Edgar Filing: E TRADE GROUP INC

Annual Report on Form 10-K

Index to Financial Statements

UNITED STATES

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, 2002.

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .

Commission file number 1-11921

E*TRADE Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware

94-2844166

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification Number)

4500 Bohannon Drive, Menlo Park, CA 94025

(Address of principal executive offices and zip code)

(650) 331-6000

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class

Common Stock—$0.01 par value

Securities Registered Pursuant to Section 12(g) of the Act:

None

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. x

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

As of June 28, 2002, the aggregate market value of voting stock, comprised of the registrant’s common stock and shares exchangeable into common stock, held by nonaffiliates of the registrant was approximately $1,783,507,000 (based upon the closing price for shares of the registrant’s common stock as reported by the New York Stock Exchange on that date). Shares of common stock held by each officer, director and holder of 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of June 28, 2002, there were 368,384,496 shares of common stock and 1,661,744 shares exchangeable into common stock outstanding. The Exchangeable Shares, which were issued by EGI Canada Corporation in connection with the acquisition of VERSUS Technologies, Inc. (renamed E*TRADE Technologies Corporation effective January 2, 2001), are exchangeable at any time into common stock on a one-for-one basis and entitle holders to dividend, voting and other rights equivalent to holders of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Definitive Proxy Statement relating to the Company’s Annual Meeting of Shareholders to be held May 22, 2003, to be filed hereafter (incorporated into Part III hereof).

Index to Financial Statements

E*TRADE GROUP, INC.

FORM 10-K ANNUAL REPORT

For the Fiscal Year ended December 31, 2002

TABLE OF CONTENTS

		Page
PART I

Item 1.	Business	1

	Overview	1

	Domestic Retail Brokerage	2

	Banking	3

	Required Financial Data	4

	Global and Institutional	17

	Competition	18

	Regulation	18

Item 2.	Properties	19

Item 3.	Legal and Administrative Proceedings	19

Item 4.	Submission of Matters to a Vote of Security Holders	22

PART II

Item 5.	Market for Registrant’s Common Equity and Related Shareholder Matters	23

Item 6.	Selected Consolidated Financial Data	25

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

	Forward-Looking Statements	26

	Overview	26

	Summary of Critical Policies and Estimates	27

	Results of Operations	31

	Liquidity and Capital Resources	44

	Impact of Recently Issued Accounting Pronouncements	50

	Risk Factors	51

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	58

Item 8.	Consolidated Financial Statements and Supplementary Data	62

	Independent Auditors’ Report	63

	Report of Independent Public Accountants	64

	Consolidated Balance Sheets as of December 31, 2002 and 2001	65

	Consolidated Statements of Operations for the Years Ended December 31, 2002 and 2001, Three Months Ended December 31, 2000 and Year Ended September 30, 2000	66

	Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2002 and 2001, Three Months Ended December 31, 2000 and Year Ended September 30, 2000	67

	Consolidated Statements of Cash Flows for the Years Ended December 31, 2002 and 2001, Three Months Ended December 31, 2000 and Year Ended September 30, 2000	70

	Notes to Consolidated Financial Statements:

	Note 1—Organization and Basis of Presentation	72

	Note 2—Summary of Significant Accounting Policies	73

	Note 3—Business Combinations	83

	Note 4—Brokerage Receivables, Net and Brokerage Payables	88

	Note 5—Mortgage-Backed Securities, Available-for-Sale	89

	Note 6—Loans Receivable, Net	90

	Note 7—Investments	92

	Note 8—Property and Equipment, Net	99

	Note 9—Other Assets	100

Index to Financial Statements

		Page

	Note 10—Asset Securitization—Collateralized Debt Obligation	100

	Note 11—Related Party Transactions	102

	Note 12—Deposits	104

	Note 13—Borrowings by Bank Subsidiary	105

	Note 14—Subordinated Debt	106

	Note 15—Accounts Payable, Accrued, Other Liabilities and Short-Term Borrowings	107

	Note 16—Company-Obligated Redeemable Capital Securities	108

	Note 17—Income Taxes	109

	Note 18—Accumulated Other Comprehensive Loss	111

	Note 19—Shareholders’ Equity	111

	Note 20—Employee Benefit Plans	112

	Note 21—Facility Restructuring and Other Exit Charges	116

	Note 22—Executive Agreement and Loan Settlement	119

	Note 23—Cumulative Effect of Accounting Change, Goodwill and Intangible Assets	120

	Note 24—Income (Loss) Per Share	122

	Note 25—Regulatory Requirements	123

	Note 26—Lease Arrangements	125

	Note 27—Commitments, Contingencies and Other Regulatory Matters	126

	Note 28—Accounting for Derivative Financial Instruments and Hedging Activities	129

	Note 29—Fair Value Disclosure of Financial Instruments	132

	Note 30—Segment and Geographic Information	133

	Note 31—Condensed Financial Information (Parent Company Only)	135

	Note 32—Subsequent Event	138

	Note 33—Quarterly Data (Unaudited)	139

Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	139

PART III

Item 10.	Directors and Executive Officers of the Registrant	140

Item 11.	Executive Compensation	140

Item 12.	Security Ownership of Certain Beneficial Owners and Management	140

Item 13.	Certain Relationships and Related Transactions	140

Item 14.	Evaluation of Disclosure Controls and Procedures	140

PART IV

Item 15.	Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K	140

Exhibit Index		141

Signatures		145

Certifications		146

The page numbers in this Table of Contents reflect actual page numbers, not EDGAR page tag numbers.

Unless otherwise indicated, references to “the Company,” “We,” and “E*TRADE” mean E*TRADE Group, Inc. and/or its subsidiaries. Prior to and including September 30, 2000, references to “Fiscal” mean the Company’s year ended September 30 (e.g., “Fiscal 2000” represents the period from October 1, 1999 to September 30, 2000). Subsequent to September 30, 2000, references to “Fiscal” mean the Company’s year ended December 31 (e.g., “Fiscal 2001” represents the period from January 1, 2001 to December 31, 2001).

E*TRADE, the E*TRADE logo, etrade.com, E*TRADE Bank, ClearStation, Equity Edge, Equity Resource, OptionsLink and E*TRADE FINANCIAL, are trademarks or registered trademarks of E*TRADE Group, Inc. or its subsidiaries in the United States. Some of these and other trademarks are also registered outside the United States.

Index to Financial Statements

PART I

Item 1. Business

OVERVIEW

E*TRADE Group, Inc. is a diversified financial services company that offers a wide range of financial products and services under the brand “E*TRADE Financial.” Our core strategy is to create value for customers and competitive advantage by utilizing technology to provide brokerage, banking and lending products, primarily through electronic delivery channels. We offer products and services to retail, corporate and institutional customers, and operate in multiple countries around the world. Retail customers can move money electronically between brokerage, banking and lending accounts and have access to physical touchpoints that include E*TRADE Centers in selected cities and over 15,000 E*TRADE automated teller machines (“ATMs”) located throughout the United States. Corporate clients utilize our employee stock plan administration and options management tools. Institutional customers enjoy access to a broad range of brokerage products and services, including cross-border trading and independent research.

We divide our business into four segments—Domestic Retail Brokerage, Wealth Management, which is combined with Domestic Retail Brokerage, Banking and Global and Institutional.

E*TRADE’s Domestic Retail Brokerage segment includes online investing and trading; automated order placement and execution of market and limit equity orders; streaming quotes; advanced trading platforms for active traders; personalized portfolio tracking; charting and quote applications; access to nearly 3,000 non-proprietary and proprietary mutual funds; bond trading and proprietary bond funds; access to separate account money management; individual retirement accounts; college savings plan products; and real-time market commentary, real-time quotes and news.

E*TRADE’s Wealth Management segment includes mutual fund operations, the E*TRADE Business Solutions Group, Inc. (“BSG”) and other services focused on retirement and 401(k) rollover programs, college savings plans, delivery of electronic advice and money management, tiered product offerings and activities generated from corporate operations. Our Wealth Management business currently is not material to our consolidated results and has characteristics comparable to the offerings of other retail brokerage firms; accordingly we have aggregated Wealth Management with Domestic Retail Brokerage.

E*TRADE’s Banking segment offers a range of Federal Deposit Insurance Corporation (“FDIC”) insured products, including certificates of deposit, money market and savings accounts and interest-bearing checking accounts. Services also include a range of lending products, including first and second variable and fixed rate mortgages, home equity loans and other consumer loans to finance automobiles, marine and recreational vehicles.

E*TRADE’s Global and Institutional segment provides online retail brokerage services to international retail customers and financial services to institutional investors.

For further discussion on our segments, see Note 30 of Item 8. Consolidated Financial Statements and Supplementary Data.

E*TRADE’s corporate offices are located at 4500 Bohannan Drive, Menlo Park, California 94025. We also maintain significant corporate and operational offices in Arlington, Virginia and New York City, New York and major administrative facilities near Sacramento, California and Atlanta, Georgia. Finally we maintain significant operational facilities in Orange County, California and Chicago, Illinois. E*TRADE was incorporated in California in 1982 and reincorporated in Delaware in July 1996. We have approximately 3,500 employees. Our website address is http://www.etrade.com. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments to the forgoing, available free of charge at our website as soon as reasonably practicable after they have been filed with the Securities and Exchange Commission (“SEC”).

Index to Financial Statements

DOMESTIC RETAIL BROKERAGE

Our Domestic Retail Brokerage business is primarily comprised of the activities of E*TRADE Securities, LLC (“E*TRADE Securities”), an SEC registered broker-dealer, its securities clearing firm, E*TRADE Clearing LLC (“E*TRADE Clearing”) a member of the New York Stock Exchange (“NYSE”), Dempsey & Company, LLC, (“Dempsey”) a specialist and market-making firm and E*TRADE Professional Trading, LLC (“E*TRADE Professional Trading”), a direct access brokerage firm for active online traders. E*TRADE completed its acquisitions of Dempsey and E*TRADE Professional Trading in fiscal 2001 and fiscal 2002, respectively.

Products and Services. Domestic Retail Brokerage services are based upon proprietary transaction-enabling technology and are designed to serve the needs of self-directed investors. Our services include: fully-automated stock, option, fixed income and mutual fund order processing; online investment portfolio tracking; and providing financial market news and information. We offer our services to customers 24 hours a day, seven days a week through the Internet, automated telephone service, Internet-enabled wireless devices, direct modem access and live telephone representatives.

Customers can access us in person at any one of our E*TRADE Financial Centers or E*TRADE Financial Zones for help in opening a new account or guidance with an existing account. E*TRADE Financial Centers in New York City, San Francisco, Beverly Hills, Boston and Denver offer personal access to our team of licensed relationship specialists. The Centers offer a full suite of services for investors to open an account and review available products. Existing customers can use self service kiosks to access their accounts, make deposits to brokerage accounts, place trades or use our ATMs. E*TRADE Financial Zones are located in Super Target stores and offer ATM access to customers and certain brokerage services. Customers can also speak with a relationship specialist to receive help with their accounts, make deposits to brokerage accounts and learn about our full line of products and services.

Market-Making Activities. Market-making activities in listed and over-the-counter issues are conducted by Dempsey, a Chicago Stock Exchange specialist. A specialist is a broker-dealer authorized by an exchange to be a party through which all trading on the floor of the exchange is transacted. Trading gains and losses result from these activities. While a significant portion of security trades originated by the clients of E*TRADE Securities are directed to Dempsey, a large percentage of Dempsey’s trading volume comes from parties other than E*TRADE Securities. Dempsey is also a member of the Boston Stock Exchange and the Cincinnati Stock Exchange. A wholly-owned Dempsey subsidiary is a market maker in the National Market System (“Nasdaq”) and bulletin board securities. Dempsey is also a clearing member of the National Securities Clearing Corporation. GVR Company, LLC (“GVR”) is a wholly-owned subsidiary of Dempsey. GVR is a broker-dealer registered with the SEC, a member of the NASD, and a clearing member of the National Securities Clearing Corporation. GVR operates as a market-maker in over-the-counter equity securities, primarily those traded on the Nasdaq and on the OTC Bulletin Board.

Clearing Operations. Clearing operations include the confirmation, receipt, settlement, custody and delivery functions involved in securities transactions. Performing our own clearing operations allows E*TRADE Clearing to retain customer free credit balances and securities for use in margin lending activities subject to Regulation T and the New York Stock Exchange Rule 431. E*TRADE Clearing has an agreement with BETA Systems, through January 2006, for the provision of computer services to support order entry, order routing, securities processing, customer statement preparation, tax reporting, regulatory reporting and other services necessary to manage a brokerage clearing business.

