UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number: 0-49992

Ameritrade Holding Corporation

((Exact name of registrant as specified in its charter)

4211 South 102nd Street,

Omaha, Nebraska 68127

(Address of principal executive offices and zip code)

(402) 331-7856

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) under 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 þ          No o

      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.     o

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

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

      The aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $2.6 billion computed by reference to the closing sale price of the stock on the Nasdaq National Market on March 24, 2005, the last trading day of the registrant’s most recently completed second fiscal quarter.

      The number of shares of Common Stock outstanding as of November 25, 2005 was 406,373,588 shares.

DOCUMENTS INCORPORATED BY REFERENCE

      Definitive Proxy Statement relating to the registrant’s 2006 Annual Meeting of Stockholders to be filed hereafter (incorporated into Part III hereof).

AMERITRADE HOLDING CORPORATION

INDEX

      Unless otherwise indicated, references to “we”, “us” or “Company” mean Ameritrade Holding Corporation and its subsidiaries, and references to “fiscal” mean the Company’s fiscal year ended the last Friday of September. The term “GAAP” refers to generally accepted accounting principles in the United States of America.

PART I

      We are a leading provider of securities brokerage services, with online brokerage representing the vast majority of our business. The Company was established in 1971 as a local investment banking firm. The Company began operations as a retail discount securities brokerage firm in 1975.

Retail Securities Brokerage Industry Overview

      The retail brokerage industry is comprised of companies that employ two primary delivery channels: online delivery and offline delivery utilizing registered representatives. The number of client accounts in the online segment of the retail brokerage industry has grown substantially over the past decade. A number of factors have contributed to this growth, including:

Operations

      We are a leading provider of securities brokerage services and technology-based financial services to retail investors and business partners, predominantly through the Internet. Our services appeal to a broad market of independent, value conscious retail investors, traders, financial planners and institutions. We use our low-cost platform to offer brokerage services to retail investors and institutions under a low-cost commission structure that is generally simpler than that of most of our major competitors.

      We have been an innovator in electronic brokerage services since entering the retail securities brokerage business in 1975. We believe that we were the first brokerage firm to offer the following products and services to retail clients: touch-tone trading; trading over the Internet; unlimited, streaming, free real-time quotes; extended trading hours; direct access; and commitment on the speed of execution. Since initiating online trading, we have substantially increased our number of brokerage accounts, average daily trading volume and total assets in client accounts. We have also built, and continue to invest in, a proprietary trade processing platform that is both cost efficient and highly scalable, significantly lowering our operating costs per trade. In addition, we have made significant and effective investments in building the Ameritrade brand.

Strategy

      Our business strategy is to continue to capitalize on the projected growth of the online brokerage industry in the United States and leverage our low-cost infrastructure to grow market share and profitability. We strive

to enhance the client experience while delivering greater value to stockholders. The key elements of our strategy are as follows:

Proposed Acquisition of TD Waterhouse

      On June 22, 2005, we entered into an Agreement of Sale and Purchase (the “Purchase Agreement”) with The Toronto-Dominion Bank, a Canadian chartered bank (“TD”), pursuant to which we agreed to purchase from TD (the “Share Purchase”) all of the capital stock of TD Waterhouse Group, Inc., a Delaware corporation and wholly owned subsidiary of TD (“TD Waterhouse”). Upon the closing of the transaction, we will issue 196,300,000 shares of Company Common Stock and pay $20,000 in cash to TD pursuant to the Purchase Agreement, as amended. The shares of Common Stock issuable to TD will represent approximately 32.6 percent of our outstanding shares after giving effect to the transaction. In connection with the acquisition, the Company will change its name to TD Ameritrade Holding Corporation effective at the completion of the transaction.

      The Purchase Agreement specifies that, prior to the consummation of the Share Purchase, TD Waterhouse will conduct a reorganization in which it will transfer its Canadian retail securities brokerage business and TD Waterhouse Bank, N.A. to TD such that, at the time of consummation of the Share Purchase, TD Waterhouse will retain only its United States retail securities brokerage business. TD Waterhouse will also distribute to TD any excess capital of TD Waterhouse above certain thresholds prior to the consummation of the Share Purchase. The Purchase Agreement further contemplates that we will pay a special cash dividend of $6.00 per share in respect of the shares of our Common Stock outstanding prior to the consummation of the Share Purchase.

      Consummation of the Share Purchase is subject to conditions, including regulatory and stockholder approval and our ability to pay the special cash dividend of $6.00 per share, and is expected to occur on or around January 24, 2006.

      The Purchase Agreement contains certain termination rights for both the Company and TD and further provides that, upon termination of the Purchase Agreement under specified circumstances, we may be required to pay TD a termination fee of $97 million. In connection with the Purchase Agreement, TD was given rights to have its shares registered for resale with the Securities and Exchange Commission (“SEC”), and TD licensed the Company to use the “TD” name in connection with the operation of the TD Ameritrade business. The parties also agreed to establish bank sweep account and mutual fund relationships.

      In connection with the Purchase Agreement, the Company, TD, and J. Joe Ricketts, our Chairman and Founder, and certain of his affiliates also entered into a Stockholders Agreement (the “Stockholders Agreement”). The Stockholders Agreement sets forth certain governance arrangements and contains various provisions relating to stock ownership, voting, election of directors and other matters. The Stockholders Agreement also contemplates changes to our certificate of incorporation and bylaws to give effect to and facilitate the provisions contained in the Stockholders Agreement.

      In addition, the Company and TD also entered into a stock purchase agreement which provides for the purchase by TD of Ameritrade Canada, Inc. for $60 million in cash. After the consummation of the Share Purchase, we will not compete or own any portion of a business that competes with TD in Canada (including in the retail securities brokerage business).

      In connection with the proposed transaction, Ameritrade filed a definitive proxy statement concerning the transaction with the SEC with a filing date of December 5, 2005. SECURITY HOLDERS OF AMERITRADE ARE URGED TO READ THE DEFINITIVE PROXY STATEMENT AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. Investors and security holders can obtain free copies of the definitive proxy statement and other documents when they become available by contacting Investor Relations at www.amtd.com, or by mail at Ameritrade Investor Relations, 4211 S. 102 Street, Omaha, NE 68127, or by Telephone: 800-237-8692. In addition, documents filed with the SEC by Ameritrade are available free of charge at the SEC’s web site at www.sec.gov.

Client Experience Organization

      In March 2005, we reorganized our corporate and management structure to meet the specific needs of our growing and diverse client base of active traders, long-term investors and registered investment advisors. In connection with the reorganization, we established the Client Experience Organization. The Clearing and Client Service operations for our Private Client Division and Institutional Client Division were combined under one Brokerage Services unit.

Client Offerings

      Our client-centric strategy focuses on maintaining an outside-in perspective. This includes establishing an improved insight into the needs of clients and creating appropriate value propositions for active traders, long-

term investors and registered investment advisors. We have developed strategies aimed at specific client segments, matching tools, information and choices to investor priorities. Our client offerings include:

Products and Services

      We strive to provide the best value of online brokerage services to our clients. Our products include:

      We provide our clients with an array of channels to access our products and services. These include Internet, wireless telephone or Personal Digital Assistant, Interactive Voice Response and registered representatives.

Client Service

      We endeavor to optimize our highly rated client service by:

      We provide client service support through a variety of access points, including:

      We strive to provide the best client service in the industry as measured by: (1) speed of response time on telephone calls; (2) turnaround time on responding to client inquiries; and (3) client satisfaction with the account relationship.

Technology and Information Systems

      Technology is a core function for our business and is critical to our goal of providing the best execution at the best value to our clients. Our operations require reliable, scalable systems that can handle complex financial transactions for our clients with speed and accuracy. We maintain sophisticated and proprietary technology that automates traditionally labor-intensive securities transactions. Our ability to effectively leverage and adopt new technology to improve our services is a key component to our success.

      We continue to make investments in technology and information systems. Since 1999, we have spent a significant amount of resources to increase capacity and improve speed and reliability. To provide for system continuity during potential power outages, we also have equipped our data centers with uninterruptible power supply units, as well as back-up generators.

      Our current capacity for trades is approximately 350,000 trades per day. During fiscal 2005, our clients averaged approximately 156,000 trades per day. Our highest average client trades per day for any single month occurred in January 2004, when clients averaged approximately 254,000 trades per day. Because of the scalability of our system, we believe that we would be able to increase capacity to approximately 600,000 trades per day at an estimated cost of $10 million.

Advertising and Marketing

      We intend to continue to grow and increase our market share by advertising through online avenues, television, print, direct mail and our own Web sites. In October 1997, we launched a national marketing campaign to promote the Ameritrade brand name. Since that date, we have invested heavily in advertising programs designed to bring greater brand recognition to our services. We intend to continue to aggressively

advertise our services. From time to time, we may choose to increase our advertising to target specific groups of investors or to decrease advertising in response to market conditions.

      Advertising for retail clients is generally conducted through Web sites, financial news networks and other television and cable networks. We also place print advertisements in a broad range of business publications, including The Wall Street Journal, Barron’s and Investor’s Business Daily, and use direct mail advertising. Advertising for institutional clients is significantly less than for private clients and is generally conducted through highly targeted media.

      To monitor the success of our various marketing efforts, we have installed a data gathering and tracking system. This system enables us to determine the type of advertising that best appeals to our target market so that we can invest future dollars in these programs and obtain a greater yield from our marketing dollars. Additionally, through the use of our database tools, we are working to more efficiently determine the needs of our various client segments and tailor our services to their individual needs. We intend to utilize this system to strengthen relationships with our clients and support marketing campaigns to attract new clients. All of our methods and uses of client information are disclosed in our privacy statement.

      All of our brokerage-related communications with the public are regulated by the NASD.

Clearing Operations

      Ameritrade, Inc. provides self-clearing and execution services, as well as services to each of our affiliated broker-dealers and a number of correspondent firms such as independent broker-dealers, depository institutions, registered investment advisors and financial planners. Clearing services include the confirmation, receipt, settlement, delivery and record-keeping functions involved in the processing of securities transactions. For third parties, the clearing function involves a sharing of responsibilities between the clearing broker and the introducing broker. Our correspondents, as introducing brokers, are responsible for all client contact, including opening client accounts, responding to client inquiries and placing client orders with the clearing broker. As a clearing broker, we provide the following back office functions:

      We make margin loans to clients collateralized by client securities. Our margin lending is subject to the margin rules of the Board of Governors of the Federal Reserve System (“Federal Reserve”), the margin requirements of NASD and our own internal policies. By permitting clients to purchase on margin, we take the risk that a market decline could reduce the value of the collateral securing our loan to an amount that is less than the clients’ indebtedness to us. Under applicable securities laws and regulations, we are obligated to require the client to maintain net equity in the account equal to at least 25 percent of the value of the securities in the account. Our current internal requirement, however, is that the client’s net equity not be allowed to fall below 30 percent of the value of the securities in the account. If it does fall below 30 percent, we require the client to increase the account’s net equity to 35 percent of the value of the securities in the

account. These requirements can be, and often are, raised as we deem necessary for certain accounts, groups of accounts, securities or groups of securities.

Competition

      We believe that the principal determinants of success in the online brokerage market are brand recognition, size of client base, client trading activity, efficiency of operations, technology infrastructure and access to financial resources. We also believe that the principal factors considered by clients in choosing a broker are price, client service, quality of trade execution, delivery platform capabilities, convenience and ease of use, breadth of services, innovation and overall value. Based on our experience, focus group research and the success we have enjoyed to date, we believe that we presently compete successfully in each of these categories.

      The market for brokerage services, particularly electronic brokerage services, continues to evolve and is intensely competitive. We have seen a dramatic increase in competition during the past five years and expect this competitive environment to continue. We encounter direct competition from numerous other brokerage firms, many of which provide online brokerage services. These competitors include such brokerage firms as Charles Schwab & Co., Inc., E*TRADE Financial Corporation, Fidelity Investments and Scottrade, Inc. We also encounter competition from established full-commission brokerage firms including such full service brokerage firms as Merrill Lynch and Smith Barney as well as financial institutions, mutual fund sponsors and other organizations, some of which provide online brokerage services.

