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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the quarterly period ended December 31, 1999

Commission file number 1-11921

E*TRADE Group, Inc.
(Exact name of registrant as specified in its charter)

Delaware 94-2844166
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or
organization)

4500 Bohannon Drive, Menlo Park, CA 94025
(Address of principal executive offices and zip code)

Registrant's telephone number, including area code: (650) 331-6000

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:

As of February 7, 2000, the number of shares outstanding of the
registrant's common stock was 289,095,417.

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E*TRADE Group, Inc.
Form 10-Q/A Quarterly Report
For the Quarter Ended December 31, 1999

Table of Contents

Page
----
Part I--Financial Information

Item 1. Financial Statements

Consolidated Statements of Operations.................................................. 3

Consolidated Balance Sheets............................................................ 4

Condensed Consolidated Statements of Cash Flows........................................ 5

Notes to Consolidated Financial Statements............................................. 6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 15

Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 38

Part II--Other Information

Item 1. Legal and Administrative Proceedings................................................... 40

Item 2. Changes in Securities and Use of Proceeds.............................................. 42

Item 3. Defaults Upon Senior Securities........................................................ 42

Item 4. Submission of Matters to a Vote of Security Holders.................................... 42

Item 5. Other Information...................................................................... 42

Item 6. Exhibits and Reports on Form 8-K....................................................... 42

Signatures..................................................................................... 44

----------------

UNLESS OTHERWISE INDICATED, REFERENCES TO "COMPANY" MEAN E*TRADE GROUP,
INC. AND ITS SUBSIDIARIES.

This Form 10-Q/A is being filed to give retroactive effect to the Company's
acquisition of Telebanc Financial Corporation on January 12, 2000, which was
accounted for as a pooling of interests (see Note 10 to the consolidated
financial statements). Other than the acquisition of Telebanc Financial
Corporation, the inclusion of certain additional exhibits, and updates to Part
II Item 1. Legal and Administrative Proceedings, this Form 10-Q/A has not been
updated to give effect to any items addressed in documents filed with the SEC
subsequent to December 31, 1999.

E*TRADE(R) and the E*TRADE logo are registered trademarks of E*TRADE
Securities, Inc. All other products, trademarks or service marks mentioned in
this document or any document incorporated by reference herein are trademarks
or service marks of E*TRADE Group, Inc., its subsidiaries, or other companies
with which they are associated or with which they have a business
relationship.

----------------

FORWARD-LOOKING STATEMENTS

Certain statements in this discussion and analysis, including statements
regarding the Company's strategy, financial performance and revenue sources,
are forward-looking statements based on current expectations and entail
various risks and uncertainties. The Company's actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth
under "Risk Factors" and elsewhere in this report. Readers are urged to
carefully review and consider the various disclosures made by the Company in
this report and in the Company's other reports filed with the SEC, including
the Company's Annual Report on Form 10-K/A as filed with the SEC, that attempt
to advise interested parties of certain risks and factors that may affect the
Company's business. Readers are cautioned not to place undue reliance on these
forward-looking statements to reflect events or circumstances occurring after
the date hereof. The following should be read in conjunction with the
Company's financial statements and notes thereto.

PART I. Financial Information

Item 1. Financial Statements

E*TRADE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)

Three months ended
December 31,
--------------------
1999 1998
--------- ---------

Revenues:
Transaction revenues................................... $ 152,312 $ 60,320
Interest income........................................ 157,197 61,040
Global and institutional............................... 33,699 28,106
Other.................................................. 19,283 8,250
--------- ---------
Gross revenues....................................... 362,491 157,716
Interest expense....................................... (94,312) (38,019)
Provision for loan losses.............................. (537) (280)
--------- ---------
Net revenues......................................... 267,642 119,417
--------- ---------
Cost of services......................................... 111,507 50,237
--------- ---------
Operating expenses:
Selling and marketing.................................. 129,680 57,709
Technology development................................. 36,380 14,566
General and administrative............................. 42,078 20,366
Amortization of goodwill and other intangibles......... 2,025 760
Merger-related expenses................................ 5,787 --
--------- ---------
Total operating expenses............................. 215,950 93,401
--------- ---------
Total cost of services and operating expenses........ 327,457 143,638
--------- ---------
Operating loss........................................... (59,815) (24,221)
--------- ---------
Non-operating income (expense):
Corporate interest income--net......................... 1,789 5,409
Gain on sale of investments............................ 31,316 --
Unrealized gain on venture fund........................ 25,453 --
Equity in income (losses) of investments............... (3,889) 14
Other.................................................. 153 (44)
--------- ---------
Total non-operating income........................... 54,822 5,379
--------- ---------
Pre-tax loss............................................. (4,993) (18,842)
Income tax benefit....................................... (697) (8,481)
Minority interest in subsidiary.......................... 495 571
--------- ---------
Net loss................................................. (4,791) (10,932)
Preferred stock dividends................................ -- 60
--------- ---------
Loss applicable to common stock.......................... $ (4,791) $ (10,992)
========= =========
Loss per share:
Basic and Diluted...................................... $ (0.02) $ (0.04)
========= =========
Shares used in computation of loss per share:
Basic and Diluted...................................... 282,505 257,860

See notes to consolidated financial statements.

E*TRADE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

December September 30,
31, 1999 1999
----------- -------------
(Unaudited)

ASSETS
------

Cash and equivalents.................................. $ 297,298 $ 124,801
Cash and investments required to be segregated under
Federal or other regulations......................... 811,153 104,500
Brokerage receivables--net............................ 4,243,618 2,912,581
Mortgage-backed securities............................ 2,025,192 1,426,053
Loans receivable--net................................. 2,422,252 2,154,509
Investments........................................... 1,086,944 830,329
Property and equipment--net........................... 194,351 178,854
Goodwill and other intangibles........................ 372,987 17,211
Other assets.......................................... 284,842 159,386
----------- ----------
Total assets........................................ $11,738,637 $7,908,224
=========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------

Liabilities:
Brokerage payables.................................. $ 4,758,423 $2,824,212
Banking deposits.................................... 2,714,204 2,162,682
Borrowings by bank subsidiary....................... 1,760,158 1,267,474
Bank loan payable................................... 107,785 --
Accounts payable, accrued and other liabilities..... 417,830 203,971
----------- ----------
Total liabilities................................. 9,758,400 6,458,339
----------- ----------
Company-obligated mandatorily redeemable preferred
capital securities of subsidiary trusts holding
solely junior subordinated debentures of the
Company and other mandatorily redeemable preferred
securities......................................... 30,600 30,584
----------- ----------

Commitments and contingencies

Shareowners' equity:
Common stock, $.01 par: shares authorized,
600,000,000; shares issued and outstanding:
December 31, 1999, 288,259,448;
September 30, 1999, 275,145,791.................... 2,883 2,751
Additional paid-in capital.......................... 1,611,428 1,269,167
Unearned ESOP shares................................ (1,970) (2,122)
Accumulated deficit................................. (13,155) (8,364)
Accumulated other comprehensive income.............. 350,451 157,869
----------- ----------
Total shareowners' equity......................... 1,949,637 1,419,301
----------- ----------
Total liabilities and shareowners' equity......... $11,738,637 $7,908,224
=========== ==========

See notes to consolidated financial statements.

E*TRADE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

Three Months Ended
December 31,
------------------------
1999 1998
----------- -----------

Net cash provided by (used in) operating activities.. $ (72,889) $ 82,981
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities.......... (1,135,729) (2,207,993)
Proceeds from sales, maturities of and principal
payments on available-for-sale securities......... 592,661 2,007,804
Net increase in loans held for investment.......... (271,299) (142,458)
Purchase of investments............................ (23,865) (777)
Proceeds from sales of investments................. 39,393 --
Restricted deposits................................ (49,759) --
Cash used in acquisitions.......................... (26,707) --
Purchases of property and equipment, net of capital
lease............................................. (33,716) (4,443)
Proceeds from the sale of foreclosed real estate... 213 265
Release of unearned shares held by Employee Stock
Ownership Plan.................................... 152 60
Equity investments in subsidiaries-net............. (176) (295)
----------- -----------
Net cash used in investing activities.......... (908,832) (347,837)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in banking deposits................... 551,521 90,187
Advances from the Federal Home Loan Bank of
Atlanta........................................... 946,000 529,500
Payments on advances from the Federal Home Loan
Bank of Atlanta................................... (730,000) (265,000)
Net increase (decrease) in securities sold under
agreements to repurchase.......................... 276,684 (75,307)
Proceeds from issuance of common stock............. 7,937 1,822
Proceeds from bank loans payable, net of
transaction costs................................. 102,535 --
Dividends paid on trust preferred securities....... (495) (571)
Other.............................................. 36 114
----------- -----------
Net cash provided by financing activities...... 1,154,218 280,745
----------- -----------
INCREASE IN CASH AND EQUIVALENTS..................... 172,497 15,889
CASH AND EQUIVALENTS--Beginning of period............ 124,801 71,317
----------- -----------
CASH AND EQUIVALENTS--End of period.................. $ 297,298 $ 87,206
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest ............................ $ 79,667 $ 38,596
Cash paid for income taxes......................... $ 1,153 $ 47
Non-cash investing and financing activities:
Unrealized gain on available-for-sale
securities...................................... $ 325,159 $ 30,433
Assets acquired under capital lease obligations... $ 31,698 $ --
Acquisitions, net of cash acquired:
Common stock issued and stock options assumed.. $ 323,967 --
Cash paid, less acquired....................... 26,707 --
Liabilities assumed............................ 6,000 --
Carrying value of joint-venture investment..... 5,343 --
----------- -----------
Fair value of assets acquired (including
goodwill of $357,397)......................... $ 362,017
=========== ===========

See notes to consolidated financial statements.

E*TRADE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.--BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements
include E*TRADE Group, Inc., a financial services holding company, and its
subsidiaries (collectively, the "Company"), including E*TRADE Securities, Inc.
("E*TRADE Securities"), a securities broker-dealer, Telebanc Financial
Corporation ("Telebanc"), a provider of financial services, and TIR (Holdings)
Limited ("TIR"), a provider of global securities brokerage and other related
services to institutional clients. The primary business of Telebanc is the
activities conducted by Telebank and Telebanc Capital Markets, Inc. ("TCM").
Telebank is a federally chartered savings bank that provides deposit accounts
insured by the Federal Deposit Insurance Corporation ("FDIC") to customers
nationwide. TCM is a funds manager and registered broker-dealer.

These interim consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC")
and, in the opinion of management, reflect all normal recurring adjustments
necessary to present fairly the financial position, results of operations and
cash flows for the periods presented in conformity with accounting principles
generally accepted in the United States of America. All significant
intercompany accounts and transactions have been eliminated. These interim
consolidated financial statements should be read in conjunction with the
audited annual consolidated financial statements and notes thereto included in
the Company's Annual Report to Shareowners on Form 10-K/A for the fiscal year
ended September 30, 1999.

The consolidated financial statements of the Company have been prepared to
give retroactive effect to the acquisition of Telebanc on January 12, 2000,
which was accounted for as a pooling of interests (see Note 10).

NOTE 2.--BROKERAGE RECEIVABLES--NET AND PAYABLES

Brokerage receivables--net and payables consist of the following (in
thousands):

December 31, September 30,
1999 1999
------------ -------------

Receivable from customers and non-customers (less
allowance for doubtful accounts of $2,955 at
December 31, 1999 and $975 at September 30,
1999)............................................ $3,782,599 $2,559,283
Receivable from brokers, dealers and clearing
organizations:
Net settlement and deposits with clearing
organizations................................... 34,092 20,066
Deposits paid for securities borrowed............ 396,829 306,326
Securities failed to deliver..................... 4,423 7,508
Other............................................ 25,675 19,398
---------- ----------
Total brokerage receivables--net................ $4,243,618 $2,912,581
========== ==========

Payable to customers and non-customers............ $1,286,794 $ 946,760
Payable to brokers, dealers and clearing
organizations:
Deposits received for securities loaned.......... 3,434,902 1,806,590
Securities failed to receive..................... 14,370 7,235
Other............................................ 22,357 63,627
---------- ----------
Total brokerage payables........................ $4,758,423 $2,824,212
========== ==========

Receivable from and payable to brokers, dealers and clearing organizations
result from the Company's brokerage activities. Receivable from customers and
non-customers represents credit extended to finance their purchases of
securities on margin. At December 31, 1999 and September 30, 1999, credit
extended to customers

and non-customers with respect to margin accounts was $3,776 million and
$2,452 million, respectively. Securities owned by customers and non-customers
are held as collateral for amounts due on margin balances (the value of which
is not reflected on the accompanying consolidated balance sheets). Payable to
customers and non-customers represents free credit balances and other customer
and non-customer funds pending completion of securities transactions. The
Company pays interest on certain customer and non-customer credit balances.

NOTE 3.--INVESTMENTS

Investments are comprised of trading and available-for-sale debt and equity
securities, as defined under the provisions of SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Also included in
investments are investments in entities in which the Company owns between 20%
and 50% or has the ability to exercise significant influence, accounted for
under the equity method.

The carrying amounts of investments are shown below (in thousands):

December 31, September 30,
1999 1999
------------ -------------

Trading securities................................ $ 17,673 $ 38,269
Available-for-sale investment securities.......... 934,877 685,555
Equity method investments:
Joint ventures (see Note 10).................... 13,285 20,862
Archipelago..................................... 25,162 25,149
Venture funds................................... 65,473 36,270
E*OFFERING...................................... 15,898 11,391
KAP Group......................................... 2,000 2,000
Other investments................................. 12,576 10,833
---------- --------
Total investments................................. $1,086,944 $830,329
========== ========

Publicly-traded Equity Securities

Included in available-for-sale securities are investments in several
companies that are publicly-traded and carried at fair value. These companies
include Knight/Trimark Inc., CriticalPath, Digital Island, Message Media, E-
LOAN and Versus. During the first quarter of fiscal 2000, the Company sold
shares of Knight/Trimark generating proceeds of $30.0 million, resulting in a
pre-tax gain of $29.9 million. Unrealized gains related to these investments
were $610.2 million and $282.3 million at December 31, 1999 and September 30,
1999, respectively. There were no unrealized losses at December 31, 1999 and
September 30, 1999. Certain of these investments are currently subject to sale
restriction agreements.