On August 30, 2002, E*TRADE Securities, Incorporated was reorganized and renamed E*TRADE Securities, LLC. Also, on September 3, 2002, E*TRADE Clearing LLC became the clearing firm for E*TRADE Securities. E*TRADE Clearing (formerly E*TRADE Institutional Securities, Inc.) is a wholly-owned indirect subsidiary of the Company. In connection with the above, all cash balances and security positions in customer accounts previously maintained by E*TRADE Securities and associated liabilities were transferred to E*TRADE

Index to Financial Statements

Clearing on September 3, 2002, and E*TRADE Clearing began performing clearance and settlement services for cash and margin accounts of customers of E*TRADE Securities.

The clearing arrangement involves a sharing of responsibilities pursuant to a written contract between E*TRADE Clearing, as clearing broker, and E*TRADE Securities, as introducing broker. As introducing broker, E*TRADE Securities is responsible for contact with customers, including opening customer accounts, responding to general customer inquiries and placing customer orders with E*TRADE Clearing. As clearing broker, E*TRADE Clearing provides back office functions, including centralized cashiering, settlement of securities transactions with clearing houses, preparing customer trade confirmations and statements, safeguarding funds and securities in customer accounts and extending credit to margin customers and other services.

Margin Lending. We make margin loans to customers that are exclusively collateralized by customer securities. Our margin lending is subject to the margin rules of the Board of Governors of the Federal Reserve System, NYSE margin requirements and our internal policies, which are more stringent than the Federal Reserve and NYSE requirements. In permitting customers to purchase securities on margin, we take the risk of a market decline that could reduce the value of the collateral held by us below the customers’ indebtedness before the collateral can be sold, which could result in losses to us.

Securities Lending and Borrowing. We borrow securities both to cover customer short sales and to complete customer transactions in the event a customer fails to deliver securities by the required settlement date. We collateralize such borrowings by depositing cash or securities with the lender and receive a rebate (in the case of cash collateral) or pay a fee calculated to yield a negotiated rate of return. When lending securities, we receive cash or securities and generally pay a rebate (in the case of cash collateral) to the other party in the transaction. Securities lending and borrowing transactions are generally conducted pursuant to written and/or oral agreements with counterparties requiring that the securities borrowed be “marked-to-market” on a daily basis through the facilities of the various national clearing organizations.

BANKING

We offer retail banking products and services through E*TRADE Bank (the “Bank”), which is the nation’s eighth largest Office of Thrift Supervision (“OTS”) regulated financial institution based on total assets as of December 31, 2002. Our branchless structure permits us to serve customers nationwide. The Bank has three primary subsidiaries, E*TRADE Access, Inc. (“E*TRADE Access”), which operates an independent network of ATMs in the United States and Canada, E*TRADE Mortgage Corporation (“E*TRADE Mortgage”), a direct to consumer mortgage loan originator and Ganis Credit Corporation (“Ganis”), a consumer recreational vehicle (“RV”), marine and other consumer loan originator.

Products and Services. The Bank offers a full suite of consumer banking products and services, which are delivered through the Internet, telephone and ATMs. We offer interest checking accounts, money market and savings accounts and certificates of deposit. We also offer first- and second-lien residential mortgage loans, home equity loans and home equity lines of credit (“HELOC”) through E*TRADE Mortgage. Customers can access E*TRADE Mortgage by way of telephone, e-mail or through a proprietary “web chat” system. We also offer RV, marine and other consumer loans by telephone and online. In September 2002, we began offering proprietary credit cards on a limited basis.

In 2002, E*TRADE Mortgage originated approximately $6.2 billion in mortgages, which were generally resold to other institutions. E*TRADE Mortgage originated $0.4 billion in HELOCs, which were transferred to the Bank portfolio. We also purchased $5.9 billion in mortgage loans through our correspondent network in 2002.

Index to Financial Statements

REQUIRED FINANCIAL DATA

The data presented below is provided in compliance with the SEC’s Industry Guide 3, “Statistical Disclosure by Bank Holding Companies.” Prior to its January 2000 acquisition by E*TRADE, the Bank reported its results of operations on a calendar year basis. Prior to 2001, E*TRADE reported on a fiscal year ending September 30. The financial information below for fiscal 1998 includes the results of the Bank for the twelve-month period ended December 31.

Lending Activities

General. We offer first- and second-lien residential mortgage loans, home equity loans and HELOCs through E*TRADE Mortgage; RV, marine and other consumer loans through Ganis; and we purchase pools of mortgage, automobile and RV loans in the secondary market.

Loan Portfolio Composition. At December 31, 2002, our net loans receivable, including loans held-for-sale, totaled $7.4 billion or 43% of total bank assets, of which approximately $3.4 billion, or 47% consisted of one- to four-family residential mortgage loans. Automobiles, RV and marine loans amounted to $3.3 billion or 46% of our total gross loan portfolio. Multi-family, commercial, mixed-use real estate, home equity lines of credit, second mortgage loans and other loans amounted to $521 million, or 7%, of our total gross loan portfolio. During the third quarter of fiscal 2002, the Bank reclassified a portion of its held-for-investment loans to held-for-sale to reposition the portfolio for the future sale of these loans, consistent with our plan to achieve a more diversified loan portfolio through the future purchase and acquisition of consumer loans. During the fourth quarter of fiscal 2002, the Bank acquired $1.9 billion of consumer loans as a result of the purchase of Ganis.

Index to Financial Statements

The following table presents information concerning our banking loan portfolio, in dollar amounts and in percentages, by type of loan (dollars in thousands):

	December 31, 2002			%		December 31, 2001			%		September 30, 2000			%		September 30, 1999			%		September 30, 1998			%
Real estate loans:
One- to four-family fixed-rate	$	1,877,265		26.05	%	$	3,672,512		45.95	%	$	1,583,129		37.45	%	$	1,391,254		63.69	%	$	466,850		50.76	%
One- to four-family adjustable-rate		1,502,224		20.86			2,645,952		33.11			2,635,955		62.36			785,821		35.98			430,319		46.79
Home equity lines of credit and second mortgage loans		354,768		4.93			23,059		0.29			4,042		0.10			1,024		0.05			5,895		0.64
Multi-family		106		—			183		—			203		0.01			1,330		0.06			3,223		0.35
Commercial		13,397		0.19			1,981		0.03			2,717		0.06			3,050		0.14			8,916		0.97
Mixed-use		121		—			635		0.01			503		0.01			945		0.04			929		0.10
Land		—		—			—		—			—		—			279		0.01			316		0.03

Total real estate loans(1)		3,747,881		52.03			6,344,322		79.39			4,226,549		99.99			2,183,703		99.97			916,448		99.64

Consumer and other loans:
Automobiles loans		1,481,695		20.57			1,436,407		17.97			224		0.01			430		0.02			2,758		0.30
Recreational vehicles loans		1,366,876		18.98			198,643		2.49			—		—			—		—			—		—
Marine loans		453,783		6.30			—		—			—		—			—		—			—		—
Other		152,645		2.12			12,237		0.15			82		—			255		0.01			554		0.06

Total consumer and other loans		3,454,999		47.97			1,647,287		20.61			306		0.01			685		0.03			3,312		0.36

Total loans(1)		7,202,880		100.00	%		7,991,609		100.00	%		4,226,855		100.00	%		2,184,388		100.00	%		919,760		100.00	%

Add (deduct):
Premiums (discounts) and deferred fees on loans		190,506					38,722					(43,171	)				(22,718	)				(9,989	)
Allowance for loan losses		(27,666	)				(19,874	)				(10,930	)				(7,161	)				(4,766	)
Other		—					—					—					—					(151	)

Total		162,840					18,848					(54,101	)				(29,879	)				(14,906	)

Loans receivable, net(1)(2)	$	7,365,720				$	8,010,457				$	4,172,754				$	2,154,509				$	904,854

(1)	Includes loans held-for-sale, principally one- to four-family real estate loans. These loans were $1,812,739 at December 31, 2002, $1,616,089 at December 31, 2001, $95,400 at September 30, 2000, $89,862 at September 30, 1999 and $117,928 at September 30, 1998.

(2)	The largest concentrations of mortgage loans at December 31, 2002 are located in California (32.4% of the portfolio), New York (7.9% of the portfolio) and Virginia (6.2% of the portfolio).

Index to Financial Statements

Maturity of Loan Portfolio. The following table shows, as of December 31, 2002, the dollar amount of loans maturing in our portfolio in the time periods indicated. This information includes scheduled principal repayments, based on the loans’ contractual maturities. The table below does not include any estimate of prepayments. Prepayments may significantly shorten the average life of a loan and may cause our actual repayment experience to differ from that shown in the following table (in thousands):

	Due in One Year or Less		Due in One to Five Years		Due After Five Years		Total
Real estate loans:
One- to four-family fixed-rate	$	64	$	2,921	$	1,874,280	$	1,877,265
One- to four-family adjustable-rate		20		607		1,501,597		1,502,224
Home equity lines of credit and second mortgage loans		29		513		354,226		354,768
Multi-family		—		—		106		106
Commercial		—		13,067		330		13,397
Mixed-use		—		7		114		121

Total real estate loans		113		17,115		3,730,653		3,747,881

Consumer and other loans:
Automobiles loans		14,566		1,386,470		80,659		1,481,695
Recreational vehicles loans		272		16,251		1,350,353		1,366,876
Marine loans		136		3,765		449,882		453,783
Other		11,628		89,403		51,614		152,645

Total consumer and other loans		26,602		1,495,889		1,932,508		3,454,999

Total loans	$	26,715	$	1,513,004	$	5,663,161	$	7,202,880

The following table shows, as of December 31, 2002, the dollar amount of our loans distinguishing between those with fixed interest rates and those with adjustable interest rates (in thousands):

	Fixed Rates		Adjustable Rates		Total
Real estate loans:
One- to four-family	$	1,877,265	$	1,502,224	$	3,379,489
Home equity lines of credit and second mortgage loans		51,458		303,310		354,768
Multi-family		—		106		106
Commercial		1,072		12,325		13,397
Mixed-use		121		—		121

Total real estate loans		1,929,916		1,817,965		3,747,881

Consumer and other loans:
Automobiles loans		1,481,695		—		1,481,695
Recreational vehicles loans		1,366,876		—		1,366,876
Marine loans		453,783		—		453,783
Other		152,623		22		152,645

Total consumer and other loans		3,454,977		22		3,454,999

Total loans	$	5,384,893	$	1,817,987	$	7,202,880

The one- to four-family real estate loans include $1.6 billion as held-for-investment (“HFI”) loans and $1.8 billion in held-for-sale loans (“HFS”). Over 50% of the HFI one- to four-family loans are fixed rate and over 55% of the HFS one- to four-family loans are fixed rate.

Index to Financial Statements

Purchase and Origination of Loans. The following table shows our loan purchases and originations during the periods indicated (in thousands):

	Loan Purchases and Originations
Year Ended:
December 31, 2002	$	15,243,492
December 31, 2001	$	13,458,127
September 30, 2000	$	2,658,940
September 30, 1999	$	1,806,019
September 30, 1998	$	518,000
Three Months Ended:
December 31, 2000	$	1,080,290

The following table shows our loan purchase, sale and repayment activity during the periods indicated including loans acquired through business combinations (in thousands):

	Year Ended December 31,						Three Months Ended December 31, 2000			Year Ended September 30, 2000
	2002			2001			Three Months Ended December 31, 2000			Year Ended September 30, 2000
Loans receivable—net, at beginning of period	$	8,010,457		$	5,039,602		$	4,172,754		$	2,154,509
Loan purchases and originations:
One- to four-family variable-rate		3,565,449			4,451,489			834,936			2,235,900
One- to four-family fixed-rate		8,921,213			6,988,688			161,681			423,027
Consumer and other loans		2,756,830			2,017,950			83,673			13

Total loan purchases and originations		15,243,492			13,458,127			1,080,290			2,658,940

Loans sold		(12,011,864	)		(7,899,991	)		(5,062	)		(232,209	)
Loans repurchased		—			1,189			—			(417	)
Loans repaid		(3,948,424	)		(2,653,385	)		(209,721	)		(424,283	)

Total loans sold, repurchased and repaid		(15,960,288	)		(10,552,187	)		(214,783	)		(656,909	)

Net change in deferred discounts and loan fees		105,715			74,010			2,982			20,252
Net transfers to real estate owned and repossessed assets		(25,864	)		(1,786	)		(6	)		(269	)
Net change in allowance for loan losses		(7,792	)		(7,309	)		(1,635	)		(3,769	)

Increase (decrease) in total loans receivable		(644,737	)		2,970,855			866,848			2,018,245

Loans receivable—net, at end of period	$	7,365,720		$	8,010,457		$	5,039,602		$	4,172,754

Our primary method of purchasing loans is through the secondary market, utilizing our correspondent network. We purchase loans in pools made up of multiple whole loans. In fiscal 2002, we purchased 4,448 pools with 10,527 loans. In fiscal 2001, we purchased 1,649 pools with 15,346 loans. In the three months ended December 31, 2000, we purchased 231 pools with 3,063 loans. In fiscal 2000, we purchased 851 pools with 7,047 loans.