Regulation

      The securities industry is subject to extensive regulation under federal and state law. In general, broker-dealers are required to register with the SEC and to be members of NASD or the New York Stock Exchange. As members of NASD, our broker-dealer subsidiaries are subject to the requirements of the Securities Exchange Act of 1934 and the rules promulgated thereunder relating to broker-dealers and to the Rules of Fair Practice of NASD. These regulations establish, among other things, minimum net capital requirements for our broker-dealer subsidiaries. We are also subject to regulation under various state laws in all 50 states and the District of Columbia, including registration requirements.

      In its capacity as a securities clearing firm, Ameritrade, Inc. is a member of The Depository Trust & Clearing Corporation and The Options Clearing Corporation, each of which is registered as a clearing agency with the SEC. As a member of these clearing agencies, Ameritrade, Inc. is required to comply with the rules of such clearing agencies, including rules relating to possession and control of client funds and securities, margin lending and execution and settlement of transactions.

      Margin lending activities are subject to limitations imposed by regulations of the Federal Reserve and NASD. In general, these regulations provide that in the event of a significant decline in the value of securities collateralizing a margin account, we are required to obtain additional collateral from the borrower.

Intellectual Property Rights

      Our success and ability to compete are dependent to a significant degree on our intellectual property, which includes our proprietary technology, trade secrets and client base. We rely on numerous methods of intellectual property protection to protect our intellectual property, including copyright, trade secret, trademark, domain name, patent and contract law and have utilized the various methods available to us, including registrations with the Patent and Trademark office for various properties, as well as entry into written licenses and other technology agreements with third parties. We hold two patents, one of which expires in 2019 and the other in 2020. The source and object code for our proprietary software is also protected using applicable methods of intellectual property protection. In addition, it is our policy to enter into confidentiality, intellectual property ownership and/or noncompetition agreements with our associates, independent contractors and business partners, and to control access to and distribution of our intellectual property.

Associates

      As of September 30, 2005, we employed 2,052 full-time equivalent employees. The number of employees has increased from 1,961 full-time equivalent employees as of the end of fiscal 2004. None of our employees is covered under a collective bargaining agreement. We believe that our relations with our employees are good.

Financial Information About Segments and Geographic Areas

      See Note 14 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for financial information about the Company’s segments and geographic areas.

Internet Address

      We maintain a Web site where additional information concerning our business can be found. The address of that Web site is www.amtd.com. We make available free of charge on our Web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such materials to the SEC.

      Our corporate headquarters is located in Omaha, Nebraska, and occupies approximately 74,000 square feet of leased space. The lease expires in April 2019. Also in the Omaha metropolitan area, we lease approximately 154,000 square feet for the operations center as well as several other locations totaling approximately 11,000 square feet. The leases on these other Omaha-area locations expire on various dates from 2008 through 2009. We lease approximately 140,000 square feet for a second operations center in Ft. Worth, Texas. The Ft. Worth lease expires in January 2015. We also lease smaller administrative and operational facilities in Arizona, California, Illinois, Maryland, Missouri, New Jersey, Oregon, Pennsylvania, Utah, Texas and Ontario, Canada. We believe that our facilities are suitable and adequate to meet our needs.

      Legal — In May 2005, four putative class action lawsuits were filed in the Delaware Court of Chancery against the Company and its directors. The plaintiffs, Judith Friedman, Margaret Carroll, Mirfred Partners LLC and Irgun Torah, bring the actions on behalf of themselves and other stockholders of the Company. The complaints allege that defendants breached their fiduciary duties by refusing to consider a merger and acquisition proposal by E*Trade Financial Corporation. The complaints request injunctive relief and unspecified damages. On May 31, 2005, the Court entered an order consolidating the actions under the caption In re Ameritrade Holding Corp. Shareholders Litigation. Under the order, the plaintiffs are to file a consolidated amended complaint and the defendants are not required to respond to the original complaints. The plaintiffs have not yet filed a consolidated amended complaint. The defendants believe that these actions are without merit and intend to vigorously defend against them.

      The nature of the Company’s business subjects it to lawsuits, arbitrations, claims and other legal proceedings. We 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 Company has adequate legal defenses with respect to the legal proceedings to which it is a defendant or respondent and the outcome of these pending proceedings is not likely to have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

      Net Capital Matter — On November 12, 2004, the Company’s broker-dealer subsidiary Ameritrade, Inc. was notified by the staff of the NASD and the staff of the SEC Division of Market Regulation (collectively the “Staffs”) that they believe that for regulatory purposes certain funds held in banks on behalf of clients are liabilities and assets of Ameritrade, Inc. rather than liabilities and assets only of the banks. The resulting assets have not been allowed for purposes of Ameritrade, Inc.’s regulatory net capital calculation. Accordingly, in the

Staffs’ view Ameritrade, Inc.’s net capital was below its minimum amount required under Exchange Act Rule 15c3-1. Ameritrade, Inc. cured the asserted deficiency on November 15, 2004, the first business day following the notification.

      The asserted deficiency was based upon the Staffs’ concerns regarding a Federal Deposit Insurance Corporation (“FDIC”) insured deposit sweep program available to Ameritrade, Inc.’s clients wherein funds were deposited, through an intermediary agent, into FDIC-insured deposit accounts at banks (“Program Banks”). The Staff indicated that Ameritrade, Inc. did not for regulatory purposes effectively move client free credit balances to bank accounts established in client names at the Program Banks. Ameritrade, Inc. was also notified, on November 5, 2004, by the NASD that client funds deposited in the FDIC-insured sweep program should be included in Ameritrade, Inc.’s computation of reserve requirements under Exchange Act Rule 15c3-3. A deposit into Ameritrade, Inc.’s reserve account was made to fund the asserted Rule 15c3-3 requirement effective November 5, 2004.

      Ameritrade, Inc. informed the Staffs that it believed that the free credit balances were effectively transferred to the Program Banks in accordance with well-established banking law, that the accounts held at the Program Banks were the obligations of the Program Banks to each client and not obligations of Ameritrade, Inc., that the FDIC insurance passed through to each client in accordance with FDIC regulations and that it has been in compliance with Rules 15c3-1 and 15c3-3.

      At the direction of the NASD, Ameritrade, Inc. filed a notice describing the asserted net capital deficiency as well as Ameritrade, Inc.’s position on the matter on November 12, 2004 in accordance with Exchange Act Rule 17a-11. Ameritrade, Inc. cured the asserted deficiency the first business day following the notification by causing the transfer of the cash in the FDIC-insured accounts to a money market fund in accounts in the names of the clients. No client funds were lost and the Company believes that the client balances in the FDIC-insured deposit accounts at the Program Banks were, at all times, protected by FDIC insurance on a pass-through basis and no client balance was at risk. Ameritrade, Inc. ceased offering the FDIC-insured product pending NASD review. At the direction of the NASD, Ameritrade, Inc. filed, on December 8, 2004, amended Form X-17A-5 Financial and Operational Combined Uniform Single (FOCUS) Reports for the months of May through September 2004 reflecting the Staffs’ position.

      This matter had no impact on the Company’s results of operations or net cash flows for any period presented.

      On November 14, 2005, the NASD advised the Company that NASD Staff has made a preliminary determination to recommend disciplinary action against the Company based on allegations that it violated SEC net capital and customer protection rules and NASD conduct rules. The Company intends to submit a response setting forth the reasons the Company believes that NASD should not bring a disciplinary action. If NASD elects to do so, it may seek censures, fines, suspensions or other sanctions. The Company is unable to predict the outcome of this matter.

      Other Regulatory Matters — The Company is in discussions with its regulators about other matters raised during regulatory examinations or otherwise subject to their inquiry. These matters could result in censures, fines or other sanctions. Management believes the outcome of any resulting actions will not be material to the Company’s financial condition, results of operations or cash flows. However, the Company is unable to predict the outcome of these matters.

      No matters were submitted to a vote of stockholders during the fourth quarter of fiscal 2005.

PART II

Price Range of Common Stock

      Our Common Stock trades on the Nasdaq National Market under the symbol “AMTD”. The following table shows the high and low sales prices for the Common Stock for the periods indicated, as reported by the Nasdaq National Market. The prices reflect inter-dealer prices and do not include retail markups, markdowns or commissions.

      The closing sale price of our Common Stock as reported on the Nasdaq National Market on November 16, 2005 was $22.17 per share. As of that date there were 646 holders of record of our Common Stock based on information provided by our transfer agent. The number of stockholders of record does not reflect the actual number of individual or institutional stockholders that own our stock because most stock is held in the name of nominees. Based on the results of the broker search for our January 4, 2006 special meeting of stockholders, there are approximately 88,000 beneficial holders of Ameritrade Common Stock.

Dividends

      We have not declared or paid cash dividends on our Common Stock. In connection with our proposed acquisition of TD Waterhouse, we intend to declare a special cash dividend of $6.00 per share. The special dividend will be declared and paid only if sufficient funds are available for the dividend, such declaration and payment is permitted by applicable law and the acquisition of TD Waterhouse is completed. Our Board of Directors has not yet declared the special dividend. With the exception of the special dividend, we currently intend to retain all of our earnings, if any, for use in our business and do not anticipate paying any other cash dividends in the foreseeable future. Our revolving credit agreement prohibits the payment of cash dividends. We have obtained a waiver to the revolving credit agreement to permit the declaration of the special dividend. The payment of any future dividends will be at the discretion of our Board of Directors, subject to the provisions of the revolving credit agreement and financing agreements that the Company expects to enter into in connection with the payment of the special dividend and the closing of the acquisition of TD Waterhouse, and will depend upon a number of factors, including future earnings, the success of our business activities, capital requirements, the general financial condition and future prospects of our business, general business conditions and such other factors as the Board of Directors may deem relevant.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

      Our Common Stock repurchase program was announced on September 9, 2002. Our Board of Directors authorized the Company to repurchase up to 40 million shares over a two-year period expiring September 9, 2004. On May 5, 2004, our Board of Directors extended the stock repurchase program through May 5, 2006. Under the stock repurchase program, as extended, we may repurchase, from time to time, up to 70 million shares of Common Stock, a 30 million-share increase from the previous authorization. The September 9, 2002 program, as extended, is the only program currently in effect and there were no programs that expired during the period covered by this report. We did not make any repurchases pursuant to the publicly announced

program or otherwise during the fourth quarter of fiscal 2005. The maximum number of shares that may yet be purchased under the publicly announced program is 21,614,343. We do not expect to make any repurchases pursuant to the publicly announced program during the first quarter of fiscal 2006.

      This discussion contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those anticipated in such forward-looking statements. Important factors that may cause such differences include, but are not limited to: general economic and political conditions, interest rates, stock market fluctuations and changes in client trading activity, increased competition, systems failures and capacity constraints, inability to obtain stockholder or regulatory approval for our planned acquisition of the U.S. brokerage business of TD Waterhouse Group, Inc., delay or failure to close such transaction or to meet the conditions necessary to such closing, the cost or lack of availability of financing necessary to pay the proposed special cash dividend of $6.00 per share, other regulatory and legal matters and uncertainties and the other risks and uncertainties set forth under the heading “Risk Factors”. The forward-looking statements contained in this report speak only as of the date on which the statements were made. We undertake no obligation to publicly update or revise these statements, whether as a result of new information, future events or otherwise.

      In particular, forward-looking statements contained in this discussion include our expectations regarding: the significant trends that will affect our financial condition and results of operations; the effect of client trading activity on our results of operations; the effect of short-term interest rates on our net interest spread; average commissions and clearing fees per trade; amounts of commissions and clearing fee revenue and net interest revenue; the effect of client trading activity on account maintenance fee revenues; amounts of employee compensation and benefits expense, clearing and execution costs, communications expense, occupancy and equipment costs, depreciation and amortization, professional services, other operating expenses and advertising expenses; the effect of accounting for the embedded collars within our prepaid variable forward contracts on our Knight Capital Group, Inc. (“Knight”) shares as non-hedging derivatives; our evaluation of alternatives with respect to our Knight investment; our effective income tax rate; our capital and liquidity needs and our plans to finance such needs; our planned acquisition of the U.S. brokerage business of TD Waterhouse Group, Inc., including our ability to obtain adequate financing for and to pay the proposed special cash dividend; our stock repurchase program; and the impact of recently issued accounting pronouncements.

Glossary of Terms

      In discussing and analyzing our business, we utilize several metrics and other terms that are defined in the following Glossary of Terms. Italics indicate other defined terms that appear elsewhere in the Glossary.

