OptionsXpress Holdings (OXPS)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission file number: 0-49992

(Exact name of registrant as specified in its charter)

39 S. LaSalle, Suite 220, Chicago, Illinois

60603

(Address of principal executive offices)

(Zip Code)

(312) 630-3300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months, and (2) has been subject to such filing requirements for the past ninety days. Yes   ý  No  o

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

As of June 30, 2005, there were 61,859,889 outstanding shares of the registrant’s Common Stock.

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Part I - FINANCIAL INFORMATION

optionsXpress Holdings, Inc.

Condensed Consolidated Statements of Financial Condition

(Unaudited)

(In thousands, except per share data)

See accompanying notes

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optionsXpress Holdings, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

See accompanying notes.

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optionsXpress Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

See accompanying notes.

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optionsXpress Holdings, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except per share data)

1.               Basis of Presentation and Nature of Operations

Effective July 31, 2004, the consolidated financial statements include the accounts of optionsXpress Holdings, Inc., optionsXpress, Inc., brokersXpress LLC and its other subsidiaries (collectively, the Company).  Prior to July 31, 2004, the consolidated financial statements included the accounts of optionsXpress, Inc., bX Holdings LLC and brokersXpress LLC (collectively, the Company).  See the Corporate Reorganization paragraph below for additional information regarding the corporate reorganization.  All significant intercompany balances and transactions have been eliminated in consolidation.

The Company follows United States generally accepted accounting principles, including certain accounting guidance used by the brokerage industry.  Certain notes and other information normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted.

optionsXpress, Inc. is a broker-dealer registered with the Securities and Exchange Commission (SEC) and a member of the National Association of Securities Dealers, Inc. (NASD), the Chicago Board Options Exchange and the National Futures Association (NFA). brokersXpress LLC is a broker-dealer registered with the SEC and a member of the NASD and the NFA. The Company provides internet-based options, stock and futures brokerage services to retail customers located throughout the United States and the world. The Company clears all customer transactions through two clearing brokers on a fully disclosed basis.

Prior to July 31, 2004, optionsXpress, Inc. wholly owned bX Holdings LLC and bX Holdings LLC wholly owned brokersXpress LLC. Effective July 31, 2004, optionsXpress Holdings, Inc. was formed as a Delaware Corporation and optionsXpress, Inc. entered into a corporate reorganization whereby optionsXpress Holdings, Inc. acquired 100 percent of optionsXpress, Inc., bX Holdings LLC and brokersXpress LLC. The stockholders of optionsXpress, Inc. at July 31, 2004 exchanged shares in optionsXpress, Inc. for shares in optionsXpress Holdings, Inc. on a one for one basis. Subsequent to the corporate reorganization, optionsXpress, Inc., bX Holdings LLC and brokersXpress LLC became wholly owned by optionsXpress Holdings, Inc.

Except as described in the following paragraph, there have been no changes in the significant accounting policies from those included in the Company’s most recent Annual Report filed on Form 10-K.

All of our short-term investments are considered available for sale.  These investments are classified as short-term investments, as these investments generally consist of highly marketable securities that are intended to be available to meet current cash requirements.  Short-term investments are reported at fair market value, and net unrealized gains or losses are recorded in accumulated other comprehensive income or loss, a separate component of

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stockholders’ equity, net of taxes.  Any gains or losses on sales of short-term investments are computed based upon specific identification.  Currently, short-term investments primarily consist of auction rate securities.  The interest rates on these securities are typically reset to market prevailing rates every 90 days or less, but may have longer stated maturities.

Prior to the corporate reorganization effective July 31, 2004, optionsXpress, Inc. maintained the stock compensation plan. Subsequent to the corporate reorganization, the Company now maintains the stock compensation plan. All of the options outstanding at June 30, 2005 are options to buy common stock of the Company granted to employees of optionsXpress, Inc. and brokersXpress, LLC.