In fiscal 2002, we originated $19.3 million in consumer auto loans. We did not originate any non-mortgage consumer loans during fiscal 2001, the three months ended December 31, 2000 or fiscal 2000. To service our loan portfolio, we enter into loan servicing contracts with multiple third party servicers.

Index to Financial Statements

Delinquent, Non-performing and Other Problem Assets

General. We continually monitor our loan portfolio so that we will be able to anticipate and address potential and actual delinquencies. Based on the length of the delinquency period, we reclassify these assets as non-performing and, if necessary, take possession of the underlying collateral. Once the Bank takes possession of the underlying collateral, the property is classified on our balance sheet as other assets.

Non-performing Assets. Loans for which payment of principal or interest is 90 days past due, as well as other loans considered uncollectible, are placed on non-accrual status. All non-accrual loans are considered non-performing. Interest income is not accrued for loans classified as non-performing and any income accrued through the initial 90-day delinquency is reversed. Accretion of deferred loan fees is discontinued for non-accrual loans. The Company’s method of accounting for payments received on non-accrual loans is to recognize payments as interest income when the loan is considered collectible and to apply payments to principal when it is doubtful that principal and interest will be fully recovered.

Real Estate Owned and Repossessed Assets. At acquisition, we record Real Estate Owned (“REO”) and repossessed assets at estimated fair value less estimated selling costs. Fair value is determined by appraisal or other appropriate valuation method. Losses estimated at the time of acquisition are charged to the allowance for loan losses. Management performs periodic valuations and establishes a valuation allowance for REO and repossessed assets through a charge to income if the carrying value of a property exceeds its estimated fair value less estimated selling costs.

As of December 31, 2002, our REO and repossessed assets consisted of $1.6 million of one to four-family real estate loans, $1.4 million of automobile loans and $3.7 million of RV loans.

The following table presents information about our non-accrual loans and other repossessed assets at the dates indicated (in thousands):

	December 31, 2002			December 31, 2001			September 30, 2000			September 30, 1999			September 30, 1998
Real estate loans:
One- to four-family	$	22,497		$	20,595		$	11,391		$	7,595		$	7,727
Home equity lines of credit and second mortgage loans		81			—			—			21			255
Commercial		—			—			657			664			372
Land		—			—			—			—			316
Automobiles loans		2,277			91			—			—			—
Marine loans		94			—			—			—			—
Recreational vehicles loans		1,486			—			—			—			—
Other		53			—			—			60			205

Total non-performing loans, net		26,488			20,686			12,048			8,340			8,875
Total REO and other repossessed assets, net		6,723			3,328			850			539			1,460

Total non-performing assets, net	$	33,211		$	24,014		$	12,898		$	8,879		$	10,335

Total non-performing assets, net, as a percentage of total bank assets		0.19	%		0.18	%		0.14	%		0.21	%		0.45	%

Total loss allowance as a percentage of total non-performing loans, net		104.45	%		96.07	%		90.72	%		85.86	%		53.70	%

During fiscal 2002, our non-performing assets increased by $9.2 million, or 38%, to $33.2 million at December 31, 2002 from $24.0 million at December 31, 2001. This increase was attributable primarily to the

Index to Financial Statements

Bank’s decision to shift a portion of its assets into consumer loans which are higher-yielding asset classes that have higher risk characteristics.

If our non-accruing loans as of December 31, 2002 had been performing in accordance with their terms, we would have recorded additional interest income of approximately $1.4 million in fiscal 2002. In fiscal 2002, $0.6 million of interest was recognized on non-accrual loans.

Special Mention Loans. In certain situations, a borrower’s past credit history may cast doubt on the borrower’s ability to repay under the loan’s contractual terms, whether or not the loan is delinquent. Such loans, classified as “special mention” loans, continue to accrue interest and remain as a component of the loans receivable balance. These loans represented $31.0 million of the total loan portfolio at December 31, 2002, and are actively monitored.

Allowance for Loan Losses. As an investor in mortgage and consumer loans, we recognize that we will experience credit losses. We believe the risk of credit loss varies based on a variety of factors including the following:

•

type of loan;

•

creditworthiness of the borrower over the term of the loan;

•

general economic conditions; and

•

in the case of a secured loan, the type and quality of the loan’s security and the loan-to-value ratio.

Our policy is to maintain an adequate allowance for loan losses based on a variety of factors including the following:

•

our historical loan loss experience;

•

regular reviews of delinquencies and loan portfolio quality;

•

the industry’s historical loan loss experience for similar asset types; and

•

evaluation of economic conditions.

We increase our allowance for loan losses when we estimate that losses have been incurred by charging provisions for probable loan losses against income. Charge-offs reduce the allowance when losses are recognized.

In establishing the allowance for loan losses, we record specific allowances for probable losses that we have identified for commercial and certain large dollar real estate and consumer loans specifically reviewed for impairment. We provide a general allowance for estimated expected losses for real estate and consumer loans not specifically reviewed. The allowances established by management are subject to review and approval by the Bank’s board of directors. Each month, we review the allowance for adequacy, based on our assessment of the risk in our loan portfolio as a whole, considering the following factors:

•

the composition and quality of the portfolio;

•

delinquency levels and trends;

•

expected losses for the next twelve months;

•

current charge-off and loss experience;

•

current industry charge-off and loss experience;

•

the condition of the real estate market and geographic concentrations within the loan portfolio; and

•

current general economic and market conditions.

We recorded a net increase of $7.8 million in the allowance for loan losses from December 31, 2001 to December 31, 2002. The increase resulted from the addition of a $14.4 million allowance acquired from the purchase of Ganis, a provision of $14.7 million, offset by net charge-offs of $21.3 million. As of December 31, 2002, the total allowance for loan losses was $27.7 million, of which $166,100 represented reserves established

Index to Financial Statements

by management for probable losses on specific loans. See also Notes 2 and 6 of Item 8. Consolidated Financial Statements and Supplementary Data.

The general allowance is computed on loans based on an assessment of loans not specifically reviewed. Our policy requires that the level of the provision is, at a minimum, sufficient to absorb twelve months of projected losses for all loan types because we believe this is indicative of the probable losses inherent in the loan portfolio at that date. It may be appropriate after considering the factors detailed above to increase the level of the general allowance in excess of twelve months of expected losses to account for uncertainties in the economy. In determining the adequacy of the general allowance, the assumptions underlying the twelve-month loss projection are validated through analyzing actual loss experience, industry loss experience and changes in portfolio quality. Consideration is given to changes in economic conditions and the potential impact on the loan portfolio’s performance. For loan portfolios that are considered unseasoned and lacking in meaningful historic loss data, we utilize appropriate industry charge-off and loss rates as a proxy for the bank’s actual loss experience. As the loan portfolios season and actual loss data matures, we rely on industry loss experience as a validation tool and not the final determinant of projected losses.

The loan loss provision recorded for fiscal 2002 was based upon our assessment of the required allowances at December 31, 2002. The increase in the loan loss provision as compared to fiscal 2001 is principally attributable to the increased level of charge-offs resulting from a higher concentration in consumer loan types that typically experience charge-offs at a higher rate than single-family mortgage loans. We believe that the level of our loan loss allowance is adequate to cover probable losses inherent in our portfolio at December 31, 2002.

The addition to our portfolio of $2.8 billion of consumer automobile, marine and RV loans, which traditionally have a higher loss experience than residential mortgages, creates additional credit risk. Historical charge-offs were $32.0 million in fiscal 2002, $5.6 million in fiscal 2001, $12,000 for the three months ended December 31, 2000 and $253,000 in fiscal 2000. Based on our analysis of the loan portfolio’s historic loss experience and our estimate of projected losses inherent in the loan portfolio we believe the allowances for loan losses, which were $27.7 million (0.50% of total loans held-for-investment) at December 31, 2002 and $19.9 million (0.25% of total loans held-for-investment) at December 31, 2001, were appropriate and in accordance with the Bank’s approved policy on allowance for loan losses.

We believe that we have established our existing loss allowances in accordance with accounting principles generally accepted in the United States of America. However, circumstances may change, and regulators may request us to increase our allowance for losses. Such an increase could negatively affect our financial condition and earnings.

Index to Financial Statements

The following table allocates the allowance for loan losses by loan category at the dates indicated. This allocation does not necessarily restrict the use of the allowance to absorb losses in any other category. The table shows the percentage of total loans that each loan category represents (dollars in thousands):

	December 31, 2002				December 31, 2001				September 30, 2000				September 30, 1999				September 30, 1998
	Amount		Percent of Loans in Each Category to Total Loans		Amount		Percent of Loans in Each Category to Total Loans		Amount		Percent of Loans in Each Category to Total Loans		Amount		Percent of Loans in Each Category to Total Loans		Amount		Percent of Loans in Each Category to Total Loans
Real estate loans:
One- to four-family	$	3,343	46.92	%	$	8,716	79.06	%	$	10,554	99.81	%	$	7,055	99.67	%	$	4,089	97.55	%
Home equity lines of credit and second mortgage loans		649	4.93			115	0.29			29	0.10			9	0.05			57	0.64
Commercial		201	0.19			30	0.03			336	0.06			53	0.14			520	0.97
Mixed-use		1	—			9	0.01			8	0.01			17	0.04			9	0.10
Land		—	—			—	—			—	—			—	0.01			6	0.03
Multi-family		—	—			3	—			3	0.01			23	0.06			32	0.35

Total real estate loans		4,194	52.04			8,873	79.39			10,930	99.99			7,157	99.97			4,713	99.64

Consumer loans:
Automobiles		8,190	20.57			11,001	20.46			—	—			—	—			—	—
Recreational vehicles		9,480	18.98			—	—			—	—			—	—			—	—
Marine		3,108	6.30			—	—			—	—			—	—			—	—
Other consumer		2,694	2.11			—	0.15			—	0.01			4	0.03			53	0.36

Total consumer loans		23,472	47.96			11,001	20.61			—	0.01			4	0.03			53	0.36

Total allowance for loan losses	$	27,666	100.00	%	$	19,874	100.00	%	$	10,930	100.00	%	$	7,161	100.00	%	$	4,766	100.00	%

The above amounts include specific reserves related to non-performing loans totaling $166,100 at December 31, 2002, $2.1 million at December 31, 2001, $391,000 at September 30, 2000, $406,000 at September 30, 1999 and $449,000 at September 30, 1998.

Index to Financial Statements

The following table shows the activity in our allowance for loan losses during the periods indicated (in thousands):

	Year Ended December 31,						Three Months Ended December 31, 2000			Year Ended September 30,
	2002			2001			Three Months Ended December 31, 2000			2000			1999			1998
Allowance for loan losses, beginning of period (1)	$	19,874		$	12,565		$	10,930		$	7,161		$	4,715		$	3,594
Charge-offs:
Real estate loans		(460	)		(94	)		(12	)		(240	)		(400	)		(463	)
Other consumer loans		—			(79	)		—			(13	)		(56	)		(76	)
Automobiles loans		(28,046	)		(5,395	)		—			—			—			—
RV loans		(3,456	)		—			—			—			—			—
Other loans		—			—			—			—			(2	)		(17	)

Total charge-offs		(31,962	)		(5,568	)		(12	)		(253	)		(458	)		(556	)

Recoveries:
Real estate loans		30			29			—			19			38			13
Other consumer loans		—			4			—			—			79			81
Automobiles loans		10,632			669			—			—			—			—
Other loans		—			—			—			—			4			5

Total recoveries		10,662			702			—			19			121			99

Net charge-offs		(21,300	)		(4,866	)		(12	)		(234	)		(337	)		(457	)
Allowance acquired through acquisitions (2)		14,428			4,699			—			—			—			724
Provision for loan losses		14,664			7,476			1,647			4,003			2,783			905

Allowance for loan losses, end of period	$	27,666		$	19,874		$	12,565		$	10,930		$	7,161		$	4,766

Net charge-offs to average loans outstanding		0.28	%		0.07	%		0.00	%		0.01	%		0.03	%		0.07	%

(1)

The information for fiscal 1998 includes the results of the Bank for the twelve months ended December 31, 1998. As a result, the reconciliation of activities for the year ended September 30, 1999 begins with the October 1, 1998 balance, whereas the September 30, 1998 reconciliation covers the Bank’s operating period from January 1, 1998 through December 31, 1998. This reconciliation causes certain amounts to be included in both fiscal 1999 and 1998.