Equity Method Investments

The Company made a $25 million contribution to the E*TRADE eCommerce Fund,
L.P. (the "Fund") on October 1, 1999. The Fund has committed capital of
approximately $100 million, $75 million of which was raised from third party
investors. The Fund invests in early to mid-stage Internet companies focused
on e-commerce, infrastructure tools, communication and services. The Company
received a general and limited partnership interest of approximately 28% in
the Fund. Through the Fund, the Company is able to leverage its own investment
capital, expand the scope of its strategic investments (beyond financial
services) and keep it in a position to capitalize on leading-edge
technologies. The Fund is managed by its General Partner, E*TRADE Ventures I,
LLC (the "General Partner"). Christos M. Cotsakos, the Chairman of the Board
of Directors and Chief Executive Officer of the Company, and Thomas
Bevilacqua, Chief Strategic Investment Officer, are the managing members of
the General Partner. The Company is a non-managing member of the General
Partner. The General Partner receives an annual management fee of
approximately 1.75% of the total committed capital.

The management fee is paid in its entirety to the Company and is used to
offset the costs and expenses of its corporate development group. In addition,
to the extent that the Fund generates profits, 20% are allocated to the
General Partner as a carried interest. As members of the General Partner, the
Company is entitled to receive 50% of such amount and Messrs. Cotsakos and
Bevilacqua are each entitled to receive 25% of such amount, provided that up
to one-fifth of the Company's interest can be allocated by the managing
members to Company personnel. The Company also has limited partnership
interests in two other unrelated venture capital funds.

In the quarter ended December 31, 1999, the Company invested an additional
$5,000,000 in E*OFFERING in the form of a subordinated note, which was
utilized by E*OFFERING for its Internet-based investment banking activities.
The note has been classified as part of the investment at December 31, 1999
and was subsequently repaid in January 2000. E*OFFERING has since completed
additional rounds of financing whereby the Company's ownership position was
reduced to approximately 28%.

NOTE 4.--COMPREHENSIVE INCOME

On October 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which requires that an enterprise report, by major
components and as a single total, the change in net assets during the period
from non-owner sources. The reconciliation of net loss to comprehensive income
is as follows (in thousands):

Three Months
Ended December
31,
------------------
1999 1998
-------- --------

Net loss................................................... $ (4,791) $(10,932)
Changes in other comprehensive income:
Unrealized gain on available-for-sale securities, net of
tax..................................................... 192,498 17,710
Cumulative translation adjustments....................... 84 658
-------- --------
Total comprehensive income............................. $187,791 $ 7,436
======== ========

NOTE 5.--LOSS PER SHARE

The Company reported a net loss for the three months ended December 31,
1999 and 1998; therefore, the calculation of diluted net loss per share does
not include common stock equivalents as it would result in a reduction of net
loss per share. If the Company had reported net income for the three months
ended December 31, 1999 and 1998, there would have been 20,234,000 and
15,308,000 additional shares in the calculation of diluted earnings per share,
respectively.

NOTE 6.--BANK LOANS

In November 1999, the Company obtained a $50 million line of credit under
an agreement with a bank that expires in November 2000. The line of credit is
collateralized by investment securities that are owned by the Company.
Borrowings under the line of credit bear interest at 0.35% above LIBOR. The
agreement requires the Company to meet certain financial covenants; as of
December 31, 1999, the Company was in compliance with all such covenants. As
of December 31, 1999, the Company had $34.8 million outstanding under this
line of credit.

In December 1999, the Company obtained a $150 million line of credit
agreement with a syndicate of banks that expires on March 31, 2000. The line
of credit is collateralized by publicly-traded investments owned by the
Company. Borrowings under the line of credit bear interest at 0.25% above
LIBOR. The agreement requires the Company to meet certain financial covenants
and prohibits the assumption of any major debt, except for equipment leases;
as of December 31, 1999, the Company was in compliance with all such
covenants. As of December 31, 1999, the Company had $70.0 million outstanding
under this line of credit.

NOTE 7.--COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES

In June 1997, Telebanc formed Telebanc Capital Trust I ("TCT I"), which in
turn sold, at par, 10,000 shares of trust preferred securities, Series A,
liquidation amount of $1,000, for a total of $10.0 million. TCT I is a
business trust formed for the purpose of issuing capital securities and
investing the proceeds in junior subordinated debentures issued by Telebanc.
These junior subordinated debentures, which are the sole assets of TCT I, have
a principal amount of $10.0 million and bear interest at an annual rate of
11.0%. The junior subordinated debentures mature in 2027.

In July 1998, Telebanc formed Telebanc Capital Trust II ("TCT II"), a
business trust formed solely for the purpose of issuing capital securities.
TCT II sold, at par, 1,100,000 shares of Beneficial Unsecured Securities,
Series A, with a liquidation amount of $25 per share, for a total of $27.5
million and invested the net proceeds in Telebanc's 9.0% Junior Subordinated
Deferrable Interest Debentures, Series A. These Junior Subordinated Deferrable
Interest Debentures, Series A, which are the sole assets of TCT II, have a
principal amount of $27.5 million and mature in 2028.

All of the capital securities of TCT I and TCT II (together the "Trusts")
are owned by Telebanc. The guarantees for the Trusts, together with
obligations under the trust agreements as assumed in the Company's acquisition
of Telebanc, and the indenture and junior subordinated debentures, constitute
a full, irrevocable and unconditional guarantee by the Company of the capital
securities issued by TCT I and TCT II.

NOTE 8.--REGULATORY REQUIREMENTS

E*TRADE Securities is subject to the Uniform Net Capital Rule (the "Rule")
under the Securities Exchange Act of 1934 administered by the Securities and
Exchange Commission ("SEC") and the National Association of Securities
Dealers, Inc. ("NASD"), which requires the maintenance of minimum net capital.
E*TRADE Securities has elected to use the alternative method permitted by the
Rule, which requires that the Company maintain minimum net capital equal to
the greater of $250,000 or two percent of aggregate debit balances arising
from customer transactions, as defined. E*TRADE Securities had amounts in
relation to the Rule as follows (in thousands, except percentage data):

December 31, September 30,
1999 1999
------------ -------------

Net capital..................................... $239,353 $162,729
Percentage of aggregate debit balances.......... 6.0% 6.2%
Required net capital............................ $ 79,218 $ 52,206
Excess net capital.............................. $160,135 $110,523

Under the alternative method, a broker-dealer may not repay subordinated
borrowings, pay cash dividends or make any unsecured advances or loans to its
parent or employees if such payment would result in net capital of less than
5% of aggregate debit balances or less than 120% of its minimum dollar amount
requirement.

TIR's brokerage subsidiary companies are also subject to net capital
requirements. These companies are located in the United States, Australia,
Hong Kong, Ireland, the Philippines and the United Kingdom. The companies
outside the United States have various and differing capital requirements, all
of which were met at December 31, 1999 and September 30, 1999. The net capital
requirements of TIR's brokerage subsidiary companies located in the United
States are summarized as follows:

TIR Securities, Inc. and TIR Investor Select, Inc.--TIR Securities, Inc.
and TIR Investor Select, Inc. are subject to the Rule and are required to
maintain net capital equal to the greater of $5,000 or 6.67% of aggregate
indebtedness, as defined. The Rule also requires that the ratio of
aggregate indebtedness to net capital shall not exceed 15 to 1. TIR
Securities, Inc. is also subject to the Commodity Futures Trading
Commission ("CFTC") Regulation 1.17, which requires the maintenance of net
capital of 4% of the funds

required to be segregated in accordance with Section 4d(2) of the
Commodities Exchange Act or $30,000, whichever is greater. TIR Securities,
Inc. is required to maintain net capital in accordance with the Rule or
CFTC Regulation 1.17, whichever is greater.

Marquette Securities, Inc.--Marquette Securities, Inc. is subject to the
Rule and is required to maintain net capital equal to the greater of
$250,000 or 6.67% of aggregate indebtedness, as defined. The Rule also
requires that the ratio of aggregate indebtedness to net capital shall not
exceed 15 to 1.

The table below summarizes the minimum capital requirements for the above
companies (in thousands):

December 31, 1999 September 30, 1999
------------------------ ------------------------
Required Excess Required Excess
net Net net net Net net
capital capital capital capital capital capital
-------- ------- ------- -------- ------- -------

TIR Securities, Inc...... $ 65 $1,398 $1,333 $ 82 $2,289 $2,207
TIR Investor Select,
Inc..................... 5 39 34 5 254 249
Marquette Securities,
Inc..................... 250 445 195 250 445 195

Telebank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators that, if undertaken, could have a direct material effect on
Telebank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Telebank must meet specific
capital guidelines that involve quantitative measures of Telebank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. Telebank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require Telebank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets and of Tier I capital to average assets.
Management believes, as of December 31, 1999, that Telebank meets all capital
adequacy requirements to which it is subject. As of December 31, 1999 and
September 30, 1999, the Office of Thrift Supervision ("OTS") categorized
Telebank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, Telebank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the following table. There are no conditions or events
since that notification that management believes have changed the
institution's category.

Telebank's actual capital amounts and ratios are presented in the table
below (dollars in thousands):

Required To Be
Well
Capitalized
Under Prompt
Required For Corrective
Capital Adequacy Action
Actual Purposes Provisions
--------------- ---------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
--------- ----- ---------- ----- --------- -----

As of December 31, 1999:
Core Capital (to adjusted
tangible assets).......... $ 441,987 8.83% >$200,314 >4.0% >$250,392 > 5.0%
Tangible Capital (to
tangible assets).......... $ 441,987 8.83% >$ 75,118 >1.5% N/A N/A
Tier I Capital (to risk
weighted assets).......... $ 441,987 21.08% N/A N/A >$125,828 > 6.0%
Total Capital (to risk
weighted assets).......... $ 449,174 21.42% >$167,771 >8.0% >$209,713 >10.0%

As of September 30, 1999:
Core Capital (to adjusted
tangible assets).......... $ 440,469 11.20% >$ 157,320 >4.0% >$196,651 > 5.0%
Tangible Capital (to
tangible assets).......... $ 440,469 11.20% >$ 58,995 >1.5% N/A N/A
Tier I Capital (to risk
weighted assets).......... $ 440,469 25.97% N/A N/A >$101,768 > 6.0%
Total Capital (to risk
weighted assets).......... $ 441,170 26.36% >$ 135,691 >8.0% >$169,614 >10.0%

Telebank is subject to certain restrictions on the amount of dividends it
may declare without prior regulatory approval. At December 31, 1999,
approximately $128.4 million of Telebank's retained earnings was available for
dividend declaration.

NOTE 9.--COMMITMENTS, CONTINGENCIES AND OTHER REGULATORY MATTERS

As of December 31, 1999, the Company had commitments to purchase $26.0
million in fixed rate and $180.8 million in variable rate loans, and
certificates of deposit scheduled to mature in less than one year
approximating $1.1 billion. In the normal course of business, the Company
makes various commitments to extend credit and incur contingent liabilities
that are not reflected in the balance sheets.

The Company is a defendant in civil actions arising in the normal course of
business, including several putative class action filings. The matters alleged
by the plaintiffs include:

. False and deceptive advertising and other communications regarding the
Company's commission rates and ability to timely execute and confirm
online transactions;

. Damages arising from alleged problems in accessing accounts and placing
orders;

. Damages arising from system interruptions, including those occurring on
February 3, 4 and 5, 1999; and

. Unfair business practices regarding the extent to which initial public
offering shares are made available to the Company's customers.

These proceedings are at early stages, and the Company is unable to predict
their ultimate outcome; however, the Company believes that all of these claims
are without merit and intends to defend against them vigorously. An
unfavorable outcome in any of these matters, if they are not covered by
insurance, could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, even if the
ultimate outcomes are resolved in favor of the Company, the defense of such
litigation could entail considerable cost and the diversion of efforts of
management, either of which could have a material adverse effect on the
Company's results of operation.

From time to time, the Company has been threatened with, or named as a
defendant in, lawsuits, arbitrations and administrative claims. Compliance and
trading problems that are reported to the NASD or the SEC by dissatisfied
customers are investigated by the NASD or the SEC, and, if pursued by such
customers, may rise to the level of arbitration or disciplinary action. One or
more of such claims or disciplinary actions decided adversely against the
Company could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company is also subject to
periodic regulatory audits and inspections.

The securities industry is subject to extensive regulation under federal,
state and applicable international laws. As a result, the Company is required
to comply with many complex laws and rules and its ability to so comply is
dependent in large part upon the establishment and maintenance of a qualified
compliance system. The Company is aware of several instances of its
noncompliance with applicable regulations.