In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to require more prominent disclosures in annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results.

As permitted in SFAS No. 123 and 148, the Company has elected to continue to follow Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. Under APB 25, the Company, utilizing the intrinsic value-based method of accounting, recognizes no compensation expense related to employee stock options as long as options are granted with an exercise price equal to, or greater than, the fair market value of the underlying common stock on the date of grant. The following table illustrates the effect on the Company’s reported net income and earnings per common share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:

The Company’s calculations were made using the Black-Scholes option-pricing model taking into account the stock price and exercise price and the following assumptions applied to grants made in the following periods:

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The June 30, 2005 expected volatility percentage represents the implied volatility of our stock as a publicly traded company.  The June 30, 3004 expected volatility percentage is based on the implied volatility of other publicly traded companies in our industry during that period.

In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 123R (revised 2004), Share-Based Payment. This statement requires use of the fair value method of accounting for share-based payment transactions with employees. With the adoption of SFAS No. 123R, the Company will be required to account for stock options under the fair value method of accounting and to estimate expected forfeitures of stock grants instead of its current practice of accounting for forfeitures as they occur. In addition, the Company will begin to classify the excess tax benefits, if any, related to employee option exercises as financing activities rather than operating activities in its consolidated statements of cash flows. The Company will also consider whether to begin using a binomial model as a valuation technique to determine the fair value of stock option grants rather than the Black Scholes model that is currently used. The provisions of SFAS No. 123R are required to be adopted as of the beginning of the first interim or annual reporting period that begins after December 31, 2005, and the Company is currently evaluating the impact of the adoption on its consolidated financial statements.

Under the terms of the clearing agreements with Goldman Sachs Equity & Clearing (GSEC) and Legent Clearing Corp., the Company introduces its customers’ accounts to GSEC and Legent who, as the clearing brokers, clear and carry all customer account activity. As such, the Company is required to guarantee the performance of its customers in meeting their contractual obligations. The Company has agreed to indemnify the clearing brokers for losses that they may sustain for the customer accounts introduced by the Company. In accordance with applicable margin lending practices and in conjunction with the clearing brokers, customer balances are typically collateralized by customer securities or supported by other types of recourse provisions. Compliance with the various guidelines are monitored daily and, pursuant to such guidelines, customers may be required to deposit additional collateral, or reduce positions, when necessary.

As of June 30, 2005 and 2004, the Company had $97,514 and $60,285 in credit extended to its customers through its clearing brokers, respectively. The amount of risk to which the Company is exposed from the leverage extended to its customers and specifically from short sale transactions by its customers is not quantifiable since the risk would be dependent upon analysis of a potential significant and undeterminable rise or fall in stock prices. The account level margin and leverage requirements meet or exceed those required by Regulation T of the Board of Governors of the Federal Reserve. The Company believes that it is unlikely that it will have to make any significant payments under these arrangements, and no liabilities related to these guarantees and indemnifications have been recognized in the accompanying condensed consolidated financial statements.

6. Capitalization

At June 30, 2005, the Company had 187,500 shares of $0.0001 par value common stock authorized. Of the authorized common stock, 61,860 shares were issued and outstanding.

On January 26, 2005, the Company effected a 7.5 to 1 stock split. The condensed consolidated financial statements reflect the retroactive effect of the stock split and appropriate restatement of the capital accounts.

On January 27, 2005, the Company completed an initial public offering of 5,000 newly issued shares of common stock and 7,000 shares from existing stockholders, at an offering price of $16.50 per share, with net proceeds to the Company of $74.8 million. The underwriters’ also exercised their over-allotment option to purchase an additional 1,800 shares from existing stockholders.

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At June 30, 2005, the Company had 75,000 shares of $0.0001 par value convertible preferred stock authorized. Of the authorized shares, 18,750 were designated as a new Series A Convertible Preferred. On January 26, 2005, all shares of this new Series A preferred stock were converted into shares of common stock, prior to the stock split, on a one for one basis in connection with the initial public offering.  At June 30, 2005, the Company had no shares of convertible preferred stock issued and outstanding.

