SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended June 30, 2010

OR

o		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: 001-32419

optionsXpress Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware		20-1444525
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

311 W. Monroe, Suite 1000, Chicago, Illinois
60606
(Address of principal executive offices)
(Zip Code)

(312) 630-3300
(Registrant’s telephone number, including area code)

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 twelve months, and (2) has been subject to such filing requirements for the past ninety days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuit to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of August 2, 2010, there were 57,429,141 outstanding shares of the registrant’s Common Stock.

 

 

TABLE OF CONTENTS

Part I — FINANCIAL INFORMATION			3
Item 1. — Condensed Consolidated Financial Statements			3
Condensed Consolidated Statements of Financial Condition			3
Condensed Consolidated Statements of Operations			4
Condensed Consolidated Statements of Cash Flows			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3. — Quantitative and Qualitative Disclosures about Market Risk			20
Item 4. — Controls and Procedures			20
Part II — OTHER INFORMATION			21
Item 1. — Legal Proceedings			21
Item 1A. — Risk Factors			21
Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds			21
Item 6. — Exhibits			22
Signatures			23
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

Part I — FINANCIAL INFORMATION

Item 1. — Condensed Consolidated Financial Statements

optionsXpress Holdings, Inc.

(In thousands, except per share data)

		June 30,				December 31,
		2010				2009
ASSETS
Cash and cash equivalents		$	174,699			$	178,989
Cash and investments segregated in compliance with federal regulations			891,244				881,210
Receivables from brokerage customers, net			195,406				149,871
Receivables from brokers, dealers and clearing organizations			44,348				110,779
Investments in securities			19,290				70,850
Deposits with clearing organizations			20,037				30,245
Fixed assets, (net of accumulated depreciation and amortization of $23,402 and $19,758 at June 30, 2010 and December 31, 2009, respectively)			12,539				13,263
Goodwill			85,474				81,590
Other intangible assets, net			5,594				6,525
Other assets			29,249				22,999
Total assets		$	1,477,880			$	1,546,321
LIABILITIES AND STOCKHOLDERS’ EQUITY
Payables to brokerage customers		$	1,074,949			$	1,179,204
Payables to brokers, dealers and clearing organizations			4,964				144
Accrued liabilities and accounts payable			23,729				19,027
Current and deferred income taxes			28				193
Other liabilities			36,370				36,878
Total liabilities			1,140,040				1,235,446
Stockholders’ equity
Common stock, $0.0001 par value (250,000 shares authorized; 57,428 and 57,525 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively)			6				6
Preferred stock, $0.0001 par value (75,000 shares authorized; none issued)			—				—
Additional paid-in capital			14,446				15,131
Accumulated other comprehensive loss			(1,043	)			(1,179	)
Non-controlling interests			159				120
Retained earnings			324,272				296,797
Total stockholders’ equity			337,840				310,875
Total liabilities and stockholders’ equity		$	1,477,880			$	1,546,321

See accompanying notes.

optionsXpress Holdings, Inc.

(In thousands, except per share data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Revenues:
Commissions		$	44,713			$	42,008			$	84,311			$	80,097
Other brokerage-related revenue			5,243				7,108				9,741				13,405
Interest revenue and fees			4,826				4,489				9,593				8,869
Interest expense			(56	)			(61	)			(107	)			(123	)
Net interest revenue and fees			4,770				4,428				9,486				8,746
Education revenue			7,707				7,234				15,237				7,234
Other income			3,067				937				3,756				1,527
Net revenues			65,500				61,715				122,531				111,009
Expenses:
Compensation and benefits			11,854				10,434				23,502				18,808
Brokerage, clearing and other related expenses			10,250				8,047				19,268				15,237
Brokerage advertising			5,747				5,005				10,116				10,794
Education marketing and fulfillment			4,986				4,792				10,281				4,792
Depreciation and amortization			2,277				2,298				4,568				4,290
Other general and administrative			5,772				5,883				11,331				10,625
Total expenses			40,886				36,459				79,066				64,546
Income before income taxes of consolidated companies			24,614				25,256				43,465				46,463
Income taxes			9,005				9,165				15,951				16,804
Net income of consolidated companies			15,609				16,091				27,514				29,659
Net income attributable to non-controlling interests			22				18				39				30
Net income		$	15,587			$	16,073			$	27,475			$	29,629
Earnings per common share:
Basic		$	0.27			$	0.28			$	0.48			$	0.51
Diluted		$	0.27			$	0.28			$	0.48			$	0.51
Weighted-average number of common shares:
Basic			57,403				57,832				57,434				58,146
Diluted			57,611				57,988				57,643				58,266
Dividends declared per share		$	—			$	—			$	—			$	0.0800

See accompanying notes.

optionsXpress Holdings, Inc.

(In thousands, except per share data)

		Six Months Ended
		June 30,				June 30,
		2010				2009
Operating activities
Net income		$	27,475			$	29,629
Adjustments to reconcile net income to cash (used in) provided by operating activities:
Depreciation and amortization			4,568				4,290
Stock-based compensation			2,352				1,811
Excess tax benefit for stock-based compensation			18				290
Deferred income taxes			1,078				311
Increase in contingent liability			112				—
Unrealized loss, deferred rent and other			(231	)			40
Changes in operating assets and liabilities:
(Increase) decrease in:
Cash and investments segregated in compliance with federal regulations			(10,034	)			(214,807	)
Receivables from brokerage customers, net			(45,535	)			10,917
Receivables from brokers, dealers and clearing organizations			87,381				(8,490	)
Investments in securities			27,750				1,500
Deposits with clearing organizations			10,208				36,220
Other assets			(6,765	)			(1,035	)
Increase (decrease) in:
Payables to brokerage customers			(104,255	)			179,360
Payables to brokers, dealers and clearing organizations			4,820				(125	)
Accrued liabilities and accounts payable			761				(10,426	)
Current income taxes			(914	)			(304	)
Other liabilities			(478	)			8,939
Net cash (used in) provided by operating activities			(1,689	)			38,120
Investing activities
Proceeds from sales and maturities of investments in securities			3,200				1,200
Purchases and development of computer software			(2,103	)			(1,464	)
Purchases of fixed assets			(817	)			(343	)
Cash used in acquisition (net of cash received of $3,761)			—				(14,697	)
Net cash provided by (used in) investing activities			280				(15,304	)
Financing activities
Exercise of stock options			81				28
Excess tax benefit for stock-based compensation			(18	)			(290	)
Purchases through employee stock purchase plan			24				19
Purchase of non-controlling equity interest			—				(1,021	)
Stock repurchases			(2,874	)			(12,664	)
Dividends paid			—				(4,638	)
Net cash used in financing activities			(2,787	)			(18,566	)
Effect of exchange rates on cash and cash equivalents			(94	)			(266	)
Net (decrease) increase in cash and cash equivalents			(4,290	)			3,984
Cash and cash equivalents, beginning of period			178,989				114,450
Cash and cash equivalents, end of period		$	174,699			$	118,434
Supplemental cash flow information:
Income taxes paid		$	15,830			$	16,866
Interest paid			107				123
Supplemental disclosure of non-cash activity:
Non-cash foreign currency translation gain (loss)			88				(94	)
Intangible assets acquired in lieu of debt repayment			—				2,500
Non-cash change in unrealized gain on available for sale investments in securities			340				901
Non-cash gain from CBOE seat exchanged for initial public offering stock			2,053				—

See accompanying notes.

optionsXpress Holdings, Inc.

