The following discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements involving risks and uncertainties. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as "expect," "may," "anticipate," "intend," "plan" and similar expressions. Our actual results could differ materially from those discussed in these forward-looking statements, and we caution that we do not undertake to update these statements. Factors that could contribute to our actual results differing from any forward-looking statements include those discussed under "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report. The cautionary statements made in this report should be read as being applicable to all forward-looking statements wherever they appear in this report. Important factors that may cause actual results to differ materially from any forward-looking statements are set forth in our 2008 Form 10-K filed with the Securities and Exchange Commission ("SEC") under the heading "Risk Factors," as well as the factors set forth in or incorporated by reference in this report under Part II, Item 1A "Risk Factors".

We further caution that there may be risks associated with owning our securities other than those discussed in such filings.

GLOSSARY OF TERMS

In analyzing and discussing our business, we utilize certain metrics, ratios and other terms that are defined in the "Glossary of Terms," which is located at the end of Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

OVERVIEW

Strategy

Our core business is our trading and investing customer franchise. Our strategy is designed to profitably grow this business by focusing on several key factors. These key factors include development of innovative online brokerage products and services, a concerted effort to deliver superior customer service, creative and cost-effective marketing and sales, and expense discipline. In addition, we have and continue to invest significantly for long-term growth so that we remain competitive among the largest online brokers. We believe our focus on these key factors will lead to continued growth in our core business.

In addition to focusing on our customer franchise, our strategy includes an intense focus on addressing the balance sheet issues caused by the mortgage crisis. We are focused primarily on improving our capital structure as well as mitigating the credit losses inherent in our loan portfolio. We believe the recapitalization transactions executed in the second and third quarters of 2009 significantly improve our capital structure and better position the Company for future growth in the online brokerage business.

Key Factors Affecting Financial Performance

Our financial performance is affected by a number of factors outside of our control, including:

• customer demand for financial products and services;

• the weakness or strength of the residential real estate and credit markets;

• the performance, volume and volatility of the equity and capital markets;

• customer perception of the financial strength of our franchise;

• market demand and liquidity in the secondary market for mortgage loans and securities; and

• market demand and liquidity in the wholesale borrowings market, including securities sold under agreements to repurchase.

In addition to the items noted above, our success in the future will depend upon, among other things:

• continuing our success in the acquisition, growth and retention of brokerage customers;

• our ability to assess and manage credit risk;

• our ability to generate capital sufficient to meet our operating needs, particularly at a level sufficient to offset loan losses;

• our ability to assess and manage interest rate risk; and

• disciplined expense control and improved operational efficiency.

Management monitors a number of metrics in evaluating the Company's performance. The most significant of these are shown in the table and discussed in the text below:

                                         As of or For the                                            As of or For the
                                        Three Months Ended                                          Nine Months Ended
                                          September 30,                   Variance                    September 30,                   Variance
                                     2009               2008            2009 vs. 2008            2009               2008            2009 vs. 2008
Customer Activity Metrics:
Daily average revenue trades          196,413            183,691                    7 %           204,143            178,814                   14 %
Average commission per trade      $     11.50        $     11.10                    4 %       $     11.05        $     11.07                   (0 )%
End of period brokerage
accounts                            2,729,137          2,520,102                    8 %         2,729,137          2,520,102                    8 %
Customer assets (dollars in
billions)                         $     148.7        $     142.2                    5 %       $     148.7        $     142.2                    5 %
Net new customer assets
(dollars in billions)(1)          $      (0.2 )      $       0.8                    *         $       4.2        $       2.0                    *
Brokerage related cash
(dollars in billions)             $      20.3        $      17.7                   15 %       $      20.3        $      17.7                   15 %
Other customer cash and
deposits (dollars in
billions)                                14.2               15.7                  (10 )%             14.2               15.7                  (10 )%

Customer cash and deposits
(dollars in billions)             $      34.5        $      33.4                    3 %       $      34.5        $      33.4                    3 %

