Business Overview

Investools Inc. offers market-leading investor education and brokerage and related financial products and services for self-directed investors. Our Investor Education segment offers a full range of investor education products and services that provide lifelong learning in a variety of interactive delivery formats. Our educational products and services cover a broad range of financial products, including equity securities, options, fixed income, index products, futures, other derivatives and foreign exchange. We have more than 337,000 graduates of our foundation courses and 102,800 active subscribers to our websites.

On February 15, 2007, we merged with thinkorswim Group, Inc., a leading online brokerage firm and provider of related technology-based financial services to self-directed options traders and retail investors. thinkorswim® offers customers a broad range of products including equity securities, index products, exchange traded options, futures, mutual funds, bonds and foreign exchange. All securities

transactions are cleared on a fully disclosed basis pursuant to a clearing agreement with our primary clearing broker, Penson Financial Services.

See Note 3 to the Consolidated Financial Statements for a discussion regarding Business Acquisitions that took place during 2007.

Segment Summary Results of Operations

During 2007, the operations of thinkorswim have been included in the Company's operations since the date of the merger. Previously reported amounts reported by the Company do not include the consolidated results of thinkorswim. As a result of the merger, we operate in the following two principal business segments:

Investor Education segment-This business segment provides a full range of investor education products and services that provide lifelong learning and support to self-directed investors. The Company has more than 337,000 graduates of our Foundation course and 102,800 paid subscribers to our websites. The investor education products and services are offered in a variety of learning formats with courses ranging from beginning to advanced, to address the needs of students on all investor levels.

Brokerage Services segment-This business segment is a leading online brokerage firm specializing in options and offers customers a broad range of products including equities, futures, mutual funds and bonds. The Company supports retail and active traders through its own trading platforms and is widely recognized as a premier option software for order entry, professional analytical tools and real-time position management. thinkorswim was ranked by Barron's as its top rated software-based online broker and best for options traders for 2006 and 2007.

See Note 17 to the Consolidated Financial Sheets for additional disclosure regarding Segment Reporting.

Consolidated Revenue

Investor Education segment sales transaction volume ("STV"), a non-GAAP measure, represents sales transactions generated in each period before the impact of recognition of deferred revenue from prior periods, for services performed in the current period, and the deferral of current period sales for services to be performed in the future. We believe that STV is an important measure of business performance for the Investor Education segment.

                                                      Years Ended December 31,
                                                  ---------------------------------
                                                    2007        2006        2005
                                                  ---------   ---------   ---------
Investor Education segment revenue
   Workshop                                       $  40,667   $  54,903   $  47,646
   Coaching services                                 80,387      89,034      69,124
   Home study/Online courses                         56,706      68,046      27,732
   Webtime renewals                                  30,632      33,243      25,941
   Other revenue                                      2,263       7,576       5,727
                                                  ---------   ---------   ---------
Total Investor Education sales transaction          210,655     252,802     176,170
volume ("STV")
   Change in deferred revenue                        (3,528 )   (82,472 )   (37,549 )
                                                  ---------   ---------   ---------
Investor Education segment revenue                  207,127     170,330     138,621
                                                  ---------   ---------   ---------
Brokerage Services segment revenue
   Commissions                                       67,734           -           -
   Interest and dividends                            20,961           -           -
   Other & brokerage related revenue                 22,187           -           -
                                                  ---------
Brokerage Services segment revenue                  110,882
                                                  ---------   ---------   ---------
Total Consolidated Revenue                        $ 318,009   $ 170,330   $ 138,621
                                                  ---------   ---------   ---------


Cost of Revenue
(in thousands)

                                  % of    % of                 % of    % of                % of    % of
Cost of Revenue         2007      STV    Revenue     2006      STV    Revenue     2005     STV    Revenue
-------------------   ---------   ----   -------   ---------   ----   -------   --------   ----   -------
Partner Commissions   $  33,468     10 %      10 % $  48,477     19 %      29 % $ 30,688     17 %      22 %
Payroll cost             40,234     13 %      13 %    39,838     16 %      23 %   32,858     19 %      24 %
Brokerage, clearing
and other related
fees                     17,361      5 %       5 %         -      -         -          -      -         -
Depreciation and
amortization             15,572      5 %       5 %     2,278      1 %       1 %    1,534      1 %       1 %
Other                    36,876     12 %      12 %    30,677     12 %      18 %   27,081     15 %      20 %
                      ---------                    ---------                    --------
Cost of Revenue       $ 143,511     45 %      45 % $ 121,270     48 %      71 % $ 92,161     52 %      67 %
                      ---------                    ---------                    --------


Selling Expense
(in thousands)

