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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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or

1-11921
(Commission file number)
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E*TRADE Group, Inc.
(Exact name of registrant as specified in its charter)

     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)

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Securities Registered Pursuant to Section 12(b) of the Act: None 

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

Title of each class 
Common Stock—$0.01 par value

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     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. [   ]

     As of November 6, 2000, 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 $3,364,633,000 (based upon the closing price for shares of the registrant’s common stock as reported by the National Market System of the National Association of Securities Dealers Regulation Automated Quotation System 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 November 6, 2000, there were 306,586,119 shares of common stock and 5,609,078 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., 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 Shareowners, to be held December 21, 2000, to be filed hereafter (incorporated into Part III hereof).

     E*TRADE Group, Inc. 

Form 10-K Annual Report 
For the Fiscal Year ended September 30, 2000 

TABLE OF CONTENTS

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

      UNLESS OTHERWISE INDICATED, REFERENCES TO “COMPANY” AND “E*TRADE” MEAN E*TRADE GROUP, INC. AND ITS SUBSIDIARIES, AND REFERENCES TO “FISCAL” MEAN THE COMPANY’S YEAR ENDED SEPTEMBER 30 (E.G., “FISCAL 2000” REPRESENTS THE PERIOD OCTOBER 1, 1999 TO SEPTEMBER 30, 2000).

     E*TRADE, the E*TRADE logo, E*TRADE Bank, E*TRADE ATM, ClearStation, Equity Edge, Equity Resource, OptionsLink, ShareData, Stateless Architecture, Power E*TRADE, Destination E*TRADE, and TELE*MASTER are servicemarks or registered marks of E*TRADE Group, Inc. or its subsidiaries in the United States. Some of these and other trademarks are registered outside the United States.

PART I

ITEM 1. BUSINESS

           E*TRADE Group, Inc. (“E*TRADE”) is a global leader in online personal financial services offering value-added investing, banking, research and educational tools, premium customer service and a proprietary Stateless Architecture^® infrastructure to our customers through services provided by our wholly-owned subsidiaries, including but not limited to, E*TRADE Securities, Inc. (“CCS”), (“E*TRADE Securities ”), TIR (Holdings) Limited (“TIR”), E*TRADE Bank (the “Bank”), Card Capture Services, Inc., now E*TRADE Access Inc. (“E*TRADE Access”), VERSUS Technologies, Inc. (“VERSUS”) and other international subsidiaries. We were incorporated in California in 1982 and were reincorporated in Delaware in July 1996. Our principal corporate offices are located at 4500 Bohannon Drive, Menlo Park, CA 94025. We offer automated order placement and e xecution, financial products and services that can be personalized, including portfolio tracking, charting and quote applications, “real-time” market commentary and analysis, news, professional research reports and other information services. Our products also include mutual funds, proprietary mutual funds, bond trading, banking, automated teller machine (“ATM”) services, and access to participate in initial public offerings (“IPOs”). We provide our services 24 hours a day, 7 days a week by means of the Internet, automated telephone service, dire ct modem access, Internet-enabled wireless devices, and live telephone support.

During fiscal 2000, we expanded and diversified our business, executing upon our three key business strategies:

To build an efficient electronic business model

We have continued to build our technology infrastructure to increase the electronic delivery of statements, transaction confirmations, real-time account  openings, and access to our products and services through wireless platforms and content providers. In addition, we have expanded the capabilities of our technology infrastructure through the expansion of capacity and speed of execution.

To grow global, diversified revenue streams through strategic market initiatives, globalization, and acquisitions

We have diversified our revenue streams in fiscal 2000 through the acquisitions of Telebanc FinancialCorporation (“Telebanc”), now E*TRADE Financial Corporation (“ETFC”), the holding company ofE*TRADE Bank, and E*TRADE Access, VERSUS, and several of our international affiliates. With the acquisitions of ETFC and E*TRADE Access, we have begun to offer banking services through a nationwide network of ATMs. We have also positioned ourselves to grow internationally by increasing our institutional client base worldwide and enhancing our ability to conduct cross-border trading through the acquisitions of VERSUS and several other foreign affiliates. E*TRADE now serves over 465,000 international customers and has nine retail branded Web sites outside the United States.

To combine choice, service, product density, and personalization to provide superior, simplified financial solutions for our customers

Our asset gathering strategy has been designed to expand the value we provide to and derive from each of our customers. Through our acquisition of Electronic Investing Corporation (“eInvesting”) in July 2000, we will enable our customers to create personalized portfolios of securities via the Internet and trade in dollar denominated transactions. Our recent partnership with Ernst & Young, LLP (“E&Y”) will give our customers access to electronic advisory services and E&Y’ network of financial planners through a new company, Bright Future, Inc., conducting business as eAdvisor. Through strategic alliances with State Street Bank and Wit Soundview Group, Inc. (“Wit”), we will expand our asset management services by providing customers access to tax-advantaged college savings products, access to participation in IPOs, and Wit’s world class research tools. Our cross-selling ability between brokerage, banking, global and institutional, and asset gathering customers, will enable us to diversify revenue by increasing services and products to our existing customers while minimizing costs to acquire new accounts. Also, through the acquisition of PrivateAccounts, Inc. (“PrivateAccounts”) in October 2000, we expect to further expand our product portfolio to offer separate account management services for those investors who are looking for private management of their money.

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           In January 2000, we completed our acquisition of Telebanc, now ETFC. ETFC is the holding company of E*TRADE Bank, formerly Telebank, an Internet-based, federally chartered savings bank. We issued approximately 35.7 million shares of our common stock in connection with the acquisition. We pursued this acquisition primarily in order to enable us to become a competitive and immediate participant in the online banking market, thereby broadening our product portfolio and creating a leading end-to-end, “one-stop-shop” portal for managing personal finances and financial services online. The transaction was accounted for as a pooling of interests, and accordingly, all historical information has been prepared to give retroactive effect to the acquisition.

           In August 2000, we acquired the outstanding shares of VERSUS, a Canadian-based provider of electronic securities trading services for institutional and retail investors and owner of the E*TRADE Canada license, in a share exchange. Through the acquisition of VERSUS, we increased our retail and institutional client base and will be able to incorporate the technology underlying the VERSUS Network, a scalable proprietary electronic trading platform, into our global cross-border trading platform, enabling institutions and investment dealers worldwide to route orders globally through our trading networks. Each VERSUS shareowner received approximately .725 shares of E*TRADE common stock or shares of EGI Canada Corporation (“ECC ”) that are exchangeable for shares of E*TRADE common stock (the “Exchangeable Shares”) for every VERSUS share held (see Note 3 to the Consolidated Financial Statements). Options held by VERSUS associates were assumed by E*TRADE and, upon exercise, are convertible into approximately .725 shares of E*TRADE common stock. The acquisition was accounted for as a pooling of interests, and accordingly, all historical information has been prepared to give retroactive effect to the acquisition.