Glossary of Terms

      Account maintenance fees — A $15 quarterly fee assessed on funded brokerage accounts with less than $2,000 in total liquidation value. This fee is not assessed if:

This fee is assessed at the close of business on the last Friday of the second month of each quarter (February, May, August, and November).

      Activity rate — Average client trades per day during the period divided by the average number of total accounts during the period.

      Average client trades per account (annualized) — Total trades divided by the average number of total accounts during the period, annualized based on the number of trading days in the fiscal year.

      Average client trades per day — Total trades divided by the number of trading days in the period.

      Average commissions and clearing fees per trade — Total commissions and clearing fee revenues as reported on the Company’s Consolidated Statements of Operations divided by total trades for the period. Commissions and clearing fee revenues primarily consist of trading commissions and revenue-sharing arrangements with market destinations (also referred to as “payment for order flow”).

      Basis point — When referring to interest rates, one basis point represents one one-hundredth of one percent.

      Beneficiary accounts — Brokerage accounts managed by a custodian, guardian, conservator or trustee on behalf of one or more beneficiaries. Examples include Uniform Gift to Minors Act (UGMA), Uniform Transfer to Minors Act (UTMA), guardianship, conservatorship, trust, pension or profit plan for small business accounts.

      Brokerage accounts — Accounts maintained by the Company on behalf of clients for securities brokerage activities. The primary types of brokerage accounts are cash accounts, margin accounts, IRA accounts and beneficiary accounts.

      Cash accounts — Brokerage accounts that do not have margin account approval.

      Clearing accounts — Accounts for which the Company serves as the clearing broker/dealer on behalf of an unaffiliated introducing broker/ dealer. The Company charges a fee to the introducing broker/dealer to process trades in clearing accounts.

      Client assets — The total value of cash and securities in brokerage accounts.

      Client credit balances — Client cash held in brokerage accounts, excluding balances generated by client short sales, on which no interest is paid. Interest paid on client credit balances is a reduction of net interest revenue.

      Client margin balances — The total amount of cash loaned to clients in margin accounts. Such loans are secured by client assets. Interest earned on client margin balances is a component of net interest revenue.

      EBITDA — EBITDA (earnings before interest, taxes, depreciation and amortization) is considered a Non-GAAP financial measure as defined by SEC Regulation G. We consider EBITDA an important measure of our financial performance and of our ability to generate cash flows to service debt, fund capital expenditures and fund other corporate investing and financing activities. EBITDA eliminates the non-cash effect of tangible asset depreciation and intangible asset amortization. EBITDA should be considered in addition to, rather than as a substitute for, pre-tax income, net income and cash flows from operating activities.

      EPS from ongoing operations — EPS from ongoing operations is considered a Non-GAAP financial measure as defined by SEC Regulation G. We define EPS from ongoing operations as earnings (loss) per share, adjusted to remove any significant unusual gains or charges. We consider EPS from ongoing operations an important measure of the financial performance of our ongoing business. Unusual gains and charges are excluded because we believe they are not likely to be indicative of the ongoing operations of our business. EPS from ongoing operations should be considered in addition to, rather than as a substitute for, basic and diluted earnings per share.

      Expenses excluding advertising — Expenses excluding advertising is considered a Non-GAAP financial measure as defined by SEC Regulation G. Expenses excluding advertising consists of total expenses, adjusted to remove advertising expense. We consider expenses excluding advertising an important measure of the financial performance of our ongoing business. Advertising spending is excluded because it is largely at the discretion of the Company, varies significantly from period to period based on market conditions and relates to the acquisition of future revenues through new accounts rather than current revenues from existing accounts. Expenses excluding advertising should be considered in addition to, rather than as a substitute for, total expenses.

      IRA accounts (Individual Retirement Arrangements) — A personal trust account for the exclusive benefit of a U.S. individual (or his or her beneficiaries) that provides tax advantages in accumulating funds to save for retirement or other qualified purposes. These accounts are subject to numerous restrictions on additions to and withdrawals from the account, as well as prohibitions against certain investments or transactions conducted within the account. The Company offers traditional, Roth, Savings Incentive Match Plan for Employees (SIMPLE) and Simplified Employee Pension (SEP) IRA accounts.

      Liquid assets — Liquid assets is considered a Non-GAAP financial measure as defined by SEC Regulation G. We define liquid assets as the sum of a) non broker-dealer cash and cash equivalents, b) non broker-dealer short-term investments and c) regulatory net capital of our broker-dealer subsidiaries in excess of 5% of aggregate debit items. We consider liquid assets an important measure of our liquidity and of our ability to fund corporate investing and financing activities. Liquid assets should be considered as a supplemental measure of liquidity, rather than as a substitute for cash and cash equivalents.

      Liquidation value — The net value of a client’s account holdings as of the close of a regular trading session. Liquidation value includes client cash and the value of long security positions, less margin balances and the cost to buy back short security positions.

      Margin accounts — Brokerage accounts in which clients may borrow from the Company to buy securities or for any other purpose, subject to regulatory and Company-imposed limitations.

      Net interest revenue — Net interest revenue is interest revenues less brokerage interest expense. Interest revenues are generated by charges to clients on margin balances maintained in margin accounts and the investment of cash from operations and segregated cash in short-term marketable securities. Brokerage interest expense consists of amounts paid or payable to clients based on credit balances maintained in brokerage accounts and other brokerage-related interest expense. Brokerage interest expense does not include interest on Company borrowings.

      Net new accounts or Net account growth — The number of new client accounts (funded and unfunded) opened in a specified period minus the number of client accounts closed in the same period.

      Operating margin — Operating margin is considered a Non-GAAP financial measure as defined by SEC Regulation G. We define operating margin as pre-tax income, adjusted to remove advertising expense, unrealized gains and losses on financial instruments and any unusual gains or charges. We consider operating margin an important measure of the financial performance of our ongoing business. Advertising spending is excluded because it is largely at the discretion of the Company, varies significantly from period to period based on market conditions and relates to the acquisition of future revenues through new accounts rather than current revenues from existing accounts. Unrealized gains and losses on financial instruments and unusual gains and charges are excluded because we believe they are not likely to be indicative of the ongoing

operations of our business. Operating margin should be considered in addition to, rather than as a substitute for, pre-tax income, net income and earnings per share.

      Qualified accounts — All open client accounts with a total liquidation value greater than or equal to $2,000, except clearing accounts. Historically, qualified accounts have generated the vast majority of the Company’s revenues. The Company’s normal account-opening requirement for non-IRA accounts is $2,000. Additionally, accounts with $2,000 or more of liquidation value are not subject to account maintenance fees and may be eligible for margin account approval.

      Segregated cash — Client cash and investments segregated in compliance with SEC Rule 15c3-3 (the Customer Protection Rule) and other regulations. Interest earned on segregated cash is a component of net interest revenue.

      Total accounts — All open client accounts (funded and unfunded), except clearing accounts.

      Total trades — All client securities trades, which are executed by the Company’s broker/dealer subsidiaries on an agency basis. Total trades are the principal source of the Company’s revenues. Such trades include, but are not limited to, trades in equities, options, mutual funds and debt instruments. Substantially all trades generate revenue from commissions, transaction fees and/or revenue-sharing arrangements with market destinations (also known as “payment for order flow”).

      Trading days — Days in which the U.S. equity markets are open for a full trading session. Reduced exchange trading sessions are treated as half trading days.

Overview

      We provide securities brokerage and clearing execution services to our clients through our principal retail and clearing broker-dealer, Ameritrade, Inc. Substantially all of our net revenues are derived from our brokerage activities and clearing and execution services.

      Our primary focus is serving retail clients by providing services at low prices that are generally simpler than most of our competitors. Our brokerage clients are able to trade securities with us through a variety of channels, principally the Internet. We provide our clients with investment news and information as well as educational services. We also provide clearing and execution services to our brokerage operations as well as to unaffiliated broker-dealers.

      Our largest sources of revenue are commissions earned from our brokerage activities and associated securities transaction clearing fees. Our other principal source of revenue is net interest revenue. We also receive payment for order flow, which results from arrangements we have with many execution agents to receive cash payments in exchange for routing trade orders to these firms for execution and is included in commissions and clearing fees on the Consolidated Statements of Operations.

      Our largest operating expense generally is employee compensation and benefits. Employee compensation and benefits expense includes salaries, bonuses, stock-based compensation, group insurance, contributions to benefit programs, recruitment and other related employee costs. Clearing and execution costs include incremental third-party expenses that tend to fluctuate as a result of fluctuations in client accounts or trades. Examples of expenses included in this category are statement and confirmation processing and postage costs and clearing expenses paid to the National Securities Clearing Corporation, option exchanges and other market centers. Communications expense includes telecommunications, other postage, news and quote costs. Occupancy and equipment costs include the costs of leasing and maintaining our office spaces and the lease expenses on computer and other equipment. Depreciation and amortization includes depreciation on property and equipment, as well as amortization of intangible assets.

      Professional services expense includes costs paid to outside firms for assistance with legal, accounting, technology, marketing and general management issues. Interest on borrowings consists of interest expense on our prepaid variable forward contracts and other borrowings. Other operating expenses include provision for losses, client trade execution price adjustments, travel expenses and other miscellaneous expenses. Advertising costs are expensed as incurred and include production and placement of advertisements in various media,

including online, television, print and direct mail. Advertising expenses may increase or decrease significantly from period to period. Unrealized fair value adjustments of derivative instruments consist of changes in the fair value of the embedded collars within our Knight prepaid variable forward contracts.

      We believe that the online securities brokerage market is currently impacted by four significant industry trends that may affect our financial condition and results of operations. First, price is an important component of the value proposition for the online securities brokerage market. This trend has resulted in the implementation of various strategies such as tiered pricing, account maintenance fees, order-handling fees and per share charges. Second, technology has increased in importance, as delivery channels such as the Internet have become more prevalent. The vast majority of our trades and a significant percentage of our client support activities are now placed through electronic media, primarily the Internet. This increased use of electronic media has helped to decrease operating expenses per trade over the past several years and we believe this trend will continue. Third, the increasing recognition of the need for scale and required investment in technology have resulted in consolidation in the industry. Finally, we believe the intense advertising and promotional efforts by our major competitors and us are making it increasingly difficult for new entrants to make a competitive impact without substantial financial resources to invest in building a brand.

      Our fiscal year ends on the last Friday in September. References to fiscal year in this document or in the information incorporated herein by reference are to the approximate twelve-month period ended on any such Friday. For example, “fiscal 2005” refers to the fiscal year ended September 30, 2005.

Critical Accounting Policies and Estimates

      The preparation of our financial statements requires us to make judgments and estimates that may have a significant impact upon our financial results. Note 1 to the consolidated financial statements contains a summary of our significant accounting policies, many of which require the use of estimates and assumptions. We believe that the following areas are particularly subject to management’s judgments and estimates and could materially affect our results of operations and financial position.

      We test goodwill for impairment on at least an annual basis, or whenever events and circumstances indicate that the carrying value may not be recoverable. In performing the impairment tests, we utilize quoted market prices of our Common Stock to estimate the fair value of the Company as a whole. The estimated fair value is then allocated to our reporting units based on operating revenues, and is compared with the carrying value of the reporting units. No impairment charges have resulted from our annual impairment tests. We review our acquired intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such asset may not be recoverable. We evaluate recoverability by comparing the undiscounted cash flows associated with the asset to the asset’s carrying amount. We also evaluate the remaining useful lives of intangible assets each reporting period to determine if events or trends warrant a revision to the remaining period of amortization. We have had no events or trends that have warranted a revision to the originally estimated useful lives.

      We may utilize derivative financial instruments to manage risks such as interest rate risk, foreign currency risk or market risk. Our derivatives policy prohibits us from using derivatives for speculative or trading purposes.

      Accounting for derivatives differs significantly depending on whether a derivative is designated as a “hedge,” which is a transaction intended to reduce a risk associated with a specific balance sheet item or future expected cash flow at the time it is purchased. In order to qualify as a hedge, a derivative must be designated as such by management, who must also continue to evaluate whether the instrument effectively reduces the risk associated with that item.