NOTE 10.--ACQUISITIONS

On January 12, 2000, the Company completed the acquisition of Telebanc.
Telebanc is the holding company for Telebank, an Internet-based bank. Under
the terms of the agreement, Telebanc shareowners received 1.05 shares of
E*TRADE common stock for each share of Telebanc common stock representing a
total of 35.6 million shares of the Company's common stock. The Company also
assumed all outstanding Telebanc options, which were converted to options to
purchase approximately 5,494,000 shares of the Company's common stock. The
acquisition was accounted for as a pooling of interests and, accordingly, all
prior financial data of the Company has been restated to include the
historical operations of Telebanc. There were no significant intercompany
transactions requiring elimination for any prior periods presented. The
information below reflects the operations of E*TRADE (as reported) and
Telebanc on a standalone and consolidated basis (in thousands):

Three Months Ended December 31,
----------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
E*TRADE Proforma E*TRADE Proforma
(as reported) Telebanc Combined (as reported) Telebanc Combined
------------- -------- -------- ------------- -------- --------

Net revenues............ $244,219 $23,423 $267,642 $110,511 $8,906 $119,417
Net income (loss)....... $ (5,214) $ 423 $ (4,791) $(11,587) $ 655 $(10,932)

During the quarter ended December 31, 1999, the Company acquired 100%
ownership of three of its foreign affiliates, E*TRADE Nordic AB, a Swedish
company, E*TRADE @ Net Bourse S.A., a French company, and the remaining
portion of its E*TRADE UK joint venture, for an aggregate purchase price of
$362 million. The purchase price was composed of 11.7 million shares of the
Company's common stock, cash of $26.7 million and the assumption of options of
the affiliates. The purchase price exceeded the fair value of the assets
acquired by $357 million, which was recorded as goodwill to be amortized over
20 years.

The pro forma information below assumes that the acquisitions occurred at
the beginning of fiscal 1998 and includes the effect of amortization of
goodwill from that date (in thousands, except per share amounts):

Three Months Ended
December 31,
--------------------
1999 1998
--------- ---------

Net revenues.......................................... $ 267,642 $ 119,417
Net loss.............................................. $ (10,259) $ (15,874)
Basic and diluted loss per share...................... $ (0.03) $ (0.06)

The pro forma information is for informational purposes only and is not
necessarily indicative of the results of future operations nor results that
would have been achieved had the acquisitions taken place at the beginning of
fiscal 1998.

NOTE 11.--SEGMENT INFORMATION

The Company provides securities brokerage and related investment and
financial services. Following the acquisitions of TIR and Telebanc (see Note
10), the Company has classified the operations of E*TRADE's historical
business, TIR and Telebanc as separate reportable segments due to the
relatively short operating history of the combined operations of E*TRADE's
historical business with TIR and Telebanc and due to Telebanc's online banking
services which represent a new line of business. This is the manner in which
management currently evaluates their operating performance. Financial
information for the Company's reportable segments is presented in the table
below, and the totals are equal to the Company's consolidated amounts as
reported in the consolidated financial statements.

E*TRADE
Group TIR Telebanc Total
---------- ------- ---------- -----------
(in thousands)

Quarter ended December 31,
1999:
Interest--net of interest
expense..................... $ 41,398 $ 154 $ 21,333 $ 62,885
Non-interest revenue--net of
provision for loan losses... 169,496 33,171 2,090 204,757
---------- ------- ---------- -----------
Net revenues................. $ 210,894 $33,325 $ 23,423 $ 267,642
========== ======= ========== ===========
Operating income (loss)...... $ (64,241) $ 2,224 $ 2,202 $ (59,815)
Pre-tax income (loss)........ $ (9,431) $ 2,189 $ 2,249 $ (4,993)
Segment assets............... $6,627,493 $66,774 $5,044,370 $11,738,637

Quarter ended December 31,
1998:
Interest--net of interest
expense..................... $ 16,167 $ 233 $ 6,621 $ 23,021
Non-interest revenue--net of
provision of loan losses.... 66,665 27,446 2,285 96,396
---------- ------- ---------- -----------
Net revenues................. $ 82,832 $27,679 $ 8,906 $ 119,417
========== ======= ========== ===========
Operating income (loss)...... $ (28,424) $ 2,250 $ 1,953 $ (24,221)
Pre-tax income (loss)........ $ (23,118) $ 2,316 $ 1,960 $ (18,842)
Segment assets............... $2,241,518 $73,144 $2,283,341 $ 4,598,003

No one single customer accounted for greater than 10% of total revenues for
the quarters ended December 31, 1999 or 1998.

NOTE 12.--RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The new standard
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives will be reported in the statement of
operations or as a deferred item, depending on the use of the derivatives and
whether they qualify for hedge accounting. The key criterion for hedge
accounting is that the derivative must be highly effective in achieving
offsetting changes in fair value or cash flows of the hedged items during the
term of the hedge. The effective date of SFAS No. 133 was delayed to fiscal
2001 by the issuance of SFAS No. 137. The Company expects to implement SFAS
133 as of October 1, 2000. The Company has not yet determined the effect, if
any, of adopting this new standard.

NOTE 13.--SUBSEQUENT EVENTS

Debt Offering

On February 7, 2000, the Company completed a Rule 144A offering of $500
million convertible subordinated notes due February 2007. The notes are
convertible, at the option of the holder, into a total of 21,186,441 shares of
the Company's common stock at a conversion price of $23.60 per share. The
notes bear interest at 6%, payable semiannually, and are non-callable for
three years and may then be called by the Company at a premium, which declines
over time. The holders have the right to require redemption at a premium in
the event of a change in control or other defined redemption event. On March
17, 2000, the initial purchasers exercised an option to purchase an additional
$150 million of notes, which are convertible into 6,355,932 shares of common
stock. The Company expects to use $150 million of the net proceeds to
refinance outstanding senior secured indebtedness and the remaining net
proceeds for general corporate purposes, including financing the future growth
of the business. Debt issuance costs of $19.1 million will be included in
other assets and amortized to interest expense over the term of the notes. Had
these securities been issued as of the beginning of the quarter ended December
31, 1999, loss per share would have been increased to $0.05 due to the
additional net interest expense associated with the securities.

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 consolidated
financial statements and notes thereto included elsewhere in this Form 10-Q/A.
This discussion contains forward-looking statements, including statements
regarding the Company's strategy, financial performance and revenue sources
which involve risks and uncertainties. The Company's actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth in
the section entitled "Risk Factors" and elsewhere in this Form 10-Q/A.

Results of Operations

Revenue Detail (in millions, except percentage and transaction data)

The following table sets forth the components of revenue and the quarterly
change for the three months ended December 31, 1999 and December 31, 1998:

Three Months
Ended
December 31,
-------------
1999 1998 Change
------ ------ ------

Transaction revenues:
Commissions ............................................. $136.7 $ 52.3 161%
Order flow............................................... 15.6 8.0 95%
------ ------
Total transaction revenue............................ 152.3 60.3 153%
------ ------
Interest income:
Brokerage-related activities............................. 75.2 25.8 191%
Banking-related lending activities....................... 82.0 35.2 133%
------ ------
Total interest income................................ 157.2 61.0 158%
------ ------
Global and institutional .................................. 33.7 28.1 20%
Other...................................................... 19.3 8.3 133%
------ ------
Gross revenues....................................... 362.5 157.7 130%
------ ------
Interest expense:
Brokerage-related activities............................. 33.6 9.4 257%
Banking-related borrowing activities..................... 60.7 28.6 112%
------ ------
Total interest expense............................... 94.3 38.0 148%
Provision for loan losses.................................. 0.6 0.3 92%
------ ------
Net revenues......................................... $267.6 $119.4 124%
====== ======

Revenues

The Company's net revenues increased to $267.6 million in the first quarter
of fiscal 2000, up 124% from $119.4 million in the equivalent period of fiscal
1999.

Transaction Revenues

Transaction revenues increased to $152.3 million in the first quarter of
fiscal 2000, up 153% from $60.3 million in the equivalent period in fiscal
1999. Transaction revenues consist of commission revenues and payments for
order flow. Growth in transaction revenues reflected the overall high level of
trading volume in U.S. financial markets, as well as the increase in new
customer accounts.

Commission revenues for the first quarter of fiscal 2000 increased to
$136.7 million, up 161% from $52.3 million for the same period a year ago.
Brokerage transactions for the first quarter of fiscal 2000 totaled 8.5
million or an average of 133,000 transactions per day. This is an increase of
209% over the average daily brokerage transaction volume of 43,000 in the
prior year. The decline in commissions per trade was a result of promotional
activities, changes in the mix of revenue generating transactions and the
August 1999 implementation of the new Power E*TRADE program, a component of
which provides reduced commissions for active traders.

Payments for order flow increased to $15.6 million for the first quarter of
fiscal 2000, up 95% from $8.0 million for the same period a year ago. As a
percentage of transaction revenue, payments for order flow have decreased to
10% for the first quarter of fiscal 2000, down from 13% for the same period a
year ago. Payments for order flow did not increase at the same rate as
transactions due to changes in the order flow mix, a decrease in the average
shares per equity transaction, and the continued impact of the SEC's order
handling rules.

Interest Income and Expense

Interest income from brokerage-related activities is comprised of interest
earned by the Company on credit extended to its customers to finance their
purchases of securities on margin, and fees on its customer assets invested in
money market accounts. Interest expense from brokerage-related activities is
comprised of interest paid to customers on certain credit balances, interest
paid to banks and interest paid to other broker-dealers through the Company's
stock loan program. Interest income from banking-related activities reflects
interest earned on assets, consisting primarily of loans receivable and
mortgage-backed securities. Interest expense from banking-related activities
is comprised of interest-bearing liabilities which include customer deposits,
advances from the Federal Home Loan Bank of Atlanta, and other borrowings.

Brokerage interest income increased to $75.2 million in the first quarter
of fiscal 2000, up 191% from $25.8 million for the same period a year ago.
This increase primarily reflects the overall increase in average customer
margin balances, which increased 193% to $2.9 billion in the first quarter of
fiscal 2000, from $1.0 billion in the same period a year ago, and average
customer money market fund balances, which increased 145% to $5.3 billion in
the first quarter of fiscal 2000, from $2.2 billion in the same period a year
ago. Brokerage interest expense increased to $33.6 million, up 257% from $9.4
million in the comparable prior year quarter, due to an overall increase in
average customer credit balances, which increased 277% to $1.1 billion in the
first quarter of fiscal 2000, from $0.3 billion in the same period a year ago
and average stock loan balances, which increased 299% to $2.1 billion in the
first quarter of fiscal 2000, from $0.5 billion in the same period a year ago.

Banking interest income increased to $82.0 million in the first quarter of
fiscal 2000, up 133% from $35.2 million for the same period a year ago. This
increase reflects an increase in the average interest-earning asset balances
coupled with an increase in the average interest yield. Average interest-
earning assets increased 130% to $4.5 billion during the first quarter of
fiscal 2000, from $2.0 billion in the same period a year ago. The average
yield increased to 7.27% in the first quarter of fiscal 2000 from 7.13% in the
same period a year ago. Interest expense from banking activities increased to
$60.7 million in the first quarter of fiscal 2000, up 112% from $28.6 million
for the same period a year ago. This increase reflects an increase in the
average interest-bearing liabilities partially offset by a decrease in the
average cost of the borrowings. Average interest-bearing liabilities increased
118% to $4.1 billion during the first quarter of fiscal 2000, from $1.9
billion in the same period a year ago. The average cost decreased to 5.85% in
the first quarter of fiscal 2000 from 5.90% in the same period a year ago.

The following table presents average balance data and income and expense
data for the Company's banking operations and the related interest yields and
rates for the quarters ended December 31, 1999 and 1998. The table also
presents information for the periods indicated with respect to net interest
margin, an indicator of an institution's profitability. Another indicator of
profitability is net interest spread, which is the difference between the
weighted average yield earned on interest-earning assets and weighted average
rate paid on interest-bearing liabilities. Interest includes the incremental
tax benefit of tax exempt income.

Quarter Ended December 31, Quarter Ended December 31,
1999 1998
------------------------------ ------------------------------
Interest Average Interest Average
Average Income/ Annualized Average Income/ Annualized
Balance Expense Yield/Cost Balance Expense Yield/Cost
---------- -------- ---------- ---------- -------- ----------
(In thousands)
(unaudited)

Interest-earning banking
assets:
Loans receivable,
net.................. $2,337,629 $43,698 7.48% $ 857,065 $16,761 7.82%
Interest-bearing
deposits............. 45,524 581 5.06 13,091 193 5.85
Mortgage-backed and
related available-
for-sale securities
..................... 1,887,358 33,369 7.07 856,042 14,225 6.65
Available-for-sale
investment
securities........... 187,998 3,163 6.96 221,743 3,523 6.35
Investment in FHLB
stock................ 37,837 740 7.75 16,779 318 7.50
Trading securities.... 23,823 467 7.84 3,333 67 8.07
---------- ------- ---------- -------
Total interest-
earning banking
assets............. 4,520,169 $82,018 7.27 1,968,053 $35,087 7.13
------- -------
Non-interest-earning
banking assets......... 166,762 87,866
---------- ----------
Total banking
assets............. $4,686,931 $2,055,919
========== ==========
Interest-bearing banking
liabilities:
Retail deposits....... $2,304,878 $33,379 5.74% $1,072,181 $15,831 5.86%
Brokered callable
certificates of
deposit.............. 79,180 1,305 6.54 67,038 1,122 6.64
FHLB advances......... 739,185 10,903 5.77 318,040 4,447 5.47
Other borrowings...... 990,692 15,099 5.96 402,650 5,829 5.66
Subordinated debt,
net.................. -- -- -- 29,814 884 11.85
---------- ------- ---------- -------
Total interest-
bearing banking
liabilities........ 4,113,935 $60,686 5.85 1,889,723 $28,113 5.90
------- -------
Non-interest-bearing
banking liabilities.... 66,564 62,708
---------- ----------
Total banking
liabilities........ 4,180,499 1,952,431
Total banking
shareowners'
equity............. 506,432 103,488
---------- ----------
Total banking
liabilities and
shareowners'
equity............. $4,686,931 $2,055,919
========== ==========
Excess of interest-
earning banking assets
over interest-bearing
banking liabilities/net
interest income........ $ 406,234 $21,332 $ 78,330 $ 6,974
========== ======= ========== =======
Net interest spread..... 1.42% 1.23%
====== ======
Net interest margin (net
yield on interest-
earning banking
assets)................ 1.90% 1.42%
====== ======
Ratio of interest-
earning banking assets
to interest-bearing
banking liabilities.... 109.87% 104.15%
====== ======
Return on average total
banking assets......... 0.04% 0.13%
====== ======
Return on average net
banking assets......... 0.33% 2.53%
====== ======
Equity to total banking
assets................. 10.81% 5.03%
====== ======

Global and Institutional

Global and institutional revenues increased to $33.7 million for the first
quarter of fiscal 2000, up 20% from $28.1 million for the same period one year
ago. Global and institutional revenues are comprised of revenues from TIR's
operations, as well as licensing fees and royalties from E*TRADE
International's affiliates. TIR's revenues increased to $33.1 million in the
first quarter of fiscal 2000, up 23% from $27.0 million for the same period a
year ago. These increases are primarily attributable to strong market
conditions in Asia and Europe, as well as an increase in futures commissions.
TIR revenues are largely comprised of commissions from institutional trade
executions; for the first quarter of fiscal 2000 approximately 55% of TIR's
transactions were from outside the U.S., and approximately 82% were cross-
border transactions.

