Co. KCM clears all of its trades through National
Investor Services Corp., a subsidiary of TD Waterhouse Group, Inc. The contract
will remain in effect until terminated by either party upon sixty days' prior
written notice. KFP clears the majority of its trades through First Options of
Chicago, a subsidiary of Goldman Sachs Group, Inc.

Technology

   Our success is largely attributable to management's ability to identify and
deploy emerging technologies that facilitate the execution of trades.
Technology has not only enhanced our ability to handle order flow, it has also
been an important component of our strategy to comply with government
regulations, achieve the highest execution standards and provide superior
client service. We also use our proprietary technology and technology licensed
from third parties to monitor proactively the performance of our traders, to
assess our inventory positions and to provide ongoing information to our
clients. We are electronically linked to our broker-dealer and institutional
clients through dedicated servers. Our trading volume is transacted over
dedicated communications networks, which provide immediate access to our
trading operations and facilitate the handling of client orders. We plan to
continue to make additional investments in technology and to automate further
our execution services.

   Architectural Design and Industry Standards. Our systems are designed to be
open, interoperable, scalable, redundant and flexible. We utilize leading edge
technologies including Sun Microsystems, Inc.'s client /server architecture,
C/C++ programming languages, Java, relational database management systems and
on-line analytical processing.

   Electronic Commerce. Our electronic commerce architecture enables our
broker-dealer and institutional clients to send their orders through a variety
of electronic communications gateways, including the Internet and direct client
interfaces over our private network. Our clients can use their own order
management system, an institutional portfolio management system or can select
from a variety of our electronic connections.

   Trading Systems. KS, KSIL and KSJ use the BRASS(R) trading system designed
by SunGard. This system has a client /server architecture that uses Sun
Microsystems, Inc. workstations and servers. KS, KSIL and KSJ run a local
version of BRASS(R). KS, KSIL and KSJ also make extensive use of application
program interfaces, commonly known as APIs to develop software applications.

   KCM uses the Appletree trading system designed by TCAM. This system runs on
Stratus Computer Inc.'s fault tolerant platform. KCM has also developed
software applications using APIs.

                                      10
<PAGE>

   KFP uses an inhouse developed proprietary system to make markets on five
major option exchanges in the U.S. The system supports screen based trading as
well as floor trading. The system has a distributed architecture which can be
run on Sun Microsystems Platforms and MS Windows NT Platforms.

   Disaster Recovery Center. We currently operate a back-up data center at a
leased facility in Weehawken, NJ. This facility is used primarily to backup or
support our trading data and processing if a disaster or major system
malfunction occurs. To provide for system continuity in the event of short
power outages, we have also equipped our three data centers and trading rooms
with uninterruptible power supply units and back up generators.

   A larger facility in Fairfield, NJ is now being constructed to replace the
Weehawken operation and provide expanded back-up capability. The Fairfield
center will run a "hot" realtime copy of all our trading data and provide
back-up realtime operation to support trading floors at the Jersey City
offices. The Fairfield center will also support a small number of traders on
site.

Competition

   Through 2000, we derived substantially all of our revenues from
market-making and asset management activities. The market for these services,
particularly market-making services through electronic communications networks
("ECNs"), is rapidly evolving and intensely competitive. We expect competition
to continue and intensify in the future. KS and KSIL competes primarily with
wholesale, national, and regional broker-dealers, as well as ECNs. KCM competes
with the NYSE, the AMEX, regional exchanges, other broker-dealer competitors
and ECNs. KFP competes with other options specialists and market makers, while
Deephaven competes with other asset management companies. We compete primarily
on the basis of execution standards, our relationship with our clients and
technology.

   A number of our competitors have significantly greater financial, technical,
marketing and other resources than we have. Some of our competitors also offer
a wider range of services and products than we offer and have greater name
recognition and more extensive client bases. These competitors may be able to
respond more quickly to new or evolving opportunities, technologies and client
requirements than we can and may be able to undertake more extensive
promotional activities and offer more attractive terms to clients. Recent
advancements in computing and communications technology are substantially
changing the means by which market-making services are delivered, including
more direct access on-line to a wide variety of services and information, and
have also created demand for more sophisticated levels of client service. The
provision of such services may entail considerable cost without an offsetting
increase in revenues. Moreover, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties or may consolidate to enhance their services and products. New
competitors or alliances among competitors may emerge and they may acquire
significant market share. All of these above factors may affect us in the
future.

   ECNs. An electronic communications network, commonly referred to as an ECN,
is defined by the SEC as "any electronic system that widely disseminates to
third parties limit orders entered therein by an exchange market maker or OTC
market maker and permits such orders to be executed against, in whole or in
part." ECNs are private trading systems used by institutional investors and
broker-dealers, including market makers and day trading firms. ECNs provide
market participants with the ability to trade securities anonymously, manage
inventory and to obtain immediate display of their limit orders. ECNs, however,
merely provide a neutral forum in which third parties can display and match
their limit orders.

   As ECNs do not buy or sell securities as principal they cannot provide
enhanced liquidity to investors. ECNs essentially are private limit order files
that are highly dependent on trade volume and price volatility to be effective.
In the absence of high trade count or wide price fluctuations in a particular
security, the rapidity of execution and overall fill rates in an ECN can
suffer. Consequently, ECNs have their greatest value in a select few Nasdaq
stocks with the greatest levels of trade volume and price fluctuations.

                                      11
<PAGE>

Employees

   At December 31, 2000, we had a total of 1,364 full-time employees, of which
672 were employed at KS, 144 were employed at KCM, 379 were employed at KFP and
Deephaven, 139 were employed at KSIL and 30 were employed at KSJ. Of KS's 672
employees, 387 were engaged in market-making and sales activities, 136 in
systems and technology, 67 in client service and 82 in administration. Of KCM's
144 employees, 84 were engaged in market-making activities, 29 in client
service, 15 in systems and technology and 16 in administration. Of KFP and
Deephaven's 379 employees, 264 were engaged in market-making and sales
activities, 63 in systems and technology, 5 in client service and 47 in
administration. None of our employees are subject to a collective bargaining
agreement. We believe that our relations with our employees are excellent.

   We recruit and retain our employees by compensating them largely on a
performance basis, measuring performance primarily in terms of revenue
generation. We are committed to improving the skill levels of our employees
and, to that end, we have established Knight School, formal training sessions
in which trading staff learn new trading techniques and are informed of
regulatory developments. We are continuing to expand this initiative and to
develop additional programs to improve the skills and productivity of our work
force.

Intellectual Property and Other Proprietary Rights

   We rely primarily on trade secret and trademark law to protect our
proprietary technology. Notwithstanding the precautions we take to protect our
intellectual property rights, it is possible that third parties may copy or
otherwise obtain and use our proprietary technology without authorization or
otherwise infringe on our proprietary rights. It is also possible that third
parties may independently develop technologies similar to ours. It may be
difficult for us to police unauthorized use of our intellectual property
rights. In addition, litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. These litigations, whether successful or
unsuccessful, could result in substantial costs and diversions of resources
either of which could have a material adverse effect on our business, financial
condition and operating results. We may in the future receive notices of claims
of infringement of other parties' proprietary rights.

Government Regulation

   The securities industry in the United States is subject to extensive
regulation under both federal and state laws. In addition, the SEC, the NASD,
other self regulatory organizations, commonly known as SROs, such as the
various stock exchanges, and other regulatory bodies, such as state securities
commissions, require strict compliance with their rules and regulations. As a
matter of public policy, regulatory bodies are charged with safeguarding the
integrity of the securities and other financial markets and with protecting the
interests of clients participating in those markets, not protecting creditors
or stockholders of market makers. Market makers are subject to regulation
concerning certain aspects of their business, including trade practices,
capital structure, record retention and the conduct of directors, officers and
employees. Failure to comply with any of these laws, rules or regulations could
result in censure, fine, the issuance of cease-and-desist orders or the
suspension or disqualification of its directors, officers or employees, and
other adverse consequences. We and certain of our officers and other employees
have, in the past, been subject to claims arising from the violation of such
laws, rules and regulations, which resulted in the payment of fines and
settlements.

   The regulatory environment in which we operate is subject to change. Our
business, financial condition and operating results may be adversely affected
as a result of new or revised legislation or regulations imposed by the SEC,
other United States or foreign governmental regulatory authorities or the NASD.
Our business, financial condition and operating results also may be adversely
affected by changes in the interpretation or enforcement of existing laws and
rules by these governmental authorities and the NASD.

                                      12
<PAGE>

   Additional regulation, changes in existing laws and rules, or changes in
interpretations or enforcement of existing laws and rules often directly affect
the method of operation and profitability of securities firms. We cannot
predict what effect any such changes might have. Both regulations directly
applicable to us and regulations of general application could have a material
adverse effect on our business, financial condition, and operating results. For
example, the volume of our market-making activities in a given period could be
affected by, among other things, existing and proposed tax legislation,
antitrust policy and other governmental regulations and policies (including the
interest rate policies of the Federal Reserve Board) and changes in
interpretation or enforcement of existing laws and rules that affect the
business and financial communities. The level of trading and market-making
activity can be affected not only by such legislation or regulations of general
applicability, but also by industry-specific legislation or regulations.

   Our business, both directly and indirectly, relies on the Internet and other
electronic communications gateways. We intend to expand our use of these
gateways. To date, the use of the Internet has been relatively free from
regulatory restraints. However, the SEC, certain SROs and certain states are
beginning to address the regulatory issues that may arise in connection with
the use of the Internet. Accordingly, new regulations or interpretations may be
adopted that constrain our own and our clients' abilities to transact business
through the Internet or other electronic communications gateways.

   In addition, we have established London and Japan-based subsidiaries and
intend to expand our business to other countries in the future. To expand our
services internationally, we will have to comply with the regulatory controls
of each country in which we conduct business. The brokerage industry in many
foreign countries is heavily regulated. The varying compliance requirements of
these different regulatory jurisdictions and other factors may limit our
ability to expand internationally.

  Termination of SEC's KCM Inquiry

   In 1996, the SEC advised KCM that it was conducting an inquiry with respect
to KCM and asked that KCM voluntarily provide the SEC certain documents. At
such time, based on the request for documents, it appeared that the SEC's
inquiry concerned four areas: price improvement, protection of limit orders,
payment for order flow and trade reporting. This inquiry was disclosed in the
Company's initial public offering and follow-on offering prospectus'.

   On January 5, 2000, the staff of the SEC notified counsel for KCM that it
intended to recommend an administrative and cease and desist proceeding against
KCM and its then president, Steven Steinman, for alleged violations of Sections
10(b) and 15(c)(1) of the Securities Exchange Act of 1934 (the "Exchange Act")
and Rules 10b-5 and 15c1-2 promulgated thereunder. On January 28, 2000, KCM and
Mr. Steinman filed a submission with the SEC staff setting out their reasons
why there was no basis for the staff's allegations. By letter dated February
16, 2000, the SEC staff notified KCM and Mr. Steinman that the staff was
terminating its inquiry dating back to 1996 and that no enforcement action was
recommended.

Net Capital Requirements

   As registered broker-dealers and members of the NASD, certain of our
subsidiaries are subject to the SEC's Net Capital Rule. The Net Capital Rule,
which specifies minimum net capital requirements for registered broker-dealers,
is designed to measure the general financial integrity and liquidity of a
broker-dealer and requires that at least a minimum part of its assets be kept
in relatively liquid form. In general, net capital is defined as net worth
(assets minus liabilities), plus qualifying subordinated borrowings and certain
discretionary liabilities, and less certain mandatory deductions that result
from excluding assets that are not readily convertible into cash and from
valuing conservatively certain other assets. Among these deductions are
adjustments, which are commonly called haircuts, which reflect the possibility
of a decline in the market value of an asset prior to disposition.

                                      13
<PAGE>

   Failure to maintain the required net capital may subject a firm to
suspension or revocation of registration by the SEC and suspension or expulsion
by the NASD and other regulatory bodies and ultimately could require the firm's
liquidation. The Net Capital Rule prohibits payments of dividends, redemption
of stock, the prepayment of subordinated indebtedness and the making of any
unsecured advance or loan to a stockholder, employee or affiliate, if such
payment would reduce the firm's net capital below required levels.

   The Net Capital Rule also provides that the SEC may restrict for up to 20
business days any withdrawal of equity capital, or unsecured loans or advances
to stockholders, employees or affiliates (capital withdrawal), if such capital
withdrawal, together with all other net capital withdrawals during a 30-day
period, exceeds 30% of excess net capital and the SEC concludes that the
capital withdrawal may be detrimental to the financial integrity of the
broker-dealer. In addition, the Net Capital Rule provides that the total
outstanding principal amount of a broker-dealer's indebtedness under certain
subordination agreements, the proceeds of which are included in its net
capital, may not exceed 70% of the sum of the outstanding principal amount of
all subordinated indebtedness included in net capital, par or stated value of
capital stock, paid in capital in excess of par, retained earnings and other
capital accounts for a period in excess of 90 days.

   A change in the Net Capital Rule, the imposition of new rules or any
unusually large charges against net capital could limit those of our operations
that require the intensive use of capital and also could restrict our ability
to withdraw capital from our broker-dealer subsidiaries, which in turn could
limit our ability to pay dividends, repay debt and repurchase shares of our
outstanding stock. A significant operating loss or any unusually large charge
against net capital could adversely affect our ability to expand or even
maintain our present levels of business.

   Additionally, our foreign subsidiaries in London and Japan are subject to
capital adequacy requirements of the Securities and Futures Authority Limited
in the United Kingdom and the Financial Service Industry in Japan,
respectively.

Item 2. Properties

   Our headquarters are located in Jersey City, New Jersey. We lease
approximately 105,053 square feet under a lease which expires in March 2006,
and we have an option to extend the lease term on three floors for an
additional five-year period. We also lease approximately 183,202 square feet
for our offices in Purchase, NY; Minnetonka, MN, Chicago, IL; Santa Clara, CA;
Boston, MA; Jericho, NY; London, England and Japan. Our London lease represents
space leased on the former floor of the London Stock Exchange.

   In July 2000, we signed a lease for our new world headquarters in Jersey
City, NJ. The new headquarters will be located at 545 Washington Boulevard in
Jersey City, a building now under construction adjacent to our current
headquarters at 525 Washington Boulevard. We have leased approximately 266,000
square feet in our new building, and anticipate occupying our new space during
the fourth quarter of 2001.

   We believe that our present facilities, together with our current options to
extend lease terms and occupy additional space, are adequate for our current
needs.

Item 3. Legal Proceedings

   We are not currently a party to any legal proceedings, the adverse outcome
of which, individually or in the aggregate, we can predict with any reasonable
certainty, could have a material adverse effect on our business, financial
condition or operating results. We and certain of our past and present officers
and employees are currently the subject of legal proceedings, such as those
stated in our 8-K filing of November 30, 2000, that are in their preliminary
stages. As such, we are unable to predict the outcome of any such proceeding
and assess or quantify the potential damages, if any.

                                      14
<PAGE>

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

   None.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

   Our Class A Common Stock is traded on the Nasdaq National Market under the
symbol "NITE." Public trading of our Class A Common Stock commenced on July 8,
1998. Before that, no public market for our Class A Common Stock existed. The
following table sets forth, for the past two years, the high and low quarterly
sales price per share of the Class A Common Stock in the Nasdaq National Market
(adjusted for our stock split in May 1999):

<TABLE>
<CAPTION>
                          1999
                          ----
                          <S>            <C>    <C>
                          First Quarter. $33.81 $10.00
                          Second Quarter  81.63  32.50
                          Third Quarter.  64.81  26.25
                          Fourth Quarter  57.50  21.69

                          2000
                          ----
                          First Quarter.  60.06  29.50
                          Second Quarter  53.00  24.31
                          Third Quarter.  39.75  25.00
                          Fourth Quarter  35.73  13.88
</TABLE>

   As of March  , 2001, there were approximately    holders of record of our
Class A Common Stock.