On January 25, 2005, the Company declared a dividend of $33,500, to be payable pro rata to the holders of record of common stock and Series A preferred stock of the Company, as of that date.

On January 26, 2005, the Company declared a common stock dividend of 606 shares. The condensed consolidated financial statements reflect the retroactive effect of the stock dividend and appropriate restatement of the capital accounts.

On June 7, 2005, the Company declared a common stock dividend of $0.04 per share to shareholders of record on June 17, 2005, payable on July 7, 2005.

7. Regulatory Requirements

optionsXpress, Inc. and brokersXpress LLC are subject to the Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934, administered by the SEC and NASD, which requires the maintenance of minimum net capital. Under this Rule, optionsXpress Inc. is required to maintain net capital of 6 2/3% of “aggregate indebtedness” or $250, whichever is greater, as these terms are defined. brokersXpress LLC is required to maintain net capital of 6 2/3% of “aggregate indebtedness” or $50, whichever is greater. Net capital and aggregate indebtedness change from day to day.

optionsXpress, Inc. and brokersXpress, LLC also are subject to the Commodity Futures Trading Commission (“CFTC”) Regulation 1.17 under the Commodity Exchange Act, administered by the CFTC and the National Futures Association, which also requires the maintenance of minimum net capital.  optionsXpress, Inc., as a futures commission merchant, is required to maintain net capital equal to the greater of its capital requirement under Rule 15c3-1; $250; 4% of customer segregated funds (with some adjustments); or the sum of 8% of the total risk margin requirements for all positions carried in customer accounts and 4% of the total risk margin requirements for all positions carried in non-customer accounts.  brokersXpress, LLC, as an introducing broker, is required to maintain net capital equal to the greater of its capital requirement under Rule 15c3-1 or $30.

Below is a summary of the capital requirements for optionsXpress, Inc. and brokersXpress LLC:

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The net capital rules may effectively restrict the payment of cash distributions or other equity withdrawals.

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

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

Forward-Looking Statements

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2004, and the Condensed Consolidated Financial Statements and Notes thereto contained in this quarterly report on Form 10-Q. This discussion contains forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. The forward-looking statements made in this Form 10-Q relate only to events as of the date on which the statements are made, and we undertake no ongoing obligation, other than any imposed by law, to update these statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Important factors that may cause such differences include, but are not limited to: risks related to general economic conditions, regulatory developments, the competitive landscape, the volume of securities trading generally or by our customers specifically, competition, systems failures and capacity constraints and the other risks and uncertainties set forth under the heading “Risk Factors” in Item 1 of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2004.

In particular, forward-looking statements include, but are not limited to, the following:

•              the statements about our intention to pay dividends;

•              the statements about future growth in online brokerage accounts, options trading and online options

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trading;

•              the statements relating to the registration of, and transfers of accounts to, optionsXpress Canada and other potential responses to possible enforcement actions against us by Canadian authorities;

•              the statement that on a per trade basis, brokerage, clearing and other related expenses generally decrease as the number of customer trades increase;

•              the statements concerning continued financing options; and

•              the statements regarding scalability of our systems and the cost of increases.

Results of Operations

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

Statistical Data

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

(1)     Customer accounts are open, numbered accounts.

(2)     DARTs are total revenue-generating trades for a period divided by the number of trading days in that period.

(3)     Customer trades per account are total trades divided by the average number of total customer accounts during the period. Customer trades are annualized.

(4)     Calculated based on total new customer accounts opened during the period.

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Our results for the period reflect the following principal factors:

•           total customer accounts increased by 53,100 to 133,200, or 66.3% from June 30, 2004 to June 30, 2005;

•           total trades increased by 207,500 to 1,088,700, or 23.5% for the quarter ended June 30, 2005, from the comparable period in 2004; and

•           average commissions per trade decreased by $2.89 to $18.90, or 13.3% for the quarter ended June 30, 2005, from the comparable period in 2004.