(In thousands, except per share data)

1. Basis of Presentation and Nature of Operations

Basis of Presentation

The condensed consolidated financial statements include the accounts of optionsXpress Holdings, Inc. and its subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

The Company follows United States generally accepted accounting principles (“GAAP”) including certain accounting guidance used by the brokerage industry. Certain notes and other information normally included in financial statements prepared in accordance with United States GAAP have been condensed or omitted. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements included in the Annual Report on Form 10-K of the Company for the year ended December 31, 2009.

In the opinion of management, all adjustments necessary to present fairly the Company’s consolidated financial position at June 30, 2010 and the consolidated results of operations and cash flows for each of the periods presented have been recorded. The results of operations and cash flows for an interim period are not necessarily indicative of the results of operations or cash flows that may be reported for the year or any subsequent period.

Nature of Operations

The Company’s Brokerage Services segment provides internet-based options, stock, bond, mutual fund and futures brokerage services to retail customers located throughout the United States and certain foreign countries. Except for trades placed by its Canadian customers, all securities trades are cleared through the Company’s internal self-clearing operations. The Company clears its futures accounts transactions as a non-clearing futures commission merchant through an omnibus account arrangement with several futures commission merchants.

optionsXpress, Inc. is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and is a member of the Financial Industry Regulatory Authority Inc. (“FINRA”), the Securities Investor Protection Corporation (“SIPC”), the National Securities Clearing Corporation and the Depository Trust Company (together, the Depository Trust & Clearing Corporation or “DTCC”), and the Options Clearing Corporation (“OCC”). optionsXpress, Inc. is also a member of various exchanges, including the Chicago Board Options Exchange (“CBOE”), the International Securities Exchange, the American Stock Exchange, the NYSE Arca Exchange, and the Philadelphia Stock Exchange. brokersXpress LLC (“brokersXpress”) is a broker-dealer registered with the SEC and a member of FINRA and SIPC. In addition, optionsXpress, Inc., brokersXpress and Open E Cry, LLC (“OEC”, formerly known as Open E Cry) are registered with the Commodity Futures Trading Commission (“CFTC”) and are members of the National Futures Association (“NFA”). optionsXpress Canada Corp. is registered with the Investment Industry Regulatory Organization of Canada. optionsXpress Singapore Pte. Ltd. is registered with and licensed by the Monetary Authority of Singapore. optionsXpress Europe, B.V. is registered with and licensed by the Netherlands Authority for the Financial Markets. optionsXpress Australia Pty Limited is registered with and licensed by the Australian Securities & Investments Commission.

The Company’s Education Services segment offers a full range of education products and services which cover a broad range of financial products including stock, market analysis, options, foreign exchange and financial planning. The Company entered the education business on May 4, 2009 through the acquisition of Optionetics, Inc. and its affiliates (collectively, “Optionetics”).

2. Summary of Significant Accounting Policies

Except as described in the following paragraphs, there have been no changes in the significant accounting policies from those included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Fair Value of Financial Instruments — In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), by requiring additional disclosures regarding fair value measurements. Specifically, the amendment requires additional disclosures of i) the input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements of Level 2 and Level 3 positions, ii) the transfers between all levels (including Level 1 and Level 2) will be required to be disclosed on a gross basis as well as the reasons for the transfers and iii) separate disclosures are required for each class of assets and liabilities rather than each major category of assets and liabilities. ASU 2010-06 is effective for fiscal years beginning after December 15, 2009. Therefore, ASU 2010-06 was effective for the Company’s fiscal year beginning January 1, 2010. The adoption of ASU 2010-06 did not have a material impact on the Company’s condensed consolidated financial statements.

Subsequent Events — Effective February 24, 2010, the FASB issued ASU 2010-09, Subsequent Events (“ASU 2010-09”). ASU 2010-09 amends ASC 855, Subsequent Events, by requiring less disclosure regarding subsequent events. As a result of the amendment, the Company is not required to disclose the date through which management evaluated subsequent events in the financial statements. ASU 2010-09 also changes the criteria for determining whether an entity would evaluate subsequent events through the date that financial statements are issued or when they are available to be issued. The Company is still required to evaluate subsequent events through the date that the financial statements are issued. ASU 2010-09 was effective for the Company’s interim period ended March 31, 2010. The adoption of ASU 2010-09 did not have a material impact on the Company’s condensed consolidated financial statements.

Other Liabilities — Other liabilities include deferred revenue, corporate securities sold, at fair value, accrued contingent consideration and other miscellaneous liabilities that were previously reported in accrued liabilities and accounts payable. Prior year balances have been reclassified to conform to the current year presentation.

3. Recently Issued Accounting Pronouncements

Fair Value of Financial Instruments — In January 2010, the FASB issued ASU 2010-06, amending ASC 820. As a supplement to the additional required fair value measurement disclosures regarding assets and liabilities that are effective for the Company’s fiscal year beginning January 1, 2010, FASB requires further disclosures effective for fiscal periods beginning after December 15, 2010. Specifically, the additional amendment requires the purchases, sales, issuances and settlements of Level 3 assets and liabilities to be shown on a gross basis in a roll forward table. This amendment to ASU 2010-06 is effective for the Company’s fiscal year beginning January 1, 2011. The adoption of ASU 2010-06 is not expected to have a material impact on the Company’s consolidated financial statements.

Revenue Recognition — Multiple-element Arrangements - In October 2009, the FASB issued ASC 605-25. ASC 605-25 requires enhanced disclosures regarding the products that the Company sells either separately or in various bundles that contain multiple deliverables. These enhanced disclosure requirements affect the Company’s disclosures regarding the timing and amount of revenue recognition from these products for fiscal periods on or after June 15, 2010. Therefore, the adoption of ASC 605-25 will be effective for the interim period beginning July 1, 2010. The adoption of ASC 605-25 is not expected to have a material impact on the Company’s consolidated financial statements.

4. Goodwill

The Company has recorded goodwill for purchase business combinations to the extent the purchase price of each completed acquisition exceeded the fair value of the net identifiable tangible and intangible assets of the acquired company. The following table summarizes changes in the carrying amount of goodwill:

Balance, January 1, 2010		$	81,590
Contingent consideration payment for OEC acquisition			3,884
Balance, June 30, 2010		$	85,474

In performing the annual impairment test, the Company utilized quoted market prices of the Company’s common stock to estimate the fair value of the Company as a whole. The estimated fair value was then allocated to the Company’s reporting units based on operating revenues, and was compared to the carrying value of the respective reporting unit. No impairment of goodwill was determined for the six months ended June 30, 2010. All of the goodwill has been allocated to the Brokerage Services segment. The Company amortizes goodwill for income tax purposes on a straight-line basis over a period of fifteen years with the exception of the goodwill recognized from the Optionetics acquisition, which is non-deductible for income tax purposes.