                                    % of                 % of                 % of
                          2007     Revenue     2006     Revenue     2005     Revenue
                        --------   -------   --------   -------   --------   -------
Marketing               $ 53,211        16 % $ 38,109        23 % $ 26,510        19 %
Payroll                    8,522         3 %    5,781         3 %    4,512         3 %
Other                      9,127         3 %    9,057         5 %    6,310         5 %
                        --------   -------   --------   -------   --------   -------
Total selling expense   $ 70,860        22 % $ 52,947        31 % $ 37,332        27 %
                        --------   -------   --------   -------   --------   -------

General and Administrative Expense
(in thousands)

                                % of                 % of                 % of
                      2007     Revenue     2006     Revenue     2005     Revenue
                    --------   -------   --------   -------   --------   -------
Payroll             $ 38,554        12 % $ 15,318         9 % $ 12,723         9 %
Other                 31,020        10 %   17,328        10 %   11,552         8 %
                    --------   -------   --------   -------   --------   -------
Total G&A expense   $ 69,574        22 % $ 32,646        19 % $ 24,275        17 %
                    --------   -------   --------   -------   --------   -------

Operating Data

    The following table sets forth certain statistical data for each segment of
the Company for the periods presented below:

                                                        Years Ended December 31,
                                                     ------------------------------
                                                         2007        2006     2005
                                                     ------------   ------   ------
Investor Education segment operating data:
Initial Education Sales Transaction Volume %(1)                14 %     15 %     15 %
Continuing Education Sales Transaction Volume %(2)             86 %     85 %     85 %
Total Paid Graduates(3)                                    43,090   45,060   43,780
Active Subscribers(4)                                     102,800   85,400   68,000
Brokerage Service segment operating data:(5)
Trading days                                                  219
New retail accounts opened(6)                              67,975
New funded retail accounts                                 34,675
Period-end funded retail accounts                          57,775
Retail Daily Average Revenue Trades ("DARTs")(7)           28,800
Active trader DARTs(8)                                     23,800
                                                     ------------
Total DARTs                                                52,600
Total trades                                           11,482,000
Ending client assets ($MM)                           $      2,580
Average client equity/retail account                       44,600
Retail commission per trade                                  9.44


--------------------------------------------------------------------------------
   º (1)

º (2)
º Continuing education revenues consist of sales of advanced products and services sold to graduates.

º (3)
º Total graduates include customers who purchased the Foundation Course and/or the Forex Course as a result of direct or indirect marketing efforts.

º (4)
º Active subscribers are those customers who have an active subscription to Investools Online, Investools FX Online or Prophet.net as of the end of the period.

º (5)
º Brokerage Services information is included in operating data from the merger date.

º (6)
º Accounts opened represent accounts that have initiated the application process with the intent to fund.

º (7)
º Retails DARTs are trades executed using the retail thinkorswim platform.

Revenue

Revenue from our Investor Education segment is derived from: (i) the initial education sales of our products and services as a result of marketing efforts from the Company or one of its marketing partners across multiple marketing channels which include, but are not limited to, television, online banner, paid and organic search, print, direct mail, radio and email direct marketing campaigns which drive customers to either a free preview of investor education products offered at locations near the prospect or the opportunity to speak with a telesales representative about the products offered; and (ii) the continuing education sales of products and services to graduates as a result of continued interaction with us in workshops, periodic email and direct mail communications and through access to coaches and instructors.

Our primary source of revenue for the Brokerage Services segment is commissions earned from our brokerage activities, which are driven largely by our customer's trading activities. The Company derives commission revenues from customer transactions in options, stock, mutual funds, fixed income securities, spot forex and futures. Commission revenues and related brokerage and clearing related costs are recognized on a trade-date basis. Interest revenue and fees consists primarily of income generated by customer cash and money market funds held by our clearing broker, net of interest paid to customers on their credit balances and charged to customers on margin balances. Interest income is recorded when earned. The Company receives payment for order flow from exchanges, forex dealers and liquidity providers where its customers' orders are routed. Payment for order flow is accrued when earned based on the respective trades generating such payments.

Operating Expenses

The largest components of cost of revenue include investor education solicitation and fulfillment costs, which include employee sales commissions, partner commissions, travel and venue expenditures and credit card fees paid in connection with education sales. These costs are expensed as incurred at the inception of the sales transaction and are therefore recorded in the period of sale, not as the revenue is recognized. Employee compensation and benefits include salaries, bonuses, and related benefit costs for employees in both segments. Brokerage, clearing and other related fees include fees to clearing organizations, exchanges, third-party broker dealers and independent registered representatives.

The largest component of selling expense is the marketing costs across multiple marketing channels which include, but are not limited to, television, online banners, paid and organic search, print, direct mail, radio and email direct marketing campaigns. These marketing efforts drive customers to either a free preview of investor education products offered at nearby locations, to purchase online and/or the opportunity to speak with a telesales representative about the products offered. Advertising costs are expensed as incurred, except for production costs, which are expensed when the first broadcast airs. Payroll costs included in selling expenses relate to the salaries, commissions and associated employee benefit costs paid to certain employees for customer acquisition, at our live education events or via our telesales groups.

