Overview: Mixed securities market returns, continuing geopolitical uncertainties, and concerns about rising interest rates all weighed on client engagement during much of the second quarter of 2004. Client daily average revenue trades declined by 20% from the first quarter of 2004, and were comparable to the year-ago level. The sharp downturn in trading activity was the primary cause of the 26% decline in the Company's trading revenues from the first quarter of 2004. Although client trading activity decreased, the Company's non-trading revenues - asset management and administration fees, net interest revenue, and other revenues - reached a record level in the second quarter of 2004, as the Company continued its focus on building stronger client relationships and diversifying its sources of revenues. Net new client assets of $6.7 billion for the second quarter of 2004 were comparable to the year-ago level, despite a $6.0 billion outflow in June relating to a mutual fund clearing client. Additionally, assets in client accounts were $998.3 billion at June 30, 2004, an increase of $153.6 billion, or 18%, from a year ago.
The Charles Schwab Corporation (CSC) and its subsidiaries (collectively referred to as the Company) provide securities brokerage, banking, and related financial services for 7.5 million active client accounts(a). Charles Schwab & Co., Inc. (Schwab) is a securities broker-dealer with 336 domestic branch offices in 48 states, as well as a branch in the Commonwealth of Puerto Rico. For further discussion on the branch offices, see Description of Business - Restructuring. U.S. Trust Corporation (USTC, and with its subsidiaries collectively referred to as U.S. Trust) is a wealth management firm that through its subsidiaries also provides fiduciary services and private banking services with 38 offices in 15 states. Other subsidiaries include Charles Schwab Investment Management, Inc., the investment advisor for Schwab's proprietary mutual funds, Schwab Capital Markets L.P. (SCM), a market maker in Nasdaq, exchange-listed, and other securities providing trade execution services primarily to broker-dealers and institutional clients, CyberTrader, Inc., an electronic trading technology and brokerage firm providing services to highly active, online traders, and Charles Schwab Bank, N.A. (Schwab Bank), a retail bank which commenced operations in the second quarter of 2003.
The Company provides financial services to individuals, institutional clients, and broker-dealers through four segments - Individual Investor, Institutional Investor, Capital Markets, and U.S. Trust. The Individual Investor segment includes the Company's retail brokerage and banking operations. The Institutional Investor segment provides custodial, trading and support services to independent investment advisors (IAs), serves company 401(k) plan sponsors and third-party administrators, and supports company stock option plans. The Capital Markets segment provides trade execution services in Nasdaq, exchange-listed, and other securities primarily to broker-dealers, including Schwab, and institutional clients. The U.S. Trust segment provides investment, wealth management, custody, fiduciary, and private banking services to individual and institutional clients.
Management of the Company focuses on several key financial and non-financial metrics (as shown in the following table) in evaluating the Company's financial position and operating performance:

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                                           Three Months          Six Months
                                              Ended                Ended
                                             June 30,             June 30,
Key Metrics                                2004    2003         2004    2003
--------------------------------------------------------------------------------
Client Activity Metrics:
Net new client assets (in billions) (1)  $  6.7  $  6.5       $ 20.5  $ 20.7
   Percent change                            3%                  (1%)
Client assets
   (in billions, at period end)          $998.3  $844.7
   Percent change                           18%
Daily average revenue trades
   (in thousands)                         142.2   141.0        160.1   128.0
   Percent change                            1%                  25%
Company Financial Metrics:
Revenue growth (decline) from
   prior year's period                       9%     (2%)         20%     (8%)
After-tax profit margin                   10.2%   12.3%        11.9%   10.2%
Return on stockholders' equity              10%     12%          12%     10%
Net income growth (decline) from
   prior year's period                     (10%)    29%          39%      3%
Revenue per average full-time
   equivalent employee
   (annualized, in thousands)            $  263  $  250       $  274  $  233
   Percent change                            5%                  18%
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Management continues to believe that the key to sustaining and improving the Company's competitive position will be its ability to combine people and technology in ways that provide investors with the access, information, guidance, advice and control they expect - as well as high-quality service - all at a lower cost than traditional providers of financial services.
(a) Accounts with balances or activity within the preceding eight months.