           We have further expanded globally during fiscal 2000 through several key acquisitions of former licensees and through the formation of joint ventures. During the first quarter of fiscal 2000, we acquired 100% of the equity in E*TRADE U.K., E*TRADE Nordic AB, and E*TRADE NetBourse, which owns a 34% interest in CPR E*TRADE in France, expanding our branded Web site to customers in the United Kingdom, France, the Nordic countries, the Netherlands, Luxembourg, Austria, and Italy. However, we terminated our relationship with CPR E*TRADE in France in September 2000 and are now evaluating new opportunities in the French market. Acquisitions of our international affiliates, with the exception of VERSUS, have been accounted for under the purchase method.

           During fiscal 2000, we also entered into joint venture agreements to establish online retail brokerage operations in Korea, Germany, and Norway. E*TRADE Korea was launched to offer customers in Korea attractive trading rates that provide significant savings compared to competitors’ fees and no fees for deposits and other services. We maintain a 10% investment in E*TRADE Korea. The E*TRADE Germany AG joint venture has capitalized on the German market’s strong growth in electronic personal financial services. We subsequently signed an agreement to increase our ownership percentage of E*TRADE Germany AG from 60% to 100% in the first quarter of fiscal 2001. E*TRADE Norway offers Norwegian and Swedish stocks and options trading to retail investors in Norway and gives us access to over 1.4 million clients of our joint venture partner. E*TRADE Japan KK was also launched and went public in fiscal 2000, at which point we sold a portion of our investment resulting in a gain of approximately $77.5 million, and reducing our ownership percentage from 42% to 32%. The launch of E*TRADE Japan KK coincided with the deregulation of Japanese brokerage commission rates and enabled us to determine the commission structure for securities transactions for our Japanese investors, presenting them a wider range of investing opportunities than previously available. In the first quarter of fiscal 2001, E*TRADE South Africa was launched to offer online trading of stocks and warrants listed on the Johannesburg Stock Exchange as well as comp rehensive market information to the largest investor market in Africa.

           During the third quarter of fiscal 2000, we launched the first phase of our cross-border trading network, allowing investors in Sweden to purchase U.S. securities online in their own currency. We will continue to roll out cross-border trading in Australia and U.S. trading of foreign equities in fiscal 2001. We now serve customers through branded Web sites in Australia, Canada, Denmark, Japan, Korea, New Zealand, Norway, South Africa, Sweden, and the U.K. We expect to continue our global expansion efforts throughout fiscal 2001.

           With the expansion of our business during fiscal 2000, we have separated our financial services into four major categories: 1) Domestic Retail Brokerage, 2) Banking, 3) Global and Institutional, and 4) Asset Gathering and Other. Domestic Retail Brokerage is comprised of the activities of our wholly-owned subsidiary, E*TRADE

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Securities, which offers domestic retail brokerage services by means of the Internet, automated telephone service, direct modem access, Internet-enabled wireless devices, and live telephone support. Banking is comprised primarily of the activities of the Bank, offering a wide range of Federal Deposit Insurance Corporation (“FDIC”)-insured and other banking products, and E*TRADE Access, which operates a nationwide network of over 9,600 ATMs. These channels, in addition to the E*TRADE Zone, a service center located in the SuperTarget store in Roswell, Georgia, offering guests access to integrated banking, brokerage and investment planning services, and our 540 Madison Avenue, New York location, expected to open in the second quarter of 2001, will enhance customer convenience and extend the reach of our financial services portal by offering a blended approach to our services, combining “high-tech” with “high-touch,” through a physical E*TRADE presence. Global and Institutional includes the activities of TIR, which provides services primarily to institutional investors, VERSUS, which provides both retail and institutional services, and our international affiliates which provide services primarily to non-domestic retail investors. These channels have allowed us to expand internationally and our expanding technology in these sectors has enabled us to launch the first phase of our cross-border trading platform, allowing retail customers in Sweden and Norway to buy U.S. equities in real time, online. In addition, we are developing an electronic trading platform for our institutional customers. Asset Gathering and Other includes our mutual fund operations, the Business Solutions Group (“BSG”), eInvesting, and other services focused on retirement/401(k) programs, college savings plans, delivery of electronic advice and money management, tiered product offerings and activities generated from our corporate operations. As the Asset Gathering and Other operations of our business represent emerging activities which are not material to our consolidated results for segment reporting purposes, management has combined Asset Gathering and Other with Domestic Retail Brokerage to form one of three reportable segments. Banking and Global and Institutional comprise the other two reportable segments constituting the manner in which management currently evaluates company performance.

     For financial information by segment and geographic area for the three years ended September 30, 2000, see Note 23 to the Consolidated Financial Statements. No material part of our consolidated revenue is received from a single customer.

DOMESTIC RETAIL BROKERAGE

Business Overview

           Our domestic retail brokerage business is comprised of the activities of E*TRADE Securities. As of September 30, 2000, we had 2,952,000 active brokerage accounts, up 90% for the year, with assets held in customer brokerage accounts in excess of $59.9 billion, up 111% from last year. In fiscal 2000, we added 1,401,000 net new active brokerage accounts, an increase of 39% over the number of net new brokerage accounts added in fiscal 1999. Our average daily transaction volume was 167,000 in fiscal 2000, a 144% increase over the average daily transaction volume of 68,500 in fiscal 1999. The strong gains in new brokerage accounts, transactions and assets represent the success of our strategy to become the branded, global leader and recognized authority in electronic personal financial services as led by our domestic retail brokerage business. This strategy involves:

• leveraging our powerful brand to increase new customer accounts and assets held in customer accounts by offering a unique and compelling online experience;
  
• providing the broadest range of high-value-added tools, products and services;
  
• enabling ‘‘anytime, anywhere, anyway’’ access, worldwide, to actionable information; and
  
• integrating a broad-based digital financial media strategy with existing product and service offerings.
  

Products and Services

           Our domestic retail brokerage and related investment 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 financial market news and information. We offer our services to consumers through a broad range of electronic gateways, including the Internet, automated telephone service, Internet-enabled wireless devices, direct modem access, and live telephone representatives available 24 hours a day, 7 days a week. Customers have access to current account information regardless of which gateway they are using. We expanded our services significantly during fiscal 2000

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with several important new offerings, including wireless access to quotes and trading, pre-open trading, online documents, and real-time account opening and funding.

           We continually strive to increase the functionality of our services, as well as to offer new services that enhance customers’ online investing experiences. Our services give consumers increased control over their personal investments by providing a link to the financial markets and to financial information through a user interface that can be customized and personalized. Our existing services and product offerings are described below.

       Stock, Option, Fixed Income and Mutual Fund Investing

           Customers can directly place orders to buy and sell NASDAQ and exchange-listed securities, as well as equity and index options, bonds and mutual funds through our automated order processing system. In fiscal 2000, we extended our trading window to include the hours from 8:00am-6:30pm Eastern Standard Time (“EST”), supporting trading for an additional 4 hours outside the regular market window. We support a range of order types, including market orders, limit orders (good-until-canceled or day), stop orders and short sales. System intelligence automatically checks the parameters of an order, together with the customer’s available cash balance and positions held, prior to executing an order. All market orders for exchange-listed securities (subject to certain size limitations) are executed at the National Best Bid/Offer (‘‘NBBO’’) or better, at the time of receipt by the third market firm or exchange. The NBBO is a dynamically updated representation of the combined highest bid and lowest offer quoted across all United States stock exchanges and market makers registered in a specific stock. Eligible orders are exposed to the marketplace for possible price improvement, but in no case are orders executed at a price inferior to the NBBO. Limit orders are executed based on an indicated price and time priority. All NASDAQ market orders, subject to certain size limitations, are executed at the Best Bid/Offer, Inside Market or better at the time of receipt by the market-maker. All transaction and portfolio records are automatically updated to reflect trading activity. Buy and sell orders placed when the markets are closed are automatically submitted prior to the next day’s market opening unless the customer chose to enter the order as an extended-hours transaction. Account holders receive electronic notification of order executions, printed transaction confirmations and detailed statements. We also arrange for the transmittal of proxy, annual report and tender offer materials to customers.