Company Financial Metrics:
Corporate cash (dollars in
millions)                         $     501.1        $     665.6                  (25 )%      $     501.1        $     665.6                  (25 )%
E*TRADE Bank excess
risk-based capital (dollars
in millions)                      $     985.4        $     523.9                   88 %       $     985.4        $     523.9                   88 %
Allowance for loan losses
(dollars in millions)             $   1,214.5        $     874.2                   39 %       $   1,214.5        $     874.2                   39 %
Allowance for loan losses as
a % of nonperforming loans              82.37 %           109.45 %             (27.08 )%            82.37 %           109.45 %             (27.08 )%
Enterprise net interest
spread (basis points)                     282                263                    7 %               269                261                    3 %
Enterprise interest-earning
assets (average in billions)      $      44.3        $      46.6                   (5 )%      $      44.7        $      47.7                   (6 )%

* Percentage not meaningful

(1) For the nine months ended September 30, 2008, net new customer assets were $2.9 billion excluding the sale of Retirement Advisors of America ("RAA").

Customer Activity Metrics

• Daily average revenue trades ("DARTs") are the predominant driver of commissions revenue from our customers.

• Average commission per trade is an indicator of changes in our customer mix, product mix and/or product pricing. As a result, this metric is impacted by both the mix between our domestic and international businesses and the mix between active traders, mass affluent and main street customers.

• End of period brokerage accounts are an indicator of our ability to attract and retain trading and investing customers.

• Changes in customer assets are an indicator of the value of our relationship with the customer. An increase in customer assets generally indicates that the use of our products and services by existing and new customers is expanding. Changes in this metric are also driven by changes in the valuations of our customers' underlying securities, which declined substantially towards the end of 2008 and into 2009.

• Net new customer assets are total inflows to all new and existing customer accounts less total outflows from all closed and existing customer accounts and are a general indicator of the use of our products and services by existing and new customers.

• Customer cash and deposits, particularly our brokerage related cash, are an indicator of a deepening engagement with our customers and are a key driver of net operating interest income.

Company Financial Metrics

• Corporate cash is an indicator of the liquidity at the parent company. It is also a source of cash that can be deployed in our regulated subsidiaries.

• E*TRADE Bank excess risk-based capital is the excess capital that E*TRADE Bank has compared to the regulatory minimum well-capitalized threshold and is an indicator of E*TRADE Bank's ability to absorb future loan losses.

• Allowance for loan losses is an estimate of the losses inherent in our loan portfolio as of the balance sheet date and is typically equal to the expected charge-offs in our loan portfolio over the next twelve months as well as the estimated charge-offs, including economic concessions to borrowers, over the estimated remaining life of loans modified in troubled debt restructurings.

• Allowance for loan losses as a percentage of nonperforming loans is a general indicator of the adequacy of our allowance for loan losses. Changes in this ratio are also driven by changes in the mix of our loan portfolio.

• Enterprise net interest spread is a broad indicator of our ability to generate net operating interest income.

• Enterprise interest-earning assets, in conjunction with our enterprise net interest spread, are indicators of our ability to generate net operating interest income.

Significant Events in the Third Quarter of 2009

Completion of Our Previously Announced $1.7 Billion Debt Exchange

• We obtained shareholder approval for and completed an offer to exchange $1.7 billion aggregate principal amount of our corporate debt, including $1.3 billion principal amount of our 12 1/2% springing lien notes due 2017 ("12 1/2% Notes") and $0.4 billion principal amount of our 8% Senior Notes due 2011 ("8% Notes"), for an equal principal amount of newly-issued non-interest-bearing convertible debentures ("Debt Exchange");

• As a result of the Debt Exchange, we reduced our annual corporate interest payments from approximately $360 million to approximately $160 million and eliminated any substantial debt maturities until 2013; and

Conversions of the Newly-Issued Convertible Debentures into Equity

• The newly-issued non-interest-bearing convertible debentures are convertible into shares of our common stock at any time at the election of the holder; and

• As of September 30, 2009, $592.3 million principal amount, or 34%, of the convertible debentures had been converted into 572.2 million shares of our common stock(1).