The largest component of general and administrative expenses is the salary, bonus and related benefit costs for employees in both segments. Lease expenses on office space, professional fees, technology, licensing, hosting, depreciation expenses related to the deployment of internal system and general travel and other miscellaneous expenses are also included in general and administrative expenses.

Year Ended December 31, 2007 versus Year Ended December 31, 2006

thinkorswim operations are included in the Consolidated Financial Statements from the merger date of February 15, 2007 through December 31, 2007.

Revenue increased by $147.7 million for the year ended December 31, 2007, when compared to the prior year, of which $110.9 million of the increase resulted from the acquisition of thinkorswim. The increase is also attributable to continued fulfillment of a growing base of deferred revenue related to education products and services sold in current and prior periods.

Investor Education Segment

Investor Education Sales Transaction Volume decreased approximately 16 percent on a year over year basis. The decrease was attributed to a number of factors, including an over 35 percent decrease in the number of graduates from our partner marketed channels, mostly attributed to the loss of one of our partners (NET Marketing Alliance) during the year. The Company implemented a 45 percent price reduction, on a year over year basis, for the initial education product, resulting in an over 45 percent volume increase in Investools marketed graduates. The decline in partner marketed graduates was mostly offset by this increase in the number of Investools marketed graduates. The decrease in leads from our partner marketed channels was also partially offset by an improvement in sales effectiveness and the sales mix of our advanced products. In addition, the Company introduced a 6 month $199 per month subscription for the initial education course. The lower priced initial education products led to the increased volume of graduates available for continuing education product offerings and brokerage services.

Brokerage Services Segment

The Company entered into the Brokerage Services segment on February 15, 2007 with the merger with thinkorswim. During the ten and a half months included in the Consolidated Financial Statements of the Company, the Brokerage Services segment had approximately $110.9 million of revenue. Commission revenue, which made up $67.7 million was primarily a result of the commissions earned on the trading activity of the 57,775 retail funded accounts that existed at year end. Those accounts had daily average revenue trades of 28,800 during this period. Interest income is primarily earned from our clearing firm based on a negotiated rate that takes into account interest earned by our clearing firm on customer credit cash balances and charges to customers on margin balances. At year end, the average client balance was $44,600, of which a portion was held in cash. The Company also earned payment for order flow on trades made during the year. Total trades were 11,482,000 during the ten and a half months included in the accompanying Consolidated Financial Statements.

Change in Deferred Revenue

Change in deferred revenue decreased $78.9 million for the year ended December 31, 2007, when compared to the prior year. The change in deferred revenue is made up of two components. Additions to deferred revenue include current period sales of products and services that have a future fulfillment date, which include coaching services, workshops, online courses and website subscription renewals. Bundled sales including deferred revenue components are added to deferred revenue and revenue is recognized as services to the student are rendered. Recognition of previously deferred revenue includes revenue recognized over either (1) the passage of time for subscription based products such as toolbox or online courses or (2) based on fulfillment of products or services for coaching and workshops. The primary reason for the decrease was the combination of products and services sold during the current year, as well as the mix of products that existed in our deferred revenue liability account, as well as a decrease in sales transaction volume during the year.

Cost of Revenues

Overall cost of revenue increased during the year ended December 31, 2007 compared to the year ago period by $22.2 million primarily related to the merger with thinkorswim. As a percentage of STV, cost of revenues decreased during the year ended December 31, 2007 compared to the same period in

2006 as the results include partial period operations for the merged entity which have lower cost of revenues as a percentage of STV.

Partner commissions, which relate solely to the Investor Education segment, decreased $15.0 million from 2006 amounts, due to a change in the mix of STV generated through partnership channels. This is partially due to the loss of a marketing partner during the year and reflective of the decreased number of partner marketed graduates compared to the same period in 2006.

Payroll costs include employee commissions based on a percentage of sales achieved from our Investor Education events or telesales groups, certain fixed wages related to the brokerage trade desk and education coaching services and the associated employee benefit costs. Payroll costs, which increased by $0.4 million when compared to the same period in 2006, were impacted by incremental costs associated with thinkorswim, not included in previous year amounts. Additionally, certain Investor Education fulfillment costs declined as a result of the continued transition to online coaching formats that provide efficiencies as we service more students.

Brokerage, clearing and other related fees, which totaled $17.4 million for fiscal year 2007, relate solely to the Brokerage Services segment and include fees to clearing organizations, exchanges, third-party broker dealers and independent registered representatives. As a result of the merger with thinkorswim, the current year period includes operations for the merged entity which was not included in prior year amounts.