5. Capitalization

Common Stock

At June 30, 2010, the Company had 250,000 shares of $0.0001 par value common stock authorized. Of the authorized common stock, 57,428 shares were issued and outstanding.

On February 24, 2009, the Company’s Board of Directors approved a stock repurchase program that authorized the Company to repurchase up to $20,000 of the Company’s outstanding common stock (the “2009 Repurchase Program”). On February 12, 2008, the Company’s Board of Directors approved a stock repurchase program that authorized the Company to repurchase up to $100,000 of the Company’s outstanding common stock (the “2008 Repurchase Program”).

In addition, on February 14, 2008, the Company entered into an agreement with Ned W. Bennett, Executive Vice Chairman and founder of optionsXpress, pursuant to which, the Company may repurchase up to an additional 200 shares annually from Mr. Bennett (the “Bennett Stock Purchase Agreement”). The Bennett Stock Purchase Agreement does not create an obligation for the Company to buy, or Mr. Bennett to sell to the Company, any of his shares of our common stock. The number of shares the Company may purchase under the Bennett Stock Purchase Agreement is limited to 200 shares per year, but the total number of shares is limited only by the number of shares of our common stock that Mr. Bennett may hold from time to time.

The repurchase programs have no expiration date and the Company’s Board of Directors may terminate any or all of the stock repurchase programs at any time.

For the six months ended June 30, 2010, the Company has repurchased 195 shares of its common stock in aggregate under these programs at a total cost of $2,874, or an average cost of $14.77 per share. Since inception, the Company has repurchased 6,150 shares of its common stock in aggregate under these programs at a total cost of $108,217, or an average cost of $17.60 per share. The repurchased shares were retired to authorized, but unissued shares.

6. Fair Value Measurements

As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under which assets and liabilities measured at fair value will be classified are as follows:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

As required by ASC 820, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Financial Assets and Liabilities

The following table sets forth by level within the fair value hierarchy the Company’s assets and liabilities owned, at fair value, including $5,034 of available-for-sale investments in securities that are pledged as collateral for a letter of credit, and financial instruments sold but not yet purchased at fair value as of June 30, 2010 and December 31, 2009:

June 30, 2010		Level 1(1)				Level 2(2)				Level 3(3)				Total
Financial assets, at fair value:
Money market funds included in cash and cash equivalents		$	103,298			$	—			$	—			$	103,298
U.S. treasury securities included in deposits with clearing organizations			13,197				—				—				13,197
Corporate equities and derivatives included in other assets			17,325				2,213				—				19,538
Investments in securities			—				—				19,290				19,290
		$	133,820			$	2,213			$	19,290			$	155,323
Financial liabilities, at fair value:
Corporate equities and derivatives included in other liabilities		$	18,263			$	—			$	—			$	18,263
		$	18,263			$	—			$	—			$	18,263

December 31, 2009		Level 1(1)				Level 2(2)				Level 3(3)				Total
Financial assets, at fair value:
Money market funds included in cash and cash equivalents		$	72,094			$	—			$	—			$	72,094
U.S. treasury securities included in deposits with clearing organizations			12,997				—				—				12,997
Corporate equities and derivatives included in other assets			12,162				—				—				12,162
Investments in securities			—				—				70,850				70,850
		$	97,253			$	—			$	70,850			$	168,103
Financial liabilities, at fair value:
Corporate equities and derivatives included in other liabilities		$	17,520			$	—			$	—			$	17,520
		$	17,520			$	—			$	—			$	17,520

The following table provides a reconciliation of the beginning and ending balances for the major classes of financial assets and liabilities measured at fair value using significant unobservable inputs (Level 3):

		Investments
		in
		Securities
		Assets
Balance, January 1, 2010		$	70,850
Total gains/(losses), realized and unrealized			340
Redemptions			(51,900	)
Balance, June 30, 2010		$	19,290

The Company’s Level 3 financial assets are comprised of auction rate securities (“ARS”). The Company’s ARS are backed by United States Department of Education-guaranteed student loans issued under the Federal Family Education Loan Program (“FFELP”). The Company’s ARS are marketable securities with long-term stated maturities (during years 2033-2040) for which the interest rates are reset through periodic short-term auctions every 7 or 35 days, depending on the issue. As a result of the current liquidity issues in the global credit and capital markets, all of the auctions for all of the Company’s ARS have failed since February 2008. A failed auction is not a default of the debt instrument and the ARS holder continues to receive interest payments when the auctions fail. All of the Company’s ARS are current with respect to the receipt of interest payments according to the stated terms of each ARS indenture. The Company believes it has the ability and intent, if necessary, to hold its ARS investments until such time as the auctions are successful, the issuer redeems the securities, or another market for ARS develops. Since the ARS markets began failing on February 14, 2008, $86,775 of the Company’s ARS securities have been redeemed by issuers or their brokers at par. Issuers or their brokers have redeemed $51,900 of par value ARS at par during the six months ended June 30, 2010.

At June 30, 2010, there was insufficient observable ARS market information available to determine the market value of the Company’s investments in ARS. Therefore, the Company has continued to designate the ARS as Level 3 financial assets under ASC 820 and estimated the Level 3 fair values for these securities by using the income method, incorporating assumptions that market participants would use in their estimates of fair value. The Company calculated income by developing a discounted cash flow model based on the expected cash flows from the ARS compared to a market rate. Based on the Company’s analysis, the weighted average economic life was estimated to be approximately four years. For the fair market interest rates used in its discounted cash flow, the Company used a current market rate for liquid debt instruments of similar underlying assets and credit quality, with spreads of approximately 200bps-300bps over the London Interbank Offered Rate.

In November 2008, the Company accepted an offer from UBS, entitling it to sell at par value ARS originally purchased from UBS at anytime during a two-year period from June 30, 2010 through July 2, 2012 (the “UBS Put Right”). The Company has adopted the fair value option under ASC 825, Financial Instruments, to classify the UBS Put Right and the ARS sold by UBS as trading securities. On June 30, 2010, the Company exercised the UBS Put Right and sold the remaining $20,950 par value of ARS originally purchased from UBS at par value according to the provisions of the UBS Put Right. The exercise settled on July 1, 2010. The redemption proceeds have been included in receivables from brokers, dealers and clearing organizations in the condensed consolidated statement of financial condition at June 30, 2010.

The remaining $20,800 in par value ARS were sold by another investment advisor, who has not made an offer similar to UBS, and therefore, the Company has continued to classify them as available-for-sale securities. The Company’s calculation of fair value of the ARS not held at UBS at June 30, 2010 implied an impairment of fair value of approximately $1,510, which has been recorded through accumulated other comprehensive loss on the condensed consolidated statement of financial condition, and the carrying fair value of those ARS was approximately $19,290.

Non-Financial Assets and Liabilities

Non-financial assets and liabilities subject to fair value measurements include customer relationships included in other intangible assets and contingent consideration included in other liabilities. The fair value of the Company’s customer relationships’ intangible assets were $5,122 at December 31, 2009 and $4,331 at June 30, 2010. For the six months ended June 30, 2010 and 2009, no impairment was recorded against the Company’s customer relationships intangible assets. The fair value of the Company’s contingent consideration liability was $11,925 at December 31, 2009 and $12,037 at June 30, 2010.