Launched and Completed an At the Market Common Stock Offering

• We raised $150 million in gross proceeds ($147 million in net proceeds) from our common stock offering that was launched and completed in September 2009 (the "At the Market Offering") in which a total of 80.2 million shares of common stock were issued; and

• The completion of the At the Market Offering brings our total cash equity raised during the second and third quarters of 2009 to $765 million of gross proceeds ($733.2 million in net proceeds).

Summary Financial Results

Income Statement Highlights for the Three and Nine Months Ended September 30,
2009 (dollars in millions, except per share amounts)



                                     Three Months Ended                                 Nine Months Ended
                                        September 30,             Variance                September 30,              Variance
                                     2009           2008        2009 vs. 2008          2009           2008         2009 vs. 2008
Net operating interest income      $   321.4      $  324.8                 (1 )%    $    939.6      $   993.9                 (5 )%
Commissions                        $   144.5      $  129.5                 12 %     $    424.2      $   374.0                 13 %
Fees and service charges           $    50.4      $   49.6                  2 %     $    145.0      $   155.5                 (7 )%
Principal transactions             $    24.9      $   20.7                 20 %     $     65.2      $    59.5                 10 %
Gains (losses) on loans and
securities, net                    $    42.0      $ (141.9 )                *       $    150.4      $  (122.4 )                *
Net impairment                     $   (19.2 )    $  (17.9 )                *       $    (67.7 )    $   (61.6 )                *
Other revenues                     $    11.4      $   13.0                (12 )%    $     36.7      $    40.3                 (9 )%
Total net revenue                  $   575.3      $  377.7                 52 %     $  1,693.6      $ 1,439.2                 18 %
Provision for loan losses          $   347.2      $  517.8                (33 )%    $  1,205.7      $ 1,070.8                 13 %
Total operating expense            $   301.7      $  295.9                  2 %     $    924.9      $   968.8                 (5 )%
Operating margin                   $   (73.6 )    $ (436.0 )                *       $   (437.1 )    $  (600.4 )                *

Net loss from continuing
operations                         $  (831.7 )    $ (320.8 )                *       $ (1,207.6 )    $  (533.2 )                *
Less: net loss on the Debt
Exchange                              (772.9 )          -                   *           (772.9 )           -                   *

Net loss from continuing
operations excluding the Debt
Exchange(2)                        $   (58.8 )    $ (320.8 )                *       $   (434.7 )    $  (533.2 )                *

Diluted net loss per share from
continuing operations              $   (0.66 )    $  (0.60 )                *       $    (1.45 )    $   (1.07 )                *
Less: diluted net loss per share
on the Debt Exchange                   (0.61 )          -                   *            (0.93 )           -                   *

Diluted net loss per share from
continuing operations excluding
the Debt Exchange(2)               $   (0.05 )    $  (0.60 )                *       $    (0.52 )    $   (1.07 )                *

* Percentage not meaningful

(1) As of October 26, 2009, a total of $688.2 million of the convertible debentures had been converted into 664.9 million shares of common equity.

(2) Net loss excluding the non-cash charge on the Debt Exchange represents net loss plus the non-cash charge on the Debt Exchange, net of tax and is a non-GAAP measure. Loss per share excluding the non-cash charge on the Debt Exchange represents net loss plus the non-cash charge on the Debt Exchange, net of tax, divided by diluted shares and is a non-GAAP measure. Management believes that excluding the non-cash charge associated with the Debt Exchange from net loss and loss per share provides a useful additional measure of the Company's ongoing operating performance because the charge is not directly related to our performance and is non-recurring. The reconciliation of these non-GAAP measures is provided in the table above.