Business Strategy: The Company's primary strategy is to meet the financial services needs of individual investors and independent IAs. To sustain and advance this core franchise, the Company remains focused on improving service for these clients and building stronger relationships with them. The Company provides investors and IAs with products and services that are tailored to (a) support a full spectrum of investment styles and life stages, and (b) utilize its scale in trading, operations, distribution and marketing.
For further discussion of the Company's business strategy, see "Management's Discussion and Analysis of Results of Operations and Financial Condition - Description of Business - Business Strategy" in the Company's 2003 Annual Report to Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the year ended December 31, 2003. See also Item 1 - Business - Narrative Description of Business - Business Strategy in the Company's Form 10-K for the year ended December 31, 2003. Significant recent developments relating to the Company's main avenues for growth include:

Product Expansion: During the second quarter of 2004, the Company launched the PortfolioCenter Relationship Manager(TM), a contact management and office workflow automation system designed to assist IAs in strengthening client and prospect relationships.
For clients interested in fixed income securities, the Company introduced Standard & Poor's Ratings Xpress(TM), a tool designed to provide in-depth information on a bond's credit rating, including credit profiles of bond issuers, the rationale behind upgrades and downgrades, analysts' outlooks, and recent news reports.

Service/Offer Expansion: In the second quarter of 2004, the Company lowered online equity trade commissions for many clients, including both individual investors and clients of IAs. Among the changes for individual investors, the Company introduced a flat $14.95 commission rate for clients who make at least 30 equity or option trades in a quarter, and a flat $9.95 commission rate for online equity trades made by clients who have more than $1 million in assets at Schwab. For most clients of IAs, the Company introduced $19.95 pricing for online equity trades, and it also extended the flat $9.95 commission rate to clients of IAs who have more than $1 million in assets custodied at Schwab.

Restructuring: In the second quarter of 2004, the Company announced a firm-wide cost reduction effort designed to mitigate the financial impact of its recent pricing changes and to strengthen its productivity and efficiency. This effort will consist of two phases, with phase one focusing on the elimination of work that is not essential to meeting client service standards or the Company's ongoing operating needs. The Company currently estimates that phase one will result in the identification and implementation of approximately $175 million to $225 million in annualized cost savings by the end of 2004, with the full benefit of these savings realized in 2005.
During the second quarter of 2004, the Company implemented the first element of phase one - the reallocation of certain client service functions from its Orlando regional telephone service center to other centers. In addition, during July the Company initiated the consolidation of 38 branch offices into nearby locations, the closure of 15 additional offices, and the streamlining of its technology organization. All together, these actions will result in a total of approximately 500 mandatory staff reductions. The Company expects that its phase one efforts will result in an additional 400 to 600 mandatory staff reductions by the end of 2004, and that its headcount will decline further through ongoing attrition and reduced usage of temporary staff and contractors.
Phase two of the cost reduction effort will focus on reengineering work processes to maximize productivity, minimizing organizational complexity through functional streamlining, and addressing business unit performance across the Company. Management estimates that this phase will extend through the remainder of 2004 and into 2005 - targeted expense savings and timing have not yet been established.
The Company recorded pre-tax restructuring charges of $4 million in the second quarter of 2004, reflecting severance costs for approximately 250 employees, including the workforce reduction in Orlando. Although the workforce decisions for the Orlando center were made and communicated during the second quarter, the accounting treatment of these decisions will continue into the third quarter, with a charge of approximately $6 million. Additionally, charges associated with the branch actions and the streamlining of the technology organization will be approximately $25 million. Total restructuring charges associated with the remainder of phase one have not yet been determined as the Company continues to identify and refine its plans and estimates.
The Company's 2003, 2002, and 2001 restructuring initiatives included workforce reductions, reductions in operating facilities, the removal of certain systems hardware, software, and equipment from service, and the withdrawal from certain international operations. Related to these restructuring initiatives, the Company recorded a pre-tax restructuring credit of $2 million in the second quarter and first half of 2004 and pre-tax restructuring charges of $24 million in the second quarter and first half of 2003, both primarily due to changes in estimates of sublease income associated with previously announced efforts to sublease excess facilities.
As of June 30, 2004, the remaining facilities restructuring reserve of $166 million is net of estimated future sublease income of approximately $300 million. This estimated future sublease income amount is determined