At June 30, 2010 and December 31, 2009, there was significant unobservable information used to determine the market value for these non-financial assets and liabilities. Therefore, the Company has continued to designate the customer relationships and contingent consideration as Level 3 non-financial assets and liabilities, respectively, under ASC 820.

The Company reviews other intangible assets for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of the Company’s finite-lived intangible assets is evaluated by comparing the current and forecasted cash flows associated with the assets to the assets’ carrying values.

The Company’s non-financial liabilities include contingent consideration related to the acquisition of Optionetics. The contingent consideration is payable for a period of five years following the acquisition and is based on the profitability of the business acquired and the number of funded brokerage accounts referred to the Company’s Brokerage Services segment in the year the contingent consideration is paid. Depending on the level of performance, the contingent consideration can range from zero to $7,000 for each of the first five years following the acquisition date of May 4, 2009. The fair value is based on the estimated projected future performance of Optionetics, the time remaining on the liability and the estimated market debt rate for the Company.

7. Derivative Instruments

As part of the UBS settlement agreement accepted by the Company in November 2008 (See Note 6), the Company received a UBS Put Right to sell certain ARS to UBS at par value beginning on June 30, 2010. The Company adopted the fair value option election under ASC 825 for this instrument in 2008, and accounts for any respective gain/loss as a component of other income in the condensed consolidated statement of operations. Typically, any gain/loss in the UBS Put Right is offset by an opposite, but equal gain/loss in the value of the ARS eligible for the UBS Put Right. After the exercise of the UBS Put Right on June 30, 2010, the Company recognized a gain of $2,517, offset by a corresponding loss, on the UBS Put Right for the six months ended June 30, 2010. The Company recognized a gain of $2,146, offset by a corresponding loss, on the UBS Put Right for the six months ended June 30, 2009. The gains were included as a component of other income in the condensed consolidated statement of operations. To help provide customers with improved trade execution, the Company at times enters into proprietary short-term positions in equity option and equity securities. The Company attempts to hedge these positions so that changes in market prices do not materially change the value of its securities. Any gains/losses from this trading activity are recognized as part of other brokerage-related revenue in the condensed consolidated statement of operations. For the six months ended June 30, 2010 and 2009, the total gains from the Company’s proprietary trading activities were $1,603 and $420, respectively.

8. Contingencies and Guarantees

General Contingencies

The Company extends margin credit and leverage to its customers, which are subject to various regulatory and clearing firm margin requirements. Cash and securities in customers’ accounts collateralize margin credit balances. Leverage involves securing a large potential future obligation with a lesser amount of cash or securities. The risks associated with margin credit and leverage increase during periods of fast market movements, or in cases where leverage or collateral is concentrated and market movements occur. During such times, customers who utilize margin credit or leverage and who have collateralized their obligations with securities may find that the securities have a rapidly depreciating value and may not be sufficient to cover their obligations in the event of liquidation. The Company is exposed to credit risk when its customers execute transactions, such as short sales of options, equities or futures transactions that can expose them to risk beyond their invested capital. As of June 30, 2010, the Company had $191,553 in credit extended to its customers. In addition, the Company may be obligated for margin extended to the Company’s customers by its third-party clearing agents on collateralized securities and futures positions.

The margin and leverage requirements that the Company imposes on its customer accounts meet or exceed those required by various regulatory requirements and Regulation T of the Board of Governors of the Federal Reserve. The amount of this risk is not quantifiable since the risk is dependent upon analysis of a potential significant and undeterminable rise or fall in stock prices. As a result, the Company is exposed to significant off-balance sheet credit risk in the event customer collateral is not sufficient to fully cover losses that customers may incur. In the event customers fail to satisfy their obligations, the Company may be required to purchase or sell financial instruments at prevailing market prices to fulfill customers’ obligations. The Company believes that it is unlikely that it will have to make any material payments under these arrangements, and no liabilities related to these guarantees and indemnifications have been recognized in the accompanying condensed consolidated financial statements.

The Company borrows securities temporarily from other broker-dealers in connection with its broker-dealer business. The Company deposits cash as collateral for the securities borrowed. Decreases in securities prices may cause the market value of the securities borrowed to fall below the amount of cash deposited as collateral. In the event the counterparty to these transactions does not return the cash deposited, the Company may be exposed to the risk of selling the securities at prevailing market prices. The Company seeks to manage this risk by requiring credit approvals for counterparties, by monitoring the securities’ value on a daily basis and by requiring additional collateral as needed.

Other assets and other liabilities on the condensed consolidated statement of financial condition include premiums on unrealized gains and losses for written and purchased options contracts. These contracts are subject to varying degrees of market risk. In addition, the Company has sold securities that it does not currently own (see Note 7), and therefore, will be obligated to purchase such securities at a future date. The Company has recorded these obligations in the condensed consolidated financial statements as of June 30, 2010, at the fair values of the related securities, and will incur losses if the fair values of these securities increase subsequent to June 30, 2010.

Legal Contingencies

In the ordinary course of business, the Company is subject to lawsuits, arbitrations, claims and other legal proceedings. Management cannot predict with certainty the outcome of pending legal proceedings. A substantial adverse judgment or other resolution regarding the proceedings could have a material adverse effect on the Company’s financial condition, results of operations and cash flows. However, in the opinion of management, after consultation with legal counsel, the outcome of any pending proceedings is not likely to have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

Guarantees

The Company introduces its Canadian securities customers’ accounts to a clearing broker who clears and carries all customer securities account activity. The Company clears its futures transactions on an omnibus account basis through several futures commission merchants. The Company has agreed to indemnify its third-party clearing broker and all of its clearing futures commission merchants for any losses that they may sustain for the customer accounts introduced to them by the Company.

The Company provides guarantees to its clearing organizations and exchanges under their standard membership agreements, which require members to guarantee the performance of other members. Under the agreements, if another member becomes unable to satisfy its obligations to the clearing organization or exchange, the other members would be required to meet any shortfalls. The Company’s liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, the Company believes that it is unlikely that it will have to make any material payments under these arrangements, and no liabilities related to these guarantees have been recognized in the accompanying condensed consolidated financial statements.

9. Earnings Per Share

The computations of basic and diluted EPS were as follows for the following periods:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Net income		$	15,587			$	16,073			$	27,475			$	29,629
Weighted-average number of common shares outstanding — basic			57,403				57,832				57,434				58,146
Effect of dilutive securities			208				156				209				120
Weighted-average number of common shares outstanding — diluted			57,611				57,988				57,643				58,266
Basic EPS		$	0.27			$	0.28			$	0.48			$	0.51
Diluted EPS		$	0.27			$	0.28			$	0.48			$	0.51

10. Stock-Based Compensation

The Company maintains three stock compensation plans: the 2001 Equity Incentive Plan, the 2005 Equity Incentive Plan, and the 2008 Equity Incentive Plan. All of the options outstanding pursuant to the stock compensation plans at June 30, 2010 are options to buy common stock of the Company granted to employees or directors of the Company.