      Market Data and Financial Information

           We continuously receive a direct feed of detailed quote data, market information and news. Customers can create their own personal lists of stocks and options for quick access to current trading information. We provide our customers and members free real-time price quotes, including stocks, options, major market indices, most active issues, and largest gainers and losers for the major exchanges. Users are alerted when a stock hits the price, volume or price to earnings ratio that they set. Through our alliances, we also provide access to breaking news, charts, market commentary and analysis and company financial information from over a dozen branded partners. As with after-hours trading, customers can access extended hours quotes, get breaking market news, and place orders. This service is made available via our relationship with the Archipelago Electronic Communications Network.

      Portfolio Tracking and Records Management

           Customers have online access to a listing of all their portfolio assets held by us, including data on the date of purchase, cost basis, current price and current market value. The system automatically calculates unrealized profits and losses for each asset held. Detailed account balance and transaction information includes cash and money market fund balances, buying power, net market portfolio value, dividends received, interest earned, deposits and withdrawals. Brokerage history includes all orders, executions, changes and cancellations. Tax records include total short-term or long-term gain/loss and commissions paid. Customers and registered members can also create watch lists to include most financial instruments a customer is interested in tracking—for example, assets held at another brokerage firm. These watch lists can include stocks, options, bonds and many mutual funds. In fiscal 2000, we introduced Online Documents, an optional service that allows customers to receive and view official account statements and transaction confirmations via the Internet, providing added convenience.

      Cash Management Services

         Fiscal 2000 marked the introduction of E*TRADE Account Express, a service that allows customers to open and fund new brokerage accounts in real-time via the Internet, streamlining the application process and minimizing paperwork for qualified customers. We continue to receive customer payments through the mail, federal wire system

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or the Internet, and credit these funds to customer accounts upon receipt. We also provide other cash management services to our customers. For example, uninvested funds earn interest in a credit interest program or can be invested in one of nine money market mutual funds. In addition, we provide free checking services with no minimum balance requirement through a commercial bank and are exploring the expansion of these services. We also offer electronic funds transfer via the Internet and an automatic deposit program to allow scheduled periodic transfers of funds into customers’ E*TRADE accounts.

     Other Services

          Fiscal 2000 marked significant progress in our quest for a leadership presence in wireless finance. Through alliances with AT&T Wireless, Sprint PCS, Verizon Wireless, Nextel Communications, OmniSky and OracleMobile, we are furthering our wireless strategy with the potential to offer our integrated wireless products and services to over 50 million wireless subscribers nationwide.

          Our DSL program acknowledges the value of high-speed internet access, providing a premium service for our most active investors. Power E*TRADE Basic customers (more than 30 transactions per quarter) receive free DSL installation and discounted service. Power E*TRADE Platinum customers (more than 75 transactions per quarter) receive free installation and free monthly service. This program is delivered via our partnership with SBC Communications.

          Our OptionsEdge service launched in fiscal 2000. OptionsEdge establishes E*TRADE as a leader in the options arena, providing free real-time options quotes to customers and members, most active options content, and powerful tools such as options chains and a Black-Scholes calculator.

Customers and Markets

          Current domestic retail brokerage customers will continue to be a key target in our marketing communications as they represent a major opportunity for growing total assets and leveraging our cross-selling business strategy. We plan to expand our customer base with the acquisition of online investors from competitive brokerages, investors with traditional brokerage relationships, and new investors who are just beginning to build their financial future. We believe that a common goal of our customers is to take personal control of their finances and leverage timely ideas, insights and information to build wealth.

          The domestic retail brokerage business plans to utilize the strength of its marketing partnerships, online and offline alliances and a sophisticated prospecting approach to identify, reach and convert new customers. The primary focus of these efforts will be on high-value investors, active traders and investors who have a strong affinity with one of our marketing partners.

Operations

     Clearing

          Clearing operations include the confirmation, receipt, settlement, custody and delivery functions involved in securities transactions. Performing our own clearing operations allows E*TRADE Securities to retain customer free credit balances and securities for use in margin lending activities subject to Securities and Exchange Commission (“SEC”) and National Association of Securities Dealers Regulation, Inc. (“NASDR”) rules. E*TRADE Securities has an agreement with BETA Systems through July 2003, 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.

          As a self-clearing brokerage, customers' securities typically are held in nominee name on deposit at one or more of the recognized securities industry depository trust companies, to facilitate ready transferability. We collect dividends and interest on securities held in nominee name and make the appropriate credits to customer accounts. We also facilitate exercise of subscription rights on securities held for our customers. We arrange for the transmittal of proxy, annual report and tender offer materials to customers. E*TRADE Securities relies on certificate counts and microfilming procedures as deterrents to theft of securities and, as required by the NASDR and certain other regulatory authorities, carries fidelity bonds covering loss or theft.

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     Lending and Borrowing Activities

          Margin Lending. We make loans to customers that are collateralized by customer securities. Our margin lending is subject to the margin rules of the Board of Governors of the Federal Reserve System, NASDR margin requirements and our internal policies, which are more stringent than the Federal Reserve and NASDR 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 to below the customers’ indebtedness before the collateral can be sold, which could result in losses to us. Under applicable NASDR rules, in the event of a decline in the market value of the securities in a margin account, we are generally obligated to require the customer to deposit additional securities or cash in the account so that, at all times, the customer’s equity in the account is at least 25% of the value of the securities in the account. Our current internal requirement, however, is that the customer’s equity not fall below 30%. In the event a customer’s equity falls below 30%, the customer will be required to increase the account’s equity to 35%. Margin lending to customers constitutes the major portion of the basis on which our net capital requirements are determined under the SEC’s Net Capital Rule. To the extent these activities expand, our net capital requirements will increase. See “Item 7. Risk factors—We may be fined or forced out of business if we do not maintain the net capital levels required by regulators’’ and ‘‘Item 7. Risk factors—As a significant portion of our revenues come from online investing services, any downturn in the securities industry could significantly harm our business.’’ 

          Securities Lending and Borrowing. We borrow securities both to cover 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 executed pursuant to written agreements with counterparties that require that the securities borrowed be ‘‘marked-to-market’’ on a daily basis and that excess collateral be refunded or that additional collateral be furnished in the event of changes in the market value of the securities. The securities usually are ‘‘marked-to-market’’ on a daily basis through the facilities of the various national clearing organizations.

