SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

for the Quarterly Period Ended September 30, 2009

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

for the transition period from                      to                     

Commission file number: 001-32419

optionsXpress Holdings, Inc.

(Exact name of registrant as specified in its charter)

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

(Address of principal executive offices)
(Zip Code)

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

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

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

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

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

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

As of November 2, 2009, there were 57,681,185 outstanding shares of the registrant’s Common Stock.

 

 

TABLE OF CONTENTS

Part I — FINANCIAL INFORMATION			3
Item 1. — Condensed Consolidated Financial Statements			3
Condensed Consolidated Statements of Financial Condition			3
Condensed Consolidated Statements of Operations			4
Condensed Consolidated Statements of Cash Flows			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. — Quantitative and Qualitative Disclosures about Market Risk			20
Item 4. — Controls and Procedures			21
Part II — OTHER INFORMATION			21
Item 1. — Legal Proceedings			21
Item 1A. — Risk Factors			21
Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds			22
Item 6. — Exhibits			23
Signatures			24
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

Part I — FINANCIAL INFORMATION

Item 1.	—	Condensed Consolidated Financial Statements

optionsXpress Holdings, Inc.

(In thousands, except per share data)

		September 30,				December 31,
		2009				2008
ASSETS
Cash and cash equivalents		$	100,817			$	114,450
Cash and investments segregated in compliance with federal regulations			798,489				427,669
Receivables from brokerage customers, net			132,658				137,502
Receivables from brokers, dealers and clearing organizations			62,657				15,621
Investments in securities			80,554				89,937
Deposits with clearing organizations			132,635				108,409
Fixed assets, net			13,191				12,979
Goodwill			81,660				44,234
Other intangible assets, net			8,102				4,569
Other assets			20,725				16,963
Total assets		$	1,431,488			$	972,333
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Payables to brokerage customers		$	1,080,185			$	675,872
Payables to brokers, dealers and clearing organizations			817				293
Accounts payable and accrued liabilities			44,216				27,848
Deferred revenue			8,090				—
Current and deferred income taxes			—				25
Total liabilities			1,133,308				704,038
Stockholders’ equity
Common stock, $0.0001 par value (250,000 shares authorized; 57,719 and 58,780 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively)			6				6
Preferred stock, $0.0001 par value (75,000 shares authorized; none issued)			—				—
Additional paid-in capital			17,404				28,555
Accumulated other comprehensive loss			(1,258	)			(1,340	)
Non-controlling interests			101				405
Retained earnings			281,927				240,669
Total stockholders’ equity			298,180				268,295
Total liabilities and stockholders’ equity		$	1,431,488			$	972,333

See accompanying notes.

optionsXpress Holdings, Inc.

(In thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Revenues:
Commissions		$	40,501			$	45,093			$	120,598			$	124,981
Other brokerage-related revenue			7,357				8,743				20,762				24,435
Interest revenue and fees			4,241				12,784				13,110				39,062
Interest expense			(55	)			(476	)			(178	)			(1,642	)
Net interest revenue and fees			4,186				12,308				12,932				37,420
Education revenue			9,156				—				16,390				—
Other income			1,087				708				2,614				2,405
Net revenues			62,287				66,852				173,296				189,241
Expenses:
Compensation and benefits			11,885				7,959				30,693				21,691
Brokerage, clearing and other related expenses			7,795				8,950				23,032				19,653
Brokerage advertising			3,207				4,945				14,001				14,850
Education marketing and fulfillment			6,006				—				10,798				—
Depreciation and amortization			2,350				1,996				6,640				5,441
Other general and administrative			5,748				5,212				16,373				15,192
Total expenses			36,991				29,062				101,537				76,827
Income before income taxes of consolidated companies			25,296				37,790				71,759				112,414
Income taxes			9,007				13,723				25,811				41,087
Net income of consolidated companies			16,289				24,067				45,948				71,327
Net income attributable to non-controlling interests			21				73				51				196
Net income		$	16,268			$	23,994			$	45,897			$	71,131
Earnings per common share:
Basic		$	0.28			$	0.40			$	0.79			$	1.17
Diluted		$	0.28			$	0.40			$	0.79			$	1.17
Weighted-average number of common shares:
Basic			57,743				60,022				58,011				60,873
Diluted			57,936				60,177				58,154				61,043
Dividends declared per share			—			$	0.0800			$	0.0800			$	0.2400

See accompanying notes.

optionsXpress Holdings, Inc.