During the third quarter of 2009, our brokerage business continued to perform very well, increasing the level of income generated in the trading and investing segment as well as achieving record levels of brokerage accounts. This strong performance was more than offset by the provision for loan losses reported in our balance sheet management segment. Although we expect our provision for loan losses to continue at historically high levels in future periods, the level of provision for loan losses in the third quarter of 2009 represents the fourth consecutive quarter in which the provision for loan losses has declined when compared to the prior quarter. While we cannot state with certainty that this trend will continue, we believe it is a positive indicator that our loan portfolio may be stabilizing.

We also continued to make significant progress during the third quarter of 2009 on our comprehensive plan to strengthen the Company's capital structure. We obtained shareholder approval for and completed an offer to exchange $1.7 billion aggregate principal amount of our corporate debt, including $1.3 billion principal amount of the 12 1/2% Notes and $0.4 billion principal amount of the 8% Notes, for an equal principal amount of newly-issued non-interest-bearing convertible debentures. The Debt Exchange resulted in a $968.3 million pre-tax non-cash loss on extinguishment of debt and an increase to additional paid-in capital of $707.5 million during the third quarter of 2009. The net effect of the Debt Exchange to shareholders' equity was a reduction of $65.4 million(1). As a result of the completion of this exchange, we reduced our annual corporate interest payments from approximately $360 million to approximately $160 million and eliminated any substantial debt maturities until 2013.

In addition to the Debt Exchange, we successfully raised an additional $147.0 million in net proceeds from our At the Market Offering. The completion of this offering brings our total cash equity raised during the second and third quarters of 2009 to $765 million of gross proceeds (net proceeds of $733.2 million).

Balance Sheet Highlights (dollars in millions)



                                          September 30,          December 31,           Variance
                                              2009                   2008             2009 vs. 2008
Total assets                             $      48,487.0        $     48,538.2                   (0 )%
Less: Goodwill and other
intangibles, net                                (2,316.2 )            (2,324.5 )                 (0 )%
Add: Deferred tax liability related
to goodwill                                        158.1                 127.7                   24 %

Tangible assets(2)                       $      46,328.9        $     46,341.4                   (0 )%

Loans, net                               $      20,260.0        $     24,451.9                  (17 )%
Corporate debt(3)
Interest-bearing                         $       1,537.0        $      3,150.4                  (51 )%
Non-interest-bearing                     $       1,149.6        $           -                     *
Shareholders' equity                     $       3,645.9        $      2,591.5                   41 %
Less: Goodwill and other
intangibles, net                                (2,316.2 )            (2,324.5 )                 (0 )%
Add: Deferred tax liability related
to goodwill                                        158.1                 127.7                   24 %

Tangible common equity(4)                $       1,487.8        $        394.7                  277 %

Tangible common equity to tangible
assets(5)                                           3.21 %                0.85 %               2.36 %

* Percentage not meaningful

(1) For further details regarding the loss on extinguishment of debt, see "Earnings Overview" in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Note 1-Organization, Basis of Presentation and Summary of Significant Accounting Policies and Note 9-Corporate Debt of Item 1. Consolidated Financial Statements (Unaudited).

(2) Tangible assets is calculated as total assets less goodwill, net of related deferred tax liability and intangible assets and is a non-GAAP measure. Management believes that tangible assets is a measure of the Company's capital strength and is additional useful information that supplements the regulatory capital ratios of E*TRADE Bank.

(3) The corporate debt balances represent the amount of principal outstanding.

(4) Tangible common equity is calculated as shareholders' equity less goodwill, net of related deferred tax liability and intangible assets and is a non-GAAP measure. Management believes that tangible common equity is a measure of the Company's capital strength and is additional useful information that supplements the regulatory capital ratios of E*TRADE Bank.

(5) Tangible common equity to tangible assets is calculated as shareholders' equity less goodwill, net of related deferred tax liability and intangible assets divided by total assets less goodwill, net of related deferred tax liability and intangible assets and is a non-GAAP measure. Management believes that tangible common equity to tangible assets is a measure of the Company's capital strength and is additional useful information that supplements the regulatory capital ratios of E*TRADE Bank.