     Order Processing

          All market orders for exchange-listed securities (subject to certain size limitations) are executed at the NBBO or better, at the time of receipt by the third market firm or exchange. The NBBO is a dynamically updated representation of the combined highest bid and lowest offer quoted across all United States stock exchanges and market makers registered in a specific stock. Eligible orders are exposed to the marketplace for possible price improvement, but in no case are orders executed at a price inferior to the NBBO. Limit orders are executed based on an indicated price and time priority. All NASDAQ market orders, subject to certain size limitations, are executed at the Best Bid/Offer, Inside Market or better at the time of receipt by the market-maker. All transaction and portfolio records are automatically updated to reflect trading activity. Buy and sell orders placed when the markets are closed are automatically submitted prior to the next day’s market opening unless the customer chose to enter the order as an extended-hours transaction. Account holders receive electronic notification of order executions, printed transaction confirmations and detailed statements. See “Item 7. Risk factors—We could be subject to customer litigation and our reputation could be materially harmed if our ability to correctly process customer transactions is slowed or interrupted.’’ 

          The market for online investing services, particularly over the Internet, is rapidly evolving and intensely competitive, and we expect competition to continue to intensify in the future. See “Item 7. Risk factors—Our business will suffer if we cannot effectively compete.’’

          The securities industry in the United States is subject to extensive regulation under both federal and state laws. See “Item 7. Risk factors—Our ability to attract customers and our profitability may suffer if changes in government regulation favor our competition or restrict our business practices’’ and “Item 7. Risk factors—We may be fined or forced out of business if we do not maintain the net capital levels required by regulators.’’

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     Access and Delivery of Services

          Our services are widely accessible through multiple gateways, with automated order placement available 24 hours a day, 7 days a week by personal computer, touch-tone telephone, Internet-enabled wireless devices, and live telephone representatives. In August 1999, we further enhanced our ability to offer a superior customer experience by introducing access to live agent customer service on a 24×7×366 basis.

• Personal Computer. Customers using personal computers can access our system through the Internet or direct modem access. Our Web site combines an easy-to-use graphical user interface with the trading capabilities that experienced investors demand. The Web-based system also includes direct links to many investment-related resources on the Web. Alternatively, accessing our system by dialing directly through a modem offers a method for connecting to the trading system independent of either the Internet or a proprietary online service.
  
• Touch-tone Telephone. TELE*MASTER^®, our interactive investing system, provides customers with a convenient way to access quotes, place orders and access portfolio information using their voice or a touch-tone telephone keypad.
  
• Internet-enabled Wireless Devices. Customers may access our system via Internet-enabled wireless phones supporting the Handheld Device Markup Language (HDML) or Palm VII with built in modem or Palm V handheld computer equipped with an after-market wireless modem addition. Our Mobile E*TRADE suite of products allow customers to access quotes, place orders, view portfolio and account information and retrieve customized investment-related information wherever the customer’s wireless provider offers data coverage.
  

BANKING

Business Overview

          Our banking segment is primarily comprised of the business activities of the Bank and E*TRADE Access. The Bank offers high value financial products and services primarily over the Internet. Like traditional banks, we provide a wide range of FDIC-insured and other banking products and services to customers. Unlike traditional banks, we deliver these products and services through the Internet, telephone and ATMs, thus eliminating the costs associated with brick-and-mortar branches. We believe that this cost-efficient banking platform allows us to offer significantly higher rates and lower fees than traditional banks and enables worldwide delivery of products and services through “anytime, anywhere, anyway” access. We believe that our low cost structure is a significant competitive advantage over traditional banks with brick-and-mortar branches. 

          Currently, approximately 87% of our banking customer contacts occur over the Internet. Using our secure, comprehensive and customer-friendly Web site, individuals can open accounts, view consolidated balance statements, transfer funds between accounts (both intra-bank and intra-E*TRADE), pay bills and compare our premium rates to national averages. Additionally, we seek to provide superior customer service through highly trained customer service representatives located in our call centers, which are open 24 hours a day, 7 days a week.

          In May 2000, we completed our acquisition of CCS, now E*TRADE Access, the largest independent network of centrally-managed ATMs in the U.S. This acquisition, a critical component of our “high tech, high touch” strategy, enabled us to deploy a nationwide ATM network of over 9,600 machines located in 48 states and 3 countries. We believe that our ATM network will enhance customer convenience and extend the reach of our financial services portal by providing physical touch-points for services. Importantly, the deployment of the ATM network does not require an investment in traditional brick-and-mortar branches. We are currently developing Financial Services Kiosks that offer advanced functionality and serve as a cost-effective delivery channel for cross-selling our products and services. We believe that the physical touch-point provided by our ATM network will expedite the adoption of Internet banking.

          Our core banking strategy – high value products and services, superior customer service and “anytime, anywhere, anyway” convenience – has produced significant growth. From 1993 to 1997, deposits at the Bank increased at a compound annual growth rate of 47%. From 1997 through 2000, deposits increased at a compound annual growth rate of 140%. Future growth will be driven by continued adherence to this core strategy.

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          We are focused on cross-selling banking products to the E*TRADE customer base. Since acquiring ETFC in January 2000, the percentage of new banking accounts generated from “cross-sold” customers were 40%, 30%, and 7%, in the fourth, third, and second quarters, respectively, of fiscal 2000. Working with our Business Solutions Group, we have also begun to expand our electronic/physical presence in major corporations. During the third quarter of fiscal 2000, we announced that we will install E*TRADE ATMs at Oracle Corporation’s major facilities to provide a range of banking and financial services to Oracle’s 40,000+ employees. We expect to create similar “Virtual Credit Unions” for other companies during fiscal 2001. 

          Currently, we offer loans, credit cards and insurance products through strategic partnerships with other companies. We are evaluating whether to offer proprietary products in these areas.

          The Bank asset acquisition strategy continues to be conservative. We purchase and manage pools of one-to-four family residential, first lien mortgage loans and investment-grade mortgage-backed securities. We do not currently originate residential mortgages or other loans, but instead purchase them in the secondary market.

Products and Services

          We offer a variety of deposit products. Our interest checking accounts are designed for customers who seek premium yields and outstanding benefits, including unlimited personal check writing, free check printing, free Internet banking, free unlimited online bill payment, access to a nationwide ATM network, and an ATM/debit card. Our money market and SmartSaver accounts are designed for consumers who are seeking premium and super premium yields with immediate access to funds without term restrictions or early withdrawal penalties. Our standard certificates of deposit (“CDs”) are designed for consumers who want a fixed premium yield for terms ranging from three months to five years. For those consumers who seek an even higher premium yield CD, we offer seven-to-ten year callable CDs, which are subject to redemption by us anytime after two years.

          We currently offer several financial products through strategic alliances with other companies. Through E-Loan, an online mortgage broker, we offer co-branded, rate-competitive residential mortgage loans to our customers. Through InsWeb and Answer Financial Inc., we offer insurance products, and through First USA, we offer credit card services. We are evaluating whether to offer proprietary products in these areas.

Customers and Markets

          We serve customers in all 50 states and several foreign countries. Over 68% of the Bank’s customer base is concentrated in U.S. major metropolitan areas. In line with our marketing efforts, the Bank’s highest concentration of customers are found in the cosmopolitan areas of Philadelphia (31.7%), New York (18.4%), Washington/Baltimore (15.3%), Los Angeles (8.0%), San Francisco (5.0%) and Chicago (4.5%).