Other Revenues

Other revenues increased to $19.3 million in the first quarter of fiscal
2000, up 133% from $8.3 million for the comparable period in fiscal 1999.
Other revenues increased primarily due to growth in mutual funds revenue,
revenues from fees charged for advertising on the Company's Web site,
investment banking revenue, E*TRADE Business Solutions revenue, gains from the
sales and prepayments of banking-related held-for-investment loans and
available-for-sale securities, and brokerage and banking-related fees for
services.

Provision for Loan Losses

The provision for loan losses increased to $537,000 in the first quarter of
fiscal 2000, up 92% from $280,000 for the comparable period in fiscal 1999.
The provision for loan losses recorded reflects increases to the Company's
allowance for loan losses based upon management's review and assessment of the
risk in the Company's loan portfolio, as well as the level of charge-offs to
the Company's allowance for loan losses. The increase in the provision for
loan losses in the first quarter of fiscal 2000 primarily reflects the growth
in the Company's loan portfolio. As of December 31, 1999, the total loan loss
allowance was $7.6 million, or 0.32% of total loans outstanding. The total
loan loss allowance as of September 30, 1999 was $7.1 million, or 0.33% of
total loans outstanding. As of December 31, 1999, the general loan loss
allowance was $7.2 million, or 66.1% of total non-performing assets of $10.9
million. As of September 30, 1999, the general loan loss allowance was $6.7
million, or 78.8% of total non-performing assets of $8.5 million.

Cost of Services

Total cost of services increased to $111.5 million for the first quarter of
fiscal 2000, up 122% from $50.2 million in the comparable period in fiscal
1999. Cost of services includes expenses related to the Company's clearing
operations, customer service activities, Web site content costs, system
maintenance, communication expenses and depreciation. These increases reflect
the overall increase in customer transactions processed by the Company, a
related increase in customer service inquiries, and operations and maintenance
costs associated with the Company's technology centers in Rancho Cordova,
California, and Alpharetta, Georgia. Cost of services as a percentage of net
revenues was 42% in the first quarter of fiscal 2000 and in the comparable
period in fiscal 1999.

Operating Expenses

Selling and marketing expenses increased to $129.7 million in the first
quarter of fiscal 2000, up 125% from $57.7 million in the comparable period in
fiscal 1999. The increases reflect expenditures for advertising placements,
creative development and collateral materials resulting from a variety of
advertising campaigns directed at building brand name recognition, growing the
customer base and market share, and maintaining customer retention rates.
Beginning in the fourth quarter of fiscal 1998, the Company significantly
expanded its marketing efforts including the launch of Destination E*TRADE,
expanded national television advertising and new strategic marketing alliances
with key business partners, such as AOL and Yahoo!. These increased
expenditure levels are expected to continue throughout fiscal 2000.

Technology development expenses increased to $36.4 million in the first
quarter of fiscal 2000, up 150% from $14.6 million in the comparable period in
fiscal 1999. The increased level of expense was incurred to

enhance the Company's existing product offerings, including maintenance of the
Company's Web site, and reflects the Company's continuing commitment to invest
in new products and technologies.

General and administrative expenses increased to $42.1 million in the first
quarter of fiscal 2000, up 107% from $20.4 million in the comparable period in
fiscal 1999. These increases were the result of personnel additions and the
development of administrative functions resulting from the overall growth in
the Company.

Amortization of goodwill of $2.0 million in the first quarter of fiscal
2000 primarily consists of amortization of goodwill related to the acquisition
of three of the Company's foreign affiliates. Goodwill is amortized over 15-20
years.

Merger-related expenses of $5.8 million were recognized in the first
quarter of fiscal 2000 and primarily relate to transaction costs associated
with the Telebanc acquisition. Additional costs associated with the Company's
mergers and acquisitions are expected to be incurred throughout fiscal 2000,
including a charge of approximately $30 million to be recorded in the second
quarter of fiscal 2000 relating to the acquisition of Telebanc.

Non-operating Income (Expense)

Corporate interest income was $1.8 million and $5.4 million for the
quarters ended December 31, 1999 and 1998, respectively, which primarily
resulted from interest earned on the Company's investments.

In the first quarter of fiscal 2000, the Company continued to liquidate
portions of its investment portfolio and recognized realized gains of $31.3
million.

The Company also recorded unrealized gains of $25.5 million on its
participation in the E*TRADE eCommerce Fund L.P., which was formed in the
first quarter of fiscal 2000.

Equity in losses of investments was $3.9 million in the first quarter of
fiscal 2000, which resulted from the Company's minority ownership in its
investments that are accounted for under the equity method. These investments
include E*TRADE Japan, E*OFFERING and Archipelago. The Company expects that
these companies will continue to invest in the development of their products
and services, and will incur operating losses throughout fiscal 2000, which
will result in future charges being recorded by the Company to reflect its
proportionate share of losses.

Income Tax Benefit

Income tax benefit represents the benefit for federal and state income
taxes at an effective tax rate of 14.0% for the first quarter of fiscal 2000,
and 45.0% for the comparable period in fiscal 1999. The rate for the first
quarter of fiscal 2000 reflects the impact of non-deductible merger-related
expenses and amortization of goodwill arising from the foreign acquisitions.

Minority Interest in Subsidiary

Minority interest in subsidiary was $495,000 and $571,000 in the first
quarters of fiscal 2000 and 1999, respectively, resulting from Telebanc's
interest payments to subsidiary trusts which have issued Company-obligated
mandatorily redeemable capital securities and which hold junior subordinated
debentures of the Company.

Year 2000 Compatibility

Many computer systems use only two digits to identify a specific year and
therefore may not accurately recognize and handle dates beyond the year 1999.
Additionally, the year 2000 is a leap year and computer systems may not
accurately recognize and handle February 29, 2000. If not corrected, these
computer applications could fail or create erroneous results in the year 2000.
The Company utilizes, and is dependent

upon, data processing systems and software to conduct its business. The data
processing systems and software include those developed and maintained by the
Company's third-party data processing vendors and software that is run on in-
house computer networks. Due to the Company's dependence on computer
technology to conduct its business, and the dependence of the financial
services industry on computer technology, the nature and impact of year 2000
processing failures on the Company's business, financial position, results of
operations or cash flows could be material.

In addition, the method of trading employed by the Company is heavily
dependent on the integrity of electronic systems outside of the Company's
control, such as Internet service providers, and third-party software, such as
Internet browsers. A failure of any such system in the trading process, even
for a short time, could cause interruption to the Company's business. The year
2000 issue could lower demand for the Company's services while increasing the
Company's costs. The combination of these factors, while not quantifiable,
could have a material adverse impact on the Company's financial results.

During the first quarter of fiscal 1998, the Company initiated a review and
assessment of its hardware and software to evaluate whether they will function
properly in the year 2000 without material errors or interruptions. The
Company's year 2000 efforts addressed the Company's computer systems and
equipment, as well as business partner relationships considered essential to
the Company's ability to conduct its business. The objective of the Company's
year 2000 project was to identify the core business processes and associated
computer systems and equipment that may be at risk due to the use of two-digit
year dates. Once identified, the systems and equipment were rated for risk and
prioritized for conversion or replacement according to their impact on core
business operations. The Company's year 2000 project followed a structured
approach in analyzing and mitigating year 2000 issues. This approach consisted
of six phases: awareness, assessment, remediation, validation, implementation
and industry-wide testing. The work associated with each phase was performed
simultaneously with other phases of the project, depending on the nature of
the work performed and the technology and business requirements of the
specific business unit. For example, awareness was an ongoing effort and
occurred in each phase. As part of this project, the Company reviewed its
vendor relationships (suppliers, alliances and third-party providers) in an
attempt to assess their ability to meet the year 2000 challenge. This plan
sought to ensure that all of the Company's business partners and service
providers were also year 2000 ready. In addition, written contingency plans
were developed for all mission critical systems to address any unexpected year
2000 failures.

Status of Year 2000 Efforts

The Company completed each of the phases planned for year 2000 readiness.
The Company believes that all material year 2000 problems with internally-
managed hardware and software revealed as a result of its evaluation were
remedied; however, there can be no assurances that these efforts have solved
all possible year 2000 issues, and there is a risk that other problems, not
presently known to the Company, will be discovered that could present a
material risk of disruption to the Company's operations and result in material
adverse consequences to the Company. Furthermore, there can be no assurance
that the Company will not experience unexpected delays in remediation of any
year 2000 issues that have not yet surfaced. Any inability to remediate such
issues in a timely manner could cause a material disruption of the Company's
business.

All mission-critical vendors were contacted and each indicated that their
hardware and software are year 2000 ready. The Company has relied upon
representations by vendors as to their year 2000 readiness and generally has
not attempted to perform independent verification of the accuracy of those
representations. There can be no assurance that all third parties provided
accurate and complete information or that all their systems are fully year
2000 capable. If these vendors fail to adequately address year 2000 issues for
the products and services they provide to the Company, this failure could have
a material adverse impact on the Company's operations and financial results.
The Company is dependent on systems, such as the Internet, telecommunications
and electrical systems, which are not within its control. Any failure by such
systems could also prevent the Company from delivering its services to its
customers, which could have a material adverse effect on the Company's
business, results of operations and financial condition.

In addition, other third parties' year 2000 processing failures, not
currently identified by the Company as mission-critical, could have an
unexpectedly severe material adverse impact on the Company's systems and
operations. In many cases, the Company is relying on assurances from suppliers
that new and upgraded information systems and other products are year 2000
capable. The Company cannot be sure that its tests were adequate or that, if
problems are identified, they will be addressed by the supplier in a timely
and satisfactory way.

On May 31, 1999, the Company entered into a definitive agreement to acquire
Telebanc Financial Corporation ("Telebanc"), a holding company for Telebank, a
branchless bank, which provides banking products and services over the
Internet. On July 13, 1999, the Company entered into a definitive agreement to
acquire TIR (Holdings) Limited ("TIR"), an international financial services
company offering global multi-currency securities execution and settlement
services, and a leader in providing independent research to institutional
investors. The Company has been advised by both Telebanc and TIR that they had
ongoing programs to identify and remediate any year 2000 issues. With respect
to TIR and Telebanc, the Company has relied upon the representations of
management or former management with respect to year 2000 readiness, including
representations and warranties that products and services and internal
computer systems are year 2000 ready, that appropriate inquiries of its key
suppliers of services and products have been made, and that TIR and Telebanc
did not incur any material expenses associated with securing year 2000
readiness of its products or services, internal computer systems or the
computer systems of key suppliers or customers. The TIR acquisition closed on
August 31, 1999 and the Telebanc acquisition closed on January 12, 2000;
therefore, the Company's operating results were not impacted by the additional
assessment, remediation, validation, implementation and testing costs that
these entities incurred. While the managements of Telebanc and TIR have made
certain representations with respect to their year 2000 readiness, the Company
can give no assurances as to the adequacy of the year 2000 efforts of Telebanc
or TIR or their impact to the Company.

The Company spent approximately $8.2 million on year 2000 readiness efforts
through December 31, 1999, and currently estimates that it will spend an
additional $300,000. These expenditures will consist primarily of compensation
for employees and contractors dedicated to this project and the operation of
command centers through January 7, 2000. The Company funded all year 2000
related costs through operating cash flows. These costs did not result in
increased information technology expenditures because they were funded through
a reallocation of the Company's overall development spending. In accordance
with accounting principles generally accepted in the United States of America,
such expenditures were expensed as incurred. The costs of addressing year 2000
issues did not have a material adverse impact on the Company's financial
position.

The foregoing year 2000 discussion and the information contained herein are
provided as a Year 2000 Readiness Disclosure.

Liquidity and Capital Resources

The Company has financing facilities totaling $425 million to meet the
needs of E*TRADE Securities that would be collateralized by customer
securities. There were no borrowings outstanding under these lines on December
31, 1999. The Company also has a short term loan for up to $150 million,
collateralized by publicly- traded investment securities owned by the Company,
of which $70 million was outstanding as of December 31, 1999, and a short term
line of credit for up to $50.0 million, collateralized by marketable
securities owned by the Company, of which $34.8 million was outstanding as of
December 31, 1999. In addition, the Company has entered into numerous
agreements with other broker-dealers to provide financing under the Company's
stock loan program.

Company at a premium, which declines over time. The holders have the right to
require redemption at a premium in the event of a change in control or other
defined redemption event. On March 17, 2000, the initial purchasers exercised
an option to purchase an additional $150 million of notes, convertible into
6,355,932 shares of common stock. The Company expects to use approximately
$150 million of the net proceeds to refinance outstanding senior secured
indebtedness and the remaining net proceeds for general corporate purposes,
including financing the future growth of the business. Debt issuance costs of
$19.1 million will be included in other assets and amortized to interest
expense over the term of the notes. Had these securities been issued as of the
beginning of the quarter ended December 31, 1999, net loss per share would
have increased to $0.05 due to the additional net interest expense associated
with the securities.