   We have never paid a dividend. We intend to retain future earnings, if any,
to finance the development and expansion of our business and, therefore, do not
anticipate paying any cash dividends in the foreseeable future. The payment of
cash dividends is within the discretion of our board of directors and will
depend on many other factors, including our results of operations, financial
condition and capital requirements, restrictions imposed by financing
arrangements and legal requirements.

Item 6. Selected Financial Data

   The following selected consolidated financial data are qualified by the
Consolidated Financial Statements of Knight Trading Group, Inc. and the Notes
thereto included elsewhere in this document. You should read the following in
conjunction with the Consolidated Financial Statements and the discussion under
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this document. The Consolidated
Statements of Income Data for the years ended December 31, 1998, 1999 and 2000
and the Consolidated Statements of Financial Condition Data at December 31,
1999 and 2000 have been derived from our audited Consolidated Financial
Statements included elsewhere in this document. The Consolidated Statements of
Income Data for the years ended December 31, 1996 and 1997 and the Consolidated
Statements of Financial Condition Data at December 31, 1996, 1997 and 1998 are
derived from Consolidated Financial Statements not included in this document.

                                      15
<PAGE>

<TABLE>
<CAPTION>
                                                                            For the years ended December 31,
                                                           -------------------------------------------------------------------
                                                               2000          1999          1998          1997         1996
                                                           ------------  ------------  ------------  -----------  -----------
                                                                     (In thousands, except share and per share data)
<S>                                                        <C>           <C>           <C>           <C>          <C>
Consolidated Statement of Income Data:
Revenues..................................................
  Net trading revenue..................................... $  1,157,516  $    845,105  $    395,417  $   262,217  $   188,831
  Asset management fees...................................       41,884        19,921         6,134        7,389        3,821
  Interest and dividends, net of interest expense.........       16,137        11,950         3,981        1,382          762
  Commissions and fees....................................       32,158        16,439         3,983          705          190
  Investment income and other.............................        9,225         3,160         1,520          477          209
                                                           ------------  ------------  ------------  -----------  -----------
   Total revenues.........................................    1,256,920       896,575       411,035      272,170      193,813
                                                           ------------  ------------  ------------  -----------  -----------
Expenses
  Employee compensation and benefits......................      421,170       269,224       123,023       70,977       41,927
  Payments for order flow.................................      174,646       138,697        82,499       66,912       69,829
  Execution and clearance fees............................      112,238        89,575        50,724       34,613       26,357
  Communications and data processing......................       33,025        18,944        11,721        7,843        4,835
  Depreciation and amortization...........................       25,336        11,396         7,271        4,630        3,157
  Professional fees.......................................       21,527         7,889         4,513        2,363          487
  Occupancy and equipment rentals.........................       18,742        10,706         6,139        2,916        1,846
  Business development....................................       14,806        10,295         2,913        1,798          684
  Merger related costs....................................           --         9,969            --           --           --
  Interest on preferred units.............................           --            --           715        1,942        2,093
  Other...................................................       16,899         7,050         3,435        1,370        2,479
                                                           ------------  ------------  ------------  -----------  -----------
   Total expenses.........................................      838,389       573,745       292,953      195,364      153,694
                                                           ------------  ------------  ------------  -----------  -----------
Income before income taxes and minority interest..........      418,531       322,830       118,082       76,806       40,119
Income tax expense........................................      159,446       111,546        22,251           --           --
                                                           ------------  ------------  ------------  -----------  -----------
Income before minority interest...........................      259,085       211,284        95,831       76,806       40,119
Minority interest in consolidated subsidiaries............          837            --            --           --           --
                                                           ------------  ------------  ------------  -----------  -----------
Net income................................................ $    259,922  $    211,284  $     95,831  $    76,806  $    40,119
                                                           ============  ============  ============  ===========  ===========
Basic earnings per share.................................. $       2.12  $       1.75  $       0.93  $      0.82  $      0.43
                                                           ============  ============  ============  ===========  ===========
Diluted earnings per share................................ $       2.05  $       1.68  $       0.93  $      0.82  $      0.43
                                                           ============  ============  ============  ===========  ===========
Pro forma adjustments
Income before income taxes and minority interest.......... $    418,531  $    322,830  $    118,082  $    76,806  $    40,119
Adjustment for pro forma employee compensation and
 benefits (1).............................................         (267)       (7,580)       (5,097)      (4,647)      (1,566)
                                                           ------------  ------------  ------------  -----------  -----------
Pro forma income before income taxes and minority interest      418,264       315,250       112,985       72,159       38,553
Pro forma income tax expense (2)..........................      160,089       126,790        48,040       30,918       16,569
                                                           ------------  ------------  ------------  -----------  -----------
Pro forma income before minority interest.................      258,175       188,460        64,945       41,241       21,984
Minority interest in consolidated subsidiaries............          837            --            --           --           --
                                                           ------------  ------------  ------------  -----------  -----------
Pro forma net income...................................... $    259,012  $    188,460  $     64,945  $    41,241  $    21,984
                                                           ============  ============  ============  ===========  ===========
Pro foma basic earnings per share......................... $       2.11  $       1.56  $       0.63  $      0.44  $      0.23
                                                           ============  ============  ============  ===========  ===========
Pro forma diluted earnings per share...................... $       2.04  $       1.50  $       0.63  $      0.44  $      0.23
                                                           ============  ============  ============  ===========  ===========
Shares used in basic earnings per share calculations (3)..  122,520,733   120,821,710   103,115,712   93,696,762   93,696,762
                                                           ============  ============  ============  ===========  ===========
Shares used in diluted earnings per share calculations (3)  126,863,316   125,755,430   103,115,712   93,696,762   93,696,762
                                                           ============  ============  ============  ===========  ===========
</TABLE>

                                      16
<PAGE>

<TABLE>
<CAPTION>
                                                                      December 31,
                                                    ------------------------------------------------
                                                       2000       1999      1998     1997     1996
                                                    ---------- ---------- -------- -------- --------
<S>                                                 <C>        <C>        <C>      <C>      <C>
Consolidated Statement of Financial Condition Data:
Cash and cash equivalents.......................... $  364,058 $  304,054 $117,705 $ 13,918 $ 15,436
Securities owned, at market value..................  1,799,967    910,233  411,288  180,957   72,825
Receivable from clearing brokers...................    114,047    215,423  107,537   35,747   33,345
Total assets.......................................  2,521,409  1,540,286  684,644  264,788  146,611
Securities sold, not yet purchased, at market value  1,427,214    720,919  328,171  125,827   39,298
Mandatorily Redeemable Preferred Units.............         --         --       --   27,484   37,706
Total stockholders' (members') equity..............    774,186    499,231  205,873   61,804   39,513
</TABLE>
--------
(1) Before the merger, Arbitrade was a limited liability company and
    compensation and benefits to Arbitrade's members were accounted for as
    distributions of members' equity. Pro forma compensation expense was
    computed as 15% of the before-tax profits earned by Arbitrade for the years
    ended December 31, 1996, 1997, 1998 and 1999 and for the period ended
    January 12, 2000, the date of the merger.
(2) Before our initial public offering in July 1998, we were a limited
    liability company and were not subject to income taxes. Pro forma income
    tax expense was computed based on an effective tax rate of 43%, 43% and
    42.5%, for the years ended December 31, 1996 and 1997, and for the period
    through our initial public offering in 1998, respectively. Additionally,
    before our merger, Arbitrade was a limited liability company and was not
    subject to taxes. Pro forma income tax expense was computed based on
    Arbitrade's income at an effective tax rate of 42.5% for the years ended
    December 31, 1996, 1997, 1998, 1999 and for the period ended January 12,
    2000.
(3) Weighted average shares outstanding for all years presented have been
    determined as if the merger and reorganization described in Notes 1 and 3
    to the Consolidated Financial Statements included elsewhere in this
    document occurred as of the earliest date presented. Shares issued in
    connection with our initial public offering have been considered in
    determining weighted average shares outstanding only from the date they
    were issued.

Item 7.  Management's Discussion and Analysis of Financial Condition and
Results of Operations

Overview

   We are the leading market maker in Nasdaq securities, other OTC equity
securities, and the over-the-counter market for NYSE- and AMEX-listed equity
securities. Through our wholly-owned subsidiary, Knight Securities, ("KS"), we
make markets in approximately 9,100 equity securities in Nasdaq and on the
NASD's OTC Bulletin Board. Through our wholly-owned subsidiary, Knight Capital
Markets ("KCM"), we make markets in the over-the-counter market for all NYSE-
and AMEX-listed equity securities. We are also a leading market maker in
options on individual equities, equity indices and fixed income instruments in
the U.S. and Europe through our Knight Financial Products ("KFP") subsidiary.
We also maintain an asset management business for institutional investors and
high net worth individuals through our Deephaven subsidiaries.

   The Company has two reportable business segments: securities market-making
and asset management. Securities market-making primarily includes the
operations of KS, KCM and KFP and includes market-making in equity securities
listed on Nasdaq, on the OTCBB of the NASD, in the over-the-counter market for
NYSE- and AMEX-listed securities and in options on individual equities, equity
indices, fixed income instruments and certain commodities. The asset management
segment includes the operations of Deephaven Capital Management, Deephaven
Capital and Deephaven Investment Advisers and consists of investment management
and sponsorship for a series of private investment funds.

   KS commenced Nasdaq and OTC securities market-making operations on July 24,
1995. Based on rankings published by The AutEx Group, KS was ranked first in
AutEx's Nasdaq/OTC Securities rankings during 2000. KS's equity share volume
totaled 27.4 billion, 64.0 billion and 90.8 billion, or 71%, 79% and 81% of our
total equity share volume, for the years ended December 31, 1998, 1999 and
2000, respectively. Since commencing operations in 1995, KS's business has
grown rapidly and accounted for 80%, 86% and 86% of our total equity share
volume growth during the years ended December 31, 1998, 1999 and 2000,
respectively. Since our acquisition of KCM in March 1995, KCM has also
experienced significant increases in equity share volume. In addition, KCM has
held the #1 market share ranking in trading of securities in the
over-the-counter market for NYSE- and AMEX-listed securities for over two years
as disclosed by the NASD. KCM's equity share volume totaled 11.0 billion, 17.0
billion and 21.2 billion, or 29%, 21% and 19% of our total equity share volume
for the years ended December 31, 1998, 1999 and 2000, respectively. KFP
commenced its options market-making and

                                      17
<PAGE>

specialist business in 1995. KFP's U.S. option contract volume amounted to 5.6
million, 10.6 million and 21.4 million for the years ended December 31, 1998,
1999 and 2000.

   We have experienced, and expect to continue to experience, significant
fluctuations in operating results due to a variety of factors, including the
value of our securities positions and our ability to manage the risks attendant
thereto, the volume of our market-making activities, volatility in the
securities markets, our ability to manage personnel and expenses, the amount of
revenue derived from limit orders as a percentage of net trading revenues,
changes in payments for order flow or clearing costs, the addition or loss of
sales and trading professionals, regulatory changes, the amount and timing of
capital expenditures, the incurrence of costs associated with acquisitions and
general market conditions. If demand for our market-making services declines
and we are unable to adjust our cost structure on a timely basis, our operating
results could be materially and adversely affected. We have experienced, and
may experience in the future, significant seasonality in our business.

   Due to all 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 sustain the rates of revenue
growth that we have experienced in the past, that we will be able to improve
our operating results or that we will be able to sustain our profitability on
an annual and/or quarterly basis.

  Revenues

   Our revenues consist principally of net trading revenue from securities
market-making activities. Net trading revenue, which represents trading gains
net of trading losses, is primarily affected by changes in equity trade and
share volumes and option contract volumes, our ability to derive trading gains
by taking proprietary positions, changes in our execution standards, volatility
in the marketplace and by regulatory changes and evolving industry customs and
practices. Our net trading revenue per trade for OTC securities has
historically exceeded the net trading revenue per trade for listed securities.

   We continue to focus on increasing our institutional business. OTC
securities transactions with institutional customers are executed as principal,
and all related profits and losses are included within net trading revenue.
Listed securities transactions with institutional customers are executed on an
agency basis, for which we earn commissions on a per share basis. We also
receive fees for providing certain information to market data providers and for
directing trades to certain destinations for execution. Commissions and fees
are primarily affected by changes in our trade and share volumes in listed
securities.

   Asset management fees represent fees earned for sponsoring and managing the
investments of private investment funds. Asset management fees are primarily
affected by the rates of return earned on the funds we manage 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, net of transaction-related interest charged by
clearing brokers for facilitating the settlement and financing of securities
transactions, and interest on subordinated notes and short-term debt. Net
interest is primarily affected by the changes in cash balances held at banks
and clearing brokers, the level of securities positions, and the principal
amount outstanding under subordinated notes and short-term debt.

  Expenses

   Our operating expenses largely consist of employee compensation and
benefits, payments for order flow and execution and clearance fees. A
substantial portion of these expenses is variable in nature. Employee
compensation and benefits expense, which is largely profitability based,
fluctuates, for the most part, based on changes in net trading revenue and our
profitability. Payments for order flow fluctuate based on equity share volume,
the mix of market orders and limit orders and the mix of orders received from
broker-dealers who accept payments for order flow. Execution and clearance fees
fluctuate primarily based on changes in equity trade and

                                      18
<PAGE>

share volume, the mix of trades of OTC securities compared to listed
securities, clearance fees charged by clearing brokers and ECN fees. Our
international expansion efforts have generally increased our operating
expenses.

   Employee compensation and benefits expense primarily consists of salaries
and wages paid to administrative and customer service personnel and
profitability based compensation, which includes compensation and benefits paid
to market-making and sales personnel based on their individual performance, and
incentive compensation paid to all other employees based on our overall
profitability. Profitability based compensation represented 77%, 82% and 79% of
total employee compensation and benefits expense for the years ended December
31, 1998, 1999 and 2000 respectively. We have grown from 551 employees at
December 31, 1998 to 803 and 1,364 employees as of December 31, 1999 and 2000,
respectively. Approximately 69% of our employees are directly involved in
market-making, sales or customer service activities. Compensation for employees
engaged in market-making and sales activities, the largest component of
employee compensation and benefits, is determined primarily based on a
percentage of gross trading profits net of expenses including payments for
order flow, execution and clearance costs and overhead allocations.

   Payments for order flow represent customary payments to broker-dealers, in
the normal course of business, for directing their order flow in equity
securities to us. As a result of the new Order Handling Rules implemented by
the SEC in 1997, we changed our order flow payment policy from paying
broker-dealers for substantially all order executions, to paying broker-dealers
only for orders which provide us with a profit opportunity. For example, we
make payments on market orders, but do not pay on limit orders. Payments for
order flow change as we modify our payment formulas and as our percentage of
customers whose policy is not to accept payments for order flow varies.

   Execution and clearance fees primarily represent clearance fees paid to
clearing brokers for OTC and listed securities, transaction fees paid to
Nasdaq, payments made to third parties for exchange seat leases and execution
fees paid to third parties, primarily for executing trades in listed securities
on the NYSE and AMEX and for executing orders through electronic communications
networks, commonly referred to as ECNs. Due to our significant equity share and
trade volume, we have been able to negotiate favorable rates and volume
discounts from clearing brokers and providers of execution services. As a
result of these lower rates and discounts and the increase in equity trade
volume of OTC securities as a percentage of total trade volume, execution and
clearance fees per trade have decreased.