Stock-based compensation for the six months ended June 30, 2010 and June 30, 2009 was $2,352 and $1,811, respectively. As of June 30, 2010, the total compensation cost related to stock options and deferred shares not yet vested and recognized was estimated to be $6,484. This compensation cost related to stock options and deferred shares is expected to be recognized over a weighted average period of 3.13 years and 3.67 years, respectively. As of June 30, 2010, the aggregate intrinsic value of the total outstanding stock options and deferred shares was $2,770 and $7,148, respectively, and the aggregate intrinsic value of the total exercisable stock options was $1,674. During the six months ended June 30, 2010, 112 shares were issued pursuant to the Company’s equity incentive plans.

11. Regulatory Requirements

optionsXpress, Inc. is subject to the Securities and Exchange Commission Uniform Net Capital Rule (“Rule 15c3-1”) under the Securities Exchange Act of 1934, administered by the SEC and FINRA, which requires the maintenance of minimum net capital. Under Rule 15c3-1, optionsXpress, Inc. is required to maintain net capital of 2% of “aggregate debits” or $250, whichever is greater, as these terms are defined.

optionsXpress, Inc. is also subject to the CFTC Regulation 1.17 (“Reg. 1.17”) under the Commodity Exchange Act, administered by the CFTC and the NFA, which also requires the maintenance of minimum net capital. optionsXpress, Inc., as a futures commission merchant, is required to maintain minimum net capital equal to the greater of its net capital requirement under Rule 15c3-1 ($1,000), or the sum of 8% of the total risk margin requirements for all positions carried in customer accounts, as defined in Reg. 1.17 and 8% of the total risk margin requirements for all positions carried in non-customer accounts.

As of June 30, 2010, optionsXpress, Inc. had net capital requirements of $14,392 and net capital of $103,993. As of June 30, 2009, optionsXpress, Inc. had net capital requirements of $6,544 and net capital of $77,970. All of the Company’s other broker-dealers also exceeded the net capital requirements for their respective jurisdictions. The net capital rules may effectively restrict the payment of cash distributions or other equity withdrawals.

12. Segment Reporting

The operations of Optionetics have been included in the condensed consolidated financial statements since the date of the acquisition, May 4, 2009. As a result of the acquisition, the Company operates in the following two principal business segments:

Brokerage Services segment- Brokerage Services offers a comprehensive suite of services for option, futures, stock, mutual fund, and fixed-income investors. This business segment includes almost all of the Company’s operations prior to the acquisition of Optionetics.

Education Services segment- Education Services provides a full range of investor education products and services that educate customers on stock, market analysis, options, foreign exchange and financial planning.

Information concerning the Company’s operations by reportable segment is as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
Net Revenues		2010				2009				2010				2009
Brokerage Services		$	57,797			$	54,477			$	107,288			$	103,771
Education Services			8,186				7,304				16,200				7,304
Eliminations			(483	)			(66	)			(957	)			(66	)
Total		$	65,500			$	61,715			$	122,531			$	111,009

		Three Months Ended								Six Months Ended
		June 30,								June 30,
Income (Loss) before Income Taxes		2010				2009				2010				2009
Brokerage Services		$	25,637			$	25,514			$	45,973			$	46,709
Education Services			(1,045	)			(276	)			(2,547	)			(276	)
Non-controlling interests			22				18				39				30
Total		$	24,614			$	25,256			$	43,465			$	46,463

		As of				As of
		June 30,				December 31,
		2010				2009
Assets
Brokerage Services		$	1,473,049			$	1,538,379
Education Services			12,562				12,112
Eliminations			(7,731	)			(4,170	)
Total		$	1,477,880			$	1,546,321

Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and the Condensed Consolidated Financial Statements and Notes thereto contained in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. You are urged to carefully consider these risks and factors included in this Quarterly Report on Form 10-Q. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made, and we undertake no ongoing obligation, other than any imposed by law, to update these statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Important factors that may cause such differences include, but are not limited to: risks related to general economic conditions, regulatory developments, the competitive landscape, the volume of securities trading generally or by our customers specifically, competition, systems failures and capacity constraints and the other risks and uncertainties set forth under the heading “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Forward-looking statements include, but are not limited to, the following:

•		the statements about our intention to pay dividends;
•		the statements about future growth in online brokerage accounts, options trading, futures trading, online options trading, and online futures trading;
•		the statement that, on a per trade basis, brokerage, clearing and other related expenses generally decrease as the number of customer trades increase;
•		the statements about continuing to expand our product offering and our customer base and the costs associated with such expansion;
•		the statements concerning future growth of our futures business, international operations, brokersXpress and our institutional business;
•		the statements about the impact of changes in interest rates on our earnings;
•		the statements concerning continued financing options;
•		the statements regarding scalability of our systems and the cost of capacity increases;
•		the statements concerning uncertainties and deteriorations in the credit and capital markets and the credit quality of our auction rate securities (“ARS”); and,
•		the statements concerning the number of students receiving education services and our ability to convert those students into brokerage customers.

Results of Operations

The following table sets forth our total net revenues and condensed consolidated statements of operations data for the periods presented as a percentage of total net revenues:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Results of Operations
Net revenues (in thousands)		$	65,500			$	61,715			$	122,531			$	111,009
Compensation and benefits			18.1	%			16.9	%			19.2	%			16.9	%
Brokerage, clearing, and other related expenses			15.6				13.0				15.7				13.8
Brokerage advertising			8.8				8.1				8.3				9.7
Education marketing and fulfillment			7.6				7.8				8.4				4.3
Depreciation and amortization			3.5				3.7				3.7				3.9
Other general and administrative			8.8				9.6				9.3				9.6
Income before income taxes			37.6				40.9				35.4				41.8
Income taxes			13.8				14.9				13.0				15.1
Net income			23.8				26.0				22.4				26.7

Statistical Data

The following table sets forth our statistical data for the periods presented below:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Statistical Data
Number of customer accounts (at period end) (1)			365,500				337,300				365,500				337,300
Daily average revenue trades (“DARTs”) (2)
Retail DARTs			32,700				33,200				31,500				32,500
Institutional DARTs			17,100				11,900				15,700				13,500
Total DARTs			49,800				45,100				47,200				46,000
Customer trades per account (3)			35				34				33				34
Average commission per trade		$	14.26			$	14.78			$	14.40			$	14.06
Option trades as a % of total trades			40	%			42	%			41	%			40	%
Brokerage advertising expense per net new customer account (4)		$	737			$	556			$	707			$	577
Total client assets (000s)		$	7,030,199			$	5,749,031			$	7,030,199			$	5,749,031
Client margin balances (000s)		$	204,194			$	122,770			$	204,194			$	122,770

Three Months Ended June 30, 2010 versus Three Months Ended June 30, 2009

Overview

Our results for the period reflect the following principal factors:

•		total customer accounts increased by 28,200 to 365,500, or 8.4%;
•		total trades increased by 293,800 to 3,135,400, or 10.3% and
•		average commission per trade decreased by $0.52 to $14.26, or 3.5%.

Commissions

Commissions increased $2.7 million, or 6.4%, for the three months ended June 30, 2010 to $44.7 million compared to $42.0 million for the three months ended June 30, 2009. The increase in commissions was primarily the result of the 10.3% increase in the total number of trades, which was partially offset by the 3.5% decrease in the average commission per trade.