(In thousands, except per share data)

		Nine Months Ended
		September 30,				September 30,
		2009				2008
Operating activities
Net income		$	45,897			$	71,131
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			6,640				5,441
Stock-based compensation			2,634				1,883
Deferred income taxes			793				179
Loss on investment in non-consolidated affiliate			35				28
Excess tax benefit for stock-based compensation			165				280
Unrealized gain, deferred rent and other			(847	)			(16	)
Changes in operating assets and liabilities:
(Increase) decrease in:
Cash and investments segregated in compliance with federal regulations			(370,820	)			195,441
Receivables from brokerage customers, net			4,844				(15,213	)
Receivables from brokers, dealers and clearing organizations			(47,036	)			26,639
Investments in securities			6,825				—
Deposits with clearing organizations			(24,226	)			(201,958	)
Other assets			(2,650	)			(11,391	)
Increase (decrease) in:
Payables to brokerage customers			404,313				(23,007	)
Payables to brokers, dealers and clearing organizations			524				411
Accounts payable and accrued liabilities			(2,636	)			8,652
Deferred revenue			(206	)			—
Current income taxes			(748	)			(3,616	)
Net cash provided by operating activities			23,501				54,884
Investing activities
Purchases of investments in securities			—				(20,600	)
Proceeds from sales and maturities of investments in securities			3,200				77,550
Purchases and development of computer software			(2,591	)			(3,076	)
Purchases of fixed assets			(385	)			(1,700	)
Payment of contingent consideration			(2,151	)			—
Loans to non-affiliates			—				(1,000	)
Dividend from affiliate			—				213
Cash used in acquisition (net of cash received of $3,761)			(14,697	)			(13,132	)
Net cash (used in) provided by investing activities			(16,624	)			38,255
Financing activities
Exercise of stock options			38				221
Excess tax benefit for stock-based compensation			(165	)			280
Purchases through employee stock purchase plan			19				19
Purchase of non-controlling equity interest			(1,021	)			—
Stock repurchases			(14,381	)			(73,183	)
Dividends paid			(4,638	)			(14,499	)
Net cash used in financing activities			(20,148	)			(87,162	)
Effect of exchange rates on cash and cash equivalents			(362	)			—
Net (decrease) increase in cash and cash equivalents			(13,633	)			5,977
Cash and cash equivalents, beginning of period			114,450				70,492
Cash and cash equivalents, end of period		$	100,817			$	76,469
Supplemental cash flow information:
Income taxes paid		$	26,199			$	43,930
Interest paid			178				1,642
Supplemental disclosure of non-cash activity:
Non-cash foreign currency translation (loss) gain			(72	)			28
Intangible assets acquired in lieu of debt repayment			2,500				—
Issuance of common stock in an acquisition			1,370				5,211
Non-cash change in unrealized gain on available for sale investments in securities			642				—

See accompanying notes.

optionsXpress Holdings, Inc.

(In thousands, except per share data)

1. Basis of Presentation and Nature of Operations

Basis of Presentation

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

The Company follows United States generally accepted accounting principles, including certain accounting guidance used by the brokerage industry. Certain notes and other information normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements included in the Annual Report on Form 10-K of the Company for the year ended December 31, 2008.

In the opinion of management, all adjustments necessary to present fairly the Company’s consolidated financial position at September 30, 2009 and the consolidated results of operations and cash flows for each of the periods presented have been recorded. The results of operations and cash flows for an interim period are not necessarily indicative of the results of operations or cash flows that may be reported for the year or any subsequent period.

Nature of Operations

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

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

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

2. Summary of Significant Accounting Policies

Except as described in the following paragraphs, there have been no changes in the significant accounting policies from those included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Education Services Segment

The Company recognizes education revenues in accordance with United States generally accepted accounting principles and revenue arrangements with multiple deliverables. Revenue is not recognized until it is realized or realizable and earned. The criteria to meet this guideline are: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the price to the buyer is fixed or determinable; and (iv) collectability is reasonably assured.

The Company sells its products separately and in various bundles that contain multiple deliverables that include seminars and subscriptions, along with other products and services. Sales arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (i) the product has value to the customer on a standalone basis; (ii) there is objective and reliable evidence of the fair value of undelivered items; and (iii) delivery or performance of any undelivered item is probable and substantially in our control.

The fair value of each separate element is generally determined by prices charged when sold separately. In certain arrangements, the Company offers these products bundled together at a discount. The discount is allocated pro rata to each element based on the retail market price for each element.

Each type of transaction is separated into its specific categories and revenue from each category is recognized according to the following policies:

Product		Recognition policy
Seminars		Deferred and recognized as the seminar is provided or certificate expires.
Website subscription services		Deferred and recognized on a straight-line basis over the subscription period.
Home study products		Recognized upon delivery of home study materials to the customer.

Deferred Revenue — Deferred revenue arises from seminars and website subscriptions because the payments are received before the respective service has been rendered. Deferred revenue is recognized into revenue over the period that the services are performed or at the time when the contract period expires as shown in the above table.

Reclassification — Expenses previously reported in quotation services and technology and telecommunications have been reclassified to other general and administrative. Prior year balances have been reclassified to conform to the current year presentation.

Education marketing and fulfillment — Education marketing and fulfillment consists of the costs incurred for the marketing and production of the Company’s seminars, subscriptions and home study products sold to its customers. Education marketing costs are incurred for the production and communication of advertising activities. The Company expenses the cost of advertising activities as incurred, except for costs related to the production of broadcast advertising, which are expensed when the first broadcast occurs. The Company did not capitalize any production costs associated with broadcast advertising for the period ending September 30, 2009.