Total revenues increased $4.6 million, or 19.2% to $28.6 million for the quarter ended June 30, 2005 compared to $24.0 million for the quarter ended June 30, 2004. The increase in total revenues consisted primarily of an increase in commissions for the quarter ended June 30, 2005 of $1.4 million, or 7.2% to $20.6 million compared to $19.2 million for the quarter ended June 30, 2004.  The increase in total revenues also includes an increase in the payment for order flow of $1.3 million, or 30.3%, to $5.4 million for the quarter ended June 30, 2005 compared to $4.1 million for the quarter ended June 30, 2004,. The increase in total revenue also resulted from an increase in interest income of $1.9 million, or 291.2%, to $2.6 million for the quarter ended June 30, 2005 compared to $0.7 million for the quarter ended June 30, 2004. The increases in commission and payment for order flow were primarily the result of the rise in the number of trades processed, partially offset by a decrease in the average commission per trade. The increase in interest income was a result of an increase in customer cash balances and margin balances, an increase in the average net interest rate earned on those customer cash balances and margin balances, and interest earned on the proceeds from our initial public offering.

Brokerage, clearing, and other related expenses decreased $0.6 million, or 15.3%, to $3.2 million for the quarter ended June 30, 2005 from $3.8 million for the quarter ended June 30, 2004.  Decreased brokerage expenses were primarily due to the reduction in per trade clearing expenses associated with a new clearing agreement that commenced in September 2004, partially offset by a 23.5% increase in trades for the quarter.

Compensation and benefits expenses increased $1.1 million, or 51.2%, to $3.3 million for the quarter ended June 30, 2005 from $2.2 million for the quarter ended June 30, 2004.  Increased compensation expenses were primarily due to an increase in the number of employees from 106 to 138 from June 30, 2004 to June 30, 2005 to service the growth in our accounts and to develop the infrastructure for the Company related to its initial public offering.

Advertising expenses decreased $0.4 million, or 21.2%, to $1.4 million for the quarter ended June 30, 2005 from $1.8 million for the quarter ended June 30, 2004. The decrease in advertising expenses was primarily due to the cancellation of our trial use of television advertising.

Quotation services expenses of $0.9 million for the quarter ended June 30, 2005 was consistent with the quarter ended June 30, 2004,.  A slight increase in quotation expenses associated with a 66.3% increase in customer accounts was significantly offset by a reduction in per user fees from third-party vendors.

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Depreciation and amortization expenses increased $0.2 million, or 50.7%, to $0.6 million for the quarter ended June 30, 2005 from $0.4 million for the quarter ended June 30, 2004. Increased depreciation and amortization expenses were primarily due to increased capitalized costs relating to the continued development of our brokerage platform and technology infrastructure.

Technology and telecommunication expenses increased $0.2 million, or 91.8%, to $0.5 million for the quarter ended June 30, 2005 from $0.3 million for the quarter ended June 30, 2004.  Increased technology and telecommunication expenses were primarily due to added telecommunications and data costs required to support the increase in trades and customer accounts.

Other expenses increased $0.5 million, or 87.1%, to $1.1 million for the quarter ended June 30, 2005 from $0.6 million for the quarter ended June 30, 2004.  Increased other expenses were primarily due to increased general administrative expenses consistent with the growth of the business, additional costs associated with being a publicly traded company, and fees incurred to register our newly formed international subsidiaries in their respective jurisdictions.

Income taxes increased $1.2 million, or 22.6%, to $6.8 million for the quarter ended June 30, 2005 from $5.6 million for the quarter ended June 30, 2004. Increased income taxes were primarily due to a 24.6% increase in income before income taxes for the quarter ended June 30, 2005.