based upon a number of factors, including current and expected commercial real estate lease rates in the respective properties' real estate markets, and estimated vacancy periods prior to execution of tenant subleases. At June 30, 2004, approximately 90% of the total square footage targeted for sublease under the restructuring initiatives has been subleased, up from approximately 65% at December 31, 2003. The increase in subleased square footage is primarily due to the subleasing of certain property in New Jersey to a real estate investment trust in the second quarter of 2004.
For further information on the Company's restructuring initiatives, see note "4 - Restructuring" in the Notes to Condensed Consolidated Financial Statements.

Regulatory Developments: As disclosed previously, the Company has been responding to inquiries and subpoenas from federal and state authorities relating to circumstances in which a small number of parties were permitted to engage in short-term trading of certain Excelsior(R) Funds through U.S. Trust. In addition, the Company has responded to regulatory inquiries focusing on a small percentage of trades through Schwab's Mutual Fund MarketPlace(R) service that were received from the client prior to market close, but were modified shortly after market close, in each case after employees contacted the client when Schwab's computer systems rejected the trades as originally submitted. The Company's internal review found no evidence of any intention on the part of Schwab employees to circumvent rules or policies, no evidence of arrangements with Schwab clients to permit late trading or market timing through the Mutual Fund MarketPlace, and no evidence of trading activity by clients or employees to take advantage of post-market close information.
Although the Company is unable to predict the ultimate outcome of these matters, any enforcement actions instituted as a result of the investigations may subject the Company to fines, penalties or other administrative remedies. The Company is cooperating with regulators, and has taken steps to enhance its existing policies and procedures to further discourage, detect, and prevent market timing and late trading.
Lawsuits have been filed against the Company and U.S. Trust and affiliates alleging breaches of duties and violations of law with respect to these matters. See Part II - Other Information, Item 1 - Legal Proceedings.

Effective July 20, 2004, the Company's Board of Directors appointed Charles R. Schwab as Chief Executive Officer, replacing David S. Pottruck. Mr. Schwab will continue to serve as Chairman of the Board of Directors.

For discussion on the Company's principal risks and some of the policies and procedures for risk identification, assessment, and mitigation, see "Management's Discussion and Analysis of Results of Operations and Financial Condition - Risk Management" in the Company's 2003 Annual Report to Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the year ended December 31, 2003. See Liquidity and Capital Resources of this report for a discussion on liquidity risk; and see Item 3 - Quantitative and Qualitative Disclosures About Market Risk for additional information relating to market risk.
The Company continually evaluates and considers a wide array of potential strategic transactions, including business combinations, acquisitions and dispositions of businesses, services, and other assets. Any such transaction could have a material impact on the Company's financial position, results of operations, earnings per share (EPS), or cash flows. Currently, the Company is considering strategic alternatives (e.g., retention, full or partial divestiture, outsourcing, etc.) for its Schwab SoundView Capital Markets operations. No decisions have been made at this time.
Given the nature of the Company's revenues, expenses, and risk profile, the Company's earnings and CSC's common stock price have been and may continue to be subject to significant volatility from period to period. The Company's results for any interim period are not necessarily indicative of results for a full year or any other interim period. Risk is inherent in the Company's business. Consequently, despite the Company's attempts to identify areas of risk, oversee operational areas involving risk, and implement policies and procedures designed to mitigate risk, there can be no assurance that the Company will not suffer unexpected losses due to operating or other risks.