The Company currently anticipates that its available cash resources and
credit facilities, along with the convertible subordinated debt offering
described above, will be sufficient to meet its presently anticipated working
capital and capital expenditure requirements for at least the next 12 months.
However, the Company may need to raise additional funds in order to support
more rapid expansion, develop new or enhanced services and products, respond
to competitive pressures, acquire complementary businesses or technologies or
take advantage of unanticipated opportunities. The Company's future liquidity
and capital requirements will depend upon numerous factors, including costs
and timing of expansion of research and development efforts and the success of
such efforts, the success of the Company's existing and new service offerings
and competing technological and market developments. The Company's forecast of
the period of time through which its financial resources will be adequate to
support its operations is a forward-looking statement that involves risks and
uncertainties, and actual results could vary. The factors described earlier in
this paragraph will impact the Company's future capital requirements and the
adequacy of its available funds. If additional funds are raised through the
issuance of equity securities, the percentage ownership of the shareowners of
the Company will be reduced, shareowners may experience additional dilution in
net book value per share or such equity securities may have rights,
preferences or privileges senior to those of the holders of the Company's
common stock. There can be no assurance that additional financing will be
available when needed on terms favorable to the Company, if at all.

If adequate funds are not available on acceptable terms, the Company may be
unable to develop or enhance its services and products, take advantage of
future opportunities or respond to competitive pressures, any of which could
have a material adverse effect on the Company's business, financial condition
and operating results.

Cash used in operating activities was $72.9 million in the first quarter of
fiscal 2000 compared to cash provided by operating activities of $83.0 million
in the first quarter of fiscal 1999. Cash used in operating activities
primarily reflects the increase in segregated cash balances of $706.7 million,
offset by the increase in brokerage-related liabilities in excess of assets of
$603.2 million. Cash provided by operating activities in the prior year period
was $83.0 million, which primarily reflects net loss of $10.9 million offset
by the Company's minority interest and equity portion of losses from
investments of $79.2 million and the increase in brokerage-related liabilities
in excess of assets of $36.2 million, and the impact of depreciation and
amortization of $5.5 million.

Cash used in investing activities was $908.8 million in the first quarter
of fiscal 2000 and $347.8 million in the comparable period in fiscal 1999. In
the first quarter of fiscal 2000, cash used in investing activities was the
result of the excess of purchases of investment securities over the net
sale/maturity of investments of $543.1 million, an increase in restricted
deposits of $50.0 million, the purchase of $23.9 million of investments, $33.7
million of property and equipment, an increase in loans held for investment of
$271.3 million and $26.7 million paid for the acquisition of three foreign
affiliates, offset by the proceeds from sales of investments of $39.4 million.
This compares to cash used in investing activities in the first quarter of
fiscal 1999 where the Company had an excess of purchases of investment
securities over the net sale/maturity of investments of $200.2 million, the
purchase of $0.7 million of investments, $4.4 million of property and
equipment, and an increase in loans held for investment of $142.5 million.

Cash provided by financing activities was $1.2 billion in the first quarter
of fiscal 2000, compared with $280.7 million in fiscal 1999. Cash provided by
financing activities in the first quarter of fiscal 2000 primarily resulted
from $1.5 billion in increased banking deposits and advances from the Federal
Home Loan Bank of Atlanta and increases in securities sold under agreements to
repurchase, offset by $730.0 million in payments on outstanding loans. Cash
provided by financing activities in the first quarter of fiscal 1999 primarily
resulted from $620.0 million in increased banking deposits and advances from
the Federal Home Loan Bank of Atlanta, offset by $265.0 million in payments on
outstanding loans and decreases in securities sold under agreements to
repurchase agreement.

RISK FACTORS

You should carefully consider the risks described below before making an
investment decision in our company. The risks and uncertainties described
below are not the only ones facing our company and there may be additional
risks that we do not presently know of or that we currently deem immaterial.
All of these risks may impair our business operations. This document also
contains forward-looking statements that involve risks and uncertainties and
actual results may differ materially as a result of certain factors, including
those set forth below and elsewhere in this filing. If any of the following
risks actually occur, our business, financial condition or results of
operations could be materially adversely affected. In such case, the trading
price of our common stock could decline, and you may lose all or part of your
investment.

In accordance with "plain English" guidelines provided by the Securities
and Exchange Commission, the risk factors have been written in the first
person.

We could suffer substantial losses and be subject to customer litigation if
our systems fail or our transaction processing is slow

We receive and process transactions mostly through the Internet, online
service providers and touch-tone telephone. Thus, we depend heavily on the
integrity of the electronic systems supporting these types of transactions,
including our internal software programs and computer systems. Our systems or
any other systems in the transaction process could slow down significantly or
fail for a variety of reasons including:

. undetected errors in our internal software programs or computer systems;

. our inability to effectively resolve any errors in our internal software
programs or computer systems once they are detected; or

. heavy stress placed on our system during certain peak trading times.

If our systems or any other systems in the transaction process slow down
significantly or fail even for a short time, our customers could suffer delays
in transaction processing, which could cause substantial losses and possibly
subject us to claims for such losses or to litigation claiming fraud or
negligence. We have experienced such systems failures and degradation in the
past, including certain days in February 1999. We could experience future
system failures and degradations, especially in foreign markets where we must
implement new transaction processing infrastructures. To promote customer
satisfaction and protect our brand name, we have, on certain occasions,
compensated customers for verifiable losses from such failures. To date,
during our systems failures, we were able to take orders by telephone,
however, with respect to our brokerage transactions, only associates with
securities brokers' licenses can accept telephone orders. An adequate number
of such associates may not be available to take customer calls in the event of
a future systems failure. We may not be able to increase our customer service
personnel and capabilities in a timely and cost-effective manner. We could
experience a number of adverse consequences as a result of these systems
failures including the loss of existing customers and the inability to attract
or retain new customers. There can be no assurance that our network structure
will operate appropriately in any of the following events:

. subsystem, component or software failure;

. a power or telecommunications failure;

. human error;

. an earthquake, fire or other natural disaster; or

. an act of God or war.

There can be no assurance that, in any such event, we will be able to
prevent an extended systems failure. Any such systems failure that interrupts
our operations could have a material adverse effect on our business,

financial condition and operating results. We have received in the past,
including as a result of our systems failures in February 1999, adverse
publicity in the financial press and in online discussion forums primarily
relating to systems failures.

Our security could be breached, which could damage our reputation and deter
customers from using our services

We must protect our computer systems and network from physical break-ins,
security breaches and other disruptive problems caused by the Internet or
other users. Computer break-ins could jeopardize the security of information
stored in and transmitted through our computer systems and network, which
could adversely affect our ability to retain or attract customers, damage our
reputation and subject us to litigation. We have in the past, and could in the
future, be subject to denial of service, vandalism and other attacks on our
systems by Internet hackers. Although we intend to continue to implement
security technology and establish operational procedures to prevent break-ins,
damage and failures, these security measures may fail. Our insurance coverage
in certain circumstances may be insufficient to cover issues that may result
from such events.

Our business could suffer if we cannot protect the confidentiality of customer
information transmitted over public networks

A significant barrier to online commerce is the secure transmission of
confidential information over public networks. We rely on encryption and
authentication technology, including cryptography technology licensed from RSA
Data Security, Inc., to provide secure transmission of confidential
information. There can be no assurance that advances in computer and
cryptography capabilities or other developments will not result in a
compromise of the RSA or other algorithms we use to protect customer
transaction data. If any such compromise of our security were to occur, it
could have a material adverse effect on our business, financial condition and
operating results.

Our quarterly results fluctuate and do not reliably indicate future operating
results

We do not believe that our historical operating results should be relied
upon as an indication of our future operating results. We expect to experience
large fluctuations in future quarterly operating results that may be caused by
many factors, including the following:

. fluctuations in the fair market value of our equity investments in other
companies, including through existing or future private investment funds
managed by us;

. fluctuations in interest rates, which will impact our investment and loan
portfolios;

. increased levels of advertising, sales and marketing expenditures for
customer acquisition, which may be affected by competitive conditions in
the marketplace;

. the timing of introductions or enhancements to online investing services
and products by us or our competitors;

. market acceptance of online financial services and products;

. the pace of development of the market for online commerce;

. changes in trading volume in securities markets;

. trends in securities and banking markets;

. domestic and international regulation of the brokerage, banking and
internet industries;

. implementation of new accounting pronouncements, such as Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities;

. changes in domestic or international tax rates;

. changes in pricing policies by us or our competitors;

. changes in strategy;

. the success of, or costs associated with, acquisitions, joint ventures or
other strategic relationships;

. changes in key personnel;

. seasonal trends;

. the extent of international expansion;

. the mix of international and domestic revenues;

. fluctuation in foreign exchange rates;

. changes in the level of operating expenses to support projected growth;
and

. general economic conditions.

We have also experienced fluctuations in the average number of customer
transactions per day. Thus, the rate of growth in customer transactions at any
given time is not necessarily indicative of future transaction activity.

Our business will suffer if we cannot effectively compete

The market for financial services over the Internet is new, rapidly
evolving and intensely competitive. We expect competition to continue and
intensify in the future. We face direct competition from financial
institutions, brokerage firms, banks, mutual fund companies, Internet portals
and other organizations. These competitors include, among others:

. America Online, Inc.;

. Ameritrade, Inc.;

. Bank of America;

. Charles Schwab & Co., Inc.;

. Citigroup, Inc.;

. CyBerCorp.com;

. Datek Online Holdings Corporation;

. DLJdirect;

. Fidelity Brokerage Services, Inc.;

. Intuit Inc.;

. Merrill Lynch, Pierce, Fenner & Smith Incorporated;

. Microsoft Money;

. National Discount Brokers;

. Net.B@nk, Inc.;

. PaineWebber Incorporated;

. Quick & Reilly, Inc.;

. Salomon Smith Barney, Inc.;

. SURETRADE, Inc.;

. TD Waterhouse Securities, Inc.;

. Wells Fargo & Company;

. WingspanBank.com; and

. Yahoo! Inc.

Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. In
addition, many of our competitors offer a wider range of services and
financial products than we do, and thus may be able to respond more quickly to
new or changing opportunities, technologies and customer requirements. Many of
our competitors also have greater name recognition and larger customer bases
that could be leveraged, thereby gaining market share from us. Such
competitors may conduct more extensive promotional activities and offer better
terms and lower prices to customers than we do, possibly even sparking a price
war in the online financial services industry. Moreover, certain competitors
have established cooperative relationships among themselves or with third
parties to enhance their services and products. For example, Charles Schwab's
One-Source mutual fund service and similar services may discourage potential
customers from using our brokerage services. Accordingly, it is possible that
new competitors or alliances among existing competitors may significantly
reduce our market share.

General financial success within the financial services industry over the
past several years has strengthened existing competitors. We believe that such
success will continue to attract new competitors, such as software development
companies, insurance companies and others, as such companies expand their
product lines. Commercial banks and other financial institutions have become
more competitive with our brokerage operations by offering their customers
certain corporate and individual financial services traditionally provided by
securities firms. The current trend toward consolidation in the commercial
banking industry could further increase competition in all aspects of our
business. Commercial banks generally are expanding their securities and
financial services activities. While we cannot predict the type and extent of
competitive services that commercial banks and other financial institutions
ultimately may offer, we may be adversely affected by such competition. To the
extent our competitors are able to attract and retain customers, our business
or ability to grow could be adversely affected. In many instances, we are
competing with such organizations for the same customers. In addition,
competition among financial services firms exists for experienced technical
and other personnel.

There can be no assurance that we will be able to compete effectively with
current or future competitors or that such competition will not have a
material adverse effect on our business, financial condition and operating
results.

Our success depends on our ability to effectively adapt to changing business
conditions

We have grown rapidly and our business and operations have changed
substantially since we began offering electronic investing services in 1992,
and Internet investing services in February 1996, and we expect this trend to
continue. Such rapid change and expansion places significant demands on our
administrative, operational, financial, and technical management and other
resources.

We expect operating expenses and staffing levels to increase substantially
in the future. In particular, we have hired and intend to hire a significant
number of additional skilled personnel, including persons with experience in
the computer, brokerage and banking industries, and, specifically, persons
with Series 7 or other broker-dealer licenses. Competition for such personnel
is intense, and there can be no assurance that we will be able to find or keep
additional suitable senior managers or technical persons or licensed
representatives in the future. In particular, we depend heavily on our chief
executive officer, president and chief operating officer and other members of
senior management, the loss of any of whom could seriously harm our business.
We also expect to expend resources for future expansion of our accounting and
internal information management systems and for a number of other new systems
and procedures. In addition, we expect that future expansion will continue to
challenge our ability to successfully hire and retain associates. If our
revenues do not keep up with operating

expenses, our information management systems do not expand to meet increasing
demands, we fail to attract, assimilate and retain qualified personnel, or we
fail to manage our expansion effectively, there could be a material adverse
effect on our business, financial condition and operating results.

The rapid growth in the use of our services has strained our ability to
adequately expand technologically. As we acquire new equipment and
applications quickly, we have less time to test and validate hardware and
software, which could lead to performance problems. We also rely on a number
of third parties to process our transactions, including online and Internet
service providers, back office processing organizations, service providers and
market-makers, all of which will need to expand the scope of the operations
they perform for us. Any backlog caused by a third party's inability to expand
sufficiently to meet our needs could have a material adverse effect on our
business, financial condition and operating results. As transaction volume
increases, we may have difficulty hiring and training qualified personnel at
the necessary pace, and the shortage of licensed personnel could cause a
backlog in the processing of brokerage orders that need review, which could
lead to not only unsatisfied customers, but also to liability for brokerage
orders that were not executed on a timely basis.