During the third quarter of 2009, we exchanged $1.7 billion principal amount of our interest-bearing debt for an equal principal amount of non-interest-bearing convertible debentures. Subsequent to the Debt Exchange, $592.3 million debentures were converted into 572.2 million shares of common stock during the quarter ended September 30, 2009. The considerable increase in tangible common equity during the period was a result of the common stock issued in connection with our equity offerings and the debt conversions that occurred in the third quarter of 2009.

EARNINGS OVERVIEW

We incurred a net loss of $831.7 million and $1.2 billion for the three and nine months ended September 30, 2009, respectively. The net loss for the three and nine months ended September 30, 2009 was due principally to the Debt Exchange that resulted in a non-cash loss of $772.9 million (pre-tax loss of $968.3 million) on early extinguishment of debt during the third quarter of 2009. Our brokerage business continued to perform very well, resulting in trading and investing segment income of $202.5 million and $502.8 million for the three and nine months ended September 30, 2009, respectively. However, the provision for loan losses in our balance sheet management segment more than offset this strong performance, resulting in an overall segment loss of $276.1 million and $939.8 million for the three and nine months ended September 30, 2009, respectively.

On April 1, 2009, we adopted the amended guidance for the recognition of other-than-temporary impairment ("OTTI") for debt securities as well as the presentation of OTTI on the consolidated financial statements. As a result of the adoption, we recognized a $20.2 million after-tax increase to beginning retained earnings and a corresponding offset in accumulated other comprehensive loss on our consolidated balance sheet. This adjustment represents the after-tax difference between the impairment reported in prior periods for securities on our balance sheet as of April 1, 2009 and the level of impairment that would have been recorded on these same securities under the new accounting guidance. Additionally, in accordance with the new guidance, we changed the presentation of the consolidated statement of loss to state "Net impairment" as a separate line item, as well as the credit and noncredit components of net impairment. Prior to this new presentation, OTTI was included in the "Gains (losses) on loans and securities, net" line item on the consolidated statement of loss.

During the third quarter of 2009, we added a new operating expense line item to the consolidated statement of loss for Federal Deposit Insurance Corporation ("FDIC") insurance premiums. During the nine months ended September 30, 2009, these expenses increased to a level at which we believe a separate line item on the consolidated statement of loss is appropriate. FDIC insurance premium expenses were previously presented in the "Other operating expenses" line item.

We report corporate interest income and corporate interest expense separately from operating interest income and operating interest expense. We believe reporting these two items separately provides a clearer picture of the financial performance of our operations than would a presentation that combined these two items. Our operating interest income and operating interest expense is generated from the operations of the Company. Our corporate debt, which is the primary source of our corporate interest expense, has been issued primarily in connection with our transaction with Citadel Investment Group LLC and its affiliates ("Citadel") in 2007 and past acquisitions, such as Harrisdirect and BrownCo.

Similarly, we report gains (losses) on sales of investments, net separately from gains (losses) on loans and securities, net. We believe reporting these two items separately provides a clearer picture of the financial performance of our operations than would a presentation that combined these two items. Gains (losses) on loans and securities, net are the result of activities in our operations, namely our balance sheet management segment. Gains (losses) on sales of investments, net relate to historical equity investments of the Company at the corporate level and are not related to the ongoing business of our operating subsidiaries.

The following sections describe in detail the changes in key operating factors and other changes and events that have affected our consolidated revenue, provision for loan losses, operating expense, other income (expense) and income tax benefit.

Revenue

The components of net revenue and the resulting variances are as follows
(dollars in thousands):



                                     Three Months Ended               Variance                 Nine Months Ended                Variance
                                        September 30,              2009 vs. 2008                 September 30,                2009 vs. 2008
                                    2009            2008          Amount         %           2009             2008           Amount        %
Revenue:
. . .