(2)	Acquisition of Ganis consumer loan portfolio in fiscal 2002, automobile portfolio in fiscal 2001 and acquisition of Direct Financial Corporation in fiscal 1998.

Mortgage-Backed Securities

We maintain a significant portfolio of mortgage-backed securities, primarily in the following forms:

•

privately insured mortgage pass-through securities;

•

Government National Mortgage Association (“Ginnie Mae”) participation certificates;

•

Federal National Mortgage Association (“Fannie Mae”) participation certificates;

•

Federal Home Loan Mortgage Corporation (“Freddie Mac”) participation certificates; and

•

securities issued by other non-agency organizations.

Principal and interest on Ginnie Mae certificates are guaranteed by the full faith and credit of the United States. Fannie Mae and Freddie Mac certificates are each guaranteed by their respective agencies. Mortgage-backed securities generally entitle us to receive a pro rata portion of the cash flows from an identified pool of mortgages. We also invest in collateralized mortgage obligations (“CMOs”). CMOs are securities issued by special purpose entities generally collateralized by pools of mortgage-backed securities. The cash flows from these pools are segmented and paid in accordance with a predetermined priority to various classes of securities issued by the entity. Our CMOs are senior tranches collateralized by federal agency securities or whole loans. Over 98% of our CMO portfolio is comprised of securities with a triple “A” rating. Although our CMO portfolio has maturity periods generally similar to our mortgage-backed pass-through securities, the nature of the CMO

Index to Financial Statements

bonds acquired, primarily sequential pay bonds, provides for more predictable cash flows than the mortgage-backed securities. This reduces the duration risk, extension risk and price volatility of the CMO compared to mortgage-backed pass-through securities and thus allows us to target liabilities with shorter durations.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities, we classify our mortgage-backed securities in one of three categories: held-to-maturity, available-for-sale or trading. During fiscal 2002, fiscal 2001, three months ended December 31, 2000 and fiscal 2000, we held no mortgage-backed securities or other investments classified as held-to-maturity.

The following table shows the activity in our available-for-sale mortgage-backed securities portfolio during the periods indicated (in thousands):

	Year Ended December 31,						Three Months Ended December 31, 2000			Year Ended September 30, 2000
	2002			2001			Three Months Ended December 31, 2000			Year Ended September 30, 2000
Mortgage-backed securities at beginning of period	$	3,556,619		$	5,058,919		$	4,188,553		$	1,426,053
Purchases:
CMO		5,565,479			3,420,669			3,891,680			3,579,379
Fannie Mae		6,708,046			2,778,515			1,195			590,236
Ginnie Mae		3,811,782			—			—			8,891
Freddie Mac		11,343			104,439			24,586			173,732
Other		3,853			15			—			—
Sales(1)		(11,204,621	)		(6,198,758	)		(2,740,943	)		(1,140,935	)
Repayments and amortization and accretion		(1,675,269	)		(1,574,835	)		(326,213	)		(463,985	)
Transfer to trading		—			27,357			—			—
Mark-to-market adjustments and other		155,162			(59,702	)		20,061			15,182

Mortgage-backed securities at end of period	$	6,932,394		$	3,556,619		$	5,058,919		$	4,188,553

(1)	Includes mortgage-backed securities on which call options have been exercised.

The Bank buys and holds trading securities principally for the purpose of selling them in the near term. The Bank carries these securities at market value with unrealized and realized gains and losses recognized in gain on sales of loans held-for-sale and securities, net. The amount of trading securities the Bank held was $391.8 million at December 31, 2002, $70.9 million at December 31, 2001, $171.9 million at December 31, 2000 and $3.4 million at September 30, 2000. The Bank also recognized realized gains from the sale of trading assets of $3.9 million for fiscal 2002, realized gains of $20.3 million for fiscal 2001, realized gains of $2.1 million for the three months ended December 31, 2000 and realized gains of $0.8 million for fiscal 2000. In addition, the Bank had unrealized depreciation of trading assets of $0.9 million for fiscal 2002, unrealized depreciation of $11.0 million for fiscal 2001, unrealized depreciation of $0.1 million for the three months ended December 31, 2000 and unrealized appreciation of $0.2 million for fiscal 2000.

Index to Financial Statements

The following table shows the Bank’s scheduled maturities, carrying values, and current yields for our portfolio of mortgage-backed securities, both available-for-sale and trading, at December 31, 2002 (in thousands):

	After One But Within Five Years				After Five But Within Ten Years				After Ten Years				Totals
	Balance Due		Weighted Yield		Balance Due		Weighted Yield		Balance Due		Weighted Yield		Balance Due		Weighted Yield
Mortgage-backed securities:
Private issuer and other	$	—	—	%	$	4,546	4.35	%	$	21,545	5.41	%	$	26,091	5.07	%
Collateralized mortgage obligations		18,322	4.77			2,422	5.29			3,104,071	3.72			3,124,815	3.73
Government national mortgage association		—	—			—	—			2,203,378	5.50			2,203,378	5.50
Federal Home Loan Mortgage Corporation		—	—			8	7.51			11,350	5.51			11,358	5.51
Fannie Mae		—	—			325	6.00			1,870,426	5.36			1,870,751	5.36

Total	$	18,322	4.77	%	$	7,301	4.74	%	$	7,210,770	4.70	%	$	7,236,393	4.70	%

Investment Securities

In accordance with SFAS No. 115, we classify our investments in one of three categories: held-to-maturity, available-for-sale or trading. During fiscal 2002, fiscal 2001, three months ended December 31, 2000 and fiscal 2000, we held no securities classified as held-to-maturity. The following table shows the cost basis and fair value of our available-for-sale banking-related investment portfolio other than mortgage-backed securities at the dates indicated. Investments classified as available-for-sale are carried at estimated fair value, with the unrealized gains and losses reflected as a component of accumulated other comprehensive income. Consolidated information on all investment securities we hold is presented in Item 8. Consolidated Financial Statements and Supplementary Data. The following table does not include investment securities we hold arising from our non-banking business segments (in thousands):

	December 31, 2002				December 31, 2001				September 30, 2000
	Cost Basis		Fair Value		Cost Basis		Fair Value		Cost Basis		Fair Value
Available-for-sale investment securities:
Municipal bonds	$	32,005	$	32,561	$	67,104	$	66,959	$	15,005	$	13,946
Corporate bonds		377,731		352,590		884,246		871,510		272,431		265,066
Obligations of U.S. government agencies		—		—		13,297		11,874		13,291		12,898
Asset-backed		750,221		737,582		386		386		23,661		23,660
Preferred stock in Freddie Mac		135,000		134,538		—		—		5,000		4,356
Other corporate stock		—		—		8,000		7,189		4,438		4,363
Other investments		1,093		939		21,282		21,218		12,318		12,035

Total	$	1,296,050	$	1,258,210	$	994,315	$	979,136	$	346,144	$	336,324

In addition to the available-for-sale investment securities listed above, we have an investment in the stock of the Federal Home Loan Bank (“FHLB”), as required of members of the FHLB System. The stock is recorded at cost, which approximates fair value. The balance of FHLB stock was $80.7 million at December 31, 2002 and $56.5 million at December 31, 2001.

Index to Financial Statements

The following table shows the scheduled maturities, carrying values, and current yields for our banking-related investment portfolio at December 31, 2002 (in thousands):

	Within One Year				After One But Within Five Years				After Five But Within Ten Years				After Ten Years				Totals
	Balance Due		Weighted Average Yield		Balance Due		Weighted Average Yield		Balance Due		Weighted Average Yield		Balance Due		Weighted Average Yield		Balance Due		Weighted Average Yield
Municipal bonds(1)	$	239	4.20	%	$	725	4.64	%	$	1,240	4.85	%	$	30,357	5.12	%	$	32,561	5.06	%
Corporate debt		65,347	5.03	%		168,231	7.34	%		22,247	7.06	%		96,765	3.35	%		352,590	5.68	%
Asset-backed		—	—	%		62,932	3.90	%		119,830	4.47	%		554,820	4.30	%		737,582	4.30	%
Preferred stock in Freddie Mac(2)		—	—	%		—	—	%		—	—	%		134,538	—	%		134,538	—	%
Other investments		—	—	%		—	—	%		—	—	%		939	3.65	%		939	3.65	%

Total	$	65,586			$	231,888			$	143,317			$	817,419			$	1,258,210

(1)	Yields on tax-exempt obligations are computed on a tax equivalent basis.

(2)	Preferred stock has no stated maturity date.

Deposits and Other Sources of Funds

The following table presents information about the various categories of the Bank’s deposits for the periods indicated (dollars in thousands):

	Average Balance for the Year Ended December 31, 2002		Percentage of Deposits		Average Rate		Average Balance for the Year Ended December 31, 2001		Percentage of Deposits		Average Rate		Average Balance for the Year Ended September 30, 2000		Percentage of Deposits		Average Rate
Passbook savings	$	225	—	%	1.06	%	$	375	0.01	%	2.99	%	$	498	0.02	%	2.48	%
Money market		3,796,466	44.94		2.11	%		1,644,951	22.86		2.78	%		178,174	5.37		4.84	%
Demand accounts		222,953	2.64		2.5	%		183,530	2.55		1.44	%		236,316	7.12		3.68	%
Certificates of deposit		4,223,899	49.99		3.94	%		5,337,933	74.18		5.28	%		2,813,704	84.82		6.32	%
Brokered certificates of deposit		205,239	2.43		2.79	%		29,236	0.40		6.86	%		88,601	2.67		6.43	%

Total	$	8,448,782	100.00	%			$	7,196,025	100.00	%			$	3,317,293	100.00	%

The following table classifies our deposit accounts by rate at the dates indicated (in thousands):

	December 31, 2002		December 31, 2001
0–1.99%	$	1,636,708	$	247,755
2–3.99%		5,385,945		3,692,243
4–5.99%		762,407		2,219,535
6–7.99%		615,270		1,923,269
8–9.99%		3		57

Total	$	8,400,333	$	8,082,859

Index to Financial Statements

The following table classifies certificates of deposit of $100,000 or more, by time remaining until maturity, as of December 31, 2002 (in thousands):

	Certificates of Deposit
Three months or less	$	169,564
Three through six months		142,625
Six through twelve months		411,613
Over twelve months		398,370

Total	$	1,122,172

Borrowings

Although deposits represent a significant component of our current funds, we also borrow from the FHLB and sell securities under repurchase agreements.

We are a member of the FHLB system, which, among other things, functions in a reserve credit capacity for savings institutions. This membership requires us to own capital stock in the FHLB. It also authorizes us to apply for advances on the security of FHLB stock and various home mortgages and other assets—principally securities that are obligations of, or guaranteed by, the United States government—provided that we meet certain creditworthiness standards. As of December 31, 2002, our outstanding advances from the FHLB totaled $1.31 billion at interest rates ranging from 1.4% to 6.96% and at a weighted average rate of 1.89%.

We also borrow funds by selling securities to nationally recognized investment banking firms under agreements to repurchase the same securities. The investment banking firms hold the securities in custody. We treat repurchase agreements as borrowings and secure them with designated fixed- and variable-rate securities. We also participate in the Federal Reserve Bank’s special direct investment and treasury, tax and loan borrowing programs. We use the proceeds of these transactions to meet our cash flow or asset/liability matching needs.