      To determine if a derivative instrument continues to be an effective hedge, we must make assumptions and judgments about the continued effectiveness of our hedging strategies and the nature and timing of forecasted transactions. If our hedging strategy were to become ineffective, we could no longer apply hedge accounting and our reported results of operations or financial condition could be materially affected.

      For example, during fiscal 2003, we entered into a series of prepaid variable forward contracts, which are described later in this Item under the heading “Prepaid Variable Forward Contracts”. We originally designated the forward contracts as cash flow hedges of the forecasted future sales of our investment in Knight common stock. Accordingly, all changes in the fair value of the derivatives were recorded in other comprehensive income, net of income taxes. On November 15, 2005, following discussions with the Staff of the SEC, the Company concluded that its designation of the embedded collars within the forward contracts as cash flow hedges of the forecasted future sales of Knight shares was not documented adequately at the inception of the contracts. Therefore, the embedded collars did not qualify for cash flow hedge accounting treatment, and the consolidated financial statements were restated to reflect the embedded collars as non-hedging derivatives.

      We estimate our income tax expense based on the various jurisdictions where we conduct business. This requires us to estimate our current income tax obligations and to assess temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities. Temporary differences result in deferred income tax assets and liabilities. We must evaluate the likelihood that deferred income tax assets will be realized. To the extent we determine that realization is not more likely than not, we establish a valuation allowance. Establishing or increasing a valuation allowance results in corresponding income tax expense in our Consolidated Statements of Operations. Conversely, to the extent circumstances indicate that a valuation allowance is no longer necessary, that portion of the valuation allowance is reversed, reducing income tax expense.

      We must make significant judgments to calculate our provision for income taxes, our deferred income tax assets and liabilities and any valuation allowance against our deferred income tax assets.

Results of Operations

      Our results of operations are significantly impacted by conditions in the U.S. equity markets. There is a direct correlation between the volume of our clients’ trading activity and our results of operations. We cannot predict future trading volumes in the U.S. equity markets. If client trading activity increases, we expect that it would have a positive impact on our results of operations. If client trading activity were to decline, we expect that it would have a negative impact on our results of operations.

      Changes in short-term interest rates and in client margin and client cash balances also impact our results of operations. We cannot predict the direction of short-term interest rates or the level of client margin and client cash balances. If short-term interest rates rise, we generally expect to earn a larger net interest spread. Conversely, a falling short-term interest rate environment generally would result in our earning a smaller net interest spread.

      Pre-tax income, net income, earnings per share, operating margin and EBITDA (earnings before interest, taxes, depreciation and amortization) are key metrics we use in evaluating our financial performance. Operating margin and EBITDA are both considered non-GAAP financial measures as defined by SEC Regulation G.

      We define operating margin as pre-tax income, adjusted to remove advertising expense, unrealized gains and losses on financial instruments and any unusual gains or charges. We consider operating margin an important measure of the financial performance of our ongoing business. Advertising spending is excluded because it is largely at the discretion of the Company, varies significantly from period to period based on

market conditions and relates to the acquisition of future revenues through new accounts rather than current revenues from existing accounts. Unusual gains and charges are excluded because we believe they are not likely to be indicative of the ongoing operations of our business. Operating margin should be considered in addition to, rather than as a substitute for, pre-tax income, net income and earnings per share.

      We consider EBITDA an important measure of our financial performance and of our ability to generate cash flows to service debt, fund capital expenditures and fund other corporate investing and financing activities. EBITDA eliminates the non-cash effect of tangible asset depreciation and intangible asset amortization. EBITDA should be considered in addition to, rather than as a substitute for, pre-tax income, net income and cash flows from operating activities.

      The following tables set forth operating margin and EBITDA in dollars and as a percentage of net revenues for the periods indicated, and provide reconciliations to pre-tax income, which is the most directly comparable GAAP measure (dollars in thousands):

      Our improved pre-tax income, operating margin and EBITDA for fiscal 2005 compared to fiscal 2004 are largely due to increased net interest revenue resulting primarily from increased client margin and credit balances and higher net interest rates earned on such balances, partially offset by decreased revenue from commissions and clearing fees resulting from decreased client trading activity and decreased commissions and clearing fees per trade. More detailed analysis of net revenues and expenses is presented later in this discussion.

      Our largest sources of revenue are 1) commissions and clearing fees and 2) net interest revenue. For fiscal 2005, commissions and clearing fees and net interest revenue accounted for 52 percent and 40 percent of our net revenues, respectively. The primary factors driving our revenues from commissions and clearing fees are total client trades and average commissions and clearing fees per trade. The primary factors driving our net interest revenue are average client margin balances, average segregated cash balances, average client credit balances and the average interest rates earned and paid on such balances. We also consider client account and client asset metrics, although we believe they are generally of less significance to our results of operations for any particular period than our trading activity and net interest revenue metrics.

      The following table sets forth several metrics regarding client trading activity, which we utilize in measuring and evaluating performance and the results of our operations:

      The following tables set forth metrics that we use in analyzing net interest revenue:

      The following table sets forth certain metrics regarding client accounts and client assets, which we use to analyze growth and trends in our client base:

      The following table summarizes certain data from our Consolidated Statements of Operations for analysis purposes (in millions, except percentages and interest days):

      Commissions and clearing fees decreased six percent, primarily due to a four percent decrease in total trades and a two percent decrease in average commissions and clearing fees per trade. Average trades per day decreased seven percent to 155,696 for fiscal 2005 from 167,958 for fiscal 2004. Average client trades per account were 11.0 during fiscal 2005, compared to 12.4 during fiscal 2004. The decreased revenue resulting

from these factors was partially offset by three percent more trading days in fiscal 2005 compared to fiscal 2004, due to fiscal 2005 being a 53-week year. The number of qualified accounts increased three percent to 1.74 million as of September 30, 2005, compared to 1.68 million as of September 24, 2004. Historically, qualified accounts have generated the vast majority of our revenues. Average commissions and clearing fees per trade decreased to $13.12 for fiscal 2005 from $13.42 for fiscal 2004, due primarily to a decrease in our options contract pricing and decreased payment for order flow revenue per trade. In March 2005, we lowered our options contract pricing from $1.50 to $0.75 per contract. We expect average commissions and clearing fees to range from approximately $12.50 to $13.00 per trade during the first quarter of fiscal 2006, depending on the mix of client trading activity, level of payment for order flow revenue and other factors. We expect total revenues from commissions and clearing fees to range from $116 million to $146 million for the first quarter of fiscal 2006, depending on the volume of client trading activity, average commissions and clearing fees per trade and other factors.

      Net interest revenue increased 69 percent, due primarily to an increase of 150 basis points in the average interest rate earned on segregated cash, an increase of 91 basis points in the average interest rate charged on client margin balances, a nine percent increase in average client margin balances, seven more interest days due to fiscal 2005 being a 53-week year and an $11.9 million increase in net interest earned on our securities lending program in fiscal 2005 compared to fiscal 2004. The increased net interest revenue resulting from these factors was partially offset by an increase of 32 basis points in the average interest rate paid on client credit balances in fiscal 2005 from fiscal 2004. We expect net interest revenue to range between $121.8 million and $129.8 million for the first quarter of fiscal 2006.

      Other revenues decreased four percent, due primarily to a decrease in account maintenance, confirm and other fee revenue, partially offset by higher solicitation and tender offer fees and money market fee income. Account maintenance fees are charged based on client assets and trading activity, therefore fluctuations in client assets or trades per account may result in fluctuations in revenues from account maintenance fees. We expect other revenues to range from $17.5 million to $21.5 million for the first quarter of fiscal 2006.

      Employee compensation and benefits expense increased 17 percent, due primarily to an increase in full-time equivalent employees to 2,058 at September 30, 2005 from 1,961 at September 24, 2004, increased incentive compensation due to improved financial results, annual merit increases and approximately $5 million of severance costs for departing executives in the fourth quarter of fiscal 2005. We expect total employee compensation and benefits expense to range between $47 million and $48 million for the first quarter of fiscal 2006.

      Clearing and execution costs decreased 14 percent, due primarily to lower client trading volumes, decreased order routing costs resulting from our implementation of a single web architecture trading platform during fiscal 2004 and a non-recurring refund of Nasdaq trading activity fees of approximately $1 million during the first quarter of fiscal 2005. We expect clearing and execution costs to range between $6.5 million and $7.5 million for the first quarter of fiscal 2006, depending largely on the volume of client trading activity.

      Communications expense decreased 11 percent, due primarily to reduced telecommunications costs resulting from contract negotiations in fiscal 2005. We expect communications expense to range between $8.5 million and $9 million for the first quarter of fiscal 2006.

      Occupancy and equipment costs increased two percent, due primarily to costs associated with moving technology employees to a larger facility in New Jersey during the third quarter of fiscal 2005, partially offset by slightly lower computer equipment leasing costs. We expect occupancy and equipment costs to range from approximately $10.8 million to $11.4 million for the first quarter of fiscal 2006.

      Depreciation and amortization increased five percent, due primarily to higher intangible asset amortization in fiscal 2005. We expect depreciation and amortization expense to range from $5.7 million to $6.0 million for the first quarter of fiscal 2006.

      Professional services expense increased 12 percent, due primarily to increased spending on corporate development initiatives in fiscal 2005 and increased legal fees incurred for regulatory matters, partially offset by decreased client communications consulting expenses. We expect professional services expense to range between $7.3 million and $8.0 million for the first quarter of fiscal 2006.

      Other operating expenses increased 39 percent, due primarily to increased bad debt expense during fiscal 2005 and the effect of Datek-related litigation and arbitration matters that were resolved favorably during the fourth quarter of fiscal 2004. We expect other operating expenses to range between $4.8 million and $5.2 million for the first quarter of fiscal 2006.

      Advertising expenses decreased eight percent, as we reduced expenditures in response to lackluster stock market conditions. We expect approximately $24.5 million to $29.5 million of advertising expenditures for the first quarter of fiscal 2006, depending on market conditions. We generally adjust our level of advertising spending in relation to stock market activity, in an effort to maximize the number of new accounts while minimizing the advertising cost per new account.

      Unrealized fair value adjustments of derivative instruments consisted of an $8.3 million unrealized gain for fiscal 2005 compared to a $17.9 million unrealized gain for fiscal 2004, due to decreases in the market price of the Knight stock underlying our prepaid variable forward contracts in both fiscal 2005 and fiscal 2004. Because the embedded collars within the prepaid variable forward contracts are accounted for as non-hedging derivatives, changes in the fair value of the embedded collars are recognized in the statement of operations, along with the related income tax effects. Accounting for the embedded collars as non-hedging derivatives results in volatility in our results of operations, as fluctuations in the market price of the underlying Knight shares result in changes in the fair value of the embedded collars being recorded in the statement of operations. We cannot predict changes in the market price of the Knight stock, and accordingly cannot predict future unrealized fair value adjustments of the embedded collars. We are evaluating alternatives with respect to the Knight investment, including, but not limited to, terminating the prepaid variable forward contracts and liquidating the investment in Knight.

      Our effective income tax rate was approximately 38.6 percent for fiscal 2005 compared to 38.4 percent for fiscal 2004. The Datek integration has resulted in a larger percentage of our payroll and assets being located in lower income tax states. An adjustment to our net deferred income tax liabilities to apply the lower income tax rate resulted in a lower than normal effective income tax rate for fiscal 2004. We expect our effective income tax rate to range from approximately 38.5 percent to 39 percent for the first quarter of fiscal 2006.

      Commissions and clearing fees increased 18 percent, primarily due to higher average client trades per day and increased average commissions and clearing fees per trade. Average trades per day increased 17 percent to 167,958 for fiscal 2004 from 143,470 in fiscal 2003. Average client trades per account were 12.4 during fiscal 2004, compared to 11.6 during fiscal 2003, while the number of qualified accounts increased 10 percent to 1.68 million as of September 24, 2004, compared to 1.52 million as of September 26, 2003. Historically, qualified accounts have generated the vast majority of our revenues. Average commissions and clearing fees per trade increased to $13.42 for fiscal 2004 from $13.21 for fiscal 2003, due primarily to higher payment for order flow revenue per trade during fiscal 2004 compared to fiscal 2003.