Through our Digital Financial Media initiative, we plan to deliver
interactive multimedia content and commerce through a variety of broadband
communications channels and electronic platforms. We believe that achieving
success in this strategy is essential to our ability to compete in the rapidly
evolving electronic marketplaces in which we operate. We have limited
experience in these media and our failure to execute this strategy
successfully may limit our future growth.

Our ability to attract customers and our profitability may suffer if changes
in government regulation favor our competition or restrict our business
practices

The securities and banking industries in the United States are each subject
to extensive regulation under both federal and state laws. Broker-dealers are
subject to regulations covering all aspects of the securities business,
including:

. sales methods;

. trade practices among broker-dealers;

. use and safekeeping of customers' funds and securities;

. capital structure;

. record keeping;

. advertising;

. conduct of directors, officers and employees; and

. supervision.

Because we are a self-clearing broker-dealer, we have to comply with many
complex laws and rules. These include rules relating to possession and control
of customer funds and securities, margin lending and execution and settlement
of transactions. Our ability to so comply depends largely on the establishment
and maintenance of a qualified compliance system.

Similarly, E*TRADE and Telebanc, as savings and loan holding companies, and
Telebank, as a federally chartered savings bank and subsidiary of Telebanc,
are subject to extensive regulation, supervision and examination by the Office
of Thrift Supervision ("OTS") and, in the case of Telebank, the Federal
Deposit Insurance Corporation. Such regulation covers all aspects of the
banking business, including lending practices, safeguarding deposits, capital
structure, record keeping, and conduct and qualifications of personnel.

In November 1999, the Gramm-Leach-Bliley Act was enacted into law. This act
reduces the legal barriers between banking, securities and insurance companies
will make it easier for bank holding companies to compete

directly with our securities business, as well as for our competitors in the
securities business to diversify their revenues and attract additional
customers through entry into the banking and insurance businesses. The Gramm-
Leach-Bliley Act may have a material impact on the competitive landscape that
we face.

Additionally our mode of operation and profitability may be directly
affected by:

. additional legislation;

. changes in rules promulgated by the SEC, the National Association of
Securities Dealers, Inc., ("NASD"), the Board of Governors of the Federal
Reserve System, the OTS, the various stock exchanges and other self-
regulatory organizations; or

. changes in the interpretation or enforcement of existing laws and rules.

The SEC, the NASD or other self-regulatory organizations and state
securities commissions can censure, fine, issue cease-and-desist orders or
suspend or expel a broker-dealer or any of its officers or employees. The OTS
may take similar action with respect to our banking activities. Our ability to
comply with all applicable laws and rules is largely dependent on our
establishment and maintenance of a system to ensure such compliance, as well
as our ability to attract and retain qualified compliance personnel. Our
growth has placed considerable strain on our ability to ensure such
compliance. We could be subject to disciplinary or other actions due to
claimed noncompliance in the future, which could have a material adverse
effect on our business, financial condition and operating results.

We have initiated an aggressive marketing campaign designed to bring brand
name recognition to E*TRADE. All marketing activities by E*TRADE Securities
are regulated by the NASD, and all marketing materials must be reviewed by an
E*TRADE Securities Series 24 licensed principal prior to release. The NASD has
in the past asked us to revise certain marketing materials. The NASD can
impose certain penalties for violations of its advertising regulations,
including:

. censures or fines;

. suspension of all advertising;

. the issuance of cease-and-desist orders; or

. the suspension or expulsion of a broker-dealer or any of its officers or
employees.

We do not currently solicit orders from our customers or make investment
recommendations. However, if we were to engage in such activities, we would
become subject to additional rules and regulations governing, among other
things, sales practices and the suitability of recommendations to customers.

We intend to continue expanding our business to other countries and to
broaden our customers' abilities to trade securities of non-U.S. companies and
execute other transactions through the Internet and other gateways. In order
to expand our services globally, we must comply with the regulatory controls
of each specific country in which we conduct business. Our international
expansion could be limited by the compliance requirements of other national
regulatory jurisdictions. We intend to rely primarily on local third parties
and our subsidiaries for regulatory compliance in international jurisdictions.
See "Risk Factors--We face numerous risks associated with doing business in
international markets."

There can be no assurance that other federal, state or foreign agencies
will not attempt to regulate our online and other activities. We anticipate
that we may be required to comply with record keeping, data processing and
other regulatory requirements as a result of proposed federal legislation or
otherwise. We may also be subject to additional regulation as the market for
online commerce evolves. Because of the growth in the electronic commerce
market, Congress has held hearings on whether to regulate providers of
services and transactions in the electronic commerce market. As a result,
federal or state authorities could enact laws, rules or regulations affecting
our business or operations. We may also be subject to federal, state or
foreign money transmitter laws

and state and foreign sales or use tax laws. If such laws are enacted or
deemed applicable to us, our business or operations would be rendered more
costly or burdensome, less efficient or even impossible. Any of the foregoing
could have a material adverse effect on our business, financial condition and
operating results.

Due to the increasing popularity of the Internet, laws and regulations may
be passed dealing with issues such as user privacy, pricing, content and
quality of products and services.

As required by the Gramm-Leach-Bliley Act, the SEC and OTS have recently
proposed regulations on financial privacy, to take effect in November 2000,
that will require E*TRADE Securities and Telebank to notify consumers about
the circumstances in which they may share consumers' personal information with
unaffiliated third parties and to give consumers the right to opt out of such
information sharing. Although E*TRADE Securities and Telebank already provide
such opt-out rights in our privacy policies, the regulations could require us
to modify the text and the form of presentation of our privacy policies and to
incur additional expense to ensure ongoing compliance with the regulations.

In addition, the New York Attorney General carried out an investigation of
the online brokerage industry and issued a report, citing consumer complaints
about delays and technical difficulties conducting online stock trading. SEC
Commissioner Laura Unger also issued a report on issues raised by online
brokerage, including suitability and marketing issues. Increased attention
focused upon these issues could adversely affect the growth of the online
financial services industry, which could, in turn, decrease the demand for our
services or could otherwise have a material adverse effect on our business,
financial condition and operating results.

We may be fined or forced out of business if we do not maintain the net
capital levels required by regulators

The SEC, NASD, OTS and various other regulatory agencies have stringent
rules with respect to the maintenance of specific levels of net capital by
securities broker-dealers and regulatory capital by banks. Net capital is the
net worth of a broker or dealer (assets minus liabilities), less deductions
for certain types of assets. If a firm fails to maintain the required net
capital it may be subject to suspension or revocation of registration by the
SEC and suspension or expulsion by the NASD, and could ultimately lead to the
firm's liquidation. In the past, our broker-dealer subsidiaries have depended
largely on capital contributions by us in order to comply with net capital
requirements. If such 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. Such operations may include trading
activities and the financing of customer account balances. Also, our ability
to withdraw capital from brokerage subsidiaries could be restricted, which in
turn could limit our ability to pay dividends, repay debt and redeem or
purchase shares of our outstanding stock. A large operating loss or charge
against net capital could adversely affect our ability to expand or even
maintain our present levels of business, which could have a material adverse
effect on our business, financial condition and operating results.

The table below summarizes the minimum net capital requirements for our
domestic broker-dealer subsidiaries as of December 31, 1999 (in thousands):

Required Excess
net Net net
capital capital capital
-------- -------- --------

E*TRADE Securities, Inc.......................... $79,218 $239,353 $160,135
TIR Securities, Inc.............................. 65 1,398 1,333
TIR Investor Select, Inc......................... 5 39 34
Marquette Securities, Inc........................ 250 445 195

Similarly, banks, such as Telebank, are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on a bank's operations and financial statements.
Under capital adequacy guidelines and the regulatory framework

for prompt corrective action, a bank must meet specific capital guidelines
that involve quantitative measures of a bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. A bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.

Quantitative measures established by regulation to ensure capital adequacy
require a bank to maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets and of Tier 1 capital to average assets. To be
categorized as well capitalized a bank must maintain minimum total risk-based,
Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following
table.

The table below summarizes the capital adequacy requirements for Telebank
as of December 31, 1999 (dollars in thousands):

To Be Well
Capitalized Under
Prompt Corrective
Actual Action Provisions
-------------- --------------------
Amount Ratio Amount Ratio
-------- ----- ----------- --------

Core Capital (to adjusted tangible
assets).............................. $441,987 8.83% > $ 250,392 >5.0%
Tier 1 Capital (to risk weighted
assets).............................. $441,987 21.04% > $ 126,016 >6.0%
Total Capital (to risk weighted
assets).............................. $449,174 21.39% > $ 210,027 >10.0%

As a significant portion of our revenues come from online investing services,
any downturn in the securities industry could significantly harm our business

A significant portion of our revenues in recent years has been from online
investing services, and we expect this business to continue to account for a
significant portion of our revenues in the foreseeable future. We, like other
financial services firms, are directly affected by economic and political
conditions, broad trends in business and finance and changes in volume and
price levels of securities and futures transactions. The U.S. securities
markets are characterized by considerable fluctuation and a downturn in these
markets could adversely affect our operating results. In October 1987 and
October 1989, the stock market suffered major declines, as a result of which
many firms in the industry suffered financial losses, and the level of
individual investor trading activity decreased after these events. Reduced
trading volume and prices have historically resulted in reduced transaction
revenues. When trading volume is low, our operating results may be adversely
affected because overhead remains relatively fixed. Severe market fluctuations
in the future could have a material adverse effect on our business, financial
condition and operating results. Some of our competitors with more diverse
product and service offerings might withstand such a downturn in the
securities industry better than we would. See "Risk Factors--Our business will
suffer if we cannot effectively compete."

Our brokerage business, by its nature, is subject to various other risks,
including customer default and employee misconduct and errors. We sometimes
allow customers to purchase securities on margin, therefore we are affected
because we are subject to risks inherent in extending credit. This risk is
especially great when the market is rapidly declining and the value of the
collateral we hold could fall below the amount of a customer's indebtedness.
Under specific regulatory guidelines, any time we borrow or lend securities,
we must correspondingly disburse or receive cash deposits. If we fail to
maintain adequate cash deposit levels at all times, we run the risk of loss if
there are sharp changes in market values of many securities and parties to the
borrowing and lending transactions fail to honor their commitments. Any such
losses could have a material adverse effect on our business, financial
condition and operating results.

Changes in interest rates may reduce Telebanc's profitability

The results of operations for Telebanc depend in large part upon the level
of its net interest income, that is, the difference between interest income
from interest-earning assets, such as loans and mortgage-backed securities,
and interest expense on interest-bearing liabilities, such as deposits and
borrowings. Many factors

cause changes in interest rates, including governmental monetary policies and
domestic and international economic and political conditions. If Telebanc is
unsuccessful in managing the effects of changes in interest rates, its
financial condition and results of operations could suffer.

Changes in market interest rates could reduce the value of Telebanc's
financial assets. Fixed-rate investments, mortgage-backed and related
securities and mortgage loans generally decline in value as interest rates
rise.

We could lose customers and have difficulty attracting new customers if we are
unable to quickly introduce new products and services that satisfy changing
customer needs

Our future success depends, in part, on our ability to develop and enhance
our services and products. There are significant technical risks in the
development of new services and products or enhanced versions of existing
services and products. There can be no assurance that we will be successful in
achieving any of the following:

. effectively using new technologies;

. adapting our services and products to emerging industry standards;

. developing, introducing and marketing service and product enhancements;
or

. developing, introducing and marketing new services and products.

We may also experience difficulties that could delay or prevent the
development, introduction or marketing of these services and products. Our
status as a regulated savings and loan holding company resulting from the
acquisition of Telebanc could also lead to delays in or prevent the
development, introduction and marketing of new services and products.
Additionally, these new services and products may not adequately meet the
requirements of the marketplace or achieve market acceptance. If we are unable
to develop and introduce enhanced or new services and products quickly enough
to respond to market or customer requirements, or if they do not achieve
market acceptance, our business, financial condition and operating results
will be materially adversely affected.

Our success depends upon the growth of the Internet as a commercial
marketplace

The market for financial services, particularly over the Internet, is
rapidly evolving. Consequently, demand and market acceptance for recently
introduced services and products are subject to a high level of uncertainty.
For us, this uncertainty is compounded by the risks that consumers will not
continue to adopt online commerce and that commerce on the Internet will not
adequately develop or flourish to permit us to continue to grow.

Sales of many of our services and products will depend on consumers
continuing to adopt the Internet as a method of doing business. There can be
no assurance that the Internet infrastructure will continue to be able to
support the demands placed on it by this continued growth. In addition, the
Internet could be adversely affected by slow development or adoption of
standards and protocols to handle increased Internet activity, or due to
increased governmental regulation. Moreover, critical issues including
security, reliability, cost, ease of use, accessibility and quality of service
remain unresolved and may negatively affect the growth of Internet use or
commerce on the Internet.

Adoption of online commerce by individuals who have relied upon traditional
means of commerce in the past will require such individuals to accept new and
very different methods of conducting business. Moreover, our brokerage and
banking services over the Internet involve a new approach to securities
trading and banking which require extensive marketing and sales efforts to
educate prospective customers regarding their uses and benefits. For example,
consumers who trade with traditional brokerage firms, or even discount
brokers, may be reluctant or slow to change to obtaining brokerage services
over the Internet. Also, concerns about security and privacy on the Internet
may hinder the growth of online investing and banking, which could have a
material adverse effect on our business, financial condition and operating
results.