Operations

          With E*TRADE and ETFC as savings and loan holding companies and the Bank as a federally chartered savings bank, we are subject to extensive regulation, supervision and examination by the Office of Thrift Supervision (‘OTS’’) as our primary federal regulator. We are also subject to regulation, supervision and examination by the FDIC. Further, as a financial services holding company, we are also subject to the SEC’s Industry Guide 3 reporting requirements. Certain disclosure of financial information required by Guide 3 with respect to our banking services is provided below as a part of our discussion of banking operations.

          Prior to its acquisition, ETFC reported its results of operations on a fiscal year ending December 31. Because we report on a fiscal year ending September 30, financial information contained in this document for fiscal 2000 and 1999 includes the results of ETFC for the twelve months ended September 30, 2000 and 1999. Fiscal 1998, 1997 and 1996 include the results of ETFC for the twelve months ended December 31, 1998, 1997 and 1996, respectively. Accordingly, the reconciliation of activities in certain accounts presented herein for the year ended September 30, 1999 will begin with the October 1, 1998 balance, whereas the September 30, 1998 reconciliation will cover ETFC’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.

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     Lending Activities

          General. As part of our banking operations, we purchase whole loans and mortgage-backed and related securities rather than produce or originate loans.

          Loan Portfolio Composition. At September 30, 2000, our net loans receivable totaled $4.2 billion or 46.2% of total bank assets. As of the same date, $4.2 billion, or 99.81%, of the total gross loan portfolio, consisted of one- to four-family residential mortgage loans. Prior to 1990, we originated a limited number of loans for the purchase or construction of multi-family and commercial real estate. However, as part of our general operating strategy and in response to risks associated with multi-family and commercial real estate lending and prevailing economic conditions, we stopped originating and purchasing such loans. At September 30, 2000, multi-family, commercial, and mixed-use real estate loans amounted to $3.4 million, or 0.08%, of our total gross loan portfolio. The loan portfolio also included second trust residential mortgages, home equity lines of credit, automobile loans and loans secured by savings deposits totaling $4.3 million, or 0.11%, of our total gross loan portfolio at September 30, 2000.

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       The following table presents information concerning our banking loan portfolio, in dollar amounts and in percentages, by type of loan.

______________

(1) Includes loans secured by automobiles and manufactured housing.

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          Maturity of Loan Portfolio. The following table shows, as of September 30, 2000, the dollar amount of non-originated loans maturing in our portfolio in the time periods indicated. This information includes scheduled principal repayments, based on the loans’ contractual maturities. We report demand loans, loans with no stated repayment schedule and no stated maturity, and overdrafts as due within one year. 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 below.

          The following table shows, as of September 30, 2000, the dollar amount of our loans that mature after September 30, 2001. We have allocated these loans between those with fixed interest rates and those with adjustable interest rates.

          Some loans contain due-on-sale clauses, which give us the right to declare a conventional loan immediately due and payable in the event, among other things, that the borrower sells the property. However, if market interest rates on current mortgage loans climb to a level substantially higher than rates on loans that we own, the average life of our loans tends to increase. Conversely, the average life of our mortgage loans tends to decrease when market interest rates on current loans fall substantially below rates on loans that we own.

          Purchase of Loans. Substantially all of our loans are originated by third parties. The following table shows our loan purchases during the periods indicated.

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          Additionally, during 1998, we acquired approximately $150.0 million in loans through our acquisition with Direct Financial Corporation (‘‘DFC’’).

          The following table shows our loan, purchase, sale, and repayment activity during the periods indicated including loans acquired through business combinations.

          Our primary method of purchasing loans is through the secondary market, utilizing private investors. We purchase the loans in pools made up of multiple whole loans. In fiscal 2000, 1999 and 1998 we purchased 851 pools with 7,047 loans, 477 pools with 6,245 loans and 171 pools with 2,472 loans, respectively.

          We have not originated any consumer loans during fiscal 2000, 1999 or 1998. Prior to fiscal 1998 we originated consumer loans as an accommodation to our customers or purchased such loans as part of larger loan packages. To service our loan portfolio, we enter into loan servicing contracts with multiple third party servicers.

          CRA Lending Activities. The Bank participates in various community development programs in an effort to meet its responsibilities under the Community Reinvestment Act (‘‘CRA’’). We invest in loans or other investments secured by affordable housing for low- or moderate-income individuals and have committed to invest up to $500,000 in a low-income housing tax credit fund that qualifies as a community development loan under the CRA. Senior management of the Bank serves on the boards of directors of non-profit organizations to promote community development. We also provide loan servicing for Habitat for Humanity of Northern Virginia, Inc., a non-profit organization whose purpose is to create affordable housing for those in need.

          In 1995, the federal financial regulatory agencies revised the regulations that implement the CRA. The revised regulations set forth specific types of evaluations for wholesale banks, which are those that are not in the business of extending home mortgage, small business, small farm, or consumer loans to retail customers. Satisfaction of a wholesale bank’s responsibilities under the CRA is measured by various criteria including the number and amount of community development loans, qualified investments, or community development services, and the use of innovative or complex community development services, qualified investments, or community development loans. The Bank has been approved as a wholesale bank and is currently in compliance with CRA requirements.

     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

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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 Real Estate Owned (“REO”).

          Non-performing Assets. Non-performing assets consist of loans for which interest is no longer being accrued, troubled debt restructuring (“TDRs”) which are loans that have been restructured in order to increase the opportunity to collect amounts due on the loan and real estate acquired in settlement of loans. Interest previously accrued but not collected on non-accrual loans is reversed against current income when a loan is placed on non-accrual status. Accretion of deferred fees is discontinued for non-accrual loans. All loans at least ninety days past due, as well as other loans considered uncollectible, are placed on non-accrual status. Payments received on non-accrual loans are applied to principal when it is doubtful that full payment will be collected.

          REO. We initially record REO at estimated fair value less selling costs. Fair value is defined as the estimated amount that a real estate parcel would yield in a current sale between a willing buyer and a willing seller. Subsequent to foreclosure, management periodically reviews REO and establishes an allowance if the estimated fair value of the property, less estimated costs to sell, declines.

          As of September 30, 2000, all of our REO consisted of one- to four-family real estate loans.

          The following table presents information about our non-accrual loans, TDRs, and REO at the dates indicated.

          During fiscal 2000, our non-performing assets increased by $4.0 million, or 45.3%, to $12.9 million at September 30, 2000 from $8.9 million at September 30, 1999. As a matter of policy, we actively monitor our non-performing assets.

          During fiscal 2000 and 1999, if our non-accruing loans had been performing in accordance with their terms, we would have recorded interest income of approximately $845,000 and $550,000, respectively. However, none of the interest income disclosed was recognized as income during the periods.

          Special Mention Loans. In certain situations, a borrower’s past credit history may lead to doubt regarding 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 $148,000 of the total loan portfolio at September 30, 2000, and are actively monitored.

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          Allowance for Loan Losses. As an investor in mortgage loans, we recognize that we will experience occasional credit losses. We believe the risk of credit loss varies with, among other things, 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 quality of the security for the loan.