      Net interest revenue increased 57 percent, due primarily to a 103 percent increase in average client margin balances, a 13 percent increase in average segregated cash and a decrease of eight basis points in the average interest rate paid on client credit balances during fiscal 2004 compared to fiscal 2003. The increased net interest revenue resulting from these factors was partially offset by a decrease of 10 basis points in the average interest rate earned on segregated cash, a decrease of 14 basis points in the average interest rate charged on client margin balances and an increase of 24 percent in client credit balances during fiscal 2004 as compared to fiscal 2003.

      Other revenues decreased seven percent, due primarily to lower account maintenance fee income in fiscal 2004 and decreased licensing fee revenue due to the shutdown of our Watcher Technologies business in fiscal 2003, partially offset by higher money market fee income during fiscal 2004.

      Employee compensation and benefits expense decreased 10 percent, due primarily to the elimination of duplicate clearing and technology functions during fiscal 2003 in connection with the Datek merger integration, partially offset by client service employees added during fiscal 2004 to accommodate increased client trading volume. Full-time equivalent employees totaled 1,961 at September 24, 2004, compared to 1,732 at the end of fiscal 2003. During fiscal 2003, we also incurred approximately $9.5 million of expense for bonuses based on synergies achieved in the Datek merger and approximately $4.3 million of compensation expense for stock appreciation rights (“SARs”) assumed in the Datek merger, due to increases in our stock price and costs of a cash-out offer to SAR holders. As of September 24, 2004, there were approximately 7,000 remaining SARs outstanding, compared with approximately 3.8 million SARs outstanding at the beginning of fiscal 2003.

      Clearing and execution costs decreased 14 percent, due primarily to approximately $3 million in refunds and adjustments in the second quarter of fiscal 2004 for clearing and execution costs related to previous periods and the effect of eliminating duplicate clearing and execution costs subsequent to the Datek merger in fiscal 2003, partially offset by the effect of higher client trading volumes.

      Communications expense decreased four percent, due primarily to the elimination of duplicate telecommunications, quotes and market information infrastructure subsequent to the Datek merger in fiscal 2003, partially offset by the effect of higher client trading volumes.

      Occupancy and equipment costs decreased 26 percent, due to facilities and equipment reductions during fiscal 2003 resulting from the Datek merger and lower technology licensing costs.

      Depreciation and amortization decreased 27 percent, due primarily to the effects of noncompete agreements related to the Datek merger that expired and became fully amortized by the end of fiscal 2003 and tangible assets that became fully depreciated.

      Professional services expense decreased 12 percent, primarily due to increased usage of consulting services during fiscal 2003 in connection with the Datek merger integration.

      Interest on borrowings decreased 49 percent, primarily due to the redemption of our remaining convertible subordinated notes in October 2003.

      (Gain)/loss on disposal of property includes approximately $5.9 million of gain recognized on the sale/leaseback of our Kansas City data center facility in fiscal 2003.

      Other operating expenses decreased 18 percent, due primarily to Datek-related litigation and arbitration matters that were resolved favorably during the fourth quarter of fiscal 2004.

      Advertising expenses increased 11 percent. We increased our advertising spending during fiscal 2004 in an effort to increase the number of new accounts, due primarily to improved stock market conditions during fiscal 2004.

      Unrealized fair value adjustments of derivative instruments consisted of a $17.9 million unrealized gain for fiscal 2004 compared to a $46.7 million unrealized loss for fiscal 2003, due to decreases in the market price of the Knight stock underlying our prepaid variable forward contracts in fiscal 2004 compared to increases in the market price of the Knight stock in fiscal 2003.

      Restructuring and asset impairment charges in fiscal 2003 consisted of approximately $4.8 million in severance costs related to the closing of our TradeCast business and the integration of the Datek and Ameritrade technology organizations, and approximately $1.2 million of non-cancelable lease costs in connection with the closing of TradeCast.

      Our effective income tax rate was approximately 38.4 percent for fiscal 2004, compared to approximately 39.9 percent for fiscal 2003. The Datek integration has resulted in a larger percentage of our payroll and assets being located in lower income tax states. An adjustment to our net deferred income tax liabilities to apply the lower rate resulted in a lower than normal effective income tax rate for fiscal 2004.

Liquidity and Capital Resources

      We have historically financed our liquidity and capital needs primarily through the use of funds generated from operations and from borrowings under our credit agreements. We have also issued Common Stock and convertible subordinated notes to finance mergers and acquisitions and for other corporate purposes. Our liquidity needs during fiscal 2005 were financed from our earnings, cash on hand and borrowings on our broker-dealer credit facilities. We plan to finance our ordinary capital and liquidity needs primarily from our earnings and cash on hand. In addition, we may utilize our revolving credit facility or issue equity or debt securities.

      To complete our planned acquisition of the U.S. brokerage business of TD Waterhouse Group, Inc. (“TD Waterhouse”), we plan to issue 196.3 million shares of Common Stock, subject to regulatory and stockholder approvals. We also expect to declare a $6.00 per share special cash dividend, subject to closing of the acquisition. We expect to fund the approximately $2.4 billion special dividend with approximately $0.4 billion from cash on hand, approximately $0.4 billion from excess capital in TD Waterhouse at closing and the remaining $1.6 billion by issuing private long-term debt. We also intend to issue another $300 million of private long-term debt, and enter into a $300 million revolving credit agreement, for working capital purposes. Although we believe we will be able to obtain adequate financing for the special dividend and our working capital needs, there can be no assurance that financing will be available on terms favorable to us, if at all. If adequate funds are not available on acceptable terms, we would be unable to declare the special dividend and complete the acquisition. See Note 2 of the Notes to Consolidated Financial Statements for further information about the TD Waterhouse acquisition.

      Dividends from our subsidiaries are another source of liquidity for the holding company. Some of our subsidiaries are subject to requirements of the SEC and NASD relating to liquidity, capital standards, and the use of client funds and securities, which may limit funds available for the payment of dividends to the holding company.

      Under the SEC’s Uniform Net Capital Rule (Rule 15c3-1 under the Securities Exchange Act of 1934), our broker-dealer subsidiaries are required to maintain at all times at least the minimum level of net capital required under Rule 15c3-1. This minimum net capital level is determined based upon an involved calculation described in Rule 15c3-1 that is primarily based on each broker-dealer’s “aggregate debits”, which primarily are a function of client margin balances at our broker-dealer subsidiaries. Since our aggregate debits may fluctuate significantly, our minimum net capital requirements may also fluctuate significantly from period to period. The holding company may make cash capital contributions to broker-dealer subsidiaries, if necessary, to meet net capital requirements.

      We consider liquid assets an important measure of our liquidity and of our ability to fund corporate investing and financing activities. Liquid assets is considered a Non-GAAP financial measure as defined by the SEC. We define liquid assets as the sum of a) non broker-dealer cash and cash equivalents, b) non broker-dealer short-term investments and c) regulatory net capital of our broker-dealer subsidiaries in excess of 5% of aggregate debit items. We include the excess regulatory net capital of our broker-dealer subsidiaries in liquid assets rather than simply including broker-dealer cash and cash equivalents, because regulatory net capital requirements may limit the amount of cash available for dividend from the broker-dealer subsidiaries to the holding company. Liquid assets should be considered as a supplemental measure of liquidity, rather than as a substitute for cash and cash equivalents. The following table sets forth a reconciliation of cash and cash equivalents to liquid assets for the periods indicated (in thousands):

      The increase in liquid assets from September 24, 2004 to September 30, 2005 is primarily due to the impact of curing the FDIC-insured deposit sweep program regulatory matter of $85.4 million and net income of $339.8 million, partially offset by an increase in aggregate debit items that resulted in increased regulatory net capital required of $41.9 million, cash used in investing and financing activities, excluding short-term investments, of $84.9 million (see “Cash Flow” below) and the impact of a net capital calculation issue discussed in the following paragraph of $15.8 million. The remaining $58.2 million of the increase in liquid assets is due to increased non broker-dealer working capital due to timing of income tax and other payments, non-cash gains and expenses that are reflected in net income, and other miscellaneous changes in excess regulatory net capital. We have retained a larger portion of our liquid assets during fiscal 2005 than during fiscal 2004. We intend to use the liquid assets retained to provide funding for a portion of the proposed special dividend.

      The NASD and SEC have inquired about the effect on Ameritrade, Inc.’s net capital of certain deferred income tax liabilities arising from acquisitions. The issue is whether deferred tax liabilities may offset the acquired intangible client relationship assets to which they relate before the acquired intangible client relationship assets, which are not allowable assets for regulatory net capital purposes, are deducted in the net capital calculation. For purposes of calculating net capital, the SEC has allowed Ameritrade, Inc. to offset the acquired intangible client relationship asset related to the Datek acquisition with its associated deferred tax liability. The Datek transaction was not a taxable asset purchase. However, deferred tax liabilities totaling $15.8 million for acquired intangible assets related to taxable asset purchases are excluded from Ameritrade, Inc.’s net capital calculation as of September 30, 2005.

      Cash provided by operating activities was $330.0 million for fiscal 2005, compared to $329.6 million for fiscal 2004. The slight increase was primarily due to higher net income in fiscal 2005, partially offset by changes in broker-dealer working capital.

      Cash used in investing activities was $245.1 million for fiscal 2005, compared to $84.5 million for fiscal 2004. The cash used in investing activities in fiscal 2005 consisted primarily of $211.9 million of net short-term investments in auction rate securities and $25.9 million paid in the acquisition of the online retail client accounts of JB Oxford & Company. The cash used in investing activities for fiscal 2004 consisted primarily of $56.7 million paid in the acquisition of Bidwell & Company and two small account acquisition transactions and $18.0 million of net short-term investments in auction rate securities.

      Cash used in financing activities was $51.6 million for fiscal 2005, compared to $356.3 million for fiscal 2004. The financing activities in fiscal 2005 included $77.2 million of stock repurchases, compared to $323.7 million of stock repurchases and an early redemption of convertible subordinated notes for $46.8 million during fiscal 2004. We made fewer stock repurchases during fiscal 2005, in part to retain cash in anticipation of funding a portion of the proposed special dividend. Our broker-dealer subsidiary, Ameritrade, Inc., also borrowed and subsequently repaid $280 million on its unsecured credit facilities during the first quarter of fiscal 2005 to cure the asserted Exchange Act Rule 15c3-3 deficiency described in Note 9 of the Notes to Consolidated Financial Statements. In fiscal 2004, we borrowed and repaid $25.0 million on our revolving credit agreement and $17.5 million on Ameritrade Northwest, Inc.’s (formerly Bidwell) secured credit facility to fund daily liquidity needs.

      On December 13, 2004, we entered into an amendment to our revolving credit agreement. The revolving credit agreement, as amended, permits borrowings of up to $105 million through December 12, 2005, and is secured primarily by our stock in our subsidiaries and personal property. The interest rate on borrowings is equal to one month LIBOR (determined monthly) plus a spread (determined quarterly) of 1.75 percent or 2.00 percent based on a specified financial ratio. At September 30, 2005, the interest rate on the revolving credit agreement would have been 5.47 percent. We also pay a commitment fee of 0.25 percent of the unused credit facility through the maturity date. We had no outstanding indebtedness under the revolving credit agreement at September 30, 2005 and no outstanding indebtedness under the prior revolving credit agreement at September 24, 2004. The revolving credit agreement contains certain covenants and restrictions, including maintenance of a minimum level of net worth, requiring prior written consent of the revolving lenders for certain business combinations and investments, and prohibiting the payment of cash dividends to stockholders. We were in compliance with or obtained waivers for all covenants under the revolving credit agreements.

      On December 9, 2005, the lenders under our revolving credit agreement agreed to extend the length of the agreement, on substantially the same terms, to the earlier of (a) March 12, 2006 or (b) the initial borrowing under a new syndicated loan facility to be entered into in connection with the acquisition of TD Waterhouse and payment of the special dividend.

      Our wholly owned broker-dealer subsidiary, Ameritrade, Inc., had access to secured uncommitted credit facilities with financial institutions of up to $180 million as of September 30, 2005 and September 24, 2004. Ameritrade, Inc. also had access to an unsecured uncommitted credit facility of up to $310 million as of September 30, 2005 and September 24, 2004. The financial institutions may make loans under line of credit arrangements or, in some cases, issue letters of credit under these facilities. The secured credit facilities require Ameritrade, Inc. to pledge qualified client securities to secure outstanding obligations under these facilities. Borrowings under the secured and unsecured credit facilities bear interest at a variable rate based on the federal funds rate. There were no borrowings outstanding or letters of credit issued under the secured or unsecured credit facilities as of September 30, 2005 or September 24, 2004. As of September 30, 2005 and September 24, 2004, approximately $490 million was available to Ameritrade, Inc. for either loans or, in some cases, letters of credit.