The market price of our common stock, like other technology stocks, may be
highly volatile and any significant decrease in our stock price may make it
difficult for our shareowners to sell their stock

The market price of our common stock has been, and is likely to continue to
be, highly volatile and subject to wide fluctuations due to various factors,
many of which may be beyond our control, including:

. quarterly variations in operating results;

. volatility in the stock market;

. volatility in the general economy;

. changes in interest rates;

. announcements of acquisitions, technological innovations or new software,
services or products by us or our competitors; and

. changes in financial estimates and recommendations by securities
analysts.

In addition, there have been large price and volume fluctuations in the
stock market which have affected the market prices of securities of many
technology, Internet and financial services companies, often unrelated to the
operating performance of such companies. These broad market fluctuations may
adversely affect the market price of our common stock. In the past, volatility
in the market price of a company's securities has often led to securities
class action litigation. Such litigation could result in substantial costs and
a diversion of our attention and resources, which could have a material
adverse effect on our business, financial condition and operating results.

Our success depends on our ability to protect our intellectual property and
any failure to do so could substantially harm our business

Our success and ability to compete are dependent to a significant degree on
our proprietary technology. We rely primarily on copyright, trade secret and
trademark law to protect our technology and our brand. Effective trademark
protection may not be available for our trademarks. Although we have
registered the trademark "E*TRADE" in the United States and certain other
countries, and have certain other registered trademarks, there can be no
assurance that we will be able to secure significant protection for these
trademarks. Our competitors or others may adopt product or service names
similar to "E*TRADE," thereby impeding our ability to build brand identity and
possibly leading to customer confusion. Our inability to adequately protect
the name "E*TRADE" could have a material adverse effect on our business,
financial condition and operating results. Despite any precautions we take, a
third party may be able to copy or otherwise obtain and use our software or
other proprietary information without authorization or to develop similar
software independently. Policing unauthorized use of our technology is made
especially difficult by the global nature of the Internet and difficulty in
controlling the ultimate destination or security of software or other data
transmitted on it. The laws of other countries may afford us little or no
effective protection for our intellectual property. There can be no assurance
that the steps we take will prevent misappropriation of our technology or that
agreements entered into for that purpose will be enforceable. In addition,
litigation may be necessary in the future to:

. enforce our intellectual property rights;

. protect our trade secrets;

. determine the validity and scope of the proprietary rights of others; or

. defend against claims of infringement or invalidity.

Such litigation, whether successful or unsuccessful, could result in
substantial costs and diversion of resources, either of which could have a
material adverse effect on our business, financial condition and operating
results.

We may face claims for infringement of third parties' proprietary rights and
it could be costly and time-consuming to defend against such claims, even
those without merit

We have received in the past, and may receive in the future, notices of
claims of infringement of other parties' proprietary rights. There can be no
assurance that claims for infringement or invalidity--or any indemnification
claims based on such claims--will not be asserted or prosecuted against us.
Any such claims, with or without merit, could be time consuming and costly to
defend or litigate, divert our attention and resources or require us to enter
into royalty or licensing agreements. There can be no assurance that such
licenses would be available on reasonable terms, if at all, and the assertion
or prosecution of any such claims could have a material adverse effect on our
business, financial condition and operating results.

Our attempts to enter new markets may be unsuccessful, which could decrease
our earnings and consequently decrease the market value of our common stock

One element of our strategy is to leverage the E*TRADE brand and technology
to enter new markets. No assurance can be given that we will be able to
successfully adapt our proprietary processing technology for use in other
markets. Even if we do adapt our technology, no assurance can be given that we
will be able to compete successfully in any such new markets. There can be no
assurance that our pursuit of any of these opportunities will be successful.
If these efforts are not successful, we could realize less than expected
earnings, which in turn could result in a decrease in the market value of our
common stock. Furthermore, such efforts may divert management attention or
inefficiently utilize our resources.

As a result of our recent merger with Telebanc, we face numerous new risks,
including possible failure to successfully integrate and assimilate Telebanc's
operations with our own

On January 12, 2000, we acquired Telebanc. Telebanc is an online provider
of Internet banking services. This represents a new line of business for us.
No assurance can be given that we will be successful in this market. We may
experience difficulty in assimilating Telebanc's products and services with
our own and we may not be able to integrate successfully the employees of
Telebanc into our organization. These difficulties may be exacerbated by the
geographical distance between our various locations and Telebanc's Virginia
location. If we fail to successfully integrate Telebanc's operations with our
own, our operating results and business could be adversely affected.

Telebank holds a loan portfolio consisting primarily of one- to four-family
residential loans. A critical component of the banking industry is the ability
to accurately assess credit risk and establish corresponding loan loss
reserves. Our status as a regulated savings and loan holding company resulting
from the acquisition of Telebanc could also lead to delays or prevent the
development, introduction and marketing of new services and products. This is
a new industry for E*TRADE and accordingly, we are dependent upon Telebanc
management and employees to advise us in this area.

Due to our recent merger with Telebanc, we may be restricted in expanding our
activities, and our inexperience with being regulated as a savings and loan
holding company could negatively affect both E*TRADE and Telebanc

Upon the completion of our acquisition of Telebanc and its subsidiary,
Telebank, on January 12, 2000, we became subject to regulation as a savings
and loan holding company. As a result, we are required to register with the
OTS and file periodic reports, and are subject to examination by the OTS.
Under financial modernization legislation recently enacted into law, our
activities are restricted to activities that are financial in nature and
certain real estate-related activities. We may also make merchant banking
investments in companies whose activities are not financial in nature, if
those investments are engaged in for the purpose of appreciation and ultimate
resale of the investment, and we do not manage or operate the company. Such
merchant banking investments may be subject to maximum holding periods and
special capital requirements.

We believe that all of our existing activities and investments are
permissible under the new legislation, but the OTS has not yet issued
regulations or otherwise interpreted the new statute. Even if all of our
existing activities and investments are permissible, under the new legislation
we will be constrained in pursuing future new activities that are not
financial in nature. We are also limited in its ability to invest in other
savings and loan holding companies, and all transactions between E*TRADE and
Telebank must be conducted on an arms' length basis.

In addition to regulation of E*TRADE and Telebanc as savings and loan
holding companies, federal savings banks such as Telebank are subject to
extensive regulation of their activities and investments, their
capitalization, their risk management policies and procedures, and their
relationship with affiliated companies. In addition, as a condition to
approving our acquisition of Telebanc, the OTS imposed various notice and
other requirements, primarily a requirement that Telebank obtain prior
approval from the OTS of any future material changes to Telebanc's business
plan. These regulations and conditions, and our inexperience with them, could
affect our ability to realize synergies from the merger, and could negatively
affect both E*TRADE and Telebank following the merger.

We face numerous risks associated with doing business in international markets

One component of our strategy is a planned increase in efforts to attract
more international customers. To date, we have limited experience in providing
brokerage services internationally, and Telebanc has had only limited
experience providing banking services to customers outside the United States.
There can be no assurance that our international licensees or subsidiaries
will be able to market our branded services and products successfully in
international markets. In addition, there are certain risks inherent in doing
business in international markets, particularly in the heavily regulated
brokerage and banking industries, such as:

. unexpected changes in regulatory requirements, tariffs and other trade
barriers;

. difficulties in staffing and managing foreign operations;

. the level of investor interest in cross-border trading;

. authentication of on-line customers;

. political instability;

. fluctuations in currency exchange rates;

. reduced protection for intellectual property rights in some countries;

. seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world;

. the level of adoption of the Internet in international markets; and

. potentially adverse tax consequences.

Any of the foregoing could adversely impact the success of our
international operations. In addition, because some of these international
markets are served through license arrangements with others, we rely upon
these third parties for a variety of business and regulatory compliance
matters. We have limited control over the management and direction of these
third parties. We run the risk that their action or inaction could harm our
operations and/or the goodwill associated with our brand name. Additionally,
certain of our international licensees have the right to sell sub-licenses.
Generally, we have less control over sub-licensees than we do over licensees.
As a result, the risk to our operations and goodwill is higher. There can be
no assurance that one or more of the factors described above will not have a
material adverse effect on our future international operations, if any, and,
consequently, on our business, financial condition and operating results.

Any failure to successfully integrate the companies that we acquire into our
existing operations or failure to maintain our relationships with strategic
partners could harm our business

We recently acquired Telebanc, TIR and some of our European licensees. We
may also acquire other companies or technologies in the future, and we
regularly evaluate such opportunities. Acquisitions and mergers entail
numerous risks, including:

. difficulties in the assimilation of acquired operations and products;

. diversion of management's attention from other business concerns;

. amortization of acquired intangible assets; and

. potential loss of key employees of acquired companies.

We have limited experience in assimilating acquired organizations into our
operations. No assurance can be given as to our ability to integrate
successfully any operations, technology, personnel, services or new businesses
or products that might be acquired in the future. Failure to successfully
assimilate acquired organizations could have a material adverse effect on our
business, financial condition and operating results.

We have established a number of strategic relationships with online and
Internet service providers, as well as software and information service
providers. There can be no assurance that any such relationships will be
maintained, or that if they are maintained, they will be successful or
profitable. Additionally, we may not be able to develop any new relationships
of this type in the future. We also make investments, either directly or
through affiliated private investment funds, in equity securities of other
companies without acquiring control of those companies. There may be no public
market for the securities of the companies we invest in. In order for us to
realize a return on our investment, such companies must be sold or
successfully complete a public offering of their securities. There can be no
assurance that such companies will be acquired or complete a public offering
or that such an acquisition or public offering will allow us to sell our
securities at a profit, or at all.

Due to the foregoing factors, quarterly revenues and operating results are
difficult to forecast. We believe that period-to-period comparisons of our
operating results will not necessarily be meaningful and you should not rely
on them as any indication of future performance. Our future quarterly
operating results may not consistently meet the expectations of securities
analysts or investors, which in turn may have an adverse effect on the market
price of our common stock.

We have substantially increased our indebtedness, which may make it more
difficult to make payments on our debts or to obtain financing

Subsequent to the end of fiscal 1999, as a result of our sale of our 6%
convertible subordinated notes, E*TRADE will incur $650 million of additional
indebtedness, increasing our ratio of debt to equity (expressed as a
percentage) from approximately 96% to approximately 129% as of December 31,
1999, on a pro forma basis giving effect to the sales of the notes and the
application of proceeds therefrom. We may incur substantial additional
indebtedness in the future. The level of our indebtedness, among other things,
could

. make it difficult for us to make payments on our debt;

. make it difficult for us to obtain any necessary financing in the future
for working capital, capital expenditures, debt service requirements or
other purposes;

. limit our flexibility in planning for, or reacting to, changes in our
business; and

. make us more vulnerable in the event of a downturn in our business.

There can be no assurance that we will be able to meet our debt service
obligations, including obligations under the notes.

Loss or reductions in revenue from order flow rebates could harm our business

Order flow revenue as a percentage of revenue has decreased over the past
three years. There can be no assurance that payments for order flow will
continue to be permitted by the SEC, the NASD or other regulatory agencies,
courts or governmental units. Loss of any or all of these revenues could have
a material adverse effect on our business, financial condition and operating
results.

We may incur costs to avoid investment company status and may suffer adverse
consequences if we are deemed to be an investment company

We may incur significant costs to avoid investment company status and may
suffer other adverse consequences if we are deemed to be an investment company
under the Investment Company Act of 1940, which is commonly referred to as the
"1940 Act".

A company may be deemed to be an investment company if it owns investment
securities with a value exceeding 40% of its total assets, subject to certain
exclusions. After giving effect to the offering, we will have substantial
short-term investments until the net proceeds from the offering can be
deployed. In addition, we and our subsidiaries have made minority equity
investments in other companies that may constitute investment securities under
the 1940 Act. In particular, many of our publicly traded equity investments,
which are owned directly by us or through related venture funds, are deemed to
be investment securities. Although our investment securities currently
comprise less than 40% of our total assets, the value of these minority
investments has fluctuated in the past, and substantial appreciation in some
of these investments may, from time to time, cause the value of our investment
securities to exceed 40% of our total assets. These factors may result in us
being treated as an "investment company" under the 1940 Act.

We believe we are primarily engaged in a business other than investing,
reinvesting, owning, holding, or trading securities for our account and,
therefore, are not an investment company within the meaning of the 1940 Act.
However, in the event that such exemption is not available and the 40% limit
were to be exceeded (including through fluctuations in the value of our
investment securities), we may need to reduce our investment securities as a
percentage of our total assets. This reduction can be attempted in a number of
ways, including the sale of investment securities and the acquisition of non-
investment security assets, such as cash, cash equivalents and government
securities. If we sell investment securities, we may sell them sooner than we
intended. These sales may be at depressed prices and we may never realize
anticipated benefits from, or may incur losses on, these investments. Some
investments may not be sold due to normal contractual or legal restrictions or
the inability to locate a suitable buyer. Moreover, we may incur tax
liabilities if we sell these assets. We may also be unable to purchase
additional investment securities that may be important to our operating
strategy. If we decide to acquire non-investment security assets, we may not
be able to identify and acquire suitable assets, and will likely realize a
lower return on any such investments.

If we were deemed to be an investment company, we could become subject to
substantial regulation under the 1940 Act with respect to our capital
structure, management, operations, affiliate transactions and other matters.
As a consequence, we could be barred from engaging in business or issuing our
securities as we have in the past and might be subject to civil and criminal
penalties for noncompliance. In addition, some of our contracts might be
voidable, and a court-appointed receiver could take control of us and
liquidate our business in certain circumstances.