As a result of the foregoing, we reported $10.7 million in net income for the quarter ended June 30, 2005, as compared to $8.5 million in net income for the quarter ended June 30, 2004, an increase of $2.2 million, or 26.0%.

Our results for the period reflect the following principal factors:

•              total customer accounts increased by 53,100 to 133,200, or 66.3% from June 30, 2004 to June 30, 2005;

•              total trades increased by 362,700 to 2,094,900, or 20.9% for the six months ended June 30, 2005 from the comparable period in 2004; and

•              average commissions per trade decreased by $2.53 to $19.13, or 11.7% for the six months ended June 30, 2005 from the comparable period in 2004.

Total revenues increased $7.6 million, or 16.0% to $55.4 million for the six months ended June 30, 2005 compared to $47.8 million for the six months ended June 30, 2004. The increase in total revenues consisted primarily of an increase in commissions of $2.6 million, or 6.8% to $40.1 million for the six months ended June 30, 2004, compared to $37.5 million for the six months ended June 30, 2004.  The increase in total revenues also includes an increase in the payment for order flow of $1.4 million, or 16.3%, to $10.5 million for the six months ended June 30, 2005 compared to $9.1 million for the six months ended June 30, 2004. The increase in total revenue also resulted from an increase in interest income of $3.5 million, or 291.6%, to $4.7 million for the six months ended June 30, 2005

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compared to $1.2 million for the six months ended June 30, 2004. The increases in commission and payment for order flow were primarily the result of the rise in the number of trades processed, partially offset by a decrease in the average commission per trade. The increase in interest income was a result of an increase in customer cash balances and margin balances, an increase in the average net interest rate earned on those customer cash balances and margin balances, and interest earned on the proceeds from our initial public offering.

Brokerage, clearing, and other related expenses remained consistent at $6.9 million in the six months ended June 30, 2005 from the six months ended June 30, 2004.  The decreased brokerage expenses were primarily due to the reduction in per trade clearing expenses associated with a new clearing agreement that commenced in September 2004, partially offset by a 20.9% increase in trades for the period.

Compensation and benefits expenses increased $2.2 million, or 55.2%, to $6.1 million for the six months ended June 30, 2005 from $3.9 million for the six months ended June 30, 2004.  Increased compensation expenses were primarily due to an increase in the number of employees from 106 to 138 from June 30, 2004 to June 30, 2005 to service the growth in our accounts and to develop the infrastructure for the Company related to its initial public offering.

Advertising expenses decreased $0.9 million, or 26.0%, to $2.8 million for the six months ended June 30, 2005 from $3.7 million for the six months ended June 30, 2004. The decrease in advertising expenses was primarily due to the cancellation of our trial use of television advertising.

Quotation services expenses increased to $0.3 or 17.7% to $2.0 million for the six months ended June 30, 2005 from $1.7 million for the six months ended June 30, 2004.  Increased quotation services expenses were primarily due to a 66.3% increase in customer accounts, which was significantly offset by a reduction in per user fees from third-party vendors.

Depreciation and amortization expenses increased $0.4 million, or 46.5%, to $1.1 million for the six months ended June 30, 2005 from $0.7 million for the six months ended June 30, 2004. Increased depreciation and amortization expenses were primarily due to increased capitalized costs relating to the continued development of our brokerage platform and technology infrastructure.

Technology and telecommunication expenses increased $0.5 million, or 106.6%, to $1.0 million for the six months ended June 30, 2005 from $0.5 million for the six months ended June 30, 2004.  Increased technology and telecommunication expenses were primarily due to added telecommunications and data costs required to support the increase in trades and customer accounts.

Other expenses increased $0.8 million, or 88.2%, to $1.8 million for the six months ended June 30, 2005 from $1.0 million for the six months ended June 30, 2004.  Increased other expenses were primarily due to increased general administrative expenses consistent with the growth of the business, additional fees associated with being a publicly traded company, and fees incurred to register our newly formed international subsidiaries in their respective jurisdictions.