      During fiscal 2003, we entered into a series of prepaid variable forward contracts (the “forward contracts”) with a counterparty with a total notional amount of approximately $41.4 million on 7.9 million underlying Knight shares. The forward contracts each contain a zero-cost embedded collar on the value of the

Knight shares, with a weighted average floor price of $5.13 per share and a weighted average cap price of $6.17 per share. At the inception of the forward contracts, we received cash of approximately $35.5 million, equal to approximately 86 percent of the notional amount. The forward contracts mature on various dates in fiscal years 2006 and 2007. At maturity, we may settle the forward contracts in shares of Knight or in cash, at our option. If the market price of the Knight stock at maturity is equal to or less than the floor price, the counterparty will be entitled to receive one share of Knight or its cash equivalent for each underlying share. If the market price of the Knight stock at maturity is greater than the cap price, the counterparty will be entitled to receive the number of shares of Knight or its cash equivalent equal to the ratio of the floor price plus the excess of the market price over the cap price, divided by the market price, for each underlying share. If the market price at maturity is greater than the floor price but less than or equal to the cap price, the counterparty will be entitled to receive the number of Knight shares or its cash equivalent equal to the ratio of the floor price divided by the market price for each underlying share. Regardless of whether the forward contract is settled in Knight shares or in cash, we intend to sell the underlying Knight shares at maturity.

      The embedded collars do not qualify for hedge accounting treatment, and are therefore accounted for as non-hedging derivatives in the consolidated financial statements. As of September 30, 2005 and September 24, 2004, the total fair value of the embedded collars was approximately $20.4 million and $28.7 million, respectively, and was included under the caption “Prepaid variable forward derivative instrument” on the Consolidated Balance Sheets. Changes in the fair value of the embedded collars are included under the caption “Unrealized fair value adjustments of derivative instruments” in the Consolidated Statements of Operations.

      The $35.5 million of cash received on the forward contracts is accounted for as an obligation on the Consolidated Balance Sheets. We are accreting interest on the obligation to the notional maturity amount of $41.4 million over the terms of the forward contracts using effective interest rates with a weighted average of approximately 4.3 percent. Upon settlement of a forward contract, the realized gain or loss on the Knight stock delivered to the counterparty or otherwise sold will be reclassified from other comprehensive income into earnings.

      We are evaluating alternatives with respect to the Knight investment, including, but not limited to, terminating the prepaid variable forward contracts and liquidating the investment in Knight.

      On September 9, 2002, our Board of Directors authorized a program to repurchase up to 40 million shares of our Common Stock from time to time over a two-year period beginning September 19, 2002. On May 5, 2004, our Board of Directors extended the stock repurchase program through May 5, 2006. Under the stock repurchase program, as extended, we may repurchase, from time to time, up to 70 million shares of our Common Stock, a 30 million-share increase from the previous authorization. Through September 30, 2005, we have repurchased a total of approximately 48.4 million shares at a weighted average purchase price of $10.15 per share. During the first six months of fiscal 2005, we repurchased approximately 6.0 million shares at a weighted average purchase price of $12.77 per share. We did not make any repurchases under the program during the third and fourth quarters of fiscal 2005, and do not expect to make any repurchases during the first quarter of fiscal 2006.

Off-Balance Sheet Arrangements

      The Company does not have any obligations that meet the definition of an off-balance sheet arrangement and have or are reasonably likely to have a material effect on our financial statements.

Contractual Obligations

      The following table summarizes our contractual obligations as of September 30, 2005. Amounts are in thousands.

New Accounting Pronouncements

      SFAS No. 123R — In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“No. 123R”). SFAS No. 123R is a revision of SFAS No. 123, and supersedes APB No. 25 and its related implementation guidance. SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123R requires public entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award — the requisite service period (usually the vesting period). SFAS No. 123R was originally scheduled to be effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005 for public entities that do not file as small business issuers. On April 14, 2005, the SEC announced the adoption of a new rule amending the compliance date to the beginning of the first annual reporting period that begins after June 15, 2005 for public entities that do not file as small business issuers. Therefore, SFAS No. 123R will be effective for our next fiscal year beginning October 1, 2005. As of the required effective date, we will apply SFAS No. 123R using a modified version of the prospective transition method. Under that transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123 for either recognition or pro forma disclosures. The Company estimates adoption of SFAS No. 123R will result in additional stock-based compensation expense for the unvested portion of awards previously accounted for under APB No. 25 of approximately $4.7 million for the Company’s fiscal year ending September 29, 2006.

Risk Factors

      Substantially all of our revenues are derived from securities brokerage and clearing and execution services. Like other securities brokerage businesses, we are directly affected by economic and political conditions, broad trends in business and finance and changes in volume and price levels of securities transactions. Since May 2000, the U.S. securities markets have been very volatile, which has resulted in volatility in trading volume and net revenues. The terrorist attacks in the United States on September 11, 2001, the invasion of Iraq in 2003 and other events also resulted in substantial market volatility and accompanying reductions in trading volume and net revenues. In addition, any general economic downturn would adversely affect trading volumes and net revenues. Severe market fluctuations or weak economic conditions could reduce our trading volume and net revenues and adversely affect our profitability.

      As a fundamental part of our brokerage business, we hold interest earning assets, mainly funds required to be segregated in compliance with federal regulations. These funds totaled $7.6 billion at September 30, 2005 and $7.8 billion at September 24, 2004. We invest these funds in repurchase agreements, fixed-rate U.S. Treasury securities and other qualified securities. Our interest earning assets are financed primarily by short-term interest bearing liabilities, totaling $10.1 billion at September 30, 2005 and September 24, 2004, in the form of client credit balances. We earn a net interest spread on the difference between amounts earned on client margin balances and amounts paid on client credit balances. Because we establish the rate paid on client credit balances and the rate charged on client margin balances, a substantial portion of our interest rate risk is under our direct management. However, changes in interest rates may have a beneficial or adverse affect on our results of operations. We might not change interest rates paid on client credit balances proportionately to changes in interest rates charged on client margin balances. As a result, a rising interest rate environment generally results in our earning a larger net interest spread. Conversely, a falling interest rate environment generally results in our earning a smaller net interest spread.

      Our Common Stock, and the U.S. securities markets in general, have experienced significant price fluctuations in recent years. The market prices of securities of Internet-related companies, in particular, have been especially volatile. The price of our Common Stock could decrease substantially. In addition, because the market price of our Common Stock tends to fluctuate significantly, we could become the object of securities class action litigation which could result in substantial costs and a diversion of management’s attention and resources.

      The market for electronic brokerage services is relatively young, continually evolving and intensely competitive. We expect the competitive environment to continue in the future. We face direct competition from numerous online brokerage firms, including Charles Schwab & Co., Inc., E*TRADE Financial Corporation, Fidelity Investments and Scottrade, Inc. We also encounter competition from the broker-dealer affiliates of established full-commission brokerage firms as well as from financial institutions, mutual fund sponsors and other organizations, some of which provide online brokerage services. Some of our competitors have greater financial, technical, marketing and other resources, offer a wider range of services and financial products, and have greater name recognition and a more extensive client base than we do. We believe that the general financial success of companies within the online securities industry will continue to attract new competitors to the industry, such as banks, software development companies, insurance companies, providers of online financial information and others. These companies may provide a more comprehensive suite of services than we do. We may not be able to compete effectively with current or future competitors.

      We receive and process trade orders through a variety of electronic channels, including the Internet, wireless web, personal digital assistants and our interactive voice response system. These methods of trading are heavily dependent on the integrity of the electronic systems supporting them. Our systems and operations are vulnerable to damage or interruption from human error, natural disasters, power loss, computer viruses, distributed denial of service (“DDOS”) attacks, spurious spam attacks, intentional acts of vandalism and similar events. Though all of our core computer systems and applications are fully redundant and distributed over two sites, it could take up to four hours or more to restore full functionality in the event of an unforeseen disaster. Extraordinary trading volumes could cause our computer systems to operate at an unacceptably low speed or even fail. Extraordinary internet traffic caused by DDOS or spam attacks could cause our Web site to be unavailable or slow to respond. While we have invested significant amounts in the last few years to upgrade the reliability and scalability of our systems and added hardware to address extraordinary internet traffic, there can be no assurance that our systems will be sufficient to handle such extraordinary circumstances. Systems failures and delays could occur and could cause, among other things, unanticipated disruptions in service to our clients, slower system response time resulting in transactions not being processed as quickly as our clients desire, decreased levels of client service and client satisfaction, and harm to our reputation. If any of these events were to occur, we could suffer:

      The secure transmission of confidential information over public networks is a critical element of our operations. We have not experienced network security problems in the past that have resulted in significant loss to our clients. However, our networks could be vulnerable to unauthorized access, computer viruses, phishing schemes and other security problems. Persons who circumvent security measures could wrongfully use our confidential information or our clients’ confidential information or cause interruptions or malfunctions in our operations. We could be required to expend significant additional resources to protect against the threat of security breaches or to alleviate problems caused by any breaches. We may not be able to implement security measures that will protect against all security risks.

      If our business increases, we may need to expand and upgrade our transaction processing systems, network infrastructure and other aspects of our technology. Many of our systems are, and much of our infrastructure is, designed to accommodate additional growth without redesign or replacement; however, we may need to continue to make significant investments in additional hardware and software to accommodate growth. We may not be able to project accurately the rate, timing or cost of any increases in our business, or to expand and upgrade our systems and infrastructure to accommodate any increases in a timely manner. Failure to make necessary expansions and upgrades to our systems and infrastructure could lead to failures and delays, which could cause a loss of clients or a reduction in the growth of the client base, increased operating expenses, financial losses, additional litigation or client claims, and regulatory sanctions or additional regulatory burdens.

      The securities industry is subject to extensive regulation and broker-dealers are subject to regulations covering all aspects of the securities business. The SEC, NASD and other self-regulatory organizations and

state and foreign regulators can, among other things, censure, fine, issue cease-and-desist orders to, suspend or expel a broker-dealer or any of its officers or employees. While we neither actively solicit new accounts nor have established offices outside the United States and Canada, our websites are accessible world-wide over the Internet and we currently have account holders located outside the United States and Canada. These accounts make up approximately 2.5% of our accounts and are spread across many jurisdictions. Any adverse action by foreign regulators with respect to regulatory compliance by us in foreign jurisdictions could adversely affect our revenues from clients in such country or region.

      Various regulatory and enforcement agencies have been reviewing mutual fund trading, regulatory reporting obligations, best execution practices, client privacy, system security and safeguarding practices, Regulation T compliance and advertising claims as they relate to the brokerage industry. These reviews could result in enforcement actions or new regulations, which could adversely affect our operations.

      In addition, we use the Internet as a major distribution channel to provide services to our clients. A number of regulatory agencies have adopted regulations regarding client privacy, system security and safeguarding practices and the use of client information by service providers. Additional laws and regulations relating to the Internet and safeguarding practices could be adopted in the future, including laws related to identity theft and regulations regarding the pricing, taxation, content and quality of products and services delivered over the Internet. Complying with these laws and regulations is expensive and time consuming and could limit our ability to use the Internet as a distribution channel.

      The Internet has experienced, and is expected to continue to experience, significant growth in the number of users and amount of traffic. Our success will depend upon the development and maintenance of the Internet’s infrastructure to cope with this increased traffic. The Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure and could face similar outages and delays in the future. Outages and delays are likely to affect the level of Internet usage and the processing of transactions on our Web site. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards to handle increased levels of activity.