   Communications and data processing expense primarily consists of costs for
obtaining stock market data and telecommunications services.

   Depreciation and amortization expense results from the depreciation of fixed
assets and the amortization of goodwill, which includes contingent
consideration primarily resulting from the acquisition of the listed securities
market-making businesses of KCM and Tradetech Securities, L.P. ("Tradetech")
Depreciation and amortization expense also includes the amortization of
goodwill related to our purchases of various options-related businesses.

   Professional fees primarily consist of fees paid to computer programming and
systems consultants, as well as legal fees and other professional fees.

   Occupancy and equipment rentals expense primarily consists of rental
payments on office and equipment leases.

   Business development expense primarily consists of advertising costs and
marketing expenses, including travel and entertainment expenses and promotion
costs.

   Interest on Preferred Units represents required interest payments on our
Mandatorily Redeemable Preferred A and B Units at a rate approximating the
Federal Funds rate. On April 15, 1998, we redeemed all of the remaining
outstanding Preferred A Units for $12.5 million in cash. On April 15, 1998, we
redeemed $1.2 million of Preferred B Units and, on July 17, 1998, we used $13.8
million of the proceeds from our initial public offering to redeem all of the
remaining outstanding Preferred B Units.

                                      19
<PAGE>

   Merger-related expenses primarily consist of investment banking, legal and
accounting costs incurred in connection with our merger with Arbitrade Holdings
LLC This transaction closed in January 2000.

   Other expenses primarily consist of administrative expenses and other
operating costs.

  Income Tax

   Prior to our initial public offering, we were a limited liability company
and were not subject to federal or state income taxes. Actual income tax
expense represents income taxes incurred from July 13, 1998, the date of the
reorganization, through December 31, 1998 and for the years ended December 31,
1999 and 2000. This period is referred to as the post-offering period.
Additionally, prior to the merger with KFP, KFP was a limited liability
company, which was treated as a partnership for tax purposes and its U.S.
federal and state income taxes were borne by KFP's individual partners. As such
KFP's historical financial statements only include a provision for non-U.S.
income taxes. Subsequent to the merger, KFP's income is subject to federal
income taxes and state income taxes. This period is referred to as the
post-merger period. Our effective tax rate for the post-offering period and
post-merger period and proforma effective tax rate for all periods prior to the
post-offering period and post-merger period, differ from the federal statutory
rate of 35% due to state income taxes, as well as nondeductible expenses,
including the amortization of goodwill resulting from the acquisition of
Trimark and a portion of business development expenses and merger-related
expenses.

Results of Operations

   The following table sets forth the consolidated statement of income data as
a percentage of total revenues:

<TABLE>
<CAPTION>
                                                        For the years ended
                                                            December 31,
                                                        --------------------
                                                         2000   1999   1998
                                                        -----  -----  -----
    <S>                                                 <C>    <C>    <C>
    Revenues
       Net trading revenue.............................  92.1%  94.3%  96.2%
       Asset management fees...........................   3.3    2.2    1.5
       Interest and dividends, net of interest expense.   1.3    1.3    1.0
       Commissions and fees............................   2.6    1.8    1.0
       Investment income and other.....................   0.7    0.4    0.3
                                                        -----  -----  -----
           Total revenues.............................. 100.0  100.0  100.0
                                                        -----  -----  -----
    Expenses
       Employee compensation and benefits..............  33.5   30.0   29.9
       Payments for order flow.........................  13.9   15.5   20.1
       Execution and clearance fees....................   8.9   10.0   12.3
       Communications and data processing..............   2.6    2.1    2.9
       Depreciation and amortization...................   2.0    1.3    1.8
       Professional fees...............................   1.7    0.9    1.1
       Occupancy and equipment rentals.................   1.5    1.2    1.5
       Business development............................   1.2    1.1    0.7
       Merger related costs............................   0.0    1.1    0.0
       Other...........................................   1.3    0.8    1.0
                                                        -----  -----  -----
           Total expenses..............................  66.6   64.0   71.3
                                                        -----  -----  -----
    Income before income taxes and minority interest...  33.4%  36.0%  28.7%
    Income tax expense.................................  12.7   12.4    5.4
                                                        -----  -----  -----
    Income before minority interest....................  20.7   23.6   23.3
    Minority interest in consolidated subsidiaries.....   0.1    0.0    0.0
                                                        -----  -----  -----
    Net income.........................................  20.8%  23.6%  23.3%
                                                        =====  =====  =====
</TABLE>

                                      20
<PAGE>

<TABLE>
<CAPTION>
                                                             2000  1999  1998
                                                             ----  ----  ----
 <S>                                                         <C>   <C>   <C>
 Pro forma adjustments
 Income before income taxes and minority interest........... 33.4  36.0  28.7
 Adjustment for pro forma employee compensation and benefits  0.0  -0.8  -1.2
                                                             ----  ----  ----
 Pro forma income before income taxes and minority interest. 33.4  35.2  27.5
 Pro forma income tax expense............................... 12.7  14.1  11.7
                                                             ----  ----  ----
 Pro forma income before minority interest.................. 20.7  21.1  15.8
 Minority interest in consolidated subsidiaries.............  0.1   0.0   0.0
                                                             ----  ----  ----
 Pro forma net income....................................... 20.8% 21.1% 15.8%
                                                             ====  ====  ====
</TABLE>

Years Ended December 31, 2000 and 1999

  Revenues

   Net trading revenue increased 37.0% to $1,157.5 million in 2000, from $845.1
million in 1999. This increase was primarily due to higher equity share and
option contract volumes, particularly higher equity share volume for OTC
securities. Total equity share volume increased 38.3% to 112.1 billion shares
in 2000, from 81.0 billion shares in 1999. Total equity trade volume increased
57.4% to 142.7 million trades in 2000, from 90.7 million trades in 1999. The
effect of these volume increases were offset partially by the fact that average
net revenue per equity share decreased from $0.0095 per equity share in 1999 to
$0.0092 per equity share in 2000.

   Asset management fees increased 110.2% to $41.9 million in 2000 from $19.9
million in 1999. The increase in fees was primarily due to an increase in fund
return in our Deephaven Market Neutral Master Fund from 21.08% in 1999 to
33.61% in 2000. Additionally, there was an increase in funds under management
from $314.3 million at December 31, 1999 to $743.5 million at December 31,
2000. The Deephaven Market Neutral Master Fund, represents the majority of our
funds under management.

   Interest income, net of interest expense, increased 35.0% to $16.1 million
in 2000, from $11.9 million in 1999. This increase was primarily due to larger
cash balances held at banks and our clearing brokers.

   Commissions and fees increased 95.6% to $32.2 million in 2000, from $16.4
million in 1999. This increase is primarily due to higher equity share volumes
from institutional customers in listed securities, higher fees for providing
certain information to market data providers and for directing trades to
certain destinations for execution.

   Investment income and other income increased 191.9% to $9.2 million in 2000,
from $3.2 million in 1999. This increase was primarily due to an increase in
income from our investments in the private hedge funds that we sponsor and
manage.

  Expenses

   Pro forma employee compensation and benefits expense increased 52.3% to
$421.4 million in 2000, from $276.8 million in 1999. As a percentage of total
revenue, pro forma employee compensation and benefits expense was 33.5% in 2000
and 30.8% in 1999. The increase on a dollar basis was primarily due to
increases in gross trading profits and growth in our number of employees. The
increase on a percentage basis is primarily due to an increase in our number of
employees and the decrease in average net revenue per equity share. Due to
increased net trading revenue and profitability, pro forma profitability based
compensation increased 46.4% to $331.8 million in 2000, from $226.6 million in
1999. The number of employees increased to 1,364 employees as of December 31,
2000, from 803 employees as of December 31, 1999.

                                      21
<PAGE>

   Payments for order flow increased 25.9% to $174.6 million in 2000, from
$138.7 million in 1999. As a percentage of total revenue, payments for order
flow decreased to 13.9% in 2000 from 15.5% in 1999. The increase in payments
for order flow on a dollar basis was primarily due to a 38.3% increase in
equity shares traded in 2000 to 112.1 billion equity shares, up from 81.0
billion in 1999, and the introduction of payments for order flow for options
during the third quarter of 2000. The decrease in payments for order flow as a
percentage of total revenue was primarily due to increases in our
institutional, asset management and options trading revenues, respectively,
which have less payments for order flow associated with them.

   Execution and clearance fees increased 25.3% to $112.2 million in 2000, from
$89.6 million in 1999. As a percentage of total revenue, execution and
clearance fees decreased to 8.9% in 2000 from 10.0% in 1999. The increase on a
dollar basis was primarily due to a 57.4% increase in equity trades executed to
142.7 million equity trades in 2000, from 90.7 million equity trades in 1999
and a 101.6% growth in options contracts executed from 10.6 million options
contracts executed in 1999 to 21.4 million in 2000. The increase on a dollar
basis was offset, in part, by a decrease in clearance rates charged by clearing
brokers and volume discounts. The decrease in execution and clearance fees as a
percentage of total revenue was primarily due to the decrease in clearance
rates charged by clearing brokers, volume discounts and growth in the volume of
OTC securities transactions.

   Communications and data processing expense increased 74.3% to $33.0 million
in 2000, from $18.9 million in 1999. This increase was generally attributable
to higher trading volumes and an increase in the number of employees.

   Depreciation and amortization expense increased 122.3% to $25.3 million in
2000, from $11.4 million in 1999. This increase was primarily due to the
purchase of approximately $71.0 million of additional fixed assets and
leasehold improvements during 2000 and the amortization of goodwill primarily
related to the acquisition of the listed securities market-making businesses of
KCM and Tradetech and various options related businesses.

   Professional fees increased 172.9% to $21.5 million in 2000, up from $7.9
million in 1999. This increase was primarily due to increased consulting
expenses related to our investments in technology, our European and Japanese
expansion efforts, as well as legal and other professional fees.

   Occupancy and equipment rentals expense increased 75.1% to $18.7 million in
2000, from $10.7 million in 1999. This increase was primarily attributable to
additional office space and increased computer equipment lease expense.

   Business development expense increased 43.8% to $14.8 million in 2000, from
$10.3 million in 1999. This increase was primarily the result of increased
advertising and higher travel and entertainment costs consistent with the
growth in our business and our increased focus on the institutional sales
business.

   Merger-related expenses primarily consist of investment banking, legal and
accounting costs incurred during 1999 in connection with our merger with
Arbitrade Holdings LLC. This transaction closed in January 2000.

   Other expenses increased 139.7% to $16.9 million in 2000, from $7.1 million
in 1999. This was primarily the result of increased administrative expenses and
other operating costs in connection with our overall business growth.

  Income Tax

   Our effective and pro forma effective income tax rates for 2000 and 1999,
differ from the federal statutory rate of 35% due to state income taxes, as
well as nondeductible expenses, including the amortization of goodwill
resulting from the acquisition of KCM and a portion of business development
expenses. Our pro forma tax rate declined to 38.1% in 2000 from 39.9% in 1999
primarily due to lower state and local income taxes.

                                      22
<PAGE>

Years Ended December 31, 1999 and 1998

  Revenues

   Net trading revenue increased 113.7% to $845.1 million in 1999, from $395.4
million in 1998. This increase was primarily due to higher equity share and
option contract volumes, particularly higher equity share volume for OTC
securities. Total equity share volume increased 111.1% to 81.0 billion equity
shares traded in 1999, from 38.4 billion equity shares traded in 1998. Total
equity trade volume increased 121.8% to 90.7 million equity trades in 1999,
from 40.9 million equity trades in 1998. Average net revenue per equity share
increased to $0.0095 per equity share in 1999 from $0.0091 per equity share in
1998, respectively.

   Asset management fees increased 224.8% to $19.9 million in 1999, from $6.1
million in 1998. The increase in fees was primarily due to an increase in fund
return in our Deephaven Market Neutral Master Fund from 3.18% in 1998 to 21.08%
in 1999 as well as the increase in total funds under management which increased
from $113.8 million at December 31, 1998 to $314.3 million at December 31,
1999.

   Interest income, net of interest expense, increased 200.2% to $11.9 million
in 1999, from $4.0 million in 1998. This increase was primarily due to larger
cash balances held at banks and our clearing brokers, primarily as a result of
our secondary offering in March 1999.

   Commissions and fees increased 312.7% to $16.4 million in 1999, from $4.0
million in 1998. This increase is primarily due to higher equity trade and
share volumes from institutional customers in listed securities and the receipt
of fees for providing certain information to market data providers.

   Investment income and other income increased 107.9% to $3.2 million in 1999
from $1.5 million in 1998. This increase was primarily due to an increase in
income from our investments, primarily our investments in the private hedge
funds that we sponsor and manage.

  Expenses

   Pro forma employee compensation and benefits expense increased 116.1% to
$276.8 million in 1999, from $128.1 million in 1998. As a percentage of total
revenue, pro forma employee compensation and benefits expense decreased to
30.8% in 1999, from 31.1% in 1998. The increase on a dollar basis was primarily
due to increases in gross trading profits and growth in our number of
employees. Due to increased net trading revenue and profitability, pro forma
profitability based compensation increased 130.1% to $226.6 million in 1999,
from $98.5 million in 1998. The number of employees increased to 803 employees
as of December 31, 1999, from 551 employees as of December 31, 1998.

   Payments for order flow increased 68.1% to $138.7 million in 1999, from
$82.5 million in 1998. As a percentage of total revenue, payments for order
flow decreased to 15.5% in 1999 from 20.1% in 1998. The increase in payments
for order flow on a dollar basis was primarily due to a 111.1% increase in
equity shares traded in 1999 to 81.0 billion equity shares, up from 38.4
billion in 1998. The decrease in payments for order flow as a percentage of
total revenue resulted from changes in our order flow payment policy, changes
in the mix of market orders versus limit orders, changes in customer mix and
increases in our asset management and options trading revenues, respectively.

   Execution and clearance fees increased 76.6% to $89.6 million in 1999, from
$50.7 million in 1998. As a percentage of total revenue, execution and
clearance fees decreased to 10.0% in 1999 from 12.3% in 1998. The increase on a
dollar basis was primarily due to a 121.8% increase in equity trades in 1999
and a 89.5% increase in options contracts executed from 5.6 million in 1998 to
10.6 million in 1999, which was offset, in part, by a decrease in clearance
rates charged by clearing brokers, and growth in the volume of OTC securities
transactions, which have lower execution costs than transactions in listed
securities. The decrease in execution and clearance fees as a percentage of
total revenue was primarily due to the decrease in clearance rates charged by
clearing brokers, and growth in the volume of OTC securities transactions.

                                      23
<PAGE>

   Communications and data processing expense increased 61.6% to $18.9 million
in 1999, from $11.7 million in 1998. This increase was generally attributable
to higher trading volumes and an increase in the number of employees.

   Depreciation and amortization expense increased 56.7% to $11.4 million in
1999, from $7.3 million in 1998. This increase was primarily due to the
purchase of approximately $19.4 million of additional fixed assets and
leasehold improvements during 1999 and the amortization of goodwill related to
the acquisition of the listed securities market-making businesses of KCM and
Tradetech.

   Professional fees increased 74.8% to $7.9 million in 1999, up from $4.5
million in 1998. This increase was primarily due to increased consulting
expenses related to our investments in technology, as well as legal and other
professional fees.

   Occupancy and equipment rentals expense increased 74.4% to $10.7 million in
1999, from $6.1 million in 1998. This increase was primarily attributable to
additional office space and increased computer equipment lease expense.

   Business development expense increased 253.4% to $10.3 million in 1999, from
$2.9 million in 1998. This increase was primarily the result of higher travel
and entertainment costs consistent with the growth in our business and our
increased focus on the institutional sales business.

   Interest on Preferred Units was zero in 1999 due to our redemption of all
remaining Preferred A and B Units during 1998.

   Merger-related expenses primarily consist of investment banking, legal and
accounting costs incurred during 1999 in connection with our merger with
Arbitrade Holdings LLC. The transaction closed in January 2000.

   Other expenses increased 105.2% to $7.1 million in 1999, from $3.4 million
in 1998. This was primarily the result of increased administrative expenses and
other operating costs in connection with our overall business growth.

  Income Tax

   Pro forma income tax expense in 1998 for the period prior to the Company's
reorganization and initial public offering in July 1998 and pro forma income
tax expense for 1999 were determined using an effective tax rate of 42.5%.

Liquidity

   Historically, we have financed our business primarily through cash generated
by operations, as well as the proceeds from our initial public and follow-on
stock offerings, the private placement of preferred and common units and
borrowings under subordinated notes. As of December 31, 2000, we had $2.5
billion in assets, 90% of which consisted of cash or assets readily convertible
into cash, principally receivables from clearing brokers and securities owned.
Receivables from clearing brokers 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 and on the NYSE
and AMEX markets and listed options contracts that trade on national exchanges.

   Pro forma net income plus depreciation and amortization was $284.3 million,
$199.9 million and $72.2 million during 2000, 1999 and 1998, respectively.
Depreciation and amortization expense, which related to fixed assets and
goodwill, was $25.3 million, $11.4 million and $7.3 million during 2000, 1999
and 1998, respectively. Capital expenditures were $71.0 million in 2000, $19.4
million in 1999 and $11.4 million in 1998, or 5.7%, 2.2% and 2.8% of total
revenues in each year, respectively. Capital expenditures in 2000 primarily
related to the

                                      24
<PAGE>

purchase of data processing and communications equipment, as well as leasehold
improvements and additional office facilities to support our growth. In
acquiring fixed assets, particularly technology equipment, we make a decision
about whether to lease such equipment or purchase it outright based on a number
of factors including its estimated useful life, obsolescence and cost.
Additionally, we made cash payments of $6.3 million, $6.0 million and $4.1
million in 2000, 1999 and 1998, respectively, in connection with our
acquisitions of the listed securities market-making businesses of KCM in 1995
and Tradetech in 1997. These arrangements ended during 2000. The aggregate
minimum rental commitments for 2001 are $14.8 million. We anticipate that we
will meet our 2001 capital expenditure needs out of operating cash flows.

   As registered broker-dealers and market makers, KS, KCM, KFP and Knight
Execution Partners ("KEP") a subsidiary of KFP, 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 KS, KCM, KFP and KEP, 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 their
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. At December 31, 2000, KS had
net capital of $304.8 million, which was $301.7 million in excess of its
required net capital of $3.1 million, KCM had net capital of $58.2 million,
which was $56.8 million in excess of its required net capital of $1.4 million,
KFP had net capital of $32.4 million, which was $32.1 million in excess of its
required net capital of $250,000 and KEP had net capital of $1.4 million, which
was $1.1 million in excess of its required net capital of $292,504.
Additionally, our foreign subsidiaries in London and Japan are subject to
capital adequacy requirements of the Securities and Futures Authority Limited
in the United Kingdom and the Financial Supervisory Agency in Japan,
respectively. As of December 31, 2000, we were in compliance with the capital
adequacy requirements of all of our foreign subsidiaries.

   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.

Recently Issued Accounting Standards

   In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement established
accounting and reporting standards for derivative instruments, including
certain derivative instruments imbedded in other contracts, and for hedging
activities. In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133--an amendment of FASB Statement No. 133. In June
2000, the FASB issued SFAS No. 138 Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which is an amendment to SFAS No.
133 and is effective concurrently with SFAS No. 137. We anticipate adopting the
provisions of SFAS No. 133, 137 and 138 effective January 1, 2001 and do not
believe that the adoption of these statements will have a material impact on
our financial statements.

   In September 2000, the FASB issued SFAS No. 140 Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities--a replacement
of FASB Statement No. 125. This statement resets accounting standards for
differentiating between securitizations and other transfers of financial assets
that are sales from transfers that are secured borrowings. The Company adopted
certain provisions of SFAS No. 140 as of December 31, 2000 which did not have a
material impact on our financial statements. We anticipate adopting the
remaining provisions of SFAS No. 140 effective April 1, 2001 and do not believe
that the adoption of these provisions statement will have a material impact on
our financial statements.

                                      25
<PAGE>

Item 7A. 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 or changes in liquidity, over which we have
virtually no control.

   We employ automated proprietary trading and risk management systems which
provide real time, on-line risk management and inventory control. We monitor
our risks by a constant review of trading positions and their appropriate risk
measures. We have established a system whereby transactions are monitored by
senior management as are individual and aggregate dollar and inventory position
totals, appropriate risk measures 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 securities. The fair value of these
securities at December 31, 2000 and 1999 was $256.4 million and $135.8 million,
respectively, in long positions and $70.0 million and $129.8 million,
respectively, in short positions. The potential change in fair value, using a
hypothetical 10.0% decline in prices, is estimated to be a $18.6 million loss
and a $0.6 million loss as of December 31, 2000 and 1999, respectively, due to
the offset of losses in long positions with gains in short positions. The
following table illustrates, for the period indicated, our average, highest and
lowest month-end inventory at market value (based on both the aggregate and the
net of the long and short positions of trading securities from our OTC and
exchange-listed market-making business).

                            Equities Market-Making

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                  -----------------------------------------------------------------------------------------
                              2000                          1999                          1998
                  ----------------------------- ----------------------------- -----------------------------
                   Aggregate of      Net of      Aggregate of      Net of      Aggregate of      Net of
                  Long and Short Long and Short Long and Short Long and Short Long and Short Long and Short
                    Positions      Positions      Positions      Positions      Positions      Positions
                  -------------- -------------  -------------- -------------  -------------- -------------
<S>               <C>            <C>            <C>            <C>            <C>            <C>
Average month-end   $315,072,743  $ 62,933,087    $193,579,372  $ 22,266,851    $129,322,342  $  5,139,424
Highest month-end    511,802,399   186,379,465     398,804,534    51,252,815     208,099,843    38,821,031
Lowest month-end.    217,495,778   (57,737,157)    147,263,084   (22,736,612)     73,005,491   (54,587,150)
</TABLE>

   Beginning in the fourth quarter of 1998 and throughout 1999 and 2000, there
has been a sharp increase in the price volatility of many stocks, particularly
of technology companies and companies that sell products or services via the
Internet. This volatility has been coupled with record trading volume in many
of these stocks, which are primarily listed on Nasdaq. Customers eager to trade
Internet and technology stocks have flooded their brokers and, consequently,
market makers such as us with larger numbers of orders, leading to large order
imbalances, systems queues and backlogs. During these extreme market
conditions, many firms have implemented procedures that are designed to
preserve the continuous execution of customers' orders while also lessening the
exposure of the firm to extraordinary market risk.

   In the fourth quarter of 1998, we modified our execution policies in
response to these changes in the marketplace. Our current policy is to provide
continuous automatic execution on orders of up to 2,000 shares for investors in
over 3,400 Nasdaq stocks under normal market conditions. We reserve the right
at our sole discretion to reduce, modify, suspend or cancel any of our
guaranteed or automated order handling protocols, including automated price
improvement and automatic execution, without prior notice on a stock by stock
or client by client basis, when periods of extreme or unusual market conditions
exist, risk management protocols so dictate, attempts are made to circumvent
our automated execution size limitations, or we otherwise deem it appropriate.

   In the normal course of our options market-making business, we maintain
inventories of options, futures and equities. Our main exposures are from
equity price and volatility risk. We manage these exposures by constantly
monitoring and diversifying our exposures and position sizes and establishing
offsetting hedges. Our market-making staff and trading room managers
continuously manage our positions and our risk exposures. Our systems
incorporate trades and update our risk profile using options pricing models on
a real time basis.

                                      26
<PAGE>

   Our proprietary options risk management system allows us to stress test our
portfolio on a real-time basis. On a daily basis, risk reports are distributed
to senior management and the firm's risk managers who incorporate this
information in our daily market-making decisions. These reports identify
potential exposures in terms of options and futures on individual securities
and index contracts, organized in different ways such as industry sectors,
under extreme price and volatility movements. At December 31, 2000, 10%
movements in volatility and stock prices on our entire equity options and
equity index option portfolios, which contain the majority of our market risk,
would have resulted in approximately the following gains (losses) in our
options market-making portfolio:

                             Options Market-Making

<TABLE>
<CAPTION>
                                       Change in Stock Prices
                              -----------------------------------------
                                  -10%          None           +10%
         Change in Volatility ------------ --------------  ------------
         <S>                  <C>          <C>             <C>
         +10%................ $1.6 million ($0.2 million ) $5.3 million
         None................  1.9 million             --   4.7 million
         -10%................  2.4 million    0.6 million   4.4 million
</TABLE>

   For working capital purposes, we invest in money market funds, commercial
paper, government securities or maintain interest-bearing balances in our
trading accounts with clearing brokers, which are classified as 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.

Consolidated Quarterly Results (unaudited)

   The following table sets forth certain unaudited consolidated quarterly
statement of income data and certain unaudited consolidated quarterly operating
data for the years ended December 31, 2000 and 1999. In the opinion of our
management, this unaudited information has been prepared on substantially the
same basis as the consolidated financial statements appearing elsewhere in this
annual report and includes all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the unaudited consolidated quarterly
data. The unaudited consolidated quarterly data should be read in conjunction
with the audited consolidated financial statements and notes thereto appearing
elsewhere in this annual report. The results of any quarter are not necessarily
indicative of results for any future period.

                                      27
<PAGE>

<TABLE>
<CAPTION>
                                                                            Quarter Ended
                                              --------------------------------------------------------------------------
                                              Dec. 31,  Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
                                                2000      2000      2000     2000     1999     1999      1999     1999
                                              --------  --------  -------- -------- -------- --------- -------- --------
                                                                            (in thousands)
<S>                                           <C>       <C>       <C>      <C>      <C>      <C>       <C>      <C>
Revenues
  Net trading revenue........................ $223,116  $165,106  $282,515 $486,778 $267,636  $147,144 $237,046 $193,263
  Asset management fees......................   10,857    10,013    11,241    9,774    4,187     5,113    6,373    3,423
  Interest and dividends, net of interest
   expense...................................    2,865     5,653     4,112    3,507    4,918     2,889    3,213      931
  Commissions and fees.......................   13,255     5,877     5,998    7,028    4,751     4,722    4,439    2,527
  Investment income and other................    1,235     1,216     3,262    3,512      206     1,157    1,221      592
                                              --------  --------  -------- -------- -------- --------- -------- --------
   Total revenues............................  251,328   187,865   307,128  510,599  281,698   161,025  252,292  200,736
                                              --------  --------  -------- -------- -------- --------- -------- --------
Expenses
  Employee compensation and benefits/pro
   forma employee compensation and
   benefits(1)...............................   86,377    57,308   102,286  175,466   88,569    44,459   79,855   63,921
  Payments for order flow....................   39,738    37,270    38,319   59,318   39,846    31,069   35,354   32,428
  Execution and clearance fees...............   28,623    24,476    28,917   30,222   25,301    22,560   22,027   19,715
  Communications and data processing.........   10,737     8,057     7,105    7,126    5,349     5,322    4,226    4,131
  Depreciation and amortization..............    8,244     7,375     5,501    4,215    3,445     3,046    2,765    2,140
  Professional fees..........................    5,043     5,844     6,107    4,532    2,785     1,412    2,393    1,299
  Occupancy and equipment rentals............    5,930     5,405     4,314    3,093    3,239     2,944    2,575    1,923
  Business development.......................    4,245     2,438     2,884    5,239    4,226     3,733    1,568      768
  Merger related costs.......................       --        --        --       --    9,969        --       --       --
  Other......................................    4,824     5,168     2,304    4,606    1,474       662    2,209    1,794
                                              --------  --------  -------- -------- -------- --------- -------- --------
   Total expenses............................  193,761   153,341   197,737  293,817  184,203   115,207  152,972  128,119
                                              --------  --------  -------- -------- -------- --------- -------- --------
Income before income taxes and minority
 interest....................................   57,567    34,524   109,391  216,782   97,495    45,818   99,320   72,617
Income tax expense/pro forma income tax
 expense(2)..................................   22,976    14,110    41,906   81,098   37,216    17,612   41,288   30,674
                                              --------  --------  -------- -------- -------- --------- -------- --------
Income before minority interest..............   34,591    20,414    67,485  135,684   60,279    28,206   58,032   41,943
Minority interst in consolidated subsidiaries     (659)     (178)       --       --       --        --       --       --
                                              --------  --------  -------- -------- -------- --------- -------- --------
Net income / pro forma net income............ $ 35,250  $ 20,592  $ 67,485 $135,684 $ 60,279  $ 28,206 $ 58,032 $ 41,943
                                              ========  ========  ======== ======== ======== ========= ======== ========
Other Operating Data
Total equity shares traded (in millions).....   24,797    21,922    21,517   43,817   25,947    17,801   21,320   15,943
Total equity trades executed.................   33,957    31,419    33,285   44,069   30,112    20,438   21,449   18,691
Average daily equity trades..................      539       499       528      700      470       319      340      306
Average daily net equities trading revenues.. $  2,905  $  2,269  $  3,893 $  7,209 $  3,860  $  2,022 $  3,436 $  2,927
Total U.S. option contracts executed.........    8,250     5,131     4,473    3,527    3,382     2,738    2,418    2,066
</TABLE>
--------
(1) Before the merger, Arbitrade was a limited liability company and
    compensation and benefits to Arbitrade's members was accounted for as
    distributions of members' equity. Pro forma compensation expense was
    computed as 15% of the before-tax profits earned by Arbitrade for the
    quarters ended March 31, 1999, June 30, 1999, September 30, 1999 and
    December 31, 1999 and for the period ended January 12, 2000, the date of
    the merger.
(2) Before our merger with KFP, KFP was a limited liability company and was not
    subject to income taxes. For the quarters ended March 31, 1999 and June 30,
    1999, September 30, 1999 and December 31, 1999, pro forma income taxes were
    computed based on an effective tax rate of 42.5%. Of the $81,098 in income
    taxes for the quarter ended March 31, 2000, $643 represents pro forma
    income taxes for the period from January 1, 2000 through January 12, 2000,
    and $80,455 represents actual income taxes for the period from January 13,
    2000 through March 31, 2000. The income tax amounts for subsequent quarters
    represent actual income taxes. See Note 15 of the Notes to Consolidated
    Financial Statements.

                                      28
<PAGE>

Item 8. Financial Statements and Supplementary Data

                          KNIGHT TRADING GROUP, INC.

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                           Page
                                                                                           ----
<S>                                                                                        <C>
Report of Independent Accountants.........................................................   30
Consolidated Statements of Financial Condition as of December 31, 2000 and 1999...........   31
Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998....   32
Consolidated Statements of Changes in Stockholders' (Members') Equity for the years ended
  December 31, 1998, 1999 and 2000........................................................   33
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998   34
Notes to Consolidated Financial Statements................................................   35
</TABLE>

                                      29
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Knight Trading Group, Inc.

   In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of income, of changes in
stockholders' (members') equity and of cash flows present fairly, in all
material respects, the financial position of Knight Trading Group, Inc. and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

New York, New York
January 17, 2001

                                      30
<PAGE>

                          KNIGHT TRADING GROUP, INC.

                CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                                          December 31,    December 31,
                                                                              2000            1999
<S>                                                                      <C>             <C>
Assets
Cash and cash equivalents............................................... $  364,057,534  $  304,053,554
Securities owned, held at clearing broker, at market value..............  1,799,966,679     910,232,916
Receivable from brokers and dealers.....................................    114,047,275     215,423,208
Fixed assets and leasehold improvements at cost, less accumulated
  depreciation and amortization of $34,969,580 in 2000 and
  $16,297,660 in 1999...................................................     79,014,393      26,820,045
Goodwill, less accumulated amortization of $15,569,227 in 2000 and
  $10,190,634 in 1999...................................................     45,239,177      24,899,982
Investments.............................................................     64,917,975      40,408,554
Other assets............................................................     54,166,139      18,447,547
                                                                         --------------  --------------
       Total assets..................................................... $2,521,409,172  $1,540,285,806
                                                                         ==============  ==============
Liabilities and Stockholders' Equity
Liabilities
   Securities sold, not yet purchased, at market value.................. $1,427,214,323  $  720,919,013
   Securities sold under agreements to repurchase.......................             --      10,409,736
   Payable to brokers and dealers.......................................    184,269,478     159,943,018
   Accrued compensation expense.........................................     62,444,645      57,234,608
   Accrued execution and clearance fees.................................      6,092,754       8,371,056
   Accrued payments for order flow......................................     11,635,069      13,978,854
   Accounts payable, accrued expenses and other liabilities.............     30,576,814      54,205,482
   Income taxes payable.................................................      4,813,771      15,992,937
                                                                         --------------  --------------
       Total liabilities................................................  1,727,046,854   1,041,054,704
                                                                         --------------  --------------
Minority interest in consolidated subsidiaries..........................     20,175,872              --
                                                                         --------------  --------------
Commitments and contingent liabilities (Notes 12 and 17)
Stockholders' equity
   Class A Common Stock, $0.01 par value, 500,000,000 shares
     authorized; 123,290,780 shares issued and outstanding at December
     31, 2000 and 122,121,474 shares issued and outstanding at December
     31, 1999...........................................................      1,232,908       1,221,215
   Additional paid-in capital...........................................    309,611,248     291,967,021
   Retained earnings....................................................    465,947,294     206,025,292
   Accumulated other comprehensive income (loss)--foreign currency
     translation adjustments, net of tax................................     (2,605,004)         17,574
                                                                         --------------  --------------
       Total stockholders' equity.......................................    774,186,446     499,231,102
                                                                         --------------  --------------
       Total liabilities and stockholders' equity....................... $2,521,409,172  $1,540,285,806
                                                                         ==============  ==============
</TABLE>

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

                                      31
<PAGE>

                          KNIGHT TRADING GROUP, INC.

                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                            For the years ended December 31,
                                                        ----------------------------------------
                                                             2000          1999         1998
                                                        -------------- ------------ ------------
<S>                                                     <C>            <C>          <C>
Revenues
Net trading revenue.................................... $1,157,515,897 $845,105,365 $395,416,547
Asset management fees..................................     41,883,882   19,921,092    6,134,265
Interest and dividends, net of interest expense........     16,137,298   11,949,821    3,980,751
Commissions and fees...................................     32,157,736   16,439,090    3,983,133
Investment income and other............................      9,224,764    3,160,075    1,519,936
                                                        -------------- ------------ ------------
   Total revenues......................................  1,256,919,577  896,575,443  411,034,632
                                                        -------------- ------------ ------------
Expenses
Employee compensation and benefits.....................    421,169,673  269,223,837  123,022,795
Payments for order flow................................    174,645,439  138,696,691   82,499,233
Execution and clearance fees...........................    112,238,423   89,575,394   50,724,104
Communications and data processing.....................     33,025,036   18,944,361   11,720,959
Depreciation and amortization..........................     25,335,639   11,395,735    7,271,384
Professional fees......................................     21,526,495    7,889,198    4,512,724
Occupancy and equipment rentals........................     18,741,887   10,706,397    6,138,502
Business development...................................     14,806,302   10,294,545    2,913,170
Merger related costs...................................             --    9,969,295           --
Interest on Preferred Units............................             --           --      714,904
Other..................................................     16,899,239    7,050,073    3,435,191
                                                        -------------- ------------ ------------
   Total expenses......................................    838,388,133  573,745,526  292,952,966
                                                        -------------- ------------ ------------
Income before income taxes and minority interest.......    418,531,444  322,829,917  118,081,666
Income tax expense.....................................    159,446,394  111,545,941   22,251,209
                                                        -------------- ------------ ------------
Income before minority interest........................    259,085,050  211,283,976   95,830,457
Minority interest in consolidated subsidiaries.........        836,952           --           --
                                                        -------------- ------------ ------------
Net income............................................. $  259,922,002 $211,283,976 $ 95,830,457
                                                        ============== ============ ============
Basic earnings per share............................... $         2.12 $       1.75 $       0.93
                                                        ============== ============ ============
Diluted earnings per share............................. $         2.05 $       1.68 $       0.93
                                                        ============== ============ ============
Shares used in basic earnings per share (see Note 13)..    122,520,733  120,821,710  103,115,712
                                                        ============== ============ ============
Shares used in diluted earnings per share (see Note 13)    126,863,316  125,755,430  103,115,712
                                                        ============== ============ ============
</TABLE>

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

                                      32
<PAGE>

                          KNIGHT TRADING GROUP, INC.

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (MEMBERS') EQUITY

             For the Years Ended December 31, 1998, 1999 and 2000

<TABLE>
<CAPTION>
                                                                        Roundtable Partners, L.L.C.
                                                                    ------------------------------------ ----------------------

                                                                                                                Class A
                                                                         Common Units                         Common Stock
                                                                      Units      Amount    Undistributed   Shares      Amount
                                                                    --------  -----------     Income     ----------- ----------
<S>                                                                 <C>       <C>          <C>           <C>         <C>
Balance January 1, 1998............................................  734,497  $ 7,344,970  $ 46,628,491           -- $       --
Distributions on Common Units......................................       --           --   (57,265,529)          --         --
Net income for the period from January 1, 1998 through July 12,
 1998 (see Notes 2 and 3)..........................................       --           --    36,790,346           --         --
Reorganization, July 13, 1998 (see Notes 2 and 3).................. (734,497)  (7,344,970)  (26,153,308)  76,928,102    769,281
Exercise of option by Brown and Company............................       --           --            --      789,774      7,898
Net proceeds from initial public offering..........................       --           --            --   20,376,492    203,765
Issuance of restricted stock to directors..........................       --           --            --       30,000        300
Adjustment for pooling of interests with Arbitrade Holdings, L.L.C.       --           --            --   10,505,001    105,050
                                                                    --------  -----------  ------------  ----------- ----------
Balance at July 13, 1998, as restated..............................       --           --            --  108,629,369  1,086,294
Capital distributions to members' of pooled entity.................       --           --            --           --         --
Net income for the period from July 13, 1998 through December 31,
 1998 (including pooled entity)....................................       --           --            --           --         --
                                                                    --------  -----------  ------------  ----------- ----------
Balance December 31, 1998..........................................       --           --            --  108,629,369  1,086,294
                                                                    --------  -----------  ------------  ----------- ----------
Net income.........................................................       --           --            --           --         --
Translation adjustment arising during period, net of taxes.........       --           --            --           --         --

Total comprehensive income.........................................
Net proceeds from stock offering...................................       --           --            --    4,849,440     48,494
Conversion of Class B Common Stock into Class A Common Stock.......       --           --            --    7,885,396     78,854
Capital contributions from members of pooled entity................       --           --            --           --         --
Capital distributions to members of pooled entity..................       --           --            --           --         --
Stock options exercised............................................       --           --            --      757,265      7,573
Income tax benefit--stock options exercised........................       --           --            --           --         --
                                                                    --------  -----------  ------------  ----------- ----------
Balance, December 31, 1999.........................................       --           --            --  122,121,470  1,221,215
                                                                    --------  -----------  ------------  ----------- ----------
Net income.........................................................       --           --            --           --         --
Translation adjustment arising during period, net of taxes.........       --           --            --           --         --

Total comprehensive income.........................................
Stock options exercised............................................       --           --            --    1,169,310     11,693
Income tax benefit--stock options exercised........................       --           --            --           --         --
                                                                    --------  -----------  ------------  ----------- ----------
Balance, December 31, 2000.........................................       --  $        --  $         --  123,290,780 $1,232,908
                                                                    ========  ===========  ============  =========== ==========



                                                                           Class B
                                                                        Common Stock       Additional
                                                                      Shares     Amount      Paid-In      Retained
                                                                    ----------  --------     Capital      Earnings
<S>                                                                 <C>         <C>       <C>           <C>
Balance January 1, 1998............................................         --  $     --  $         --  $         --
Distributions on Common Units......................................         --        --            --            --
Net income for the period from January 1, 1998 through July 12,
 1998 (see Notes 2 and 3)..........................................         --        --            --            --
Reorganization, July 13, 1998 (see Notes 2 and 3)..................  7,885,396    78,854    32,650,143            --
Exercise of option by Brown and Company............................         --        --        63,532            --
Net proceeds from initial public offering..........................         --        --   136,319,005            --
Issuance of restricted stock to directors..........................         --        --       217,200            --
Adjustment for pooling of interests with Arbitrade Holdings, L.L.C.         --        --    14,131,166            --
                                                                    ----------  --------  ------------  ------------
Balance at July 13, 1998, as restated..............................  7,885,396    78,854   183,381,046            --
Capital distributions to members' of pooled entity.................         --        --    (8,474,857)  (29,229,430)
Net income for the period from July 13, 1998 through December 31,
 1998 (including pooled entity)....................................         --        --            --    59,040,111
                                                                    ----------  --------  ------------  ------------
Balance December 31, 1998..........................................  7,885,396    78,854   174,906,189    29,810,681
                                                                    ----------  --------  ------------  ------------
Net income.........................................................         --        --            --   211,283,976
Translation adjustment arising during period, net of taxes.........         --        --            --            --

Total comprehensive income.........................................
Net proceeds from stock offering...................................         --        --    80,171,043            --
Conversion of Class B Common Stock into Class A Common Stock....... (7,885,396)  (78,854)           --            --
Capital contributions from members of pooled entity................         --        --    21,100,568            --
Capital distributions to members of pooled entity..................         --        --            --   (35,069,365)
Stock options exercised............................................         --        --     5,477,629            --
Income tax benefit--stock options exercised........................         --        --    10,311,592            --
                                                                    ----------  --------  ------------  ------------
Balance, December 31, 1999.........................................         --        --   291,967,021   206,025,292
                                                                    ----------  --------  ------------  ------------
Net income.........................................................         --        --            --   259,922,002
Translation adjustment arising during period, net of taxes.........         --        --            --            --

Total comprehensive income.........................................
Stock options exercised............................................         --        --     8,645,304            --
Income tax benefit--stock options exercised........................         --        --     8,998,923            --
                                                                    ----------  --------  ------------  ------------
Balance, December 31, 2000.........................................         --  $     --  $309,611,248  $465,947,294
                                                                    ==========  ========  ============  ============



                                                                     Accumulated
                                                                        Other
                                                                    Comprehensive
                                                                       Income         Total
<S>                                                                 <C>           <C>
Balance January 1, 1998............................................  $        --  $ 53,973,461
Distributions on Common Units......................................           --   (57,265,529)
Net income for the period from January 1, 1998 through July 12,
 1998 (see Notes 2 and 3)..........................................           --    36,790,346
Reorganization, July 13, 1998 (see Notes 2 and 3)..................           --            --
Exercise of option by Brown and Company............................           --        71,430
Net proceeds from initial public offering..........................           --   136,522,770
Issuance of restricted stock to directors..........................           --       217,500
Adjustment for pooling of interests with Arbitrade Holdings, L.L.C.           --    14,236,216
                                                                    ------------  ------------
Balance at July 13, 1998, as restated..............................           --   184,546,194
Capital distributions to members' of pooled entity.................           --   (37,704,287)
Net income for the period from July 13, 1998 through December 31,
 1998 (including pooled entity)....................................           --    59,040,111
                                                                    ------------  ------------
Balance December 31, 1998..........................................           --   205,882,018
                                                                    ------------  ------------
Net income.........................................................           --   211,283,976
Translation adjustment arising during period, net of taxes.........       17,574        17,574
                                                                                  ------------
Total comprehensive income.........................................                211,301,550
Net proceeds from stock offering...................................           --    80,219,537
Conversion of Class B Common Stock into Class A Common Stock.......           --            --
Capital contributions from members of pooled entity................           --    21,100,568
Capital distributions to members of pooled entity..................           --   (35,069,365)
Stock options exercised............................................           --     5,485,202
Income tax benefit--stock options exercised........................           --    10,311,592
                                                                    ------------  ------------
Balance, December 31, 1999.........................................       17,574   499,231,102
                                                                    ------------  ------------
Net income.........................................................           --   259,922,002
Translation adjustment arising during period, net of taxes.........   (2,622,578)   (2,622,578)
                                                                                  ------------
Total comprehensive income.........................................                257,299,424
Stock options exercised............................................           --     8,656,997
Income tax benefit--stock options exercised........................           --     8,998,923
                                                                    ------------  ------------
Balance, December 31, 2000.........................................  $(2,605,004) $774,186,446
                                                                    ============  ============
</TABLE>

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

                                      33
<PAGE>

                          Knight Trading Group, Inc.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                       For the year ended December 31,
                                                                                 --------------------------------------------
                                                                                      2000           1999           1998
                                                                                 -------------  -------------  -------------
<S>                                                                              <C>            <C>            <C>
Cash flows from operating activities
Net income...................................................................... $ 259,922,002  $ 211,283,976  $  95,830,457
Adjustments to reconcile net income to net cash provided by operating activities
 Income tax credit from stock options exercised.................................     8,998,923     10,311,592             --
 Issuance of restricted stock to Directors......................................            --             --        217,500
 Depreciation and amortization..................................................    25,335,639     11,395,735      7,271,384
 Minority interest in earnings of consolidated subsidiary.......................      (836,952)            --             --
(Increase) decrease in operating assets
 Securities owned...............................................................  (889,733,763)  (498,944,733)  (230,330,810)
 Receivable from clearing brokers...............................................   101,375,933   (107,886,202)   (71,790,495)
 Other assets...................................................................   (38,341,170)   (11,840,634)    (3,689,758)
Increase (decrease) in operating liabilities
 Securities sold, not yet purchased.............................................   706,295,310    392,748,376    202,343,302
 Securities sold under agreements to repurchase.................................   (10,409,736)      (781,264)    11,191,000
 Payable to clearing broker.....................................................    24,326,460    100,162,267     55,457,025
 Accrued compensation expense...................................................     5,210,037     34,117,054      9,573,704
 Accounts payable, accrued expenses and other liabilities.......................   (23,628,668)    26,576,777      5,274,864
 Accrued execution and clearance fees...........................................    (2,278,302)     1,472,961      2,931,950
 Accrued payments for order flow................................................    (2,343,785)     5,306,186      4,908,277
 Income taxes payable...........................................................   (11,179,166)    13,707,317      2,285,620
 Interest payable on Preferred Units............................................            --             --       (424,981)
                                                                                 -------------  -------------  -------------
    Net cash provided by operating activities...................................   152,712,762    187,629,408     91,049,039
                                                                                 -------------  -------------  -------------
Cash flows from investing activities
Purchases of fixed assets and leasehold improvements............................   (71,031,773)   (19,370,770)   (11,375,684)
Investments and acquisitions....................................................   (45,061,927)   (36,675,676)    (2,696,712)
Payment of contingent consideration.............................................    (6,284,903)    (5,953,219)    (4,076,896)
                                                                                 -------------  -------------  -------------
    Net cash used in investing activities.......................................  (122,378,603)   (61,999,665)   (18,149,292)
                                                                                 -------------  -------------  -------------
Cash flows from financing activities
Proceeds from short term loan...................................................            --             --     31,016,766
Repayment of short term loan....................................................            --    (11,016,766)   (20,000,000)
Net proceeds from initial public offering.......................................            --             --    136,522,770
Net proceeds from exercise of Brown option......................................            --             --         71,430
Repayment of subordinated loan..................................................            --             --       (500,000)
Proceeds from issuance of common stock..........................................            --     80,219,537             --
Stock options exercised.........................................................     8,656,997      5,485,202             --
Minority interest in consolidated subsidiary....................................    21,012,824             --             --
Loans to members................................................................            --             --    (21,569,169)
Repayments of loans to members..................................................            --             --     21,569,169
Redemptions of Mandatorily Redeemable Preferred A Units.........................            --             --    (12,483,610)
Redemptions of Mandatorily Redeemable Preferred B Units.........................            --             --    (15,000,000)
Distributions on Common Units...................................................            --             --    (65,670,855)
Redemptions by members of KFP...................................................            --             --     (2,894,399)
Capital distributions to members of KFP.........................................            --    (13,968,797)   (20,175,419)
                                                                                 -------------  -------------  -------------
    Net cash provided by financing activities...................................    29,669,821     60,719,176     30,886,683
                                                                                 -------------  -------------  -------------
Increase in cash and cash equivalents...........................................    60,003,980    186,348,919    103,786,430
Cash and cash equivalents at beginning of period................................   304,053,554    117,704,635     13,918,205
                                                                                 -------------  -------------  -------------
Cash and cash equivalents at end of period...................................... $ 364,057,534  $ 304,053,554  $ 117,704,635
                                                                                 =============  =============  =============
Supplemental disclosure of cash flow information:
 Cash paid for interest......................................................... $  40,643,281  $   9,070,476  $   4,604,910
                                                                                 =============  =============  =============
 Cash paid for income taxes..................................................... $ 175,180,680  $  98,376,867  $  19,662,278
                                                                                 =============  =============  =============
</TABLE>

Supplemental information pertaining to noncash investing and financing
activities:
During April 1998, the Company terminated a capital lease with a remaining
obligation of $713,207. The net book value of the equipment under such capital
lease was $619,747.
During 1999, all outstanding shares of Class B Common Stock were converted into
shares of Class A Common Stock.

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

                                      34
<PAGE>

                          KNIGHT TRADING GROUP, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of the Business

   Knight Trading Group, Inc. (the "Company") and its subsidiaries operate in
market-making and asset management business lines. Knight Securities ("KS")
operates as a market maker in over-the-counter equity securities ("OTC
securities"), primarily those traded in the Nasdaq stock market and on the OTC
Bulletin Board. Knight Capital Markets ("KCM," formerly known as Trimark
Securities) operates as a market maker in the over-the-counter market for New
York Stock Exchange (NYSE)--and American Stock Exchange (AMEX)--listed
securities. Knight Financial Products ("KFP") makes markets in options on
individual equities, equity indices and fixed income instruments in the U.S.
and Europe. The Company also maintains an asset management business for
institutional investors and high net worth individuals through its Deephaven
Capital Management ("Deephaven") subsidiary. KS, KCM and KFP are registered as
broker-dealers with the Securities and Exchange Commission ("SEC" or the
"Commission"). Additionally, KS and KCM are members of the National Association
of Securities Dealers, Inc. ("NASD"). Knight Securities International, Ltd.
("KSIL") provides best execution solutions for European investors in
pan-European and U.S. equities. In the third quarter of 2000 the Company
established a joint venture operation, called Knight Securities Japan ("KSJ")
with Nikko Securities Co., Ltd. to provide wholesale market-making services in
Japanese equity securities. During the year, the Company purchased the
professional execution services business from Mesirow Financial, which was
subsequently renamed Knight Execution Partners ("KEP").

   The Company was organized in January 2000 as the successor to the business
of its predecessor,
Knight /Trimark Group, Inc. (the "Predecessor") (see below). The Predecessor
was organized in April 1998 as the successor to the business of Roundtable
Partners, L.L.C. ("Roundtable"). In May 2000, the Company changed its name from
Knight /Trimark Group, Inc. to Knight Trading Group, Inc.

   On January 12, 2000, the Company completed a merger (the "Merger") with
Arbitrade Holdings LLC ("Arbitrade"). The transaction resulted in the Company,
a newly formed parent holding company, issuing shares on a tax-free basis to
holders of the Predecessor's common stock and to the owners of Arbitrade.
Following the transaction, the Predecessor and Arbitrade became subsidiaries of
the Company, which assumed the name
Knight /Trimark Group, Inc. and became the publicly traded Nasdaq company under
the same ticker symbol as the Predecessor (NITE). Arbitrade's options
market-making unit subsequently changed its name to Knight Financial Products.
The transaction was accounted for as a pooling of interest and, as such, the
historical financial statements have been restated to account for the merger on
a retroactive basis. The foregoing brief summary is qualified in its entirety
by reference to the Merger Agreement, a copy of which was filed as an exhibit
to the Company's report on Form 8-K filed with the SEC on January 12, 2000.
Unless otherwise indicated, all references to the "Company" refer to the
Company or the Predecessor, as appropriate.

2. Roundtable Partners, L.L.C.

   Roundtable was organized in March 1995 to own and operate the securities
market-making businesses of the predecessors to KS and KCM, respectively.
Roundtable was owned 40% by key employees (the "Management Investors") and 60%
by a consortium of independent securities firms and investors (the
"Non-Management Investors"). Certain Management Investors also received
Mandatorily Redeemable Preferred B Units (the "Preferred B Units") of
Roundtable in consideration for the contribution of their business to
Roundtable, while the Non-Management Investors received Mandatorily Redeemable
Preferred A Units (the "Preferred A Units") in return for cash consideration in
a ratio of six Preferred A Units to one Common Unit. In connection with a
reorganization and initial public offering of the Company's Common Stock (the
"initial public offering") on July 13, 1998, the owners of Roundtable elected
to exchange their membership interests in Roundtable for shares of Common Stock
of the Company (see Note 3). Additionally, the Preferred A and B Units were
redeemed and retired in their entirety. All redemptions were made at book
value.

3. Reorganization, Public Stock Offerings and Stock Split

   Concurrent with the closing of the initial public offering of the Company's
Common Stock on July 13, 1998, based on the initial public offering price of
$7.25 per share, all of the member interests of Roundtable were

                                      35
<PAGE>

                          KNIGHT TRADING GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

exchanged for 73,324,830 shares of Class A Common Stock of the Company and
7,885,396 shares of nonvoting Class B Common Stock of the Company (the
"Reorganization").

   The initial public offering of 23,000,000 shares of Class A Stock included
20,376,492 newly-issued shares and 2,623,508 shares from a selling shareholder.
Proceeds received by the Company from the initial public offering, net of the
applicable underwriting discounts and commissions and offering expenses, were
approximately $136.5 million.

   On February 25, 1999, the Company sold 20,700,000 shares of Class A Common
Stock at a price to the public of $17.50 per share. Of those shares, 4,849,440
were sold by Knight/Trimark, generating net offering proceeds, after deducting
underwriting discounts and commissions and offering expenses, of approximately
$80.2 million. An additional 15,850,560 shares were sold by selling
shareholders.

   In April 1999, the Company's Board of Directors approved a two-for-one stock
split of the Company's Class A and Class B Common Stock. Shareholders of record
as of the close of business on April 30, 1999 received, in the form of a stock
dividend, one additional share for each share held by them. On May 14, 1999,
the transfer agent distributed the additional shares. All share and per share
amounts presented in this document have been adjusted to reflect the stock
split.

   In connection with the Merger, the Company issued 10,505,001 shares of Class
A Common Stock to the former shareholders of Arbitrade.

4. Significant Accounting Policies

  Basis of consolidation and form of presentation

   The accompanying consolidated financial statements include the accounts of
the Company and its majority and wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.

  Cash equivalents

   Cash equivalents represent 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.

  Investments

   Investments on the Consolidated Statements of Financial Condition comprise
ownership interests of less than 20% in publicly and non-publicly traded
companies which are accounted for under the equity method or the cost basis of
accounting. Investments also include the Company's investments in private
investment funds for which the Company is the investment manager and sponsor.

  Market-making activities

   Securities owned and securities sold, not yet purchased, which primarily
consist of listed and OTC stocks, listed options contracts and futures
contracts are carried at market value and are recorded on a trade date basis.
Net trading revenue (trading gains, net of trading losses) and commissions and
related expenses, including compensation and benefits, execution and clearance
fees and payments for order flow, are also recorded on a trade date basis.
Payments for order flow represent payments to other broker-dealers for
directing their order executions to the Company. The Company records interest
income net of transaction-related interest charged by clearing brokers for
facilitating the settlement and financing of securities transactions, and
interest expense on subordinated notes and short-term debt. Interest expense
incurred during 2000 and 1999 amounted to approximately $40.9 million and $11.9
million, respectively.

                                      36
<PAGE>

                          KNIGHT TRADING GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Asset management fees

   The Company earns asset management fees for sponsoring and managing the
investments of certain private investment funds. Such fees are recorded when
earned and are calculated as a percentage of the fund's quarterly net assets,
plus a percentage of a new high net asset value, as defined, for any six-month
period ended June 30/th/ or December 31/st/.

  Mandatorily redeemable preferred units

   The Preferred A and Preferred B Units were mandatorily redeemable and the
distributions on such units have been classified as interest expense in the
Consolidated Statements of Income.

  Securities borrowed/loaned

   Securities borrowed and securities loaned are recorded at the amount of cash
collateral advanced or received. Securities borrowed transactions require the
Company to deposit cash or similar collateral with the lender. With respect to
securities loaned, the Company receives collateral in the form of cash in an
amount generally in excess of the market value of securities loaned. Interest
income and interest expense are recorded on an accrual basis. The Company
monitors the market value of securities borrowed and loaned on a daily basis.
Substantially all of the Company's securities borrowed and securities loaned
transactions are conducted with banks and other securities firms.

  Foreign Currencies

   The functional currency of the Company's consolidated foreign subsidiaries
are the U.S. dollar, the British Pound and the Japanese Yen. 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. The foreign exchange gains and losses resulting from these
translations are included as a separate component of stockholders' equity in
the Consolidated Statements of Financial Condition.

  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 life of the related office
lease. The Company records rent expense on a straight-line basis over the life
of the lease. The Company capitalizes certain costs associated with the
acquisition or development of internal-use software in accordance with
Statement of Position No. 98-1 and amortizes the software over its estimated
useful life of three years.

  Income taxes

   Income tax expense in the Consolidated Statements of Income represents
income taxes incurred from July 13, 1998, the date of the Reorganization,
through December 31, 1998 and for the years ended December 31, 1999 and 2000.
Before the Reorganization, Roundtable was a limited liability company and was
not subject to federal

                                      37
<PAGE>

                          KNIGHT TRADING GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

or state income taxes. Subsequent to the Reorganization, the Company is subject
to federal income taxes and state income taxes. Before the Merger, KFP was a
limited liability company which was treated as a partnership for tax purposes
and its federal and state income taxes were borne by KFP's individual partners.
As such, KFP's historical financial statements only include a provision for
non-U.S. income taxes. Subsequent to the Merger, KFP's income is subject to
federal and state 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.

  Estimated fair value of financial instruments

   The Company's securities owned and securities sold, not yet purchased are
carried at market value. Management estimates that the fair values of other
financial instruments recognized on the Consolidated Statements of Financial
Condition (including receivables, payables, accrued expenses, subordinated debt
and mandatorily redeemable preferred units) 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.

  Minority interest

   Minority interest represents a minority owner's share of net income or
equity in one of the Company's consolidated subsidiaries.

  Other

   The preparation of financial statements in conformity with generally
accepted accounting principles 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 could differ from those estimates.

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

5. Securities Owned and Securities Sold, Not Yet Purchased

   Securities owned and securities sold, not yet purchased consist of the
following:

<TABLE>
<CAPTION>
                                     December 31,  December 31,
                                         2000          1999
                                    -------------- ------------
<S>                                 <C>            <C>
Securities owned:
   Equities........................ $  661,327,729 $381,240,123
   Options.........................  1,126,483,498  518,408,094
   U.S. government obligations.....     12,155,452   10,584,699
                                    -------------- ------------
                                    $1,799,966,679 $910,232,916
                                    ============== ============
Securities sold, not yet purchased:
   Equities........................ $  170,167,713 $263,614,076
   Options.........................  1,257,046,610  457,304,937
                                    -------------- ------------
                                    $1,427,214,323 $720,919,013
                                    ============== ============
</TABLE>

                                      38
<PAGE>

                          KNIGHT TRADING GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


6. Receivable from/Payable to Brokers and Dealers

   At December 31, 2000, amounts receivable from and payable to brokers and
dealers consist of the following:

<TABLE>
<CAPTION>
<S>                              <C>
Receivable:
   Clearing brokers............. $ 86,156,298
   Securities failed to deliver.   19,815,796
   Securities borrowed..........    8,075,181
                                 ------------
                                 $114,047,275
                                 ============
Payable:
   Clearing brokers............. $175,552,245
   Securities failed to receive.    8,574,981
   Securities loaned............      142,252
                                 ------------
                                 $184,269,478
                                 ============
</TABLE>

   The Company had received and pledged collateral approximately equal to the
amounts borrowed and loaned, respectively.

7. Investments

   The Company's wholly-owned subsidiary, Deephaven, is the investment manager
and sponsor of private investment funds that engage in various trading
strategies involving equities, debt instruments and derivatives. The Company
owns interests in these private investment funds. Such investments amounted to
approximately $13.9 million at December 31, 2000. Certain officers of the
Company also own interests in these private investment funds. Additionally, the
Company has made strategic investments in the National Association of
Securities Dealers, Inc., Easdaq, Netfolio, Inc. and other public and private
companies.

8. Significant Customers

   Before the Reorganization and initial public offering, Roundtable was owned
by a consortium of independent securities firms and investors (the "Broker
Dealer Owners"). Under Roundtable's limited liability company agreement, the
Broker Dealer Owners, who were considered affiliated companies, shared in
Roundtable's profits in proportion to their equity interests and the quantity
of order flow they directed to the Company. After the initial public offering,
this profit sharing practice was discontinued. Subsequent to the initial public
offering, the Company considers affiliates to be holders of 10% or more of the
Company's outstanding common stock ("Affiliates"). During 2000 there were no
Affiliates of the Company.

   One customer provided 11.6% of the Company's equity order flow for the year
ended December 31, 2000 as measured in equity share volume. Rebates paid to
this firm for equity share and options contract volume amounted to $23,283,345
during the same period.
9. Goodwill

   The Company's acquisition of the business of Trimark Securities, L.P. during
1995 was recorded under the purchase method and the carrying values of the
assets and liabilities acquired were adjusted to their fair market values as of
the acquisition date. The excess of the purchase price over the fair value of
the net assets acquired of $13,960,195 was recorded as goodwill and is being
amortized over a period of 10 years. In connection with the acquisition, the
Company entered into an agreement which entitled the former owners to receive
additional consideration during the five years immediately subsequent to the
acquisition, through March 2000, equal to 10%

                                      39
<PAGE>

                          KNIGHT TRADING GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of Trimark's pre-tax earnings, before amortization of goodwill and depreciation
on fixed assets initially purchased. All amounts paid under this arrangement
have been capitalized as additional purchase price (goodwill) and are being
amortized over the remainder of the original ten-year amortization period.

   Pursuant to an agreement effective November 17, 1997, Trimark purchased the
business and the related fixed assets of Tradetech Securities, L.P.
("Tradetech"), an Illinois Limited Partnership, in exchange for $750,000 in
cash and contingent consideration. Tradetech was a direct competitor of Trimark
operating as a market maker in listed stocks and, after the acquisition, its
business and operations were integrated into Trimark's. The acquisition was
accounted for under the purchase method and the carrying values of the assets
acquired were adjusted to their fair market values as of the acquisition date.
The excess of the purchase price over the fair value of the assets acquired of
$400,000 was recorded as goodwill and is being amortized over a period of five
years.

   In connection with the acquisition, Trimark entered into an agreement with
Tradetech which entitled Tradetech to additional consideration equal to 10% of
Trimark's pretax earnings during the period from the acquisition date through
December 31, 2000 (the "Earnout Period"). All amounts paid under this
arrangement have been capitalized as additional purchase price (goodwill) and
are being amortized over the remainder of the original five-year amortization
period.

   The total contingent consideration paid and recorded as goodwill by the
Company was as follows:

<TABLE>
<CAPTION>
                                         Trimark      Tradetech
                                       Additional    Additional
                                      Consideration Consideration   Total
                                      ------------- ------------- ----------
<S>                                   <C>           <C>           <C>
For the year ended December 31, 1998.    $2,155,007    $1,921,889 $4,076,896
For the year ended December 31, 1999.     3,098,161     2,855,058  5,953,219
For the year ended December 31, 2000.     1,757,948     4,526,955  6,284,903
</TABLE>

   Additionally, consistent with the growth of the Company's options
market-making business, KFP has acquired various options related businesses.
The total excess of the purchase prices over the fair value of the assets
acquired of $26,640,859 was recorded as goodwill and is being amortized over a
period of 15 years.

10. Fixed Assets and Leasehold Improvements

   Fixed assets and leasehold improvements comprise the following:

<TABLE>
<CAPTION>
                                                                    December 31,
                                                Depreciation  ------------------------
                                                   Period         2000        1999
                                                ------------- ------------ -----------
<S>                                             <C>           <C>          <C>
Computer hardware and software.................       3 years $ 81,847,768 $26,958,037
Leasehold improvements......................... Life of Lease   15,183,830   7,948,011
Telephone systems..............................       5 years    6,944,133   3,170,016
Furniture and fixtures.........................       7 years    6,901,463   2,292,481
Trading systems................................       5 years    1,613,082   1,425,347
Equipment......................................       5 years    1,493,697   1,323,813
                                                              ------------ -----------
                                                               113,983,973  43,117,705
Less--Accumulated depreciation and amortization                 34,969,580  16,297,660
                                                              ------------ -----------
                                                              $ 79,014,393 $26,820,045
                                                              ============ ===========
</TABLE>

                                      40
<PAGE>

                          KNIGHT TRADING GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


11. Short-Term Financing

   On June 19, 1998, the Company entered into an unsecured $30.0 million loan
agreement with an affiliate of one of its clearing brokers. Such loan paid
interest monthly based on the London Interbank Offered Rate and was to mature
on June 19, 1999. The loan agreement allowed for scheduled principal
pre-payments without penalty. During 1998, the Company made principal
pre-payments under the loan of $20.0 million. On January 19, 1999, the Company
repaid the final $10.0 million. Interest expense incurred on such loan for the
years ended December 31, 1999 and 1998 amounted to $39,734 and $946,752,
respectively.

   At December 31, 1999, the Company had a $10,000,000 collateralized credit
facility with a bank under which it borrowed on a revolving basis. Interest was
variable based on prime plus one percent per annum and payable monthly. The
Company paid a one half percent per annum commitment fee on the unused portion
of the facility. The unused portion of the facility and interest rate at
December 31, 1999 were $7,945,408 and 9.00%, respectively.

12. Commitments and Contingent Liabilities

   The Company leases office space under noncancellable operating leases. The
office leases contain certain escalation clauses whereby the rental commitments
may be increased if certain conditions are satisfied and specify yearly
adjustments to the lease amounts based on annual adjustments to the Consumer
Price Index. Rental expense under the office leases was as follows:

<TABLE>
<CAPTION>
                <S>                                  <C>
                For the year ended December 31, 1998 $2,000,910
                For the year ended December 31, 1999  2,989,873
                For the year ended December 31, 2000  7,288,699
</TABLE>

   Additionally, the Company leases computer and other equipment under
noncancellable operating leases. As of December 31, 2000, future minimum rental
commitments under all noncancellable operating leases were as follows:

<TABLE>
<CAPTION>
                                       Office Leases Other Leases    Total
                                       ------------- ------------ ------------
  <S>                                  <C>           <C>          <C>
  Year ending December 31, 2001.......  $ 10,477,570   $4,303,393 $ 14,780,963
  Year ending December 31, 2002.......    14,927,896    1,899,916   16,827,812
  Year ending December 31, 2003.......    14,428,717      325,888   14,754,605
  Year ending December 31, 2004.......    12,888,648      255,438   13,144,086
  Year ending December 31, 2005.......    11,873,782           --   11,873,782
  Thereafter through September 1, 2021   138,250,597           --  138,250,597
                                       ------------- ------------ ------------
                                        $202,847,210   $6,784,635 $209,631,845
                                       ============= ============ ============
</TABLE>

   The Company has been named as a defendant in legal actions. In addition,
from time to time, the Company is a party to examinations and inquiries by
various regulatory and self-regulatory bodies. In the opinion of management,
based on consultation with legal counsel, any adverse outcome with regard to
these matters would not likely have a material adverse effect on the results of
operations or the financial position of the Company.

13. Earnings per Share

   Basic and diluted earnings per common share have been calculated by dividing
net income by the sum of the weighted average shares of Class A Common Stock
and Class B Common Stock outstanding during each respective period. Except for
voting rights, the Class B Common Stock had identical rights and rewards as the
Class A Common Stock and was automatically converted to Class A Common Stock in
the event of a sale or a transfer by the owner. All outstanding shares of Class
B Common Stock were converted into shares of Class A Common Stock during 1999.

                                      41
<PAGE>

                          KNIGHT TRADING GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Weighted-average shares outstanding for the year ended December 31, 1998 has
been determined as if the Merger described in Note 1 and the Reorganization
described in Note 3 occurred as of the earliest date presented.
Weighted-average shares outstanding for the years ended December 31, 1999 and
2000 have been determined as if the Merger described in Note 1 occurred as of
the earliest date presented. For the year ended December 31, 1998 the Company's
outstanding options did not have a dilutive effect on earnings and, as such, do
not affect the calculation. The following is a reconciliation of the numerators
and denominators of the basic and diluted earnings per share computations for
the years ended December 31, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                          For the year ended December 31,
                                  -------------------------------------------------------------------------------
                                             2000                       1999                      1998
                                  -------------------------- -------------------------- -------------------------
                                  Numerator /  Denominator / Numerator /  Denominator / Numerator / Denominator /
                                   net income     shares      net income     shares     net income     shares
                                  ------------ ------------- ------------ ------------- ----------- -------------
<S>                               <C>          <C>           <C>          <C>           <C>         <C>
Income and shares used in basic
 calculations.................... $259,922,002   122,520,733 $211,283,976   120,821,710 $95,830,457   103,115,712
Effect of dilutive stock options.           --     4,342,583           --     4,933,720          --            --
                                  ------------ ------------- ------------ ------------- ----------- -------------
Income and shares used in diluted
 calculations.................... $259,922,002   126,863,316 $211,283,976   125,755,430 $95,830,457   103,115,712
                                  ============ ============= ============ ============= =========== =============
Basic earnings per share.........               $       2.12               $       1.75              $       0.93
                                               =============              =============             =============
Diluted earnings per share.......               $       2.05               $       1.68              $       0.93
                                               =============              =============             =============
</TABLE>

14. Employee Benefit Plan

   The Company sponsors 401(k) profit sharing plans (the "Plans") in which
substantially all of its employees are eligible to participate. Under the terms
of the Plans, the Company is required to make annual contributions to the Plans
equal to 50% of the contributions made by its employees, up to certain
limitations. The total expense recognized with respect to the Plans was as
follows:

<TABLE>
<CAPTION>
<S>                                  <C>
For the year ended December 31, 1998 $1,191,907
For the year ended December 31, 1999  1,838,036
For the year ended December 31, 2000  2,856,197
</TABLE>

15. Income Taxes

   The Company and its subsidiaries file a consolidated federal income tax
return. Before the Reorganization, Roundtable was treated as a partnership for
tax purposes and its federal and state income taxes were borne by its partners.
Subsequent to the Reorganization, the Company is subject to federal and state
income taxes. Actual income tax expense on the Consolidated Statements of
Income for the year ended December 31, 1998 represents income taxes incurred
from July 13, 1998, the date of the Reorganization, through December 31, 1998.
Before the Merger, KFP was treated as a partnership for U.S. tax purposes and
its federal and state income taxes were borne by KFP's individual partners. As
such, KFP's historical financial statements only include a provision for
non-U.S. income taxes.

   The provision for income taxes consists of:

<TABLE>
<CAPTION>
                                          2000         1999        1998
                                      ------------ ------------ -----------
<S>                                   <C>          <C>          <C>
Current:
   U.S. federal...................... $145,441,308 $ 95,344,483 $17,770,620
   U.S. state and local and non-U.S..   18,560,206   18,498,299   4,480,589
                                      ------------ ------------ -----------
                                       164,001,514  113,842,782  22,251,209
                                      ------------ ------------ -----------
</TABLE>

                                      42
<PAGE>

                          KNIGHT TRADING GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
                                           2000          1999         1998
                                       ------------  ------------  -----------
 <S>                                   <C>           <C>           <C>
 Deferred:
    U.S. federal......................   (4,119,805)   (1,845,141)           -
    U.S. state and local and non-U.S..     (435,315)     (451,700)           -
                                       ------------  ------------  -----------
                                         (4,555,120)   (2,296,841)           -
                                       ------------  ------------  -----------
 Provision for income taxes........... $159,446,394  $111,545,941  $22,251,209
                                       ============  ============  ===========
</TABLE>

   The following table reconciles the provision to the U.S. federal statutory
income tax rate:

<TABLE>
<CAPTION>
                                                                    2000  1999  1998
                                                                    ----  ----  ----
<S>                                                                 <C>   <C>   <C>
U.S. federal statutory income tax rate............................. 35.0% 35.0% 35.0%
U.S. state and local income and non-U.S. taxes, net of U.S. federal
  income tax benefits..............................................  2.8   4.2   6.0
Other, net.........................................................  0.3   0.7   2.2
                                                                    ----  ----  ----
Effective income tax rate.......................................... 38.1% 39.9% 43.2%
                                                                    ====  ====  ====
</TABLE>

   Deferred income taxes reflect the net tax effects 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. Significant components of the Company's
deferred tax assets and liabilities at December 31, 2000 and 1999 are as
follows:

<TABLE>
<CAPTION>
                                                 2000       1999
                                              ---------- ----------
<S>                                           <C>        <C>
Deferred tax assets:
   Employee compensation and benefit plans... $5,709,498 $1,964,276
   Fixed assets and other amortizable assets.  1,720,333    332,567
                                              ---------- ----------
       Total deferred tax assets.............  7,429,831  2,296,843
                                              ---------- ----------
Deferred tax liabilities:
   Valuation of investments..................    564,428          -
   Other.....................................     13,440          -
                                              ---------- ----------
Total deferred tax liabilities...............    577,868          -
                                              ---------- ----------
Net deferred tax assets...................... $6,851,963 $2,296,843
                                              ========== ==========
</TABLE>

16. Long-Term Incentive Plans

   In connection with the Reorganization and Offering, the Company established
the Knight/Trimark Group, Inc. 1998 Long Term Incentive Plan and the
Knight/Trimark Group, Inc. 1998 Nonemployee Director Stock Option Plan
(together, the "Plans") to provide long-term incentive compensation to selected
employees and directors of Knight Trading Group and its subsidiaries. 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, as defined by the Plans. Including a stockholder-approved increase
in the number of shares reserved under the Plans by 10 million in May 2000, the
maximum number of shares of Class A Common Stock reserved for the grant of
awards under the Plans is 24,819,000, subject to adjustment. In addition, the
Plans limit the number of shares which may be granted to a single individual
and the Plans also limit the number of shares of restricted stock which may be
awarded.

                                      43
<PAGE>

                          KNIGHT TRADING GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   It is the Company's policy 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 vest over a four-year period and expire on the tenth anniversary
of the grant date. The Company has the right to fully vest employees in their
option grants upon retirement. The following is a reconciliation of option
activity for the Plans for the years ended December 31, 2000 and 1999, and a
summary of options outstanding and exercisable at December 31, 2000:

<TABLE>
<CAPTION>
                                                     2000                  1999
                                             --------------------- ---------------------
                                                         Weighted-             Weighted-
                                                          Average               Average
                                              Number of  Exercise   Number of  Exercise
                                               Options     Price     Options     Price
                                             ----------  --------- ----------  ---------
<S>                                          <C>         <C>       <C>         <C>
Outstanding, January 1...................... 10,445,235     $10.74 10,237,000     $ 7.24
Granted at market value.....................  4,275,000      37.52  1,072,000      41.78
Exercised................................... (1,184,810)      7.31   (757,765)      7.24
Surrendered.................................   (994,250)     16.37   (106,000)      8.36
                                             ----------  --------- ----------  ---------
Outstanding at December 31.................. 12,541,175     $19.77 10,445,235     $10.77
                                             ==========  ========= ==========  =========
Exercisable at December 31..................  3,484,050     $ 9.82  1,914,485     $ 7.51
                                             ==========  ========= ==========  =========
Available for future grants at December 31.. 10,335,250             3,616,000
                                             ==========            ==========
Weighted average fair value of grants during
  the year (at market value)................                $19.87                $21.97
                                                         =========             =========
</TABLE>

<TABLE>
<CAPTION>
                                Options Outstanding         Options Exercisable
                         --------------------------------- ---------------------
                                      Weighted-
                                       Average   Weighted-             Weighted-
                                      Remaining   Average    Number     Average
                         Outstanding Contractual Exercise  Exercisable Exercise
Range of Exercise Prices at 12/31/00    Life       Price   at 12/31/00   Price
------------------------ ----------- ----------- --------- ----------- ---------
<S>                      <C>         <C>         <C>       <C>         <C>
$ 6.54..................     130,500        7.80    $ 6.54      55,500    $ 6.54
$ 7.25..................   7,371,175        7.49      7.25   3,172,675      7.25
$10.75--$33.22..........   1,286,000        9.20     27.59     111,250     25.07
$33.25--$39.75..........     434,000        9.30     38.27       3,750     34.99
$39.84--$39.84..........   2,682,500        9.04     39.84          --        --
$42.91--$73.22..........     637,000        8.48     54.44     140,875     56.37
</TABLE>

   In addition, concurrent with the closing of the initial public offering, the
Company granted a total of 30,000 restricted shares of Class A Common Stock to
certain directors of the Company under the 1998 Non-employee Director Stock
Option Plan and recorded compensation expense of $217,500 during 1998 for the
fair value of the shares on the date of grant, which has been included in Other
Expenses in the Consolidated Statements of Income.

   The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations in accounting for
its stock option plans. Accordingly, no compensation expense has been
recognized for the fair values of the options granted to employees. Had
compensation expense for the Company's options been determined based on the
fair value at the grant dates in accordance with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the

                                      44
<PAGE>

                          KNIGHT TRADING GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company's net income and earnings per share amounts for the years ended
December 31, 1998, 1999 and 2000 would have been as follows:

<TABLE>
<CAPTION>
                                            2000         1999        1998
                                        ------------ ------------ -----------
<S>                                     <C>          <C>          <C>
Net income, as reported................ $259,922,002 $211,283,976 $95,830,457
Pro forma net income...................  232,403,643  200,895,647  92,128,633
Basic earnings per share, as reported..         2.12         1.75         .93
Diluted earnings per share, as reported         2.05         1.68         .93
Pro forma basic earnings per share.....         1.90         1.66         .89
Pro forma diluted earnings per share...         1.83         1.60         .89
</TABLE>

   The fair value of each option granted is estimated as of its respective
grant date using the Black-Scholes option-pricing model with the following
assumptions:

<TABLE>
<CAPTION>
                         2000 1999 1998
                         ---  ---  ---
<S>                      <C>  <C>  <C>
Dividend yield.......... 0.0% 0.0% 0.0%
Expected volatility.....  70%  70%  44%
Risk-free interest rate. 6.0% 6.0% 5.5%
Expected life (in years)   5    5    5
</TABLE>

17. Financial Instruments with Off-Balance Sheet Risk and Concentrations of
Credit Risk

   As a market maker of OTC and listed stocks and listed options contracts, the
majority of the Company's securities transactions are conducted as principal
with broker-dealer and institutional counterparties primarily located in the
United States. The Company clears all of its securities transactions through
clearing brokers on a fully disclosed basis. Accordingly, substantially all of
the Company's credit exposures are concentrated with the clearing brokers. The
clearing brokers can rehypothecate the securities held. Additionally, pursuant
to the terms of the agreement between the Company and the clearing brokers, the
clearing brokers have the right to charge the Company for losses that result
from a counterparty's failure to fulfill its contractual obligations. The
Company's policy is to monitor the credit standing of the clearing brokers and
all counterparties with which it conducts business. Additionally, as of
December 31, 2000, the Company's credit exposures were concentrated with the
clearing brokers and amounted to $114.0 million. As of December 31, 2000, the
clearing brokers also held, as custodians, securities and options owned by the
Company with a market value of $1.8 billion.

   Securities sold, not yet purchased represent obligations to purchase such
securities at a future date. The Company may incur a loss if the market value
of the securities subsequently increases.

   Derivative contracts are financial instruments whose value is based upon
underlying asset, index, reference rate or a combination of these factors. The
Company uses derivative financial instruments as part of its options
market-making and trading business and its overall risk management process.
These financial instruments, which generally include exchange-traded options,
options on futures and futures contracts, expose the Company to varying degrees
of market and credit risk. The Company records its derivative-trading
activities at market value, and unrealized gains and losses are recognized
currently.

                                      45
<PAGE>

                          KNIGHT TRADING GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


18. Net Capital Requirements

   As registered broker-dealers, KS, KCM, KFP and KEP are subject to the SEC's
Uniform Net Capital Rule (the "Rule") which requires the maintenance of minimum
net capital. KS, KCM and KEP have elected to use the basic method, permitted by
the Rule, which requires that they each maintain net capital equal to the
greater of $1.0 million or 6 2/3% of aggregate indebtedness, as defined. KFP
has elected to use the alternative method, permitted by the Rule, which
requires that it maintains net capital equal to the greater of $250,000 or 2%
of aggregate debit items, as defined.

   At December 31, 2000, KS had net capital of $304,796,340, which was
$301,696,970 in excess of its required net capital of $3,099,370, KCM had net
capital of $58,251,583, which was $56,828,680 in excess of its required net
capital of $1,422,903, KFP had net capital of $32,354,941 which was $32,104,941
in excess of its required net capital of $250,000, and KEP had net capital of
$1,439,403 which was $1,146,899 in excess of its required net capital of
$292,504.

    Additionally,KSIL and KSJ are subject to regulatory requirements in the
countries in which they operate, including the requirements of the Securities
and Futures Authority Limited in the United Kingdom and the Financial
Supervisory Agency in Japan. As of December 31, 2000, the Company was in
compliance with these capital adequacy requirements.

19. Business Segments

   The Company has two reportable business segments: securities market-making
and asset management. Securities market-making primarily includes the
operations of KS, KCM and KFP and includes market-making in equity securities
listed on Nasdaq, on the OTCBB of the NASD, in the over-the-counter market for
NYSE- and AMEX-listed securities and in options on individual equities, equity
indices, fixed income instruments and certain commodities. The asset management
segment includes the operations of Deephaven Capital Management, Deephaven
Capital and Deephaven Investment Advisers and consists of investment management
and sponsorship for a series of private investment funds.

   The Company's net revenues, income before income taxes and minority interest
and assets by segment are summarized below:

<TABLE>
<CAPTION>
                                                     Securities Market    Asset
                                                          Making       Management      Total
                                                     ----------------- ----------- --------------
<S>                                                  <C>               <C>         <C>
For the year ended December 31, 2000:
   Revenues.........................................    $1,210,824,863 $46,094,714 $1,256,919,577
   Income before income taxes and minority interest.       383,832,971  34,698,473    418,531,444
   Total Assets.....................................     2,481,695,369  39,713,803  2,521,409,172
For the year ended December 31, 1999:
   Revenues.........................................       875,667,896  20,907,547    896,575,443
   Income before income taxes and minority interest.       306,642,287  16,187,630    322,829,917
   Total Assets.....................................     1,510,129,050  30,156,756  1,540,285,806
For the year ended December 31, 1998:
   Revenues.........................................       404,705,305   6,329,327    411,034,632
   Income before income taxes and minority interest.       115,665,815   2,415,851    118,081,666
   Total Assets.....................................       675,219,300   9,424,514    684,643,814
</TABLE>

                                      46
<PAGE>

                          KNIGHT TRADING GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


20. Condensed Financial Statements of Knight Trading Group, Inc. (parent only)

   Presented below are the Condensed Statements of Financial Condition, Income
and Cash Flows for the Company on an unconsolidated basis.

                       Statements of Financial Condition

                   Knight Trading Group, Inc. (parent only)

<TABLE>
<CAPTION>
                                                         December 31, December 31,
                                                             2000         1999
                                                         ------------ ------------
<S>                                                      <C>          <C>
Assets
Cash and cash equivalents............................... $ 25,874,092 $ 99,728,732
Securities owned, at market value.......................   12,155,452           --
Investments in subsidiaries, equity method..............  731,643,361  410,554,961
Receivable from subsidiaries............................    5,883,085   18,450,185
Other assets............................................   15,578,475    9,106,225
                                                         ------------ ------------
   Total assets......................................... $791,134,465 $537,840,103
                                                         ============ ============
Liabilities and Stockholders' Equity
Liabilities
Accrued compensation expense............................ $ 10,361,525 $  5,858,946
Accounts payable, accrued expenses and other liabilities    2,131,888   15,193,968
Income taxes payable....................................    4,454,606   17,556,087
                                                         ------------ ------------
   Total liabilities....................................   16,948,019   38,609,001
   Total stockholders' equity...........................  774,186,446  499,231,102
                                                         ------------ ------------
   Total liabilities and stockholders' equity........... $791,134,465 $537,840,103
                                                         ============ ============
</TABLE>

                             Statements of Income

                   Knight Trading Group, Inc. (parent only)

<TABLE>
<CAPTION>
                                                     For the years ended December 31,
                                                 ----------------------------------------
                                                     2000          1999          1998
                                                 ------------  ------------  ------------
<S>                                              <C>           <C>           <C>
Revenues
Equity in earnings of subsidiaries.............. $265,900,963  $217,486,596  $102,748,320
Other...........................................    2,580,130     3,857,671       266,970
                                                 ------------  ------------  ------------
   Total revenues...............................  268,481,093   221,344,267   103,015,290
                                                 ------------  ------------  ------------
Expenses
Professional fees...............................    5,562,241     1,850,310            --
Business development............................    3,193,359     4,779,582         8,123
Merger related costs............................           --     5,189,295            --
Compensation expense............................           --            --     1,200,000
Payments for order flow.........................           --            --     1,189,331
Interest on Preferred Units.....................           --            --       714,905
Other...........................................    1,064,815     1,161,569     1,716,332
                                                 ------------  ------------  ------------
   Total expenses...............................    9,820,415    12,980,756     4,828,691
                                                 ------------  ------------  ------------
Income before income taxes and minority interest  258,660,678   208,363,511    98,186,599
Income tax (benefit) expense....................   (1,261,324)   (2,920,465)    2,356,142
                                                 ------------  ------------  ------------
   Net income................................... $259,922,002  $211,283,976  $ 95,830,457
                                                 ============  ============  ============
</TABLE>

                                      47
<PAGE>

                          KNIGHT TRADING GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


                           Statements of Cash Flows

                   Knight Trading Group, Inc. (parent only)

<TABLE>
<CAPTION>
                                                                                      For the year ended December 31,
                                                                                --------------------------------------------
                                                                                     2000           1999           1998
                                                                                -------------  -------------  -------------
<S>                                                                             <C>            <C>            <C>
Cash flows from operating activities
Net income..................................................................... $ 259,922,002  $ 211,283,976  $  95,830,457
Adjustments to reconcile net income to net cash provided by (used in) operating
 activities
Equity earnings of subsidiaries................................................  (265,900,963)  (217,486,596)  (102,748,320)
Issuance of restricted stock to directors......................................            --             --        217,500
Income tax credit from stock options exercised.................................     8,998,923     10,311,592             --
(Increase) decrease in operating assets
   Securities owned............................................................   (12,155,452)     1,285,525        255,513
   Receivable from subsidiaries................................................    12,567,100    (15,834,339)    (2,615,846)
   Other assets................................................................    (6,472,250)    (8,570,753)      (312,564)
Increase (decrease) in operating liabilities...................................
   Accrued compensation expense................................................     4,502,579      5,858,946             --
   Accounts payable, accrued expenses and other liabilities....................   (13,062,080)    14,070,659        297,286
   Income taxes payable........................................................   (13,101,481)    15,247,367      2,308,720
   Interest payable on Preferred Units.........................................            --             --       (424,981)
                                                                                -------------  -------------  -------------
      Net cash provided by (used in) operating activities......................   (24,701,622)    16,166,377     (7,192,235)
                                                                                -------------  -------------  -------------
Cash flows from investing activities
Capital contributions to subsidiaries..........................................  (129,810,015)   (20,230,922)   (71,448,000)
                                                                                -------------  -------------  -------------
      Net cash used in investing activities....................................  (129,810,015)   (20,230,922)   (71,448,000)
                                                                                -------------  -------------  -------------
Cash flows from financing activities
Proceeds from short term loan..................................................            --             --     30,000,000
Repayment of short term loan...................................................            --    (10,000,000)   (20,000,000)
Repayment of subordinated note.................................................            --             --       (500,000)
Proceeds from issuance of common stock.........................................            --     80,219,537             --
Stock options exercised........................................................     8,656,997      5,485,202             --
Net proceeds from initial public offering......................................            --             --    136,522,770
Net proceeds from exercise of Brown option.....................................            --             --         71,430
Dividends received from subsidiaries...........................................    72,000,000             --     52,569,664
Redemptions of Mandatorily Redeemable Preferred A Units........................            --             --    (12,483,610)
Redemptions of Mandatorily Redeemable Preferred B Units........................            --             --    (15,000,000)
Distributions on Common Units..................................................            --             --    (65,670,855)
                                                                                -------------  -------------  -------------
      Net cash provided by financing activities................................    80,656,997     75,704,739    105,509,399
                                                                                -------------  -------------  -------------
Increase (decrease) in cash and cash equivalents...............................   (73,854,640)    71,640,194     26,869,164
Cash and cash equivalents at beginning of period...............................    99,728,732     28,088,538      1,219,374
                                                                                -------------  -------------  -------------
Cash and cash equivalents at end of period..................................... $  25,874,092  $  99,728,732     28,088,538
                                                                                =============  =============  =============
Supplemental disclosure of cash flow information:..............................
   Cash paid for interest...................................................... $      32,718  $     168,638  $   2,069,809
                                                                                =============  =============  =============
   Cash paid for income taxes.................................................. $ 175,180,680  $  72,535,458  $  16,926,278
                                                                                =============  =============  =============
</TABLE>

Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures

   None.

PART III

   The Company's Proxy Statement for its 2001 Annual Meeting of Stockholders,
which, when filed pursuant to Regulation 14A under the Securities Exchange Act
of 1934, will be incorporated by reference in this Annual

                                      48
<PAGE>

                          KNIGHT TRADING GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Report on Form 10-K pursuant to General Instruction G(3) of Form 10-K, provides
the information required under Part III (Items 10, 11, 12 and 13).

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

   (a) The following documents are filed as part of this report:

      Consolidated Financial Statements and Financial Statement Schedules. See
   "Item 8, Financial Statements and Supplementary Data"

   (b) Reports on Form 8-K:

      On November 30, 2000, the Company filed a Current Report on Form 8-K to
   report putative class action lawsuits brought against the Company and
   current and former officers.

   (c) Exhibits

      27.1 Financial Data Schedule for the fiscal year ended December 31, 2000

                                      49
<PAGE>

   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 28/th/ day of March, 2001.

                                          KNIGHTTRADING GROUP, INC.

                                                /S/ KENNETH D. PASTERNAK
                                        By: ___________________________________
                                                  Kenneth D. Pasternak
                                          Chairman of the Board, President and
                                                 Chief Executive Officer

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.

<TABLE>
<CAPTION>
            Name                           Title                    Date
            ----                           -----                    ----
  <C>                       <S>                                 <C>

   /S/ KENNETH D PASTERNAK  Chairman of the Board, President    March  , 2001
  -------------------------   and Chief Executive Officer
    Kenneth D. Pasternak

    /S/ ROBERT I. TURNER    Director, Executive Vice President, March  , 2001
  ------------------------- Treasurer and Chief Financial
      Robert I. Turner      Officer (principal financial and
                            accounting officer)

    /S/ WALTER F. RAQUET    Director and Executive Vice         March  , 2001
  -------------------------   President
      Walter F. Raquet

  /S/ ANTHONY M. SANFILIPPO Director and Executive Vice         March  , 2001
  -------------------------   President
    Anthony M. Sanfilippo

     /S/ PETER S. HAJAS     Director                            March  , 2001
  ------------------------- Chief Executive Officer,
         Peter Hajas        Knight Financial Products LLC

     /S/ JOHN G. HEWITT     Director                            March  , 2001
  ------------------------- President, Knight Securities, L.P.
         John Hewitt

   /S/ CHARLES V. DOHERTY   Director                            March  , 2001
  -------------------------
     Charles V. Doherty

    /S/ GARY R. GRIFFITH    Director                            March  , 2001
  -------------------------
      Gary R. Griffith

     /S/ ROBERT GREIFELD    Director                            March  , 2001
  -------------------------
       Robert Greifeld
</TABLE>

                                      50
<PAGE>

<TABLE>
<CAPTION>
                          Name          Title       Date
                          ----          -----       ----
                  <C>                  <S>      <C>

                  /S/ BRUCE R. MCMAKEN Director March  , 2001
                  --------------------
                    Bruce R. McMaken

                  /S/ RODGER O. RINEY  Director March  , 2001
                  --------------------
                    Rodger O. Riney

                   /S/ V. ERIC ROACH   Director March  , 2001
                  --------------------
                     V. Eric Roach
</TABLE>


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