The following table presents information regarding repurchase agreements and other short-term borrowings for the dates indicated (dollars in thousands):

	December 31,						September 30, 2000
	2002			2001			September 30, 2000
Weighted average balance during the year	$	3,835,442		$	3,180,272		$	1,471,435
Weighted average interest rate during the year		3.91	%		5.94	%		6.39	%
Maximum month-end balance during the year	$	6,623,010		$	4,162,231		$	2,173,410
Mortgage-backed securities underlying the agreements as of the end of the year:
Carrying value, including accrued interest	$	5,472,384		$	1,815,738		$	1,303,517
Estimated market value	$	5,452,720		$	1,807,115		$	1,289,313
Other securities and mortgage loans underlying the agreements as of the end of the year:
Carrying value, including accrued interest	$	400,736		$	1,185,707		$	648,433
Estimated market value	$	398,857		$	1,179,834		$	644,317

Index to Financial Statements

The following table sets forth information regarding the weighted average interest rates and the highest and average month end balances of our borrowings (dollars in thousands):

Category	Ending Balance		Weighted Average Rate (1)		Maximum Amount At Month-End		Yearly Weighted Average Balance		Yearly Weighted Average Rate
At or for the year ended December 31, 2002:
Advances from the FHLB	$	1,310,300	1.89	%	$	1,490,300	$	970,226	5.87	%
Securities sold under agreement to repurchase and other short-term borrowings	$	5,911,861	1.04	%	$	6,623,010	$	3,835,442	3.91	%
At or for the year ended December 31, 2001:
Advances from the FHLB	$	906,300	2.72	%	$	1,737,000	$	1,223,724	6.32	%
Securities sold under agreement to repurchase and other short-term borrowings	$	3,264,140	1.89	%	$	4,162,231	$	3,180,272	5.94	%
At or for the year ended September 30, 2000:
Advances from the FHLB	$	1,637,000	6.60	%	$	2,074,500	$	1,225,783	6.17	%
Securities sold under agreement to repurchase and other short-term borrowings	$	1,894,000	6.71	%	$	2,173,410	$	1,471,435	6.39	%

(1)	Average excludes cost of hedging.

GLOBAL AND INSTITUTIONAL

Our Global and Institutional business segment is comprised principally of international subsidiaries which offer online retail brokerage services to foreign investors and financial services to institutional investors.

Products and Services. E*TRADE, alone or with its partners, offers branded retail brokerage websites in Australia, Canada, Denmark, Germany, Hong Kong, Korea, Sweden, Japan and the United Kingdom. In addition, we have institutional offices in seven countries with trading capabilities in 38 markets.

Our global retail subsidiaries offer a variety of products and services including online stock and options trading in local markets, as well as comprehensive market information provided by Reuters and local news vendors. Trading in U.S. equity markets is currently available in Sweden, Germany, Hong Kong and Denmark. In some cases, affiliates offer mutual funds, access to IPOs and banking capabilities.

In March 2003, we entered into an agreement to sell our German subsidiary. The transaction is subject to approval by our Board of Directors. The transaction is also subject to German regulatory approval. After the transaction is complete, we plan to continue servicing the German market place through a broker arrangement between the purchaser and our subsidiary in the United Kingdom.

We provide institutional customers with online retail brokerage and financial services, as well as direct access to international exchanges and basket trading through a web-based platform. The platform also offers our institutional customers real-time, online access to statements and electronic settlement capabilities.

A significant part of our institutional business includes providing our customers worldwide access to independent research. Our customers select research data they consider germane and use it to assist themselves in reaching trading decisions. Clients use the commissions that they generate in trading securities to pay for the research services. We use our proprietary system to track the commissions a client has generated and the corresponding research credits awarded.

Clearing. We self-clear our U.S. institutional equity transactions. With the exception of institutional operations in Japan, Hong Kong, Singapore and Thailand, we outsource the clearing of transactions to third parties around the world.

Index to Financial Statements

Margin Lending. In the U.S., margin lending by E*TRADE Clearing is subject to the margin rules of the Federal Reserve System, NYSE, National Association of Securities Dealers (“NASD”) margin requirements and our own internal policies. In overseas markets, the rules regarding margin lending vary significantly and are generally not as well defined as the rules within the U.S.

COMPETITION

The market for electronic financial services over the Internet and other alternative channels continues to rapidly evolve and is intensely competitive. We expect competition to continue to intensify in the future. As we continue to diversify and expand our services beyond online domestic retail brokerage offerings to include banking, global cross-border trading, mutual fund offerings, market-making, consumer lending, institutional investing, financial advice and insurance the number of competitors in these varied market places is also increasing. We face direct competition from full commission brokerage firms, discount brokerage firms, online brokerage firms, pure-play Internet banks, traditional “brick & mortar” commercial banks and savings banks. These competitors provide touch-tone telephone, voice response and online banking services, electronic bill payment services and a host of other financial products. In addition, we compete with mutual fund companies, which provide money market funds and cash management accounts.

REGULATION

Our business is subject to stringent regulation by U.S. federal and state regulatory agencies and securities exchanges and by various non-U.S. governmental agencies or regulatory bodies, securities exchanges, and central banks, each of which has been charged with the protection of the financial markets and the protection of the interests of those participating in those markets. These regulatory agencies in the United States include, among others, the SEC, the NASD, the NYSE, the FDIC, the Municipal Securities Rulemaking Board and the OTS. In other areas of the world, these regulators include the Securities and Futures Association, the Securities and Futures Authority, the Bermuda Monetary Authority and the Office of Superintendent of Financial Institutions in Canada, among many others. Additional legislation and regulations and changes in rules may directly affect our manner of operation and profitability.

E*TRADE Securities, E*TRADE Clearing, E*TRADE Professional Trading, Dempsey and certain of our other subsidiaries are registered as broker-dealers with the SEC and as such are subject to regulation by the SEC and by self-regulatory organizations, such as the NYSE, NASD and the securities exchanges of which each is a member. E*TRADE Asset Management Inc. and certain other subsidiaries are registered as investment advisers with the SEC.

E*TRADE Asset Management, Inc. and E*TRADE Securities act as investment adviser and principal underwriter and distributor, respectively, of the E*TRADE Funds, a registered management investment company regulated under the Investment Company Act of 1940 and the rules thereunder. During fiscal 2002, E*TRADE converted approximately $7.1 billion in money market assets previously managed by a third party into five separate series of money market funds within the existing registration of the E*TRADE Funds. Accordingly, E*TRADE Asset Management, Inc. now actively manages six money market funds.

E*TRADE Group, E*TRADE Re, LLC and E*TRADE Financial Corporation (the parent of E*TRADE Bank), as savings and loan holding companies, and E*TRADE Bank, as a federally chartered savings bank, are subject to extensive regulation, supervision and examination by the OTS, and also, in the case of the Bank, the FDIC. Such regulation covers all aspects of the banking business, including lending practices, safeguarding deposits, capital structure, transactions with affiliates, and conduct and qualifications of personnel.

The SEC, NYSE, NASD, OTS and various other regulatory agencies have rules governing the maintenance of specific levels of net capital by securities broker-dealers and regulatory capital by banks. Net capital is the net worth of a broker or dealer (assets minus liabilities), less deductions for certain types of assets. If a firm fails to

Index to Financial Statements

maintain the required net capital it may be subject to suspension or revocation of its registration by the SEC and suspension or expulsion by the NYSE and/or NASD. Such failures could ultimately lead to the firm’s liquidation. Similarly, banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on a bank’s operations and financial statements.

Item 2. Properties

Our principal locations, most of which are leased by us, are as follows:

Location	Business Segment Use	Approximate size (in square feet)
Rancho Cordova, California	Administration, Domestic Retail Brokerage	273,000

Chicago, Illinois	Domestic Retail Brokerage	200,000

Alpharetta, Georgia	Administration and Domestic Retail Brokerage	165,000

Arlington, Virginia	Administration and Banking	161,000

Menlo Park, California	Administration and Domestic Retail Brokerage	132,000

New York, New York	Administration, Domestic Retail Brokerage and Global and Institutional	90,000

Huntington Beach, California	Banking	72,000

Costa Mesa, California	Banking	59,000

Our Domestic Retail Brokerage, Banking and Wealth Management businesses lease a number of additional facilities in the United States. Our Global and Institutional business leases facilities in Canada, Southeast Asia and Europe. We also lease facilities in New York City, Boston, Beverly Hills, Denver and San Francisco where our E*TRADE Financial Centers are located. These leases expire at various dates through 2013.

In fiscal 2001, we restructured many of our existing facilities and consolidated some sites creating additional space available for sublease. These additional facilities are not included above. See Note 21 in Item 8. Consolidated Financial Statements and Supplementary Data for a discussion of facility restructuring and other exit activity.

We believe that our facilities are adequate for current needs and that additional or substitute space will be available as needed to accommodate any future expansion of our operations.

Item 3. Legal and Administrative Proceedings

On November 21, 1997, a putative class action was filed in the Superior Court of California, County of Santa Clara, by Larry R. Cooper. The action alleges, among other things, that our advertising regarding our commission rates and ability to execute transactions through our online brokerage service was false and deceptive. The action seeks injunctive relief, and unspecified compensatory damages, punitive damages, and attorney’s fees. On June 1, 1999, the Court entered an order denying Plaintiffs’ motion for class certification. On January 25, 2000, the Court ordered plaintiff to submit all claims seeking monetary relief to arbitration and stayed all other claims pending the outcome of arbitration. In July 2001, Plaintiff filed an arbitration claim with the National Association of Securities Dealers, Inc. (“NASD”), and in October 2001, we submitted our answer. Subsequently, an NASD arbitration panel issued a ruling indicating that it would not assert jurisdiction over plaintiff’s representative claims and scheduled the hearing of Plaintiff’s individual claims for arbitration for October 14, 2002. Thereafter, the NASD cancelled the October 14, 2002 hearing of this arbitration and rescheduled this arbitration to May 12, 2003. At this time, we are unable to predict the ultimate outcome of this matter.

Index to Financial Statements

On March 1, 1999, a putative class action was filed in the Court of Common Pleas, Cuyahoga County, Ohio, by Truc Q. Hoang. The action alleges, among other things, that Plaintiff experienced problems accessing her account and placing orders and seeks injunctive relief and unspecified damages for breach of contract, breach of fiduciary duty, unjust enrichment, fraud, unfair and deceptive trade practices, negligence and intentional torts. On September 1, 1999, the Court of Common Pleas denied our motion to compel arbitration and we appealed. On March 16, 2000, the Court of Appeals reversed and remanded this case to the Court of Common Pleas ruling that our motion to compel arbitration could not be decided until the Court of Common Pleas first determined whether this case should be certified as a class action. On September 29, 2000, Plaintiff filed her First Amended Complaint limiting the class of potential plaintiffs to customers who are Ohio residents, and we filed an Answer denying Plaintiff’s claims. By order dated June 7, 2002, the Court granted plaintiff’s motion for class certification. In response, the Company filed a timely Notice of Appeal, and by a “Journal and Opinion” dated January 23, 2003, the Court of Appeals of Ohio, Eighth District, County of Cuyahoga, reversed the trial court’s previous ruling granting class certification, awarded the Company it’s costs of appeal, and remanded this action to the trial court. At this time, we are unable to predict the ultimate outcome of this action.

On March 11, 1999, a putative class action was filed in the Superior Court of California, County of Santa Clara, by Elie Wurtman. The action alleges, among other things, that Plaintiff experienced problems accessing his account and placing orders and seeks injunctive relief and unspecified damages for negligence and violations of the Consumer Legal Remedies Act and California Unfair Business Practices Act. After the Court of Appeal affirmed the Superior Court’s previous ruling denying our Motion to Compel Arbitration, we demurred to Plaintiff’s Amended Complaint. Thereafter, Plaintiff filed his First Amended Complaint on or about March 21, 2001, and we filed an Answer on April 3, 2001, denying Plaintiff’s claims. Following the September 19, 2002 hearing of Plaintiff’s motion for class certification, the Court issued an order denying class certification in this matter, and on or about October 22, 2002, Plaintiff filed notice of his intent to appeal the trial court’s ruling denying class certification. At this time, we are unable to predict the ultimate outcome of this proceeding.