          Our policy is to maintain an adequate allowance for loan losses based on, among other things, 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 confirmed.

          In establishing the allowance for loan losses, we set up specific allowances for probable losses that we have identified on specific loans. Additionally, we provide an unallocated allowance for estimated expected losses in the remainder of the loan portfolio. 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 trends;
  
• current charge-off and loss experience;
  
• the state of the real estate market; and
  
• general economic conditions.

          During fiscal 2000, we recorded a net increase of $3.8 million in the allowance for loan losses. The increase resulted from an additional provision of $4.0 million, offset by net charge-offs of $234,000. As of September 30, 2000, the total allowance for loan losses was $10.9 million, of which $391,000 represented reserves established by management for probable losses on specific loans.

          The general allowance is computed on loans with a specific allowance based on an assessment of performing loans. Each month, the performing loan portfolio is stratified by asset type—one- to four-family, commercial, consumer, etc.—and a range of expected loss ratios is applied to each type of loan. Expected loss ratios range between 15 basis points and 300 basis points depending upon asset type, loan-to-value ratio and current market and economic conditions. The expected loss ratios are based on historical loss experience, adjusted to reflect industry loss experience as published by the OTS.

          Also considered in the reserve computation is the positive impact of loans acquired that have a seller or third party credit enhancement. As of September 30, 2000, total loans receivable included nine pools of credit-enhanced one- to four-family mortgage loans totaling $30.9 million, or 0.74%, of total gross loans outstanding. Reserves are not provided for loans in which the credit enhancement amount exceeds the amount of reserves that would otherwise be required. We have purchased certain loans with an expectation that not all contractual payments of the loan will be collected. Discounts attributable to credit issues are tracked separately and are not included as a component of the allowance for loan losses.

          The loan portfolio provision recorded for fiscal 2000 was based upon the level of charge-offs and the significant growth in the portfolio. We believe that the combination of our loan loss allowance, net credit discount, and credit enhancement on certain loan pools is adequate to cover estimated losses.

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          We believe that we have established our existing loss allowances in accordance with generally accepted accounting principles. However, circumstances may change, regulators may request us to increase our allowance for losses. Such an increase could negatively affect our financial condition and earnings. The increase in the allowance for loan losses reflects the significant increase in the loan portfolio, from $2,184 million at September 30, 1999 to $4,226 million at September 30, 2000, and the fact that the Bank purchases, rather than originates in house, the majority of its loans. Even though our historic charge-offs are minimal, $253,000 and $458,000 in fiscal 2000 and1999, respectively, we believe the allowance for loan losses, $10.9 million (0.26% of total loans) and $7.2 million (0.33% of total loans) at September 30, 2000 and 1999, respectively, is an appropriate estimate of the losses inherent in the loan portfolio.

          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 also shows the percentage of total loans that each loan category represents.

          The above amounts include specific reserves at September 30, 2000, 1999, 1998, 1997 and 1996, totaling $391,000, $406,000, $449,000, $510,000 and $579,000, respectively, related to non-performing loans.

          The following table shows the activity in our allowance for loan losses during the periods indicated.

     Mortgage-Backed Securities

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

• privately insured mortgage pass through securities;

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• Government National Mortgage Association (‘Ginnie Mae’’) participation certificates;
  
• Federal National Home Loan Mortgage Corporation (‘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 government. 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 99% of our CMO portfolio is comprised of securities with a triple ‘A’’ rating. Although our CMO portfolio has maturity periods similar to our mortgage-backed pass-through securities, the nature of the CMO 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 Standard (“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 2000, 1999 and 1998, we held no mortgage-backed securities classified as held-to-maturity. 

          The following table shows the activity in our available-for-sale mortgage-backed securities portfolio during the periods indicated.

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

          We buy and hold trading securities principally for the purpose of selling them in the near term. We carry these securities at market value with unrealized gains and losses recognized in income. At September 30, 2000, 1999 and 1998, we held $3.4 million, $38.3 million and $29.6 million of trading securities, respectively. For fiscal 2000, 1999 and 1998, we also recognized $750,000, $1.4 million, and $569,000, respectively, in realized gains from the sale of trading assets and $195,000, ($1.3) million, and ($612,000), respectively, in unrealized appreciation (depreciation) of trading assets.

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          The following table shows the scheduled maturities, carrying values, and current yields for our portfolio of mortgage-backed securities, both available-for-sale and trading, at September 30, 2000.

     Investment Securities

          The following table shows the cost basis and fair value of our banking-related investment portfolio other than mortgage-backed securities at the dates indicated. The following table does not include investment securities we hold arising from our non-banking business segments. Consolidated information on all investment securities we hold is presented in “Item 8. Consolidated Financial Statements and Supplementary Data.”

          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”) of Atlanta. The stock is recorded on our books at cost, which approximates fair value. The balance of FHLB stock was $83.3 million and $29.4 million at September 30, 2000 and September 30, 1999, respectively.

          The following table shows the scheduled maturities, carrying values, and current yields for our banking-related investment portfolio of debt and equity securities at September 30, 2000.

______________

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

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      Deposits and Other Sources of Funds

             The following table presents information about the various categories of the Bank’s deposits for the periods indicated.

             The following table classifies our certificates of deposit and money market accounts by rate at the dates indicated.

             The following table classifies the amount of our large certificates of deposit, i.e., in amounts of $100,000 or more, by time remaining until maturity, as of September 30, 2000.

      Borrowings

             Although deposits are our primary source of funds, we also borrow from the FHLB of Atlanta and sell securities under agreements to repurchase to acquire additional funding. 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 of Atlanta. 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 we meet certain creditworthiness standards.

             As of September 30, 2000, our outstanding advances from the FHLB of Atlanta totaled $1.6 billion at interest rates ranging from 4.58% to 6.96% and at a weighted average rate of 6.47%.

             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 use the proceeds of these transactions to meet our cash flow or asset/liability matching needs. 

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             The following table presents information regarding repurchase agreements for the dates indicated.

             The following table sets forth information regarding the weighted average interest rates and the highest and average month end balances of our borrowings.

GLOBAL AND INSTITUTIONAL

Business Overview

             Our global and institutional business segment is comprised principally of the business activities of our international subsidiaries offering foreign investors online retail brokerage services and the business activities of TIR and VERSUS, which offer financial services to institutional investors.

             We are actively pursuing a global expansion strategy that leverages our internationally recognized brand name, award-winning Web site design, and proprietary Stateless Architecture^SM technology platform. On the retail side, our goal is to create a fully electronic cross-border trading network, linking the top financial markets globally and making electronic trading in foreign securities an affordable reality for the retail investor. We launched this trading network during fiscal 2000 with E*TRADE Sweden, allowing Swedish customers to buy U.S. equities in real-time, online. Through a fully electronic process, we seamlessly handle the execution, clearing and settlement of the transactions, while simultaneously processing the foreign exchange transactions.