Our business will suffer if our systems do not accurately process date
information relating to dates after January 1, 2000

Because many computer systems were not designed to handle dates beyond the
year 1999, computer hardware and software may need to be modified in order for
it to remain functional. This may affect us in numerous ways:

. We have assessed the impact of year 2000 issues, including other date-
related anomalies, on our products, services and internal information
systems. We do not expect our financial results to be materially affected

by the need to address year 2000 issues, but if the costs associated with
addressing these issues are greater than planned, our earnings and results
of operations could be affected. Furthermore, if corrective actions are
not adequate to avoid year 2000 problems, the impact of year 2000
processing failures on the Company's business, financial position, results
of operations or cash flows could be material;

. We must rely on outside vendors to address year 2000 issues for their
hardware and software. If these vendors fail to adequately address year
2000 issues for the products and services they provide to the Company,
this could have a material adverse impact on the Company's operations and
financial results. We have developed contingency plans in the event that
we, or our key vendors, are not year 2000 capable, but the failure of
such contingency plans may have a negative effect on our financial
results; and

. The method of transaction processing we employ depends heavily on the
integrity of electronic systems outside of our control, such as online
and Internet service providers, and third-party software such as Internet
browsers. A failure of any of these systems due to year 2000 issues could
interfere with the trading process and, in turn, may have a material
adverse effect on our business, financial condition and operating
results.

Due to our dependence on computer technology to conduct our business, the
nature and impact of year 2000 processing failures on our business, financial
condition and operating results could be material.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk, the Company
has evaluated such risk for its brokerage and banking related operations
separately due to the recent acquisition of Telebanc which represents a new
line of business for the Company. The following discussion about the Company's
market risk disclosures includes forward-looking statements. Actual results
could differ materially from those projected in the forward-looking statements
as a result of certain factors, including those set forth in the section
entitled "Risk Factors" and elsewhere in this filing. Reference is made to
Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk,
in our Annual Report on Form 10-K/A for the year ended September 30, 1999.

Brokerage and Investment Operations

The Company is exposed to market risk related to changes in interest rates,
foreign currency exchange rates and equity security price risk. The Company
does not have derivative financial instruments for speculative or trading
purposes.

Interest Rate Sensitivity

During the quarter ended December 31, 1999, the Company obtained two
variable rate bank lines of credit. As of December 31, 1999, the Company had
$104.8 million outstanding under these lines. These lines of credit and the
monthly interest payment are subject to interest rate risk. If market interest
rates were to increase immediately and uniformly by 10 percent at December 31,
1999, the interest payments would increase by an immaterial amount.

Equity Price Risk

The Company has investments in publicly-traded equity securities. The fair
value of these securities at December 31, 1999 was $646.6 million. If the
market price of the securities held at December 31, 1999 were to decrease by
10%, the fair value of the portfolio would decline by $64.7 million, which
would not have a material effect on the financial position of the Company. The
Company accounts for these securities as available-for-sale, and unrealized
gains and losses resulting from changes in the fair value of these securities
are reflected as a change in shareowners' equity, and not reflected in the
determination of operating results until the securities are sold. At December
31, 1999, unrealized gains on these securities were $610.2 million.

Financial Instruments

For its working capital and reserves, which are required to be segregated
under Federal or other regulations, the Company invests in money market funds,
resale agreements, certificates of deposit, and commercial paper. Money market
funds do not have maturity dates and do not present a material market risk.
The other financial instruments are fixed rate investments with short
maturities and do not present a material interest rate risk.

Banking Operations

The Company manages its bank-related interest rate risk through the use of
financial derivatives such as interest rate cap, swap and floor agreements.
The Company uses these instruments to ensure that the market value of equity
and net interest income are protected from the impact of changes in interest
rates. The Company has experienced no material changes in market risk
pertaining to its banking operations during the quarter ended December 31,
1999.

PART II. OTHER INFORMATION

Item 1. Legal and Administrative Proceedings--

On November 21, 1997, a putative class action was filed in the Superior
Court of California, County of Santa Clara, by Larry R. Cooper on behalf of
himself and other similarly situated individuals. The action alleges, among
other things, that our advertising, other communications and business
practices regarding our commission rates and our ability to timely execute and
confirm transactions through our online brokerage services were false and
deceptive. The action seeks injunctive relief enjoining the purported
deceptive and unfair practices alleged in the action and also seeks
unspecified compensatory and punitive damages, as well as attorney fees. On
June 1, 1999, the court entered an order denying plaintiffs' motion for class
certification. While the court declined to certify a class as to any of
plaintiffs' alleged claims, it did indicate that plaintiffs may be able to
pursue one of their claims (relating to our commission structure) on a
representative basis. On January 25, 2000, the court ordered plaintiffs to
submit all claims (including representative claims) seeking monetary relief to
arbitration; claims for injunctive relief were not ordered to arbitration, but
were stayed pending arbitration. We are unable to predict the ultimate outcome
of this proceeding.

On February 11, 1999, a putative class action was filed in the Supreme
Court of New York, County of New York, by Evan Berger, on behalf of himself
and other similarly situated individuals. The action alleged, among other
things, that our advertising, other communications and business practices
regarding our ability to timely execute and confirm transactions through our
online brokerage services were false and deceptive. Plaintiff seeks damages
based on causes of action for breach of contract and violation of New York
consumer protection statutes. After we filed a motion to dismiss or stay the
complaint on April 14, 1999, the plaintiff chose to file an amended complaint.
In response to that amended complaint, we have moved to compel arbitration or,
alternatively, dismiss the amended complaint. By a Decision and Order, entered
by the Court on March 28, 2000, the Court granted E*TRADE's notion to compel
arbitration of plaintiff's breach of contract claim by dismissing plaintiff's
breach of contract claim and ordering plaintiff to proceed to arbitration of
that claim. The Court also granted E*TRADE's motion to dismiss by dismissing
plaintiff's claims based on violation of New York's consumer protection
statutes.

On March 1, 1999, a putative class action was filed in the Court of Common
Pleas, Cuyahoga County, Ohio, by Truc Q. Hoang. The Hoang complaint seeks
damages and injunctive relief arising out of, among other things, plaintiff's
alleged problems accessing her account and placing orders. Plaintiff alleges
causes of action for breach of contract, fiduciary duty and unjust enrichment,
fraud, unfair and deceptive trade practices, negligence/intentional tort and
injunctive relief. We have filed motions both to compel arbitration and to
dismiss the complaint. All discovery regarding the merits of plaintiff's
claims is stayed pending the determination of our motion to dismiss. On
September 1, 1999, the court denied our motion to compel arbitration. We
appealed the order and a hearing on the appeal took place on February 2, 2000.
By a Journal Entry and Opinion, dated March 16, 2000, the Court of Appeals
reversed the trial court's decision on the grounds that its resolution of
E*TRADE's motion to compel arbitration was premature prior to resolution of
whether the case should be certified as a class action. The Court of Appeals
remanded the case to the trial court. This proceeding is still at an early
stage and we are unable to predict its ultimate outcome.

On March 10, 1999, a putative class action was filed in the Superior Court
of California, County of Santa Clara, by Raj Chadha. The Chadha complaint
seeks damages and injunctive relief arising out of, among other things, the
February 3, 4 and 5, 1999, system interruptions. Plaintiff brings causes of
action for breach of fiduciary duty and violations of the Consumer Legal
Remedies Act and California Unfair Business Practices Act. In response to the
complaint, we filed a petition to compel arbitration. Among other things, we
argued that, in light of the Cooper court's decision to deny class
certification, all customers who were members of the alleged Cooper class--
including Chadha--are obligated to submit their claims to arbitration in
accordance with the customer agreement. The court granted the petition to
compel arbitration on July 29, 1999, and stayed all further proceedings
pending arbitration.

On March 11, 1999, a putative class action was filed in the Superior Court
of California, County of Santa Clara, by Elie Wurtman. The Wurtman complaint
seeks damages and injunctive relief arising out of, among other things,
plaintiff's alleged problems accessing her account and placing orders. The
complaint also makes allegations regarding access problems relating to our
customers residing or traveling outside of the United States. Plaintiff brings
causes of action for negligence and violations of the Consumer Legal Remedies
Act and California Unfair Business Practices Act. In response to the
complaint, we filed a petition to compel arbitration. As in Chadha, we argued
that, in light of the Cooper court's decision to deny class certification,
Wurtman is obligated to submit his claims to arbitration in accordance with
the customer agreement. The petition to compel arbitration was heard by the
court on September 9, 1999 and was denied. On October 4, 1999, we appealed the
court's order denying the petition, and that appeal has the effect of staying
all further proceedings in the trial court. Briefing has not yet begun on our
appeal. This proceeding is still at an early stage and we are unable to
predict the ultimate outcome.

On April 14, 1999, a putative class action was filed in the Superior Court
of California, County of Los Angeles, by Matthew J. Rosenberg. Plaintiff seeks
injunctive relief based on alleged violations of the California Unfair
Business Practices Act regarding the extent to which shares in IPOs are made
available to our customers. We filed a demurrer and motion to strike on August
13, 1999, arguing (among other things) that the plaintiff has not alleged
facts sufficient to state a claim against us. On October 6, 1999, the court
dismissed the class action claims with prejudice. The claim for unfair
business practices was dismissed with leave to amend, but for injunctive
relief only and not money damages. Plaintiff filed an amended complaint on
October 26, 1999. We filed a petition to compel arbitration in response. On
December 29, 1999, the court granted the petition to compel arbitration and
dismissed the court proceeding. We are unable to predict the ultimate outcome
of this proceeding.

On December 23, 1999, plaintiff Kathleen Nyquist filed a complaint in
federal court. Ms. Nyquist is a customer who brings claims for breach of
fiduciary duty, negligence/recklessness, unfair trade practices, securities
law violations and aiding and abetting. Her claims against us arise out of
allegedly unauthorized transactions and unrestricted day-trading effected by
her husband in her IRA account as well as another account. Plaintiff alleges
losses totaling approximately $700,000 and also seeks attorney's fees,
punitive damages as well as treble damages under the South Carolina unfair
trade practices laws. E*TRADE has made a motion to compel arbitration that is
currently pending before the court. This proceeding is still at an early stage
and we are unable to predict the ultimate outcome.

The Company believes that these claims are without merit and intend to
defend against them vigorously. An unfavorable outcome in any matters which
are not covered by insurance, could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, even if the ultimate outcomes are resolved in favor of the Company,
the defense of such litigation could entail considerable cost and the
diversion of efforts of management, either of which could have a material
adverse effect on the Company's results of operation.

The securities industry is subject to extensive regulation under federal,
state and applicable international laws. As a result, the Company is required
to comply with many complex laws and rules and our ability to so comply is
dependent in large part upon the establishment and maintenance of a qualified
compliance system. The Company is aware of several instances of its
noncompliance with applicable regulations. In particular, in fiscal 1997, the
Company's failure to timely renew its broker dealer registration in Ohio
resulted in a $4.3 million pre-tax charge against earnings.

The Company maintains insurance in such amounts and with such coverages,
deductibles and policy limits as management believes are reasonable and
prudent. The principal risks that the Company insures against are
comprehensive general liability, commercial property, hardware/software
damage, directors and officers, and errors and omissions liability. The
Company believes that such insurance coverages are adequate for the purpose of
its business.

Item 2. Changes in Securities and Use of Proceeds--Not applicable.

Item 3. Defaults Upon Senior Securities--Not applicable.

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

The annual meeting of shareowners was held on December 21, 1999. Lewis E.
Randall, Lester C. Thurow, and Peter Chernin were elected as directors, as
tabulated below.

Election of Directors For Against
--------------------- ----------- ----------

Lewis E. Randall...................................... 202,537,670 2,541,659
Lester C. Thurow...................................... 191,846,312 13,233,017
Peter Chernin......................................... 202,451,036 2,628,293

In addition, Christos M. Cotsakos, William A. Porter, Richard S. Braddock,
Masayoshi Son, William E. Ford, and George Hayter will continue as directors.

The proposal to approve the amendment to the Company's 1996 Stock Incentive
Plan (the "Plan"), including an 11,900,000 shares increase in the maximum
number of shares of Common Stock reserved for issuance under the Plan was
approved, as tabulated below.

For Against Abstentions
----------- ---------- -----------

Votes..................................... 180,132,435 22,384,013 1,014,910

The proposal to ratify the selection of Deloitte & Touche LLP as
independent public accountants for the Company for the fiscal year ending
September 30, 2000 was approved, as tabulated below.

For Against Abstentions
----------- ------- -----------

Votes........................................ 202,564,183 727,679 239,467

Item 5. Other Information--None.

Item 6. Exhibits and Reports on Form 8-K

(a)Exhibits

* 4.1 Indenture, dated February 1, 2000, by and between the Company and The
Bank of New York.

*10.1 Employment agreement, dated June 1, 1999, by and between the Company
and Christos M. Cotsakos.

*10.2 Employment agreement, dated June 1, 1999, by and between the Company
and Kathy Levinson.

*10.3 Purchase Agreement, dated February 1, 2000, by and among the Company,
FleetBoston Robertson Stephens Inc., Hambrecht & Quist LLC and
Goldman, Sachs & Co.

*10.4 Registration Rights Agreement, dated February 1, 2000, by and among
the Company, FleetBoston Robertson Stephens Inc., Hambrecht & Quist
LLC and Goldman, Sachs & Co.

**10.5 E*TRADE Ventures I, LLC, Limited Liability Company Operating
Agreement.

**10.6 E*TRADE eCommerce Fund, L.P., Amended and Restated Limited
Partnership Agreement.

**27.1 Financial Data Schedule

*99.1 Press release, dated January 25, 2000, relating to the 6% convertible
subordinated notes due 2007.

*99.2 Press release, dated February 2, 2000, relating to the 6% convertible
subordinated notes due 2007.

- --------
* As previously filed.
** Filed herewith.

(b) Reports on Form 8-K

None

SIGNATURES

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

E*TRADE Group, Inc.
(Registrant)

Dated: April 17, 2000

/s/ Christos M. Cotsakos
By: _________________________________
Christos M. Cotsakos
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)

/s/ Leonard C. Purkis
By: _________________________________
Leonard C. Purkis
Chief Financial Officer
(Principal Financial and
Accounting Officer)