Other brokerage-related revenue

Other brokerage-related revenue decreased $1.9 million, or 26.2%, for the three months ended June 30, 2010 to $5.2 million compared to $7.1 million for the three months ended June 30, 2009. The decrease in other brokerage-related revenue was due to a reduction in the payment for order flow rate per contract paid by exchanges and liquidity providers for our option order flow.

Net interest revenue and fees

Net interest revenue and fees increased $0.4 million, or 7.7%, to $4.8 million for the three months ended June 30, 2010 compared to $4.4 million for the three months ended June 30, 2009. The increase in net interest revenue and fees was primarily the result of an increase in our customer cash and margin balances.

Education revenues

Education revenue increased $0.5 million, or 6.5%, to $7.7 million for the three months ended June 30, 2010 compared to $7.2 million for the three months ended June 30, 2009. The increase in education revenue was primarily due to the inclusion of operations from Optionetics for the full three month period ended June 30, 2010, versus the post-acquisition period beginning May 4, 2009 and ending June 30, 2009, which was partially offset by lower sales volumes. Prior to the acquisition of Optionetics on May 4, 2009, we did not have any material education revenue.

Other income

Other income increased $2.2 million, or 227.3%, to $3.1 million for the three months ended June 30, 2010 compared to $0.9 million for the three months ended June 30, 2009. The increase in other income is due to a gain recognized from shares we received as a result of the CBOE initial public offering.

Compensation and benefits

Compensation and benefits expenses increased $1.5 million, or 13.6%, to $11.9 million for the three months ended June 30, 2010 from $10.4 million for the three months ended June 30, 2009. The increase in compensation and benefits expenses was primarily due to the incorporation of operations from the acquisition of Optionetics on May 4, 2009, for the full three month period ended June 30, 2010, versus the post-acquisition period beginning May 4, 2009 and ending June 30, 2009. The increase in compensation and benefits expenses was partially offset by a decrease in the number of employees from 442 at June 30, 2009 to 435 at June 30, 2010.

Brokerage, clearing, and other related expenses

Brokerage, clearing and other related expenses increased $2.3 million, or 27.4%, to $10.3 million for the three months ended June 30, 2010 from $8.0 million for the three months ended June 30, 2009. Brokerage, clearing and other related expenses increased primarily due to higher payouts to the independent registered representatives of our brokersXpress subsidiary and introducing brokers in our OEC subsidiary.

Brokerage advertising

Brokerage advertising expenses increased $0.7 million, or 14.8%, to $5.7 million for the three months ended June 30, 2010 from $5.0 million for the three months ended June 30, 2009. The increase in advertising expense was primarily due to marketing expenses related to the launch of our Xtend trading platform. Brokerage advertising expenses per net new customer account increased to $737 for the three months ended June 30, 2010 from $556 for the three months ended June 30, 2009. Excluding approximately $1 million in expenses related to the launch of our Xtend trading platform, brokerage advertising per net new customer account would have been $609 for the three months ended June 30, 2010.

Education marketing and fulfillment

Education marketing and fulfillment expenses increased $0.2 million, or 4.0%, to $5.0 million for the three months ended June 30, 2010 compared to $4.8 million for the three months ended June 30, 2009. Education marketing and fulfillment expenses increased primarily due to the inclusion of operations from Optionetics for the full three month period ended June 30, 2010, versus the post-acquisition period beginning May 4, 2009 and ending June 30, 2009, which was partially offset by lower sales volumes. Prior to the acquisition of Optionetics on May 4, 2009, we did not have any material education marketing and fulfillment expenses.

Depreciation and amortization

Depreciation and amortization expenses effectively remained constant at $2.3 million for the three months ended June 30, 2010 and the three months ended June 30, 2009.

Other general and administrative

Other general and administrative expenses decreased $0.1 million, or 1.9%, to $5.8 million for the three months ended June 30, 2010 from $5.9 million for the three months ended June 30, 2009.

Income taxes

Income taxes decreased $0.2 million, or 1.7%, to $9.0 million for the three months ended June 30, 2010 from $9.2 million for the three months ended June 30, 2009. Lower income taxes were primarily due to the 2.5% reduction of income before income taxes.

Net income

As a result of the foregoing, we reported $15.6 million in net income for the three months ended June 30, 2010, compared to $16.1 million in net income for the three months ended June 30, 2009, a decrease of $0.5 million, or 3.0%.

Segment information

Brokerage Services

Brokerage Services net revenues increased $3.3 million, or 6.1% for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 due to the increase in commissions and other income, which was partially offset by the decrease in other broker-related revenue. Income before income taxes increased $0.1 million, or 0.5% for the three months ended June 30, 2010 compared to the three months ended June 30, 2009.

Education Services

Education Services net revenues increased $0.9 million, or 12.1% for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 due to the inclusion of operations from the acquisition of Optionetics on May 4, 2009, for the full three month period ended June 30, 2010, versus the post-acquisition period beginning May 4, 2009 and ending June 30, 2009, which was partially offset by lower sales volumes. The loss before income taxes increased $0.8 million, or 278.6% for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 due to the inclusion of operations for the full three month period ended June 30, 2010, versus the post-acquisition period beginning May 4, 2009 and ending June 30, 2009 and lower sales volumes.

Six Months Ended June 30, 2010 versus Six Months Ended June 30, 2009

Overview

Our results for the period reflect the following principal factors:

•		total customer accounts increased by 28,200 to 365,500, or 8.4%;
•		total trades increased by 159,200 to 5,856,600, or 2.8%; and
•		average commission per trade increased by $0.34 to $14.40, or 2.4%.

Commissions

Commissions increased $4.2 million, or 5.3%, for the six months ended June 30, 2010 to $84.3 million compared to $80.1 million for the six months ended June 30, 2009. The increase in commissions was primarily the result of the 2.8% increase in the total trades and the 2.4% increase in the average commission per trade.

Other brokerage-related revenue

Other brokerage-related revenue decreased $3.7 million, or 27.3%, for the six months ended June 30, 2010 to $9.7 million compared to $13.4 million for the six months ended June 30, 2009. The decrease in other brokerage-related revenue was due to a reduction in the payment for order flow rate per contract paid by exchanges and liquidity providers for our option order flow.

Net interest revenue and fees

Net interest revenue and fees increased $0.8 million, or 8.5%, to $9.5 million for the six months ended June 30, 2010 compared to $8.7 million for the six months ended June 30, 2009. The increase in net interest revenue and fees was primarily the result of an increase in our customer cash and margin balances.

Education revenue

Education revenue increased $8.0 million, or 110.6%, to $15.2 million for the six months ended June 30, 2010 compared to $7.2 million for the six months ended June 30, 2009. The increase in education revenue was primarily due to the inclusion of operations from Optionetics for the full six month period ended June 30, 2010, versus the post-acquisition period beginning May 4, 2009 and ending June 30, 2009, which was partially offset by lower sales volumes. Prior to the acquisition of Optionetics on May 4, 2009, we did not have any material education revenue.