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Income taxes increased $1.7 million, or 14.1%, to $13.3 million for the six months ended June 30, 2005 from $11.6 million for the six months ended June 30, 2004. Increased income taxes were primarily due to a 15.3% increase in income before income taxes for the six months ended June 30, 2005.

As a result of the foregoing, we reported $20.5 million in net income for the six months ended June 30, 2005, as compared to $17.6 million in net income for the six months ended June 30, 2004, an increase of $2.9 million, or 16.0%.

We plan to finance our future operating liquidity and regulatory capital needs from our earnings. Although we have no current plans to do so, we may issue equity or debt securities or enter into secured lines of credit from time to time. As a holding company, we access the earnings of our operating subsidiaries through receipt of dividends from these subsidiaries. Some of our subsidiaries are subject to requirements of the SEC, NASD and CFTC relating to liquidity and capital standards, which limit funds available for the payment of dividends to the holding company.

Our broker-dealer subsidiary, optionsXpress, Inc., is subject to the Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1). Under applicable provisions of this Rule, optionsXpress, Inc. is required to maintain net capital of 6 ²/₃% of “aggregate indebtedness” or $0.25 million, whichever is greater, as these terms are defined. optionsXpress, Inc. is also subject to the Commodity Futures Trading Commission (“CFTC”) Regulation 1.17 under the Commodity Exchange Act, administered by the CFTC and the National Futures Association, which also requires the maintenance of minimum net capital.  optionsXpress, Inc., as a futures commission merchant, is required to maintain net capital equal to the greater of its capital requirement under Rule 15c3-1; $.25 million; 4% of customer segregated funds (with some adjustments); or the sum of 8% of the total risk margin requirements for all positions carried in customer accounts and 4% of the total risk margin requirements for all positions carried in non-customer accounts.  Net capital and aggregate indebtedness change from day to day, but on June 30, 2005, optionsXpress, Inc. had net capital of approximately $4,451 million and net capital requirements of $467 million. The ratio of aggregate indebtedness to net capital at June 30, 2005 was 1.65 to 1.

Our other broker-dealer subsidiary, brokersXpress LLC, is also subject to Rule 15c3-1 and Regulation 1.17.   brokersXpress, LLC, as an introducing broker under Regulation 1.17, is required to maintain net capital equal to the greater of its capital requirement under Rule 15c3-1 or $30,000.  At June 30, 2005, brokersXpress had net capital of approximately $534 million and applicable net capital requirements of $0.05 million. The ratio of aggregate indebtedness to net capital at June 30, 2005 was 0.41 to 1.

Cash provided by operating activities was $19.7 million for the six months ended June 30, 2005, compared to cash provided by operating activities of $8.5 million for the six months ended June 30, 2004. The primary reason for the increase in cash provided by operating activities is due to the loan deposit made to the Company’s clearing broker in the first quarter of 2004. This loan deposit was returned to the Company in the fourth quarter of 2004.

Cash used in investing activities was $12.1 million for the six months ended June 30, 2005, compared to cash used in investing activities of $1.3 million for the six months ended June 30, 2004. The primary reason for the increase in cash used in investing activities was the transfer of a portion of the initial public offering proceeds into short-term investments.

Cash provided by financing activities was $41.8 million for the six months ended June 30, 2005, compared to cash used in financing activities of $7.7 million for the six months ended June 30, 2004. The primary reason for the increase in cash provided by financing activities is due to the net proceeds the Company received from its initial public offering.

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Capital expenditures were $0.7 million for the quarter ended June 30, 2005, compared to $0.7 million for the quarter ended June 30, 2004, and $1.3 million for the six month period ended June 30, 2005, compared to $1.3 million for the six month period ended June 30, 2004.  Capital expenditures for the periods ended June 30, 2005 and 2004 included capitalized software costs, which we capitalize in accordance with Statement of Position (“SOP”) 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” primarily related to the development of our technology.