             With the acquisition of TIR in August 1999, we extended our business to include institutional investors. TIR is active in equity, fixed income, currency and derivatives markets in over 35 countries and holds seats on multiple stock exchanges around the world. TIR’s management team is assisting in running selected segments of our international retail brokerage operations, given their existing clearing and operational infrastructure in both Europe and Asia. We are currently developing an electronic platform for the institutional investor, which will bring greater efficiencies in trading, order routing and management, and back office processing. With the acquisition of VERSUS in August 2000, we have expanded our institutional customer base and anticipate leveraging the VERSUS Network®, a proprietary electronic network that connects institutional clients and participating broker-dealers to the major Canadian Stock Exchanges and alternative liquidity pools. It also integrates with market data providers and 

back-office service providers to enhance the electronic trading environment. We will expand the VERSUS Network® by incorporating the technology into our global cross-border trading platform, enabling institutions and investment dealers worldwide to route orders globally through the VERSUS and E*TRADE networks.

             Critical to our global strategy are our local operations in both the retail and institutional businesses. During fiscal 2000, we launched E*TRADE retail branded sites in Japan, Korea, Denmark and Norway. However, we terminated our relationship with CPR E*TRADE in France in September 2000 and are now evaluating new opportunities in the French market. To date, we operate nine non-U.S. Web sites globally through a combination of licensees, in which we have either a minority or majority ownership, and wholly-owned subsidiaries. At September 30, 2000, our wholly-owned subsidiaries include: E*TRADE U.K., E*TRADE Nordic AB, and E*TRADE NetBourse, acquired in the first quarter of fiscal 2000; VERSUS, acquired in August 2000; and E*TRADE South Africa, acquired in September 2000. In addition to our wholly-owned subsidiaries, we also hold a majority ownership in E*TRADE Germany AG, which increased to 100% in the first quarter of fiscal 2001. Our international Web sites are operated by the following entities: E*TRADE Australia (which also serves New Zealand), E*TRADE Canada, E*TRADE Denmark, E*TRADE Japan KK, E*TRADE Korea, E*TRADE Norway, E*TRADE South Africa, E*TRADE Sweden, and E*TRADE U.K. Moreover, E*TRADE has institutional offices in ten countries with trading capabilities in 38 markets.

Products and Services

             Our global retail subsidiaries offer a variety of products and services including online stock and options trading as well as comprehensive market information provided by Reuters, Big Charts and local news vendors. In some cases, subsidiaries offer mutual funds, access to IPOs, and banking capabilities. During fiscal 2001, we intend to upgrade and improve the products and services we offer to clients through our international subsidiaries. A primary focus will continue to be rolling out cross-border trading, enabling foreign retail investors to have affordable access to U.S. equities online in real-time, and enabling U.S. retail investors to access several large overseas markets.

             We are also developing a Web-based product that will offer institutional clients an online trading and administration solution. The platform, which we expect to launch in the second quarter of fiscal 2001, will provide institutional customers with direct access to international exchanges and basket trading. Moreover, the platform will offer our institutional clients real-time, online access to statements and electronic settlement capabilities.

Customers and Markets

             As the sophistication of investors around the globe grows, our intention is to provide our investors with the content and tools to enable trading in multi-markets and multi-products from a single-access electronic gateway. On the retail side, our focus during fiscal 2001 will be to enable U.S. retail investors to access several large overseas markets through the development of a global cross-border trading network. We anticipate providing such access to foreign markets to all other customers around the globe, including providing overseas customers with access to U.S. markets, including our proprietary products. For our institutional customers, we are developing a fully-electronic network to allow more efficient access to global exchanges (as discussed above in Products and Services).

Operations

      Clearing

             The institutional side of our business currently outsources the majority of the clearing of its transactions to third parties around the world. During fiscal 2001, we intend to explore extending the self-clearing operations within the domestic retail business to our institutional business to take advantage of the efficiencies of self-clearing. In addition, we expect to gain further efficiencies from cross-border retail trading, where we anticipate that operations in each country will leverage the self-clearing infrastructures of operations in other countries that have a retail client base.

Lending and Borrowing Activities

             Margin Lending. As in our domestic retail operations, we make loans to customers collateralized by customer securities in other markets around the world. In the U.S., margin lending by E*TRADE Securities is subject to the

margin rules of the Board of Governors of the Federal Reserve System, NASDR margin requirements and our internal policies, which are more stringent than the Federal Reserve and NASDR requirements. In overseas markets the rules regarding margin lending vary significantly and are generally not as well defined as the rules within the U.S. We intend to adopt internal rules similar to those followed in the U.S. where those rules are more stringent than local rules. By 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 to below the customers’ indebtedness before the collateral can be sold, which could result in losses to us. Under applicable overseas regulatory rules, in the event of a decline in the market value of the securities in a margin account, we are generally obligated to require the customer to deposit additional securities or cash in the account so that at all times the customer’s equity in the account is at least a fixed percentage (25% in respect of NASDR regulations) of the value of the securities in the account. Our current internal requirement, however, is that the customer’s equity not fall below 30% (5% higher than the NASDR regulatory minimum). In the event a customer’s equity falls below such percentage, the customer will be required to increase the account’s equity to a percentage at least five percentage points higher. Margin lending to customers constitutes the major portion of the basis on which our net capital requirements are determined. To the extent these activities expand, our net capital requirements around the world will increase. See “Item 7. Risk factors—We may be fined or forced out of business if we do not maintain the net capital levels required by regulators” and “Item 7. Risk factors—As a significant portion of our revenues come from online investing services, any downturn in the securities industry could significantly harm our business.”

             Securities Lending and Borrowing. Similar to the U.S., and subject to the local regulatory environment, we may borrow securities both to cover 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 executed pursuant to written agreements with counterparties that require that the securities borrowed be “marked-to-market” on a daily basis and that excess collateral be refunded or that additional collateral be furnished in the event of changes in the market value of the securities. The securities usually are “marked-to-market” on a daily basis through the facilities of the various international clearing organizations.

             In our institutional business, we provide a number of services to a variety of clients. This mix of institutional customers includes large pension plans and insurance groups who control billions of dollars in assets which are available for securities lending and hedge funds that are large borrowers of securities. During fiscal 2001, we intend to explore the establishment of an international agency stock lending business to take advantage of our presence in both the institutional and retail global markets.

      Order Processing

             In most international markets, there are specific or implicit rules to ensure that customers obtain the best price. There are many factors that need to be taken into account when assessing best price, such as order size and liquidity of the stock. In each location we have established the necessary order-routing and management systems, seeking to ensure the best possible service to our customer in this respect. We anticipate that during fiscal 2001 we will be able to enhance this process further by the consolidation of the global cross-border retail flow and the institutional order flow for the benefit of both the retail and institutional client base. The technology to achieve this will be developed by combining the resources of our retail and institutional businesses with those of VERSUS, acquired in August 2000. See “Item 7. Risk factors—We could be subject to customer litigation and our reputation could be materially harmed if our ability to correctly process customer transactions is slowed or interrupted.’’

             The market for online investing services in the U.S. and overseas particularly over the Internet, is rapidly evolving and intensely competitive, and we expect competition to continue to intensify in the future. See “Item 7. Risk factors—Our business will suffer if we cannot effectively compete.’’

             The securities industry in the U.S. and overseas is subject to extensive regulation. See “Item 7. Risk factors—Our ability to attract customers and our profitability may suffer if changes in government regulation favor our competition or restrict our business practices’’ and “Item 7. Risk factors—We may be fined or forced out of business if we do not maintain the net capital levels required by regulators.’’