      As of November 16, 2005, J. Joe Ricketts, our Chairman and Founder, members of his family and trusts held for their benefit (collectively, the “Ricketts holders”) owned approximately 26.1% of our Common Stock and investment funds affiliated with Silver Lake Partners and TA Associates (collectively, the “Datek holders”) owned approximately 7.5% of our Common Stock. The Datek holders and the Ricketts holders are parties to a stockholders agreement, which terminates on the earlier of the closing of the proposed acquisition of TD Waterhouse or one day after our annual meeting of stockholders in 2007, that obligates the parties to vote their shares in favor of a board of directors, of which currently three are to be designated by the Ricketts holders, two are to be designated by the Datek holders and three are to be independent directors selected with the agreement of the parties. The agreement also obligates the parties to vote in favor of specified merger and sale of the company transactions that are approved by the requisite directors and to vote against specified merger and sale of the company transactions unless they are approved by the requisite directors. Accordingly, these stockholders have significant influence over the outcome of any corporate transaction or other matters submitted to our stockholders for approval, including the election of directors, mergers, consolidations and the sale of all or substantially all of our assets. The interests of these stockholders could differ from the interests of other stockholders. In addition, third parties could be discouraged from making a tender offer or bid to acquire us because of this concentration of ownership or the provisions of the stockholders agreement.

      Provisions in the stockholders agreement among the Ricketts holders and the Datek holders, our certificate of incorporation and bylaws and Delaware law will make it difficult for any party to acquire control of us in a transaction not approved by the requisite number of directors. These provisions include:

      These provisions could delay or prevent a change of control or change in management that might provide stockholders with a premium to the market price of their Common Stock.

      Our future success depends in part on our ability to develop and enhance our products and services. There are significant technical and financial risks in the development of new or enhanced products and services, including the risk that we might be unable to effectively use new technologies or adapt our services to emerging industry standards, or develop, introduce and market enhanced or new products and services. In addition, the adoption of new Internet, networking or telecommunications technologies or other technological changes could require us to incur substantial expenditures to modify or adapt our services or infrastructure.

      We have arrangements with several execution agents to receive cash payments in exchange for routing trade orders to these firms for execution. Competition between execution agents and the implementation of order handling rules and decimalization of stock prices have made it less profitable for execution agents to offer order flow payments to broker-dealers. On a per trade basis, our payment for order flow revenue has decreased significantly over the past several years. These payments could continue to decrease on a per trade basis, which could have a material adverse effect on our revenues and profitability. The SEC currently is inquiring into brokerage industry trade execution practices at the market open, including any related payment for order flow. The SEC could take action to prohibit payment for order flow, which could have a material adverse effect on our revenues and profitability.

      The SEC, NASD and various other regulatory agencies have stringent rules with respect to the maintenance of specific levels of net capital by securities broker-dealers. Net capital is a measure, defined by the SEC, of a broker-dealer’s readily available liquid assets, reduced by its total liabilities other than approved subordinated debt. All of our broker-dealer subsidiaries are required to comply with the net capital requirements. If we fail to maintain the required net capital, the SEC could suspend or revoke our registration, or NASD could expel us from membership, which could ultimately lead to our liquidation, or they could impose censures, fines or other sanctions. If the net capital rules are changed or expanded, or if there is an unusually large charge against net capital, operations that require the intensive use of capital would be limited. A large operating loss or charge against net capital could adversely affect our ability to maintain or expand our business. For example, on November 12, 2004, our broker-dealer subsidiary Ameritrade, Inc. was notified by the staff of the NASD and the staff of the SEC Division of Market Regulation (collectively the “Staffs”) that in their view Ameritrade, Inc.’s net capital was below its minimum amount required under Exchange Act Rule 15c3-1. The asserted deficiency was based upon the Staffs’ concerns regarding a Federal Deposit Insurance Corporation (“FDIC”) insured deposit sweep program available to Ameritrade, Inc.’s clients. Ameritrade, Inc. cured the asserted deficiency the next business day, November 15, 2004. On November 14, 2005, the NASD advised us that NASD Staff has made a preliminary determination to recommend

disciplinary action against the Company based on allegations that it violated SEC net capital and customer protection rules and NASD conduct rules. We intend to submit a response setting forth the reasons we believe that NASD should not bring a disciplinary action. If NASD elects to do so, it may seek censures, fines, suspensions or other sanctions. We are unable to predict the outcome of this matter. See Note 9 of the Notes to Consolidated Financial Statements for further discussion of this matter.

      Ameritrade, Inc. provides clearing and execution services to each of our brokerage businesses, as well as to independent broker-dealers, depository institutions, registered investment advisors and financial planners. Clearing and execution services include the confirmation, receipt, settlement and delivery functions involved in securities transactions. Clearing brokers also assume direct responsibility for the possession and control of client securities and other assets and the clearance of client securities transactions. Self-clearing securities firms are subject to substantially more regulatory control and examination than brokers that rely on others to perform those functions. Errors in performing clearing functions, including clerical and other errors related to the handling of funds and securities held by us on behalf of clients and introducing brokers, could lead to civil penalties imposed by applicable authorities as well as losses and liability in related lawsuits brought by clients and others.

      We make margin loans to clients collateralized by client securities and periodically borrow and lend securities to cover trades. A significant portion of our net revenues is derived from interest on margin loans. By permitting clients to purchase securities on margin, we are subject to risks inherent in extending credit, especially during periods of rapidly declining markets in which the value of the collateral held by us could fall below the amount of a client’s indebtedness. To the extent that these margin loans exceed client cash balances maintained with us, we must obtain financing from third parties. We may not be able to obtain this financing on favorable terms or in sufficient amounts. In addition, in accordance with regulatory guidelines, we collateralize borrowings of securities by depositing cash or securities with lenders. Sharp changes in market values of substantial amounts of securities and the failure by parties to the borrowing transactions to honor their commitments could have a material adverse effect on our revenues and profitability.

      We intend to pursue strategic acquisitions of businesses and technologies. Acquisitions may entail numerous risks, including:

      As part of our growth strategy, we regularly consider, and from time to time engage in, discussions and negotiations regarding strategic transactions such as acquisitions, mergers and combinations within our industry. The purchase price for possible acquisitions could be paid in cash, through the issuance of Common Stock or other of our securities, borrowings or a combination of these methods.

      We cannot be certain that we will be able to continue to identify and to consummate strategic transactions and no assurance can be given with respect to the timing, likelihood or business effect of any possible transaction. For example, in many cases we begin negotiations that we subsequently decide to suspend

or terminate for a variety of reasons. However, opportunities may arise from time to time that we will evaluate. Any transactions that we consummate would involve risks and uncertainties to us. These risks could cause the failure of any anticipated benefits of an acquisition to be realized, which could have a material adverse effect on our revenues and profitability.

      See “Risk Factors Relating to the Proposed Acquisition of TD Waterhouse” below for risk factors specific to our proposed acquisition of TD Waterhouse.

      We are subject to internal control requirements under the Sarbanes-Oxley Act of 2002, as well as rules and regulations adopted by the SEC and the Public Company Accounting Oversight Board. These laws, rules and regulations continue to evolve and could become increasingly stringent in the future. We have undertaken actions to enhance our ability to comply with the requirements of the Sarbanes-Oxley Act of 2002, including, but not limited to, the increased allocation of internal audit department resources, documentation of existing controls and implementation of new controls or modification of existing controls as deemed appropriate. Control deficiencies have been identified from time to time and we have undertaken actions to remediate them.

      On November 12, 2004, our broker-dealer subsidiary Ameritrade, Inc. was notified by the staff of the NASD and the staff of the SEC Division of Market Regulation (collectively the “Staffs”) that they believe that for regulatory purposes certain funds held in banks on behalf of clients are liabilities and assets of Ameritrade, Inc. rather than liabilities and assets only of the banks. The resulting assets have not been allowed for purposes of Ameritrade, Inc.’s regulatory net capital calculation. Accordingly, in the Staffs’ view Ameritrade, Inc.’s net capital was below its minimum amount required under Exchange Act Rule 15c3-1. Our independent registered public accounting firm concluded that the controls in place relating to the matter were not properly designed to provide reasonable assurance that these funds were properly recorded and disclosed in the financial statements and assets were appropriately considered in regulatory net capital computations. In their judgment, this was a material weakness in internal control over financial reporting. See Note 9 of the Notes to Consolidated Financial Statements for further discussion of this regulatory matter.

      During 2005, we had discussions with the Staff of the SEC regarding our accounting for and disclosure of our prepaid variable forward contracts on our Knight shares. As a result of these discussions, on November 15, 2005, we concluded that our designation of the embedded collars within the forward contracts as cash flow hedges of the forecasted future sales of Knight shares was not documented adequately at the inception of the contracts. Therefore, the embedded collars did not qualify for cash flow hedge accounting treatment, and we restated our Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Stockholders’ Equity, Consolidated Statements of Cash Flows and Notes to Consolidated Financial Statements to account for the embedded collars as non-hedging derivatives. Management concluded that the controls in place relating to hedging documentation were not properly designed to provide reasonable assurance that these derivative instruments would be properly recorded and disclosed in the financial statements, and that this is a material weakness in internal control over financial reporting.

      We continue to devote substantial time and resources to the documentation and testing of our controls, and to planning for and implementation of remedial efforts in those instances where remediation is indicated. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we could be subject to regulatory actions, civil or criminal penalties or shareholder litigation. In addition, failure to maintain adequate internal controls could result in financial statements that do not accurately reflect our financial condition, results of operations and cash flows.

      We have entered into an agreement to acquire the U.S. retail securities brokerage business of TD Waterhouse Group, Inc. from The Toronto-Dominion Bank (“TD”). The closing of the transaction, which is expected to occur on or around January 24, 2006, is subject to certain conditions including stockholder approval, regulatory approvals, the availability of financing to fund the $6.00 per share special

dividend to stockholders, and other conditions. The following risk factors relate to the proposed acquisition of TD Waterhouse and the special dividend.

      The failure of the combined company, which will be renamed TD Ameritrade Holding Corporation (“TD Ameritrade”), to meet the challenges involved in integrating the operations of Ameritrade and TD Waterhouse successfully or otherwise to realize any of the anticipated benefits of the acquisition of TD Waterhouse, including anticipated cost savings and additional revenue opportunities, could seriously harm the results of operations of the combined company. Realizing the benefits of the acquisition of TD Waterhouse will depend in part on the integration of technology, operations and personnel. The integration of the companies is a complex, time-consuming and expensive process that, without proper planning and effective and timely implementation, could significantly disrupt the businesses of Ameritrade and TD Waterhouse.

      The challenges involved in this integration include the following:

      The combined company may not successfully integrate the operations of Ameritrade and TD Waterhouse in a timely manner, or at all, and the combined company may not realize the anticipated benefits or synergies of the acquisition of TD Waterhouse to the extent, or in the timeframe, anticipated. The anticipated benefits and synergies include cost savings associated with anticipated restructurings and other operational efficiencies, greater economies of scale and revenue enhancement opportunities. However, these anticipated benefits and synergies assume a successful integration and are based on projections, which are inherently uncertain, and other assumptions. Even if integration is successful, anticipated benefits and synergies may not be achieved. In addition to the integration risks discussed above, the combined company’s ability to realize these benefits and synergies could be adversely impacted by practical or legal constraints on its ability to combine operations or implement workforce reductions.

      The market price of our common stock may decline as a result of the acquisition of TD Waterhouse if, among other things, the integration of the Ameritrade and TD Waterhouse businesses is unsuccessful, if the operational cost savings estimates are not realized, if the expected revenue opportunities are not realized, if the transaction costs related to the acquisition of TD Waterhouse are greater than expected or if the financing of the special dividend is on unfavorable terms. The market price also may decline if we do not achieve the

perceived benefits of the acquisition of TD Waterhouse as rapidly or to the extent anticipated by financial or industry analysts or if the effect of the acquisition of TD Waterhouse on our financial results is not consistent with the expectations of financial or industry analysts. In addition, as is typical in such circumstances, we anticipate that the market price of our common stock will decline following the payment of the special dividend.