Other income

Other income increased $2.3 million, or 146.0%, to $3.8 million for the six months ended June 30, 2010 from $1.5 million for the six months ended June 30, 2009. The increase in other income is due to a gain recognized from shares we received as a result of the CBOE initial public offering.

Compensation and benefits

Compensation and benefits expenses increased $4.7 million, or 25.0%, to $23.5 million for the six months ended June 30, 2010 from $18.8 million for the six months ended June 30, 2009. The increase in compensation and benefits expenses was primarily due to the incorporation of operations from the acquisition of Optionetics on May 4, 2009, for the full six month period ended June 30, 2010, versus the post-acquisition period beginning May 4, 2009 and ending June 30, 2009. The increase in compensation and benefits expenses was partially offset by a decrease in the number of employees from 442 at June 30, 2009 to 435 at June 30, 2010.

Brokerage, clearing, and other related expenses

Brokerage, clearing, and other related expenses increased $4.1 million, or 26.5%, to $19.3 million for the six months ended June 30, 2010 from $15.2 million for the six months ended June 30, 2009. Brokerage, clearing and other related expenses increased primarily due to higher payouts to the independent registered representatives of our brokersXpress subsidiary, higher payouts to introducing brokers in our OEC subsidiary and higher execution costs on certain option trades executed on behalf of our customers.

Brokerage advertising

Brokerage advertising expenses decreased $0.7 million, or 6.3%, to $10.1 million for the six months ended June 30, 2010 from $10.8 million for the six months ended June 30, 2009. Brokerage advertising expenses per net new customer account increased to $707 for the six months ended June 30, 2010 from $577 for the six months ended June 30, 2009. Excluding approximately $1 million in expenses related to the launch of our Xtend trading platform, brokerage advertising per net new customer account would have been $637 for the six months ended June 30, 2010.

Education marketing and fulfillment

Education marketing and fulfillment expenses increased $5.5 million, or 114.5%, to $10.3 million for the six months ended June 30, 2010 compared to $4.8 million for the six months ended June 30, 2009. Education marketing and fulfillment expenses increased primarily due to the inclusion of operations from Optionetics for the full six month period ended June 30, 2010, versus the post-acquisition period beginning May 4, 2009 and ending June 30, 2009, which was partially offset by lower sales volumes. Prior to the acquisition of Optionetics on May 4, 2009, we did not have any material education marketing and fulfillment expenses.

Depreciation and amortization

Depreciation and amortization expenses increased $0.3 million, or 6.5%, to $4.6 million for the six months ended June 30, 2010 from $4.3 million for the six months ended June 30, 2009. Increased depreciation and amortization expenses were primarily due to the intangible and fixed assets additions from our acquisition of Optionetics on May 4, 2009.

Other general and administrative

Other general and administrative expenses increased $0.7 million, or 6.6%, to $11.3 million for the six months ended June 30, 2010 from $10.6 million for the six months ended June 30, 2009. Increased other general and administrative expenses were primarily due to the incorporation of other general and administrative expenses from our acquisition of Optionetics on May 4, 2009.

Income taxes

Income taxes decreased $0.8 million, or 5.1%, to $16.0 million for the six months ended June 30, 2010 from $16.8 million for the six months ended June 30, 2009. Lower income taxes were primarily due to the 6.5% reduction of income before taxes.

Net income

As a result of the foregoing, we reported $27.5 million in net income for the six months ended June 30, 2010, compared to $29.6 million in net income for the six months ended June 30, 2009, a decrease of $2.1 million, or 7.3%.

Segment information

Brokerage services

Brokerage Services net revenues increased $3.5 million, or 3.4% for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 due to the increase in commissions and other income, which was partially offset by the decrease in other broker-related revenue. Income before taxes decreased $0.7 million or 1.6% for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 due primarily to lower other brokerage related revenue.

Education Services

Education Services net revenues increased $8.9 million, or 121.8% for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 due to the inclusion of operations from the acquisition of Optionetics on May 4, 2009, for the full six month period ended June 30, 2010, versus the post-acquisition period beginning May 4, 2009 and ending June 30, 2009, which was partially offset by lower sales volumes. The loss before income taxes increased $2.3 million, or 822.8% for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 due to the inclusion of operations for the full six month period ended June 30, 2010, versus the post-acquisition period beginning May 4, 2009 and ending June 30, 2009 and lower sales volumes.

Liquidity and Capital Resources

As a holding company, almost all of our funds generated from operations are earned by our operating subsidiaries. We access these funds through receipt of dividends from these subsidiaries. Some of our subsidiaries are subject to requirements of various regulatory bodies, including the SEC, FINRA, the CBOE, the CFTC and the NFA, relating to liquidity and capital standards, which limit the funds available for the payment of dividends to us.

We invest company cash in a variety of high credit quality investment vehicles including U.S. Government Treasury Bills, bank-issued commercial paper, AAA-rated institutional money market funds and tax-free ARS backed by United States Department of Education-guaranteed student loans issued under the FFELP. Our ARS are securities with long-term stated maturities (during years 2033-2040) for which the interest rates are reset through periodic short-term auctions every 7 or 35 days, depending on the issue. As a result of the liquidity issues in the global credit and capital markets, all of the auctions for all our ARS have failed since February 2008. Failed auctions limit liquidity for ARS holders until there is a successful auction, the issuer redeems the security, or another market for ARS develops. Our ARS portfolio consists entirely of securities backed by student loans issued under the FFELP program, which are individually guaranteed by the United States Department of Education. All of our ARS are AAA-rated with the exception of two issues totaling $6.0 million in par value, and all of our ARS are current with respect to receipt of interest payments according to the stated terms of each ARS indenture. As of the date of this report, we have no reason to believe that any of the underlying issuers of our ARS will be unable to satisfy the terms of the indentures or that the underlying credit quality of the assets backing our ARS investments has deteriorated. Since the ARS markets began failing on February 14, 2008, $86.8 million of our ARS securities have been redeemed by issuers or their brokers at par. We believe we have the ability and intent, if necessary, to hold our remaining ARS investments until such time as the auctions are successful, the issuer redeems the securities, or another market for ARS develops.

optionsXpress, Inc. is subject to the Securities and Exchange Commission Uniform Net Capital Rule (“Rule 15c3-1”) under the Securities Exchange Act of 1934, administered by the SEC and FINRA, which requires the maintenance of minimum net capital. Under Rule 15c3-1, optionsXpress, Inc. is required to maintain net capital of 2% of “aggregate debits” or $0.25 million, whichever is greater, as these terms are defined.

optionsXpress, Inc. is also subject to the CFTC Regulation 1.17 (“Reg. 1.17”) under the Commodity Exchange Act, administered by the CFTC and the NFA, which also requires the maintenance of minimum net capital. optionsXpress, Inc., as a futures commission merchant, is required to maintain minimum net capital equal to the greater of its net capital requirement under Rule 15c3-1 ($1.0 million), or the sum of 8% of the total risk margin requirements for all positions carried in customer accounts and 8% of the total risk margin requirements for all positions carried in non-customer accounts, as defined in Reg. 1.17.