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are identified by words such as "believe," "anticipate," "expect," "intend," "plan," "will," "may," and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements, which reflect management's beliefs, objectives, and expectations as of the date hereof, are necessarily estimates based on the best judgment of the Company's senior management. These statements relate to, among other things, the Company's

ability to pursue its business strategy and the Company's ability to sustain and improve its competitive position (see Description of Business - Business Strategy); the impact of the firm-wide cost reduction effort on the Company's results of operations (see Description of Business - Restructuring); the outcome of pending regulatory investigations (see Description of Business - Regulatory Developments); the potential impact of future strategic transactions (see Risk Management); the impact of commission pricing reductions on the Company's results of operations (see Revenues - Commissions); sources of liquidity and capital (see Liquidity and Capital Resources - Liquidity); the Company's cash position and cash flows (see Liquidity and Capital Resources - Cash and Capital Resources); and contingent liabilities (see Part II - Other Information, Item 1 - Legal Proceedings). Achievement of the expressed beliefs, objectives, and expectations described in these statements is subject to certain risks and uncertainties that could cause actual results to differ materially from the expressed beliefs, objectives, and expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q or, in the case of documents incorporated by reference, as of the date of those documents.
Important factors that may cause such differences are noted in this interim report and include, but are not limited to: the Company's success in building fee-based relationships with its clients; the effect of client trading patterns on Company revenues and earnings; changes in revenues and profit margin due to cyclical securities markets and fluctuations in interest rates; the level and continuing volatility of equity prices; a significant downturn in the securities markets over a short period of time or a sustained decline in securities prices, trading volumes, and investor confidence; the Company's ability to recognize the expected benefits of acquisitions or dispositions; geopolitical developments affecting the securities markets, the economy, and investor sentiment; the size and number of the Company's insurance claims; and a significant decline in the real estate market, including the Company's ability to sublease certain properties. Other more general factors that may cause such differences include, but are not limited to: the Company's inability to attract and retain key personnel; the timing and impact of changes in the Company's level of investments in personnel, technology, or advertising; changes in technology; computer system failures and security breaches; evolving legislation, regulation and changing industry practices adversely affecting the Company; adverse results of litigation or regulatory matters; the inability to obtain external financing at acceptable rates; the effects of competitors' pricing, product and service decisions; and intensified industry competition and consolidation.

Certain of the Company's accounting policies that involve a higher degree of judgment and complexity are discussed in "Management's Discussion and Analysis of Results of Operations and Financial Condition - Critical Accounting Policies" in the Company's 2003 Annual Report to Stockholders, which is filed as Exhibit 13.1 to the Company's Form 10-K for the year ended December 31, 2003. There have been no material changes to these critical accounting policies during the first half of 2004.

Three Months Ended June 30, 2004 Compared To Three Months Ended June 30, 2003

All references to EPS information in this report reflect diluted EPS unless otherwise noted.

FINANCIAL OVERVIEW

Total revenues for the second quarter of 2004 were $1.1 billion, up $94 million, or 9%, from the second quarter of 2003. The Company's non-trading revenues, which include asset management and administration fees, interest revenue net of interest expense (referred to as net interest revenue), and other revenues, increased 19% in the second quarter of 2004, compared to the year-ago level. The increase in non-trading revenues was largely due to increases in asset management and administration fees, resulting primarily from higher levels of client assets and higher asset-based fees from certain client relationships, and net interest revenue, resulting primarily from higher levels of interest-earning assets. The Company's trading revenues, which include commissions and principal transaction revenues, decreased 8% from the second quarter of 2003, primarily due to lower average revenue earned per revenue trade.
Total expenses excluding interest during the second quarter of 2004 were $933 million, up 12% from the second quarter of 2003. This increase was primarily due to higher compensation and benefits expense, as well as increases in professional services and advertising and market development expense.
Income from continuing operations before taxes on income was $179 million for the second quarter of 2004, down 2% from the second quarter of 2003. This decrease was primarily due to the combination of factors discussed separately above. Net income for the second quarter of 2004 was $113 million, or $.08 per share, down 10% from the second quarter of 2003. The decrease in net income was primarily due to a tax benefit in 2003 related to the Company's merger with U.S. Trust, as well as lower income from continuing operations before taxes on income as