In the ordinary course of its business, E*TRADE Securities engaged in certain stock loan transactions with MJK Clearing, Inc., (“MJK”), involving the lending of Nasdaq-listed common stock of GenesisIntermedia, Inc. (“GENI”), and other securities from MJK to E*TRADE Securities. Subsequently, E*TRADE Securities redelivered the GENI and/or other securities received from MJK to three other broker-dealers, Wedbush Morgan Securities, (“Wedbush”), Nomura Securities, Inc., (“Nomura”) and Fiserv Securities, Inc., (“Fiserv”). On September 25, 2001, Nasdaq halted trading in the stock of GENI, which had last traded at a price of $5.90 before the halt. As a result, MJK was unable to meet its collateral requirements on the GENI and other securities with certain counterparties to those transactions. Subsequently, MJK was ordered to cease operations by the SEC. These events have led to disputes between certain of the participants in the above described stock loan transactions as set forth below. These actions seek various forms of equitable relief and seek repayment of a total of approximately $60 million, plus interest, received by E*TRADE Securities in connection with the GENI and other stock loan transactions. E*TRADE Securities, as successor broker-dealer to E*TRADE Securities, Incorporated, believes that the plaintiffs must look to MJK as the debtor for repayment, and that E*TRADE Securities has defenses in each of these actions and will vigorously defend all matters:

•

By a complaint dated October 1, 2001, a lawsuit was filed in the Superior Court for the State of California, County of Los Angeles entitled, “Wedbush Morgan Securities, Inc. v. E*TRADE Securities, Inc.”, asserting claims for injunctive relief, specific performance, declaratory relief and breach of written contract and seeking (in addition to equitable relief) approximately $8 million in damages from E*TRADE Securities. Subsequently, Wedbush and E*TRADE Securities agreed to binding arbitration, and E*TRADE Securities filed an arbitration claim with the NYSE in November of 2001 asserting a claim for declaratory relief and seeking approximately $15 million in damages from Wedbush. Thereafter, Wedbush answered and filed a counterclaim with the NYSE against E*TRADE Securities on December 12, 2001 reasserting the breach of contract claim it set forth in its original complaint. At this time, the Company is unable to predict the outcome of this dispute.

Index to Financial Statements

•

By a complaint dated October 4, 2001, a lawsuit was filed in the United States District Court for the Eastern District of Pennsylvania entitled, “Fiserv Securities Inc. v. E*TRADE Securities, Inc.” Fiserv filed an amended complaint dated July 2, 2002, seeking $27 million in damages plus interest, punitive damages, attorney fees and other relief from E*TRADE Securities for breach of contract, conversion and unjust enrichment. On July 17, 2002, E*TRADE Securities filed an amended answer denying Fiserv’s claims and asserting affirmative defenses. The matter is currently set for trial on May 12, 2003. At this time, the Company is unable to predict the ultimate outcome of this dispute.

•

By a complaint dated October 22, 2001, a lawsuit was filed in the United States District Court for the Southern District of New York entitled, “Nomura Securities International, Inc., v. E*TRADE Securities, Inc.” 01-CV-9280 (AGS)(MHD). Nomura filed an amended complaint dated October 29, 2001, seeking approximately $10 million in damages plus interest, unspecified punitive damages, attorney fees and injunctive and other relief from E*TRADE Securities for conversion and breach of contract. On November 19, 2001, E*TRADE Securities filed an amended answer and interposing affirmative defenses and three counterclaims for conversion, money had and received, and unjust enrichment seeking to recover approximately $5 million in damages plus interest, punitive damages, attorneys fees and other relief from Nomura. On June 5, 2002 Nomura filed a motion for summary judgment asking that it be awarded summary judgment on its claim for breach of contract and on E*TRADE Securities’ counterclaims for conversion, money had and received, unjust enrichment and punitive damages. On June 20, 2002, E*TRADE Securities cross-moved for partial summary judgment and in opposition to Nomura’s Motion for Summary Judgment. E*TRADE Securities sought summary judgment on Nomura’s breach of contract claim, arguing that the alleged contract between Nomura and E*TRADE Securities did not apply to the transaction at issue in the case. Both Nomura’s motion for summary judgment and E*TRADE Securities cross-motion for partial summary judgment are currently pending before the court. On February 7, 2003, the Court dismissed E*TRADE Securities’ demand for punitive damages but otherwise denied Nomura’s motion to dismiss E*TRADE Securities’ counterclaims. At this time the Company is unable to predict the ultimate outcome of this dispute.

As discussed above, the Company is unable to predict the ultimate outcome of these disputes. The Company, based on information available, does not believe that an estimable loss is probable. However, the ultimate resolution of these matters may be material to the Company’s operating results or cash flows for any particular period. The Company is confident that E*TRADE Securities has sufficient capital in excess of regulatory requirements to cover any potential exposure arising from these matters.

On September 25, 2002, the Company filed an action in the United States District Court for the District of Minnesota entitled “E*TRADE Securities LLC v. Deutsche Bank AG et al.”, Civil No. 02-3711 (RHK/AJB), alleging, among other things, that Deutsche Bank AG, Nomura Canada, Inc., and others participated in a stock lending fraud and violated Section 10(b) of the Securities Exchange Act, Rule 10b-5 thereunder, Sections 5 and 12 of the Securities Act, and other provisions of state and federal law, by among other things: distributing unregistered securities beneficially owned by insiders of the issuers, disguising those distributions as routine securities lending transactions, manipulating the prices of the securities in question, and concealing material information including the real parties in interest and the underlying scheme. Through this lawsuit, the Company seeks, among other things, compensatory damages for all expenses and losses that it has incurred to date or may incur in the future in connection with the stock lending litigation described above and a declaration that defendants are liable for any further expenses or losses the Company may incur in that litigation, including by way of judgment or settlement. Deutsche Bank AG, Nomura Canada, Inc., and certain other defendants have filed motions to dismiss the Company’s complaint in whole or in part. The Company intends to oppose those motions. At this point, the Company is unable to predict the ultimate outcome of this dispute.

By a Complaint dated December 28, 2001, Thomas Barry, a shareholder, filed a shareholder derivative action on his own behalf and purportedly on behalf of E*TRADE Group, Inc. itself as a Nominal Defendant, against Christos M. Cotsakos, the Company’s Former Chairman of the Board and Chief Executive Officer, and

Index to Financial Statements

each then current member of the Company’s Board of Directors, as individuals, in the Superior Court of the State of California, County of San Mateo. Mr. Barry filed a “First Amended Shareholder Derivative Complaint” on or about February 26, 2002, for breach of fiduciary duties, waste of corporate assets, abuse of control, and gross mismanagement for acts including, but not limited to, the Board’s cancellation and settlement of a $15.0 million loan to Mr. Cotsakos in exchange for his waiver of certain monetary and other rights under his employment agreement; the Board’s agreeing as part and parcel of the cancellation and settlement of the foregoing loan to make an additional payment to Mr. Cotsakos of $15.2 million to compensate him for tax liabilities resulting from the cancellation and settlement of the foregoing loan; the Board’s approval of other loans to officers and directors, including a $15.0 million loan to founder and director William Porter; and the Company’s alleged failure to make full and adequate disclosures about such events in the Company’s previous regulatory filings. Mr. Barry sought damages allegedly sustained by the Company as a result of defendants’ alleged acts, as well as his attorney’s fees and costs, against all defendants except the Company. On or about April 30, 2002, demurrers (motions to dismiss) to Mr. Barry’s First Amended Shareholder Derivative Complaint were filed on behalf of nominal defendant E*TRADE Group, Inc., and the individually-named members of the Company’s Board of Directors, contending, among other things, that the Court must dismiss Mr. Barry’s complaint because he failed to satisfy his legal obligation to raise his concerns with the Company’s Board of Directors before commencing legal action. Subsequently, all parties agreed to enter into a memorandum of understanding to settle the matter under the terms of which the Company agreed, among other things, without admitting any wrongdoing or liability, to make certain corporate governance enhancements and to pay certain attorneys fees and costs incurred by Mr. Barry in prosecuting this action. On December 4, 2002, the Court approved the parties’ final settlement agreement and signed the parties’ stipulated judgment of dismissal and the case has been dismissed with prejudice. Thereafter the Company paid the attorney’s fees and costs to which it had agreed. Most of the payment was covered by the Company’s insurance. The Company is in the process of implementing corporate enhancements to which it has agreed in the settlement.

Except as to matters that we have reported as settled or tentatively settled, we intend to vigorously defend against the foregoing claims. An unfavorable outcome in any matters which are not covered by insurance could have a material adverse effect on our business, financial condition and results of operations. In addition, even if the ultimate outcomes are resolved in our favor, the defense of such litigation could entail considerable cost and the diversion of the efforts of management, either of which could have a material adverse effect on our results of operation.

The securities and banking industries are subject to extensive regulation under federal, state and applicable international laws. As a result, we are required to comply with many complex laws and rules and our ability to comply is dependent in large part upon the establishment and maintenance of qualified compliance systems. From time to time, we have been threatened with, or named as a defendant in, lawsuits, arbitrations and administrative claims involving securities, banking and other matters. We are also subject to periodic regulatory audits and inspections. Such matters that are reported to regulators such as the SEC, the NYSE, the NASDR or the OTS by dissatisfied customers or others are investigated by such regulators, and may, if pursued, result in formal claims being filed against us by customers and/or disciplinary action being taken against us by regulators. Any such claims or disciplinary actions that are decided against us could have a material adverse effect on our business, financial condition and results of operations.

The Company recently renewed its insurance coverage which management believes is reasonable and prudent. The principal insurance coverage we maintain covers comprehensive general liability, commercial property damage, hardware/software damage, directors and officers, employment practices liability, certain criminal acts against the Company and errors and omissions. We believe that such insurance coverage is adequate for our business. Our ability to maintain this level of insurance coverage in the future, however, is subject to the availability of affordable insurance in the market place.

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

None.

Index to Financial Statements

PART II

Item

5. Market for Registrant’s Common Equity and Related Shareholder Matters

PRICE RANGE OF COMMON STOCK

From the date of our initial public offering through January 2001, our common stock was listed on the Nasdaq. In February 2001, we listed our shares on the NYSE. The following table shows the high and low sale prices of our common stock as reported by the Nasdaq or the NYSE, as applicable for the periods indicated:

	High		Low
Fiscal 2002:
First Quarter	$	12.64	$	7.61
Second Quarter	$	9.54	$	4.60
Third Quarter	$	5.47	$	2.81
Fourth Quarter	$	5.98	$	3.61

Fiscal 2001:
First Quarter	$	15.38	$	6.35
Second Quarter	$	10.20	$	5.32
Third Quarter	$	6.82	$	4.07
Fourth Quarter	$	11.10	$	5.59

The closing sale price of the Company’s common stock as reported on the NYSE on March 20, 2003 was $4.31 per share. As of that date there were 2,591 holders of record of the Company’s common stock.

DIVIDENDS

The Company has never declared or paid cash dividends on its capital stock. The Company currently intends to retain all of its earnings, if any, for use in its business and does not anticipate paying any cash dividends in the foreseeable future. The payment of any future dividends will be at the discretion of the Company’s board of directors and will depend upon a number of factors, including future earnings, the success of the Company’s business activities, regulatory capital requirements, the general financial condition and future prospects of the Company, general business conditions and such other factors as the board of directors may deem relevant.

RECENT ISSUANCES OF UNREGISTERED SECURITIES

The following table summarizes transactions during the year in which various holders of our 6% convertible notes exchanged such securities for shares of our common stock pursuant to the exemption from registration provided in Section 3(a)(9) of the Securities Act of 1933 (in thousands):

Month	Aggregate Principal Amount Exchanged		Common Shares Issued
February 2002	$	28,710	2,797
March 2002		21,210	1,923
April 2002		10,000	1,110
May 2002		5,000	622

Total	$	64,920	6,452

In December 2002, the Company issued 1,288,784 shares of common stock in connection with the acquisition of Engelman Securities, Inc. (“Engelman”). No underwriters were involved, and there were no

Index to Financial Statements

underwriting discounts or commissions. The securities were issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act based on the fact that the common stock was sold by the issuer in a transaction not involving a public offering.

In March 2002, the Company authorized the issuance of an aggregate of 78,928 shares of Company common stock in connection with its acquisition of E*TRADE’s Nordic subsidiary. No underwriters were involved, and there were no underwriting discounts or commissions. The shares were originally issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act based on the fact that the common stock was sold by the issuer in a transaction not involving a public offering. On August 20, 2002, the Company filed a registration statement with the SEC for the resale of these 78,928 shares. The registration statement was declared effective on September 25, 2002.