As of June 30, 2010, optionsXpress, Inc. had net capital requirements of $14.4 million and net capital of $104.0 million. As of June 30 2009, optionsXpress, Inc. had net capital requirements of $6.5 million and net capital of $78.0 million. All of our other broker-dealers also exceeded the net capital requirements for their respective jurisdictions. We believe that we currently have sufficient capital to satisfy these ongoing requirements.

In addition to net capital requirements, as a self-clearing broker-dealer, optionsXpress, Inc. is subject to Depository Trust & Clearing Corporation (“DTCC”), Options Clearing Corporation (“OCC”), and other cash deposit requirements, which may fluctuate significantly from time to time based upon the nature and size of our customers’ trading activity. At June 30, 2010, we had interest-bearing security deposits and short-term treasury bills totaling $20.0 million deposited with clearing organizations for the self-clearing of equities and option trades.

At June 30, 2010, we had $891.2 million of cash segregated in compliance with federal regulations in special reserve bank accounts for the exclusive benefit of customers under Rule 15c3-3 of the Securities Exchange Act of 1934 and other regulations. Liquidity needs relating to client trading and margin borrowing activities are met primarily through cash balances in customer brokerage accounts, which were $1,074.9 million as of June 30, 2010.

Credit Facility

We generally finance our operating liquidity and capital needs through the use of funds generated from operations and the issuance of common stock.

To support our self-clearing activities, we have an unsecured, uncommitted credit facility with JPMorgan Chase Bank, NA that is callable on demand. We anticipate that the credit facility will only be used occasionally, addressing potential timing issues with the flow of customer funds, and will only be used to facilitate transactions for which customers already have sufficient funds in brokerage accounts. As of June 30, 2010, there was no balance outstanding on this credit facility.

Although we have no current plans to do so, we may issue equity or debt securities or enter into secured or additional unsecured lines of credit from time to time.

Cash Flow

Cash used in operating activities was $1.7 million for the six months ended June 30, 2010, compared to cash provided by operating activities of $38.1 million for the six months ended June 30, 2009. The primary reasons for the decrease in cash provided by operating activities was due to the decrease of payables to brokerage customers which was partially offset by the decrease of the receivables from brokers, dealers and clearing organizations.

Cash provided by investing activities was $0.3 million for the six months ended June 30, 2010, compared to cash used in investing activities of $15.3 million for the six months ended June 30, 2009. The primary reason for the decrease in cash used in investing activities was the absence of the net proceeds used to acquire Optionetics on May 4, 2009.

Cash used in financing activities was $2.8 million for the six months ended June 30, 2010, compared to cash used in financing activities of $18.6 million for the six months ended June 30, 2009. Cash used in financing activities decreased primarily due to the reduction of cash used to repurchase our outstanding common stock.

Capital Expenditures

Capital expenditures were $1.5 million for the three months ended June 30, 2010, compared to $0.8 million for the three months ended June 30, 2009. The increase in capital expenditures was related to an increased level of fixed asset additions. Capital expenditures for the periods ended June 30, 2010 and 2009 included capitalized software development costs, which we capitalized in accordance with Financial Accounting Standards Board Accounting Standards Codification tm Topic 350-50, Website Development Costs, primarily related to the development of our technology.

Item 3. — Quantitative and Qualitative Disclosures about Market Risk

Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest rates and market prices. We have established policies, procedures and internal processes governing our management of market risks in the normal course of our business operations. We do not have material exposure to commodity price changes, foreign currency fluctuations or similar market risks other than the effect they may have on trading volumes. Accordingly, we have not entered into any derivative contracts to mitigate such risks.

We extend margin credit and leverage to our customers, which are subject to various regulatory and clearing firm margin requirements. Margin credit balances are collateralized by cash and securities in our customers’ accounts. Leverage involves securing a large potential future obligation with a lesser amount of cash or securities. The risks associated with margin credit and leverage increase during periods of fast market movements or in cases where leverage or collateral is concentrated and market movements occur. During such times, customers who utilize margin credit or leverage and who have collateralized their obligations with securities may find that the securities have a rapidly depreciating value and may not be sufficient to cover their obligations in the event of liquidation. We are exposed to credit risk when our customers execute transactions, such as short sales of options and equities or futures transactions that can expose them to risk beyond their invested capital.

We expect this kind of exposure to increase with the growth in our overall business. The use of margin credit, leverage and short sales may expose us to significant off-balance-sheet risk in the event that collateral requirements are not sufficient to fully cover losses that customers may incur and those customers fail to satisfy their obligations. As of June 30, 2010, we had $191.6 million in credit extended to our customers either directly or through our clearing firms. The amount of risk to which we are exposed from the leverage we extend to our customers and from short sale transactions by our customers is unlimited and not quantifiable as the risk is dependent upon analysis of a potential significant and undeterminable rise or fall in stock or futures prices. Our account level margin credit and leverage requirements meet or exceed those required by Regulation T of the Board of Governors of the Federal Reserve. We have a comprehensive policy implemented in accordance with SRO standards to assess and monitor the suitability of investors to engage in various trading activities. To mitigate our risk, we also continuously monitor customer accounts to detect excessive concentration, large orders or positions, patterns of day trading and other activities that indicate increased risk to us.

Please see Item 2. — “Liquidity and Capital Resources” for additional information.

Item 4. — Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the six months ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II — OTHER INFORMATION

Item 1. — Legal Proceedings

We are not, nor are our subsidiaries, currently a party to any litigation that we believe could have a material adverse effect on our business, financial condition or operating results. However, many aspects of our business involve substantial risk of liability. In recent years, there has been an increasing incidence of litigation involving the securities brokerage industry, including class action suits that generally seek substantial damages, including punitive damages in some cases. Like other securities and futures brokerage firms, we have been named as a respondent in arbitrations, and from time to time we have been threatened with litigation, or named as a defendant in administrative proceedings. Compliance and trading problems that are reported to federal, state and provincial securities regulators, securities exchanges or other self-regulatory organizations by dissatisfied customers are investigated by such regulatory bodies, and, if pursued by such regulatory body or such customers, may rise to the level of arbitration or disciplinary action. We are also subject to periodic regulatory audits, inquiries and inspections.

Item 1A. — Risk Factors

Our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 lists in more detail various important risk factors facing our business in Part I, Item 1A under the heading “Risk Factors.” There have been no material changes from the risk factors disclosed in that section of our Annual Report on Form 10-K. We encourage you to review that information and to review our other reports filed periodically with the Securities and Exchange Commission for any further information regarding risks facing our business.

Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds

(c) Purchases of Equity Securities by the Issuer

We did not repurchase any of our common stock during the three months ended June 30, 2010.

Item 6. — Exhibits

Exhibit				Description
	31.1			Certification of David A. Fisher, Principal Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2			Certification of Adam J. DeWitt, Principal Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1			Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Signatures

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: August 9, 2010		optionsXpress Holdings, Inc.
		(Registrant)
		By:		/s/ DAVID A. FISHER
				David A. Fisher
				Chief Executive Officer
				(Principal Executive Officer)
		By:		/s/ ADAM J. DEWITT
				Adam J. DeWitt
				Chief Financial Officer
				(Principal Financial and Accounting Officer)

Exhibit Index

Exhibit				Description
	31.1			Certification of David A. Fisher, Principal Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2			Certification of Adam J. DeWitt, Principal Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1			Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002