Item 3. - Quantitative and Qualitative Disclosures about Market Risk

We do not have material exposure to interest rate changes, commodity price changes, foreign currency fluctuations or similar market risks other than the effect they may have on trading volumes. Accordingly, we have not entered into any derivative contracts to mitigate such risks. In addition, we do not trade securities for our own account or maintain inventories of securities for sale, and therefore are not subject to equity price risk.

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

We expect this kind of exposure to increase with growth in our overall business. Because we indemnify and hold harmless our clearing firms from certain liabilities or claims, the use of margin credit, leverage and short sales may expose us to significant off-balance-sheet risk in the event that collateral requirements are not sufficient to fully cover losses that customers may incur and those customers fail to satisfy their obligations. As of June 30, 2005, we had $97,514 in margin credit extended to our customers through our clearing firms. The amount of risk to which we are exposed from the leverage we extend to our customers and from short sale transactions by our customers is unlimited and not quantifiable as the risk is dependent upon analysis of a potential significant and undeterminable rise or fall in stock prices. Our account level margin credit and leverage requirements meet or exceed those required by Regulation T of the Board of Governors of the Federal Reserve.

We have a comprehensive policy implemented in accordance with SRO standards to assess and monitor the suitability of investors to engage in various trading activities. To mitigate our risk, we also continuously monitor customer accounts to detect excessive concentration, large orders or positions, patterns of day trading and other activities that indicate increased risk to us.

Item 4. – Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future

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events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

There were no changes in our internal control over financial reporting during the six months ended June 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II - OTHER INFORMATION

Item 1. – Legal Proceedings

Many aspects of our business involve substantial risk of liability. In recent years, there has been an increasing incidence of litigation involving the securities brokerage industry, including class action suits that generally seek substantial damages, and in some cases, punitive damages. Like other securities brokerage firms, we have been threatened with, or named as a defendant in, lawsuits, arbitrations and administrative proceedings. Compliance and trading problems that are reported to federal, state and provincial securities regulators, securities exchanges or other self-regulatory organizations by dissatisfied customers are investigated by such regulatory bodies and, if pursued by such regulatory body or such customers, may rise to the level of arbitration or disciplinary action. We are also subject to periodic regulatory audits and inspections.

We are not, nor are our subsidiaries, currently a party to any litigation that we believe could have a material adverse effect on our business, financial condition or operating results. The NASD, through a number of Wells letters delivered to us, is considering disciplinary action against us for potential violations of the NASD Order Audit Trail System reporting rules, including failure to maintain adequate procedures and/or supervise. The probability of a finding against us on these pending charges is unknown, and the potential fines or other disciplinary action for these kinds of violations of NASD rules varies, but we believe that settlements for such violations range from $10,000 for single violations to $60,000 for settlement of a number of violations. We have responded to or are in the process of responding to these letters.  In addition, the Company is corresponding with its regulators about matters raised during regulatory examinations or subsequent to regulatory 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.

In July 2004, the Ontario Securities Commission advised us that it was considering enforcement action against us for conducting business with customers located in Ontario without being registered. If the Ontario Securities Commission or the securities commissions of other Canadian provinces proceed with an enforcement action, we could choose to defend against any allegations relating to violations of Canadian registration requirements, pursue settlement to resolve the matter and/or withdraw completely from doing business in Canada. Based on other brokerage firms settling similar matters with the Ontario Securities Commission, we anticipate that if we choose to settle this matter, we may be required to pay a penalty. We recorded a reserve of $420,000 in the third quarter of 2004, which we believe is a reasonable estimate of our total exposure relating to this issue.

Item 6. - Exhibits

31.1         Certification of David S. Kalt, Principal Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2         Certification of David A. Fisher, Principal Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1         Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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Signatures

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

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