In May 2002, the Company issued 3,380,879 shares of common stock to E*TRADE Japan K.K. in a transaction in which E*TRADE Japan K.K. purchased these shares of Company common stock and the Company purchased 62,500 shares (as adjusted to reflect a 2-for-1 stock split on July 19, 2002) of E*TRADE Japan K.K. No underwriters were involved, and there were no underwriting discounts or commissions. The securities were issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act based on the fact that the common stock was sold by the issuer in a transaction not involving a public offering. On August 20, 2002, the Company filed a registration statement with the SEC for the resale of these 3,380,879 shares. The registration statement was declared effective on September 25, 2002.

In May 2002, the Company authorized the issuance of an aggregate of 2,100 shares of Company common stock in connection with the exercise of certain warrants to purchase shares of the Company’s common stock which were assumed in connection with the Company’s acquisition of the Bank. No underwriters were involved and there were no underwriting discounts or commissions. The securities were issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act based on the fact that the common stock was sold by the issuer in a transaction not involving a public offering.

In June 2002, the Company issued 9,400,042 shares of common stock in connection with the acquisition of Tradescape Technology Holdings, Inc. and Tradescape Momentum Holdings, Inc. No underwriters were involved, and there were no underwriting discounts or commissions. The securities were issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act based on the fact that the common stock was sold by the issuer in a transaction not involving a public offering. On September 30, 2002, the Company filed a registration statement with the SEC for the resale of these 9,400,042 shares and an additional 2,350,010 shares, held in escrow under the terms of the acquisition agreement. The registration statement was declared effective on November 26, 2002.

In July 2002, the Company issued 474,496 shares of common stock in connection with the acquisition of a license to software from A.B. Watley Group, Inc. on April 8, 2002. No underwriters were involved, and there were no underwriting discounts or commissions. The securities were issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act based on the fact that the common stock was sold by the issuer in a transaction not involving a public offering. On August 20, 2002, the Company filed a registration statement with the SEC for the resale of these 474,496 shares. The registration statement was declared effective on September 25, 2002.

Index to Financial Statements

Item 6. Selected Consolidated Financial Data

	Year Ended December 31,						Three (1) Months Ended December 31, 2000		Year Ended September 30,
	2002			2001					2000			1999			1998
	(in thousands, except per share amounts)
Consolidated Statement of Operations Data:
Net revenues	$	1,325,864		$	1,275,364		$	333,766	$	1,368,318		$	671,448		$	361,005
Facility restructuring and other exit charges(2)	$	(16,519	)	$	(202,765	)	$	—	$	—		$	—		$	—
Operating income (loss)	$	255,904		$	(185,958	)	$	6,909	$	(80,326	)	$	(149,193	)	$	(7,661	)
Gain (loss) on investments	$	(18,507	)	$	(49,812	)	$	3,582	$	211,149		$	54,093		$	—
Income (loss) before cumulative effect of accounting changes(3)	$	107,264		$	(241,532	)	$	1,436	$	19,152		$	(56,300	)	$	(402	)
Net income (loss)	$	(186,405	)	$	(241,532	)	$	1,353	$	19,152		$	(56,769	)	$	(402	)
Income (loss) per share before cumulative effect of accounting changes(3):
Basic	$	0.30		$	(0.73	)	$	0.00	$	0.06		$	(0.21	)	$	0.00
Diluted	$	0.30		$	(0.73	)	$	0.00	$	0.06		$	(0.21	)	$	0.00
Income (loss) per share:
Basic	$	(0.52	)	$	(0.73	)	$	0.00	$	0.06		$	(0.21	)	$	(0.01	)
Diluted	$	(0.52	)	$	(0.73	)	$	0.00	$	0.06		$	(0.21	)	$	(0.01	)
Shares used in computation of per share data:
Basic		355,090			332,370			311,413		301,926			272,832			195,051
Diluted		361,051			332,370			321,430		319,336			272,832			195,051

	December 31,				September 30,
	2002		2001		2000		1999		1998
	(in thousands)
Consolidated Balance Sheet Data:
Cash and equivalents	$	773,605	$	836,201	$	433,377	$	267,073	$	76,409
Brokerage receivables, net	$	1,500,089	$	2,139,153	$	6,542,508	$	2,982,076	$	1,451,468
Mortgage-backed securities	$	6,932,394	$	3,556,619	$	4,188,553	$	1,426,053	$	1,012,163
Loans, net	$	7,365,720	$	8,010,457	$	4,172,754	$	2,154,509	$	904,854
Total assets	$	21,534,248	$	18,172,414	$	17,317,437	$	8,032,174	$	4,448,140
Convertible subordinated notes and capital lease liability	$	699,727	$	778,459	$	676,903	$	—	$	—
Mandatorily redeemable capital preferred securities	$	143,365	$	69,503	$	30,647	$	30,584	$	38,385
Shareholders’ equity	$	1,505,789	$	1,570,914	$	1,856,833	$	1,451,795	$	853,059

(1)	On January 22, 2001, the Company changed its fiscal year end from September 30 to December 31; accordingly, results have been separately disclosed for the three-month transition period ended December 31, 2000.

(2)	In fiscal 2001, the Company announced a restructuring plan. See Note 21 to the Consolidated Financial Statements for a discussion of the restructuring and additional fiscal 2002 exit activities.

(3)

In fiscal 2002, a cumulative effect of a change in accounting principle resulted from the adoption by E*TRADE Group of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, which requires all goodwill and intangible assets with indefinite lives not be amortized,

Index to Financial Statements

but rather tested upon adoption and at least annually thereafter for impairment. Impairment to goodwill identified upon adoption in January 2002 is reported as a cumulative effect of accounting change. In fiscal 2002, the Company adopted SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, resulting in a reclassification of previously reported extraordinary gain (loss) on early extinguishment of debt, net of tax, to gain on early extinguishment of debt in non-operating income (expense); along with an adjustment of previously reported tax expense (benefit). In the three months ended December 31, 2000, a cumulative effect of a change in accounting principle resulted from the implementation by E*TRADE Group of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires that all derivatives be recorded on the balance sheet at fair value, with the initial application reported as the cumulative effect of a change in accounting principle. In fiscal 1999, the cumulative effect of change in accounting principle resulted from the implementation by E*TRADE Financial Corporation (“ETFC”) of Statement of Position 98-5, Reporting on the Cost of Start-Up Activities, which requires that the cost of start-up activities be expensed as incurred rather than capitalized, with the initial application reported as the cumulative effect of a change in accounting principle.

The selected consolidated financial data should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8. Consolidated Financial Statements and Supplementary Data.

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

FORWARD-LOOKING STATEMENTS

Statements made in this document, other than statements of historical information, are forward-looking statements that are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. These forward-looking statements may sometimes be identified by words such as “expect”, “may”, “looking forward”, “we plan”, “we believe”, “are planned”, “could have”, “could be” and “currently anticipate”. Although we believe these statements, as well as other oral and written forward-looking statements made by or on behalf of E*TRADE Group, Inc. from time to time, to be true and reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements. Important factors that could cause actual results to differ materially from our forward-looking statements are set forth in our other filings with the Securities and Exchange Commission and in this document under the heading “Risk Factors”, beginning on page 51 and in this section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. We caution that the risks and factors discussed below and in such filings are not exclusive. We do not undertake to update any forward-looking statement that we make from time to time.

OVERVIEW

Index to Financial Statements

All of our acquisitions from October 2000 through the end of fiscal 2002 have been accounted for under the purchase method; and, accordingly, the operating results of these entities are combined with those of the Company since the dates of acquisition.

On January 22, 2001, our fiscal year end was changed from September 30 to December 31. Fiscal 2002 and fiscal 2001 represent the twelve months ended December 31. Fiscal 2000 represents the twelve months ended September 30.

SUMMARY OF CRITICAL POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements which have been prepared in conformity with accounting principles generally accepted in the United States of America. Because we operate in the financial services industry, we follow certain accounting guidance used by the brokerage and banking industries. One of the more significant impacts of these rules is that interest income and expense from our lending and banking activities, as well as gains and losses from sales of loans and banking investments, are included in net revenues, whereas corporate interest income and expense, as well as gains and losses on corporate investments are reported as non-operating income and expense. Our consolidated balance sheet is not separated into current and noncurrent assets and liabilities. Certain financial assets, such as mortgage-backed and investment securities are carried at fair market value in our consolidated balance sheet while other assets, such as loans receivable, are carried at historic values.

Note 2 to Consolidated Financial Statements contains a summary of our significant accounting policies, many of which require the use of estimates and assumptions that affect the amounts reported in the consolidated financial statements for the periods presented. We believe that of our significant accounting policies, the following are based on estimates and assumptions that require complex, subjective judgments which can materially impact reported results:

•

Determination of the allowance for loan losses (see also Note 6 to Consolidated Financial Statements);

•

Classification and valuation of certain investments (see also Note 7 to Consolidated Financial Statements);

•

Valuation and accounting for financial derivatives (see also Note 28 to Consolidated Financial Statements);

•

Estimate of accrued restructuring costs (see also Note 21 to Consolidated Financial Statements); and

•

Valuation of goodwill (see also Note 23 to Consolidated Financial Statements).

Determination of the allowance for loan losses

Through the Bank, we originate and purchase mortgage and consumer loans that we intend to hold for the foreseeable future or until maturity or pay-off. We may not be able to collect all principal and interest due on these loans. Allowance for loan losses represents management’s estimate of probable credit losses inherent in our loan portfolio as of the balance sheet date. We perform regular reviews in order to identify inherent losses and to assess the overall credit risk of our portfolio. The determination of the allowance for loan losses involves the monitoring of delinquency, default and historical loss experience. We make estimates and assumptions regarding existing but yet unidentified losses caused by current economic conditions. If we do not adequately reserve for these uncollectible loans, we may incur additional charges to loan losses in our consolidated financial statements.

In determining our allowance for loan losses, we have established both specific and general allowances. The amount of the specific allowance is determined through a loan-by-loan analysis of certain large dollar real estate and consumer loans. Loans not individually reviewed are evaluated as a group using expected loss ratios, which are based on our historical charge-off experience, industry loss experience and current market and economic conditions. At December 31, 2002, our loan loss allowance was $27.7 million on $5,580.6 million of loans we intend to hold for investment. In determining the appropriate level of the general allowance and projecting losses

Index to Financial Statements

we make estimates based on various factors including borrower credit scores, debt-to-income ratios, loan-to-value ratios, geographic concentrations and the cost and timing of collateral repossession and disposal. Estimates are periodically measured against actual loss experience and industry loss data. Adjustments are made to future projections as assumptions are revised.

The determination of the allowance for loan losses requires management to make significant estimates with respect to the amounts and timing of losses and market and economic conditions. Accordingly, a continued decline in the national economy or the local economies of the areas in which the Bank’s loans are concentrated could result in an increase in loan delinquencies, foreclosures or repossessions resulting in increased charge-off amounts and the need for additional loan loss allowances in future periods. The Bank’s investment in consumer loans continues to increase with the addition of retail consumer loan origination platforms that were established or acquired during fiscal 2002. These loans provide higher yields than single-family mortgage loans but typically experience higher charge-off rates. The impact of adverse economic trends or events is generally more significant in consumer loan portfolios. In addition, the regulatory agencies that supervise the Bank periodically review the Bank’s allowance for loan losses. These reviews may also result in additions or deductions to the allowance for loan losses.

In addition to our banking loans described above, we extend credit to brokerage customers in the form of margin loans. At December 31, 2002, margin accounts had approximately $980 million in outstanding margin loans. We provided an allowance for uncollectible margin loans of $3.1 million based on historical experience as well as the review of certain individual customer accounts and the specific identification of uncollectible amounts.

Classification and valuation of certain investments

We generally classify our investment in debt instruments (including corporate, government and municipal bonds), mortgage-backed securities and marketable equity securities as either available-for-sale or trading. We have not classified any investments as held-to-maturity. Classification of an investment determines how it is accounted for. Investment classifications are subject to on-going review and change. When possible, the fair value of securities is determined by obtaining quoted market prices. We also make estimates about the fair value of investments and the timing for recognizing losses based on market conditions and other factors. If our estimates change, we may recognize additional losses. Both unrealized and realized gains and losses on trading securities, which are held by our Bank, are recognized in gain on sales of loans held-for-sale and securities, net. Our brokerage operations hold trading securities for market-making purposes and record the net gains as principal transactions revenues. Unrealized gains and losses on available-for-sale securities are included in accumulated other comprehensive income. Realized gains and losses and declines in fair value which we believe to be other-than-temporary are included in gain on sales of loans held-for-sale and securities, net for our banking investments and gain (loss) on investments for our non-banking investments.