Foreign Currency Translation — The assets and liabilities of foreign operations are translated into U.S. dollars at the exchange rate in effect at the balance sheet date, with the related translation gains and losses reported as a separate component of shareholders’ equity (deficit) and comprehensive income (loss). The results from operations are translated using the average exchange rates for the period.

Business Combinations — Effective January 1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) ASC Topic 805, Business Combinations (“ASC 805”). ASC 805 changes how business combinations are accounted for and impacts the financial statements both on the acquisition date and in subsequent periods.

Fair Value of Financial Instruments — Effective January 1, 2008, the Company adopted FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. In February 2008, the FASB issued an update to ASC 820, to partially defer the effective date of ASC 820 for non-financial assets and non-financial liabilities that are reevaluated at fair value in the financial statements on a non-recurring basis (at least annually). These non-financial assets include goodwill and other intangible assets. The Company adopted the update to ASC 820 effective January 1, 2009 for non-financial assets and non-financial liabilities.

In April 2009, the FASB issued inter-related updates and guidance that require enhanced disclosures regarding certain fair value measurements. An additional update to ASC 820 provides guidance for determining fair values when markets become inactive and for identifying distressed transactions. FASB ASC Topic 320, Investments — Debt and Equity Securities provides guidance for determining whether debt securities are other-than temporary impaired and requires enhanced disclosures of other-than-temporary impairments on debt and equity securities in the consolidated financial statements. FASB ASC Topic 825, Financial Instruments and FASB ASC Topic 325, Investments- Other, require disclosures about the fair values of financial instruments for interim reporting periods as well as in annual consolidated financial statements. The Company adopted the additional guidance and required disclosure for the interim period ending June 30, 2009.

Non-controlling Interests — Effective January 1, 2009, the Company adopted FASB ASC Topic 810, Consolidation (“ASC 810”). ASC 810 has changed the accounting and reporting for minority interests, which are now classified as a component of equity. ASC 810 also requires that any gain/ (loss) pertaining to non-controlling interest be classified as a separately stated adjustment to consolidated net income in the condensed consolidated statement of operations.

Derivative Instruments — Effective January 1, 2009, the Company adopted FASB ASC Topic 815, Derivatives and Hedging (“ASC 815”). ASC 815 changes the disclosure requirements for derivative instruments and hedging activities requiring entities to provide enhanced disclosures with the intent to provide users of financial statements with a better understanding of: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedge items are accounted for and related interpretations and (iii) how derivative instruments and related hedge items affect an entity’s financial position, performance and cash flows.

Subsequent Events — Effective for the interim financial period ending June 30, 2009, the Company adopted FASB ASC Topic 855, Subsequent Events (“ASC 855”). ASC 855 provides the disclosure requirements for subsequent events requiring entities to report the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether the date represents the date the financial statements were issued or were available to be issued.

Generally Accepted Accounting Principles — Effective for the interim period ending September 30, 2009, the Company adopted FASB ASC Topic 105, Generally Accepted Accounting Principles (“ASC 105”). ASC 105 identifies the FASB Accounting Standards Codification as the authoritative source of generally accepted accounting principles in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws are also sources of authoritative GAAP for SEC registrants. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of ASC 105 did not have a material impact on the Company’s condensed consolidated financial statements.

3. Business Acquisition

On May 4, 2009, the Company acquired 100 percent of the membership interests of Lanai Partners, LLC, the sole stockholder of Optionetics, for cash of $18,435, and the assumption of certain liabilities. Optionetics, based in Redwood City, California and Sydney, Australia, is a leading provider of investment education services, including live seminars, proprietary software analytics, online and offline educational products and individual coaching to potential investors in 12 countries. There may also be additional consideration payable for five years, based on the profitability of the business acquired and the number of funded brokerage accounts referred to the Company’s Brokerage Services segment in the year the contingent consideration is paid. Depending on the level of performance, the contingent consideration can range from zero to $7,000 for each of the first five years following the acquisition. This contingent consideration is currently valued at $14,160, based on the projected future performance of Optionetics.

The Company’s condensed consolidated financial statements include the results of operations for Optionetics beginning on May 4, 2009. The purchase price of the Optionetics acquisition includes $33,881 in acquired goodwill and $2,200 in acquired intangible assets. The acquired intangible assets include $800 in customer lists, $700 in customer relationships and $700 in education course content that will be amortized on a straight-line basis over three, eleven and five years, respectively. The Company has expensed approximately $420 of acquisition-related costs in other general and administrative expenses.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed.

Fixed assets, net		$	2,195
Other intangible assets, net			2,200
Other assets			4,005
Total identifiable assets acquired			8,400
Accounts payable and accrued liabilities			4,149
Deferred revenue			8,296
Current and deferred income taxes			163
Net identifiable assets acquired			(4,208	)
Goodwill			33,881
Net assets acquired		$	29,673

4. Goodwill

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

Balance, January