      When the acquisition of TD Waterhouse is completed, TD will own approximately 32.6%, and the Ricketts holders will own approximately 18%, of the outstanding voting securities of TD Ameritrade. Following the completion of the acquisition of TD Waterhouse, TD will commence a tender offer with the goal of increasing its ownership to 39.9% of the outstanding shares of Ameritrade common stock. J. Joe Ricketts may elect to participate as a co-bidder in the tender offer with TD or otherwise purchase shares of TD Ameritrade common stock, such that the Ricketts holders own up to 29% of the outstanding shares of Ameritrade common stock. Mr. Ricketts has informed Ameritrade that he does not intend to participate as a co-bidder in the tender offer. TD will be permitted under the terms of the stockholders agreement to acquire up to 39.9% of the outstanding shares of TD Ameritrade common stock during the three years following the closing, up to 45% of the outstanding shares of TD Ameritrade common stock for the remainder of the term of the stockholders agreement (a maximum of 10 years following the closing) and an unlimited number of shares of Ameritrade following the termination of the stockholders agreement. As a result, TD and the Ricketts holders generally will have the ability to significantly influence the outcome of any matter submitted for the vote of TD Ameritrade stockholders. The stockholders agreement also provides that TD will designate five of the twelve members of the TD Ameritrade board of directors and the Ricketts holders will designate three of the twelve members of the TD Ameritrade board of directors, subject to adjustment based on their respective ownership positions in TD Ameritrade. Accordingly, TD and the Ricketts holders generally will be able to significantly influence the outcome of all matters that come before the TD Ameritrade board. As a result of their significant interest in TD Ameritrade, TD or the Ricketts holders may have the power, subject to applicable law, to significantly influence actions that might be favorable to TD or the Ricketts holders, but not necessarily favorable to other TD Ameritrade stockholders. In addition, the ownership position and governance rights of TD and the Ricketts holders could discourage a third party from proposing a change of control or other strategic transaction concerning TD Ameritrade. As a result, the common stock of TD Ameritrade could trade at prices that do not reflect a “takeover premium” to the same extent as do the stocks of similarly situated companies that do not have a stockholder with an ownership interest as large as TD’s and the Ricketts holders’ combined ownership interest.

      Conflicts of interest may arise between TD Ameritrade and TD in areas relating to past, ongoing and future relationships, including corporate opportunities, potential acquisitions or financing transactions, sales or other dispositions by TD of its interests in TD Ameritrade and the exercise by TD of its influence over the management and affairs of TD Ameritrade. It is expected that after the acquisition of TD Waterhouse a significant number of the directors on the TD Ameritrade board will be persons who are also officers or directors of TD or its subsidiaries. Service as a director or officer of both TD Ameritrade and TD or its other subsidiaries could create conflicts of interest if such directors or officers are faced with decisions that could have materially different implications for TD Ameritrade and for TD. Our post-transaction amended and restated certificate of incorporation will contain provisions relating to avoidance of direct competition between TD Ameritrade and TD. The parties have not established any other formal procedures for TD Ameritrade and TD to resolve potential or actual conflicts of interest between them. There can be no assurance that any of the foregoing conflicts will be resolved in a manner that does not adversely affect the business, financial condition or results of operations of TD Ameritrade. In addition, the provisions of the stockholders agreement related to non-competition are subject to numerous exceptions and qualifications and may not prevent TD Ameritrade and TD from competing with each other to some degree in the future.

      In connection with payment of the special cash dividend of $6.00 per share and to fund working capital requirements after the acquisition of TD Waterhouse, we will be required to borrow approximately $1.9 billion. It is a condition to the completion of the transaction that we shall have available sufficient funds, and shall be permitted under applicable law, to pay the special dividend, and that we declare the dividend. Although we currently expect that such financing will be available on commercially reasonable terms, there can be no assurance of this. Following the completion of the acquisition of TD Waterhouse, our ability to meet our cash requirements, including our debt service obligations, will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are or may be beyond our control. We cannot provide assurance that our business will generate sufficient cash flows from operations to fund these cash requirements and debt service obligations. If we are unable to meet our cash requirements from operations, we would be required to fund these cash requirements by alternative financing. The degree to which we may be leveraged as a result of the indebtedness incurred in connection with payment of the special dividend or otherwise could materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes, could make us more vulnerable to industry downturns and competitive pressures or could limit our flexibility in planning for, or reacting to, changes and opportunities in our industry, which may place us at a competitive disadvantage. There can be no assurance that we would be able to obtain alternative financing, that any such financing would be on acceptable terms or that we would be permitted to do so under the terms of existing financing arrangements, including those entered into in connection with the payment of the special dividend. In the absence of such financing, our ability to respond to changing business and economic conditions, make future acquisitions, react to adverse operating results, meet our debt service obligations, or fund required capital expenditures, could be materially and adversely affected.

      Our executive officers and directors have interests in the acquisition of TD Waterhouse that may be different from, or in addition to, your interests.

      For example, we are currently considering a new employment agreement with Joseph H. Moglia with respect to his continued employment as our Chief Executive Officer. In addition, we may negotiate and enter into (after consultation with TD if prior to the closing) new or amended employment agreements with other executive officers.

      In connection with the acquisition of TD Waterhouse, our directors and executive officers, who beneficially own approximately 125,438,924 shares of our common stock as of November 16, 2005, will receive an aggregate of approximately $752.6 million as a result of the payment of proposed special dividend of $6.00 per share assuming the timely exercise of all vested options. The beneficial ownership of our directors and executive officers includes options to purchase 14,910,982 shares of our common stock exercisable within 60 days of November 16, 2005. In connection with the proposed special dividend, we will adjust outstanding equity awards under our stock option plans to preserve the pre-dividend economic value of the awards after payment of the special dividend. As of November 16, 2005, our directors and executive officers collectively held options (vested and unvested) to purchase 16,354,325 shares of common stock with a weighted average exercise price of $5.98 per share. These options will be adjusted unless exercised prior to the ex-dividend date.

      In addition, under the terms of the stockholders agreement, the Ricketts holders will have, among other things, specified rights relating to board representation and the ability to acquire additional Ameritrade common stock to maintain their ownership position. J. Joe Ricketts may also elect, following the closing of the acquisition of TD Waterhouse, to participate in a tender offer with TD, such that upon completion of the tender offer, the Ricketts holders may own up to 29% of the outstanding voting securities of TD Ameritrade. Mr. Ricketts has informed Ameritrade that he does not intend to participate as a co-bidder in the tender offer.

In addition, on November 17, 2005, J. Joe Ricketts and his wife entered into a $65 million credit facility with an affiliate of TD secured by Ameritrade stock.

      Further, under the terms of the amended and restated registration rights agreement, the Ricketts holders and some of the other Ameritrade directors or their affiliates will continue to be entitled to registration rights with respect to their securities of TD Ameritrade.

      Ameritrade and TD cannot complete the acquisition of TD Waterhouse unless they receive various consents, orders, approvals and clearances from authorities in the U.S. and Canada. While Ameritrade and TD believe that they will receive the requisite regulatory approvals from these authorities, there can be no assurance of this. In addition, these authorities may impose conditions on the completion of the acquisition of TD Waterhouse or require changes to the terms of the acquisition of TD Waterhouse. For example, NASD could require changes to the operations or supervisory controls of the brokerage firms. While TD and Ameritrade do not currently expect that any conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying completion of the acquisition of TD Waterhouse or imposing additional costs on or limiting the revenues of Ameritrade following the acquisition of TD Waterhouse, any of which may have an adverse effect on Ameritrade following the acquisition of TD Waterhouse.

      We intend to adjust outstanding equity awards, including non-qualified stock options that have been granted to employees in prior years, in order to preserve the pre-dividend economic value of such options after the payment of the special dividend. Such adjustments could potentially result in the disallowance of the tax deduction we would otherwise be entitled to in the future when certain of our executives exercise their options.

      We are currently seeking guidance from the Internal Revenue Service that the proposed adjustments to the outstanding options will not adversely affect our tax deduction in future years. If we are unable to obtain a favorable ruling from the Internal Revenue Service regarding such tax deductions, then our future cash flow could be negatively impacted.

      The taxable portion of the special dividend is determined by reference to our earnings and profits, as determined under the Internal Revenue Code, for the calendar year in which the special dividend is paid. The computation could be subject to review by the Internal Revenue Service, which may disagree with our computation. Any adjustment to the computation required by the Internal Revenue Service would result in more or less of the special dividend being considered a “qualified dividend” with a corresponding adjustment to the amount considered as a return of capital. Such an adjustment could negatively impact the current U.S. federal income tax consequences of the special dividend.

      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 hold any market risk-sensitive instruments for trading purposes.

      We seek to control the risks associated with our client activities by requiring clients to maintain margin collateral in compliance with regulatory and internal guidelines. We monitor required margin levels daily and,

pursuant to such guidelines, require our clients to deposit additional collateral, or to reduce positions, when necessary. We seek to control risks associated with our securities lending and borrowing activities by requiring credit approvals for counterparties, by monitoring the market value of securities loaned and collateral values for securities borrowed on a daily basis and requiring additional cash as collateral for securities loaned or return of collateral for securities borrowed when necessary, and by participating in a risk-sharing program offered through a securities clearinghouse.

      As a fundamental part of our brokerage business, we hold interest earning assets, mainly funds required to be segregated in compliance with federal regulations. These funds totaled $7.6 billion at September 30, 2005 and $7.8 billion at September 24, 2004. We invest these funds in repurchase agreements, fixed-rate U.S. Treasury securities and other qualified securities. Our interest earning assets are financed primarily by short-term interest bearing liabilities, totaling $10.1 billion at September 30, 2005 and September 24, 2004, in the form of client credit balances. We earn a net interest spread on the difference between amounts earned on client margin balances and amounts paid on client credit balances. Because we establish the rate paid on client credit balances and the rate charged on client margin balances, a substantial portion of our interest rate risk is under our direct management. However, changes in interest rates may have a beneficial or adverse affect on our results of operations. We might not change interest rates paid on client credit balances proportionately to changes in interest rates charged on client margin balances. As a result, a rising interest rate environment generally results in our earning a larger net interest spread. Conversely, a falling interest rate environment generally results in our earning a smaller net interest spread.

      We had no borrowings outstanding under our $105 million revolving credit agreement, which bears interest at a floating rate, as of September 30, 2005 and no borrowings outstanding under our prior revolving credit agreement as of September 24, 2004. We currently hold two marketable equity securities, our investments in approximately 7.9 million shares of Knight and 112,887 shares of International Securities Exchange, Inc., which were recorded at fair value of $68.4 million ($42.5 million net of tax) at September 30, 2005 and have exposure to market price risk. The potential loss in fair value resulting from a hypothetical 10 percent adverse change in prices quoted by the stock exchanges was approximately $6.8 million at September 30, 2005.

      During fiscal 2003, we entered into a series of prepaid variable forward contracts with a total notional amount of approximately $41.4 million on 7.9 million underlying Knight shares. The forward contracts each contain an embedded collar on the value of the Knight shares, with a weighted average floor price of $5.13 per share and a weighted average cap price of $6.17 per share. The embedded collars also have exposure to market price risk based on changes in the value of the underlying Knight shares. The embedded collars do not qualify for hedge accounting treatment, and the consolidated financial statements reflect the embedded collars as non-hedging derivatives. As of September 30, 2005 and September 24, 2004, the fair value of the embedded collars was approximately $20.4 million and $28.7 million, respectively, and was included under the caption “Prepaid variable forward derivative instrument” on the Consolidated Balance Sheets. The potential loss in fair value of the embedded collars resulting from a hypothetical 10 percent adverse change in price of the underlying Knight shares quoted by the stock exchanges was approximately $2.0 million at September 30, 2005. Because the embedded collars do not qualify for hedge accounting, changes in the fair value of the embedded collars are recognized in the statement of operations, along with the related income tax effects, while any offsetting changes in the fair value of the underlying Knight stock, which is classified as an available-for-sale investment, are recorded in other comprehensive income, net of income taxes.

      Our revenues and financial instruments are denominated in U.S. dollars, and we generally do not invest, except for hedging purposes, in derivative financial instruments or derivative commodity instruments.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Ameritrade Holding Corporation

Omaha, Nebraska

      We have audited the accompanying consolidated balance sheets of Ameritrade Holding Corporation and subsidiaries (collectively, the “Company”) as of September 30, 2005 and September 24, 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Ameritrade Holding Corporation and its subsidiaries as of September 30, 2005 and September 24, 2004, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2005 in conformity with accounting principles generally accepted in the United States of America.

      We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of September 30, 2005, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 13, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of a material weakness.

Omaha, Nebraska

December 13, 2005

AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of September 30, 2005 and September 24, 2004

See notes to consolidated financial statements.

AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended September 30, 2005, September 24, 2004 and September 26, 2003

See notes to consolidated financial statements.

AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Years Ended September 30, 2005, September 24, 2004 and September 26, 2003