At December 31, 2002, our investments in debt and mortgage-backed securities had unrealized losses of $76.6 million, which we believe to be temporary based in part on our intent to hold these securities for the foreseeable future. Consequently, we have not included these unrealized losses in the computation of our earnings.

We have investments in interest-only securities which totaled $11.9 million at December 31, 2002. Impairment of interest-only securities is recognized when the security’s fair value is less than its amortized cost and if the current present value of estimated cash flows have decreased since the last periodic estimate. For fiscal 2002, we recorded impairment losses of $16.6 million related to these interest-only securities. We also recognized a $16.3 million loss on sale of interest-only securities during fiscal 2002.

As of December 31, 2002, we held, as part of our investment portfolio, $5.8 million of asset-backed securities issued by Metris Master Trust 2000-1 and $29.2 million issued by Conseco Financial Securitizations

Index to Financial Statements

Corporation. These securities are backed by loans and receivables from multiple underlying obligors and are not direct obligations of Metris Companies or Conseco Incorporated. As of December 31, 2002, the market values of these securities were $4.7 million and $21.3 million, respectively. We performed a detailed credit and cash flow analysis of the underlying assets in each of these securities and do not believe this decline in market value represents an other-than-temporary impairment. We intend to hold these securities for the foreseeable future and continue to monitor any developments related to the cash flows associated with these securities.

We have investments in several publicly-traded and privately-held companies. Generally accepted accounting principles require that we evaluate our investments in these companies for declines in market value which we believe are other-than-temporary. Our policy is to recognize such declines when the market value of a company’s stock remains below our cost for a period of six months, unless recognized sooner based on other indicators. During fiscal 2002, we recognized losses of $12.5 million from declines in market value which we determined to be other-than-temporary related to investments in privately-held companies. See Note 7 to the Consolidated Financial Statements for further information. As of December 31, 2002, certain of the publicly-traded equity securities which we held had unrecognized losses of $0.7 million, which we believe to be temporary and consequently, we have not included these losses in the computation of our earnings.

We have made significant investments in venture capital funds, which invest in privately-held companies. Generally accepted accounting principles require venture capital funds to adjust their investments in publicly-traded and privately-held companies to reflect current market values each period. Because we account for our investments in these funds under the equity method, our earnings are impacted by the portion of market value changes allocated to us. The determination of market value for privately-held companies requires significant judgment on the part of the fund managers. The general practice in the venture capital industry is to record an increase in fair value only when it is supported by a third-party transaction, such as a sale of stock to an unrelated investor. Decreases in fair value are generally recognized upon a similar event, or sooner if general market conditions or company-specific events indicate there has been a decline in value. During fiscal 2002, we recorded losses of $9.7 million on our venture fund investments.

Valuation and accounting for financial derivatives

The Company enters into derivative transactions to protect against the risk of market price or interest rate movements on the value of certain assets and future cash flows. One of the most significant risks arises because the principal investments of the Bank are residential mortgages and mortgage-backed securities, which often pay a fixed interest rate over an extended period of time; however, the principal source of funds used to make these investments are customer deposits and other short-term borrowings whose interest rates are fixed for a much shorter period of time, if at all. In order to manage this difference in short-term and long-term interest rates, the Bank purchases interest rate derivatives, including interest rate swaps, caps and floors.

Under generally accepted accounting principles, all derivatives must be reflected in the balance sheet at their estimated fair market value. Accounting for derivatives differs significantly depending on whether or not a derivative is designated as a “hedge.” In order to qualify as a hedge, management must designate a derivative as a hedge or a transaction intended to reduce a risk associated with a specific balance sheet item or future expected cash flow at the time it is purchased, as well as continue to demonstrate that the instrument effectively hedges or reduces a risk associated with that item. We designated substantially all of our derivatives held as of December 31, 2002 as hedges. By doing so, the balance sheet items that we determine are hedged in fair value hedge relationships are adjusted to market value as well as the derivative itself, resulting in a net offset in the statements of operations to the extent that the hedge is effective. The effective portion of the gains and losses on cash flow hedges are recognized initially as a component of accumulated other comprehensive income and are recognized in earnings as a yield adjustment as the hedged forecasted transactions affect earnings. The assessment as to whether a derivative instrument will continue to meet the effectiveness requirements of generally accepted accounting principles requires assumptions and judgment about the continued effectiveness of

Index to Financial Statements

our hedging strategies and the nature and timing of forecasted transactions. We base our assumptions and judgments on the best information available to us at the time of the preparation of our financial statements. If our hedging strategies were to become ineffective or if our assumptions as to the nature and timing of forecasted transactions were to be inaccurate we would no longer be able to apply hedge accounting and our reported results would be significantly affected. More information concerning our derivatives is contained in Item 7A. Quantitative and Qualitative Disclosures about Market Risk and in Note 28 to Consolidated Financial Statements.

Estimate of accrued restructuring costs

On August 29, 2001, we announced a restructuring plan aimed at streamlining operations and enhancing profitability by consolidating facilities in the United States and Europe. The restructuring resulted in a pre-tax charge of $202.8 million in fiscal 2001, with additional charges of $11.4 million expensed in fiscal 2002. Total non-cash charges through fiscal 2002, principally the write-off of assets, total approximately $100.0 million, while the remainder represents cash obligations. As of December 31, 2002, our estimated remaining future cash obligations related to the consolidation of our facilities are $69.1 million. This includes rental payments due for certain facilities no longer to be used by the Company totaling $97.5 million, offset by our best estimate of the future sublease income we expect to receive of $28.3 million.

In calculating our initial restructuring accrual and the subsequent adjustments made through December 31, 2002, certain estimates were made including time to vacate facilities, potential future sublease terms, broker commissions and operating costs. In developing our estimates we obtained information from leasing agents to calculate anticipated sublease income. Fluctuating market conditions will continue to affect our ability to sublease facilities on terms consistent with our estimates.

Of the total $11.4 million fiscal 2002 increase in the 2001 original restructuring charges, $7.3 million was related to facility consolidation. This increase relates to changes in management’s estimates based on current economic conditions. The overall net increase in the restructuring reserve reflects lower than estimated sublease rental income combined with longer than estimated periods to sublet vacated facilities. The increase also reflects the Company’s negotiations in fiscal 2002 with a lessor on a contractual lease obligation that may require a possible one time $30.0 million payment by the Company in fiscal 2003 to facilitate the lessor’s sale of the property. In exchange, the Company expects to receive full release from its future lease obligations. The net increase in the facility consolidation reserve is partially offset by the decision to retain usage of certain facilities, resulting in the elimination of the reserve originally estimated for these facilities.

Valuation of goodwill

Goodwill represents the excess of purchase price over the fair value of net assets acquired from acquisitions. In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. Adjustments to the carrying value of goodwill and other intangible assets are made whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We adopted SFAS No. 142 effective January 1, 2002. Based on our evaluation of goodwill under the SFAS No. 142’s transitional impairment test, we recorded an impairment charge of $293.7 million in fiscal 2002, primarily attributed to the goodwill from our international acquisitions. This loss was recognized as the effect of a change in accounting principle in the first quarter of fiscal 2002. The evaluation was based on our forecast of operating results for each of the reporting units, as well as estimates of the fair values of the tangible and intangible assets of these units. In November 2002, the Company performed, with the assistance of an independent third party other than its Independent Auditors, its annual impairment test of goodwill. The test indicated that no additional impairment charge was necessary. The Company’s recorded goodwill at December 31, 2002 is $385.1 million, which will continue to be evaluated for impairment at least annually.

Index to Financial Statements

RESULTS OF OPERATIONS

Key Performance Indicators

The following tables set forth several key indicators used by management to measure our performance during the three years ended December 31, 2002, December 31, 2001 and September 30, 2000 (dollars in thousands, except cost per net new account, average assets per household and average commission per brokerage transactions):

	December 31,				September 30, 2000		Percentage Change
	December 31,						2002 versus 2001	2001 versus 2000
	2002		2001				2002 versus 2001	2001 versus 2000
Active brokerage accounts (1)(2)		3,690,916		3,511,941		3,027,362	5 %	16 %
Active banking accounts (3)		511,298		490,913		288,073	4 %	70 %

Total active accounts		4,202,214		4,002,854		3,315,435	5 %	21 %

Assets in brokerage accounts (2)	$	35,116,929	$	44,764,197	$	61,249,949	(22)%	(27) %
Deposits in banking accounts		8,400,333		8,082,859		4,630,068	4 %	75 %

Total assets/deposits in customer accounts	$	43,517,262	$	52,847,056	$	65,880,017	(18)%	(20)%

Total customer households		3,132,024		3,005,021		Not Available	4 %	Not Available

Average assets per household	$	13,894	$	17,586		Not Available	(21)%	Not Available

Net new global brokerage accounts (1)(2)		178,975		315,549		1,459,969	(43)%	(78)%
Net new banking accounts (3)		20,385		128,296		190,671	(84)%	(33)%

Total new accounts		199,360		443,845		1,650,640	(55)%	(73)%

Cost per new account	$	365	$	281	$	263	30 %	7 %
Total brokerage transactions (2)(4)(5)		22,152,137		28,231,162		42,560,692	(22)%	(34)%
Daily average brokerage transactions (2)(4)(5)		87,905		113,835		168,224	(23)%	(32)%
Average commission per brokerage transactions (2)(5)	$	12.78	$	13.38	$	15.88	(4)%	(16)%

(1)

Brokerage accounts are considered active if the account has a positive asset balance, or if a trade has been made in the account in the past six months or if the account was opened in connection with a corporate employee stock benefit program. Customers may have separate or multiple accounts for each relationship they maintain with us, including separate or multiple brokerage and banking accounts.

(2)	Brokerage account, transaction and asset data includes domestic and international information.

(3)

Bank deposit accounts are considered active if a customer account has been initially funded and the account is not considered abandoned or dormant under applicable Federal and State laws, or the account has not been closed. Bank loan accounts are considered active if the Company holds the underlying obligation or owns marketing rights to the account or customer.

(4)	For fiscal 2001, four fewer trading days are included as a result of the market closure following the events of September 11, 2001.

(5)	Excludes transactions and associated revenues from professional trading related to our acquisition of E*TRADE Professional Trading, due to the lack of comparability of their commission structure.

The following table sets forth the changes in average customer margin balances, average customer money market fund balances, average stock borrow balances, average stock loan balances and average customer credit balances for the years indicated (dollars in millions):

	Years Ended						2002 Versus 2001		2001 Versus 2000
	December 31, 2002		December 31, 2001		September 30, 2000		2002 Versus 2001		2001 Versus 2000
Average customer margin balances	$	1,250	$	2,092	$	4,427	(40	)%	(53	)%
Average customer money market fund balances	$	7,743	$	8,525	$	6,797	(9	)%	25	%
Average stock borrow balances	$	317	$	1,270	$	730	(75	)%	74	%
Average stock loan balances	$	441	$	1,761	$	3,597	(75	)%	(51	)%
Average customer credit balances	$	1,471	$	1,568	$	1,464	(6	)%	(7	)%

Index to Financial Statements

The following table sets forth the components of both gross and net revenues and percentage change information related to certain items on our consolidated statements of operations for the periods indicated (dollars in thousands):

										Percentage Change
	Year Ended December 31,						Year Ended September 30, 2000			2002 Versus 2001	2001 Versus 2000
	2002			2001			Year Ended September 30, 2000			2002 Versus 2001	2001 Versus 2000
Brokerage Revenues:
Commissions	$	301,778		$	377,704		$	675,791		(20)%	(44)%
Principal transactions		216,544			157,949			146,995		37 %	7 %
Other brokerage-related		178,744			156,690			164,006		14 %	(4)%
Interest income		182,103			305,581			463,590		(40)%	(34)%
Interest expense		(12,515	)		(86,489	)		(222,553	)	(86)%	(61)%

Net brokerage revenues		866,654			911,435			1,227,829		(5)%	(26)%

Banking Revenues:
Gain on sales of originated loans		128,506			95,478			—		35 %	—
Gain on sales of loans held-for-sale and securities, net		83,953			75,836			8,491		11 %	793 %
Other banking-related		46,184			38,587			17,543		20 %	120 %
Interest income		763,890			854,290			496,768		(11)%	72 %
Interest expense		(548,659	)		(692,786	)		(378,310	)	(21)%	83 %
Provision for loan losses		(14,664	)		(7,476	)		(4,003	)	96 %	87 %