Depreciation and amortization increased $13.3 million during 2007, when compared to the prior year primarily due to amortization of intangibles and other assets related to the thinkorswim merger.

Other cost of revenue is primarily comprised of amounts directly related to sales transaction volume including travel expenditures, venue costs, material costs and credit card fees. In addition, data and quotation service costs related to the brokerage segment are also included in other cost of revenue and are incremental on a comparable year over year basis given the merger with thinkorswim. Travel and venue were impacted by incremental costs associated with the Investools investor conference of $2.8 million and higher costs to fulfill workshops held compared to 2006 given we held more workshops in higher priced markets. This increase was partially offset by efforts to fulfill more products and services online along with fewer partner events in the current year.

Selling Expense

Total selling expense increased during the year ended December 31, 2007 by approximately $17.9 million, primarily due to an increase in marketing expense for the acquisition of new graduates in the Investor Education segment and due to incremental costs associated with the merger of thinkorswim.

Marketing costs increased $15.1 million for the year ended December 31, 2007 when compared to the same period in 2006, primarily due to increased spending related to our Investools branded events, which are marketed via various media channels including television, online, print and radio. In addition, we increased national advertising spending in both our television and online channels which resulted in increased traffic to www.investools.com.

During the year ended December 31, 2007, payroll costs increased primarily as a result of the incremental payroll costs associated with the education group within thinkorswim, known as OptionPlanet. The costs associated with delivering the OptionPlanet courses are included in selling expense from the date of the merger.

General and Administrative

General and administrative expenses increased $37.0 million for the year ended December 31, 2007 when compared to the same period in 2006. The increase was primarily attributed to the inclusion of general and administrative expenses associated with thinkorswim from the merger date, which includes payroll, retention bonus accruals and other general and administrative expenses. thinkorswim general and administrative expenses were not included in the prior year amounts. In addition, we incurred an $8.5 million increase in compensation expenses during the year relating to the modification of an option agreement in connection with the merger with thinkorswim. During the current year, the Company has also experienced an increase in technology, licensing and hosting expenses as well as depreciation expenses related to the current year deployment of internal systems.

The Investor Education segment operating margin improved by $34.3 million on a year over year basis. The decline in loss from operations is mostly attributed to a $36.8 million increase in revenue fulfilled and recognized during the year with only a slight increase in the level of operating expenses in the business. The Brokerage Services segment had operating margin of $42.6 million from the merger date through fiscal year end.

Interest Income

Interest income for the year ended December 31, 2007 decreased by $0.8 million due to lower balances of cash, cash equivalents and marketable securities maintained during 2007 as compared to amounts maintained during 2006. The decrease in the balances was a result of the merger with thinkorswim, given the Company paid for a portion of the merger consideration in cash.

Interest Expense

Interest expense for the year ended December 31, 2007 increased by $11.0 million over the same period for 2006, due to the interest recognized on notes payable incurred as a result of the thinkorswim merger.

Income Taxes

During the year ended December 31, 2007 income tax expense of approximately $1.2 million was recorded due to the utilization of a portion of net operating losses associated with a prior acquisition. Because there was a valuation allowance established in purchase accounting, subsequent usage of net operating losses in fiscal year 2007 resulted in a decrease to goodwill and an offsetting increase in income tax expense.

Year Ended December 31, 2006 versus Year Ended December 31, 2005

Revenue

Revenue increased by $31.7 million for the year ended December 31, 2006, when compared to the prior year. The majority of the increase resulted from an increased number of graduates acquired during the year. The increase in graduates was primarily due to an increased number of preview events, improved rates of customer response, and improved sales efforts. We also increased our internal sales force and received more sales leads, due to the increased volume of events. The increase is also attributable to improved sales percentages, sales mix of continuing education products, partner pricing initiatives and sales performance results from workshops and telesales teams. In addition, during 2006, the Company recorded sales related to the Investools investor conference held in the first quarter of 2006. There was no investor conference held during 2005.

In addition, during 2006, the Company introduced online courses as a replacement to the hardcopy course materials that were previously distributed to graduates. This change impacted the corresponding revenue recognition, given the Company ceased delivering hard copy course manuals which were recognized upon delivery, and began the fulfillment of education via online courses which are deferred and recognized over the estimated life of the subscription.

Change in Deferred Revenue

Change in deferred revenue increased $44.9 million for the year ended December 31, 2006, when compared to the prior year. This was due to the combination of products and services sold during the current year, as well as the mix of products that existed in our deferred revenue liability account. The change in deferred revenue is made up of two components. The increase was a result of increased sales of continuing education products, which include coaching sessions, advanced workshops and webtime

subscription renewals. During 2005, the Company introduced the online delivery format for all of its education courses. Sales of online courses are deferred for recognition over the estimated life of the customer relationship, and . . .