ASSET GATHERING AND OTHER

Business Overview

             Our asset gathering and other business segment is comprised primarily of the business activities of our mutual fund operations, BSG, and corporate operations.

      Mutual Funds

             In November 1997, we established a Mutual Fund Center, which now features more than 5,000 mutual funds, approximately 1,100 of which are available without transaction fees or loads. The center also offers several services free of charge, such as a state-of-the-art proprietary screening tool, and a wide spectrum of research, including risk measures, portfolio information, historical charts and online prospectuses. Mutual fund orders received by 4:00 p.m. EST result in purchases at the net asset value of the fund as of the day of order. We have eight proprietary mutual funds, four of which were launched in fiscal 2000, including the e-Commerce Index Fund and the Premier Money Market fund.

             Additionally, we have expanded the scope of the mutual funds group to encompass a broader range of investment vehicles, enabling us to provide a more diverse portfolio of product offerings to new and existing customers. Through our acquisition of eInvesting in July 2000, individual investors, as well as financial advisors and corporations offering portfolios to their employees, will be able to set up dollar-denominated, personalized portfolios via the Internet. Also, through the acquisition of (PrivateAccounts) in October 2000, we expect to further expand our product portfolio to offer separate account management services for those investors who are looking for private management of their money. We continue to expand our broad base of products and services to attract and retain all types of investors, from active investors to those who invest with a long-term, buy and hold strategy.

      Business Solutions Group

             In fiscal 1998, we acquired OptionsLink, formerly a division of Hambrecht & Quist LLC, and privately-held ShareData, Inc. (“ShareData”). OptionsLink was an all-electronic Web-based and interactive voice response inquiry and order entry system for employee stock option and stock purchase plan services for corporate stock plan participants. ShareData was a supplier of stock plan knowledge-based software and Full Service Stock Plan Administration (“FSSPA”) consulting services for pre-IPO and public companies. The products and services provided by these companies were combined and are now part of the corporate financial services offered by BSG. We believe that this service is the only one that offers a full spectrum of fully integrated electronic stock plan management services, including plan administration, compliance, employee communication, and online transaction capabilities. BSG represents an important potential growth segment for us and provides an opportunity to diversify our revenue stream while facilitating our cross-sell strategy. We currently offer products and services to over 3,300 corporations with online reach to over 1.4 million employees of those companies. Currently, initiatives to increase the scope of the BSG relationships include cross-selling various E*TRADE products such as employee banking services provided by the Bank, ATM services by placing ATMs at company locations where we have existing relationships, and an online 401(k) product.

      Corporate Operations

             Included in the asset gathering and other segment are the activities generated by our corporate operations. Corporate activities include the management of corporate held investments, participation in two venture capital funds (E*TRADE eCommerce Fund I and E*TRADE eCommerce Fund II), and the management of corporate borrowing activities. Corporate operations also encompass technology development, systems maintenance and operations, and general and administrative costs benefiting E*TRADE as a whole.

Growth Strategy

             The formation of the asset gathering business has enhanced our ability to focus on several key objectives, including targeting a more affluent customer base through new programs, increasing our “share-of-wallet” of  existing customers, and expanding the channels of distribution through which we provide services. We intend to continue to roll out new products and services to achieve these objectives, including focusing on retirement/401(k) programs, college savings plans, delivery of electronic advice, and tiered product offerings.

             Our business strategy includes expanding our product mix to include targeted and high value products and services, providing E*TRADE customers with a more personalized, integrated customer solution in meeting individual financial objectives. In the mutual fund and investment product business, we are executing on this strategy by continuing to enhance and market the mutual fund supermarket, while rolling out additional proprietary funds. Following our joint venture with Ernst and Young, LLP in September 2000, we are developing an electronic advice product that will provide customers with personalized financial advice based on their specific financial goals, and will provide recommendations on mutual funds that may help customers achieve their objectives. Additionally, as we roll out investment products from our acquisitions of eInvesting and PrivateAccounts, we will be able to provide new and differentiated products for our customer base. Some of the new products will also be offered for financial advisors as we target the intermediary channel.

             BSG will continue to focus on the Business-to-Business-to-Consumer strategy in providing products and services to corporations for end-use by their employees. We will also focus on cross-selling additional E*TRADE products to our corporate customers, and in turn, their employees. Among the products that we intend to cross-sell include an online 401(k) product and corporate banking.

             Through our high net worth initiatives, we intend to provide different levels of products and services to different tiers of customers, thereby encouraging customers to consolidate their assets at E*TRADE to receive premium services.

             Additionally, we expect our co-branded product initiatives to provide a range of online brokerage and banking services to companies that do not have an online presence. These initiatives target a company’s employees by providing links at the company’s Web site that send the employees to the co-branded products and services.

             See “Item 7. Risk factors—We could lose customers and have difficulty attracting new customers if we are unable to quickly introduce new products and services that satisfy changing customer needs” and “Item 7. Risk factors—Any failure to maintain our relationships with strategic partners or to make effective investments could harm our business.”

Customers and Markets

             The asset gathering business targets many of the same customers and markets as our domestic retail brokerage, banking, and global and institutional businesses. In addition, through our high net worth initiatives, we are executing upon our strategy to increase our customer and asset base, specifically targeting more established online investors by providing additional value to those customers who seek a breadth of product offerings.

             In addition to the direct retail customer base, BSG provides products and services directly to both public and private companies with stock purchase and stock option plans. Clients of BSG range in size and industry focus, from small pre-IPO clients to large public companies. As we expand the scope of our products and advice offerings, we expect the employees of these companies—the end-customer for E*TRADE—to benefit from the full array of products and services.

Operations

             To the extent that products and services within the asset gathering business are extensions of our domestic retail brokerage, banking, and global and institutional businesses, revenue streams and operations replicate those business lines. However, there are some aspects of the business that are unique to the asset gathering group.

             The mutual fund business derives revenues through a number of channels, including management fees from our proprietary funds, fee-sharing arrangements with third-party funds sold through the mutual fund supermarket, 12b-1 fees (administrative fees charged by funds), sales commissions paid by third-party load funds and transactions fees charged to investors on funds without fee-sharing agreements.

             E*TRADE Asset Management, a subsidiary of E*TRADE, is the investment advisor of all of our proprietary funds. Barclay’s Global Fund Advisors is the investment subadvisor of three of these funds. The other funds are set up in a structure wherein the specific E*TRADE fund invests all of its assets into a portfolio advised by Barclay’s  Global Fund Advisors. This portfolio always has the same investment objective as the E*TRADE Fund. This is commonly called a “master/feeder” structure.

             BSG, in providing Business-to-Business (“B2B”) products, generates revenue through a number of sources including:

• Equity Edge®— A world class stock plan administration software that is marketed to corporate clients from which we derive license and maintenance fees.

• OptionsLink®—Provides transaction and recordkeeping capabilities to corporate clients while enabling employees the power to conduct stock transactions and invest online when and how it’s convenient for them.

• Equity Resource®—A complete, fully integrated stock plan outsourcing solution. Services include stock plan administration and consulting, comprehensive and convenient customer support, product training and educational seminars.