discussed above. The Company's after-tax profit margin for the second quarter of 2004 was 10.2%, down from 12.3% for the second quarter of 2003. The annualized return on stockholders' equity for the second quarter of 2004 was 10%, down from 12% for the second quarter of 2003.

Segment Information: In evaluating the Company's financial performance, management uses adjusted operating income, a non-generally accepted accounting principles (non-GAAP) income measure which excludes items described in the following paragraph. Management believes that adjusted operating income is a useful indicator of the ongoing financial performance of the Company's segments, and a tool that can provide meaningful insight into financial performance without the effects of certain material items that are not expected to be an ongoing part of operations (e.g., extraordinary items, non-operating revenues, restructuring charges, impairment charges, acquisition- and merger-related charges, and discontinued operations).
In the second quarter of 2004, net income of $113 million included $1 million of after-tax restructuring charges. In the second quarter of 2003, net income of $126 million included the following items which in total had the effect of decreasing after-tax income by $4 million: $15 million of after-tax restructuring charges and an $11 million tax benefit associated with the Company's merger with U.S. Trust.
As detailed in note "15 - Segment Information" in the Notes to Condensed Consolidated Financial Statements, adjusted operating income before taxes was $181 million for the second quarter of 2004, down $25 million, or 12%, from the second quarter of 2003 primarily due to decreases of $18 million, or 16%, in the Individual Investor segment and $11 million, or 14%, in the Institutional Investor segment, partially offset by an increase of $6 million, or 120%, in the U.S. Trust segment. The decrease in the Individual Investor segment was due to growth in expenses outpacing growth in revenues primarily as a result of lower average revenue earned per revenue trade. The decrease in the Institutional Investor segment was due to growth in expenses outpacing growth in revenues primarily as a result of higher client acquisition and servicing costs. The increase in the U.S. Trust segment was due to revenue growth outpacing expense growth primarily related to the integration of State Street Corporation's Private Asset Management group (PAM) acquisition.

Discontinued Operations: On January 31, 2003, the Company sold its U.K. brokerage subsidiary, Charles Schwab Europe (CSE), to Barclays PLC. The results of CSE's operations have been summarized as loss from discontinued operations, net of tax, on the Condensed Consolidated Statement of Income.

REVENUES

     The Company  categorizes its revenues as either non-trading or trading.  As
shown in the  following  table (in  millions),  non-trading  and total  revenues
increased,  while trading revenues decreased, in the second quarter of 2004 from
the second quarter of 2003.

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                                                    Three Months
                                                       Ended
                                                      June 30,       Percent
Composition of Revenues                             2004    2003      Change
--------------------------------------------------------------------------------
Non-trading revenues:
Asset management and
   administration fees                            $  514  $  445        16%
Net interest revenue                                 224     180        24
Other                                                 48      37        30
--------------------------------------------------------------------------------
    Total non-trading revenues                       786     662        19
--------------------------------------------------------------------------------
Trading revenues:
Commissions                                          286     313        (9)
Principal transactions                                40      43        (7)
--------------------------------------------------------------------------------
    Total trading revenues                           326     356        (8)
--------------------------------------------------------------------------------
Total                                             $1,112  $1,018         9%
================================================================================
Percentage of total revenues:
Non-trading revenues                                 71%     65%
Trading revenues                                     29%     35%
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While the Individual Investor and Institutional Investor segments generate both non-trading and trading revenues, the Capital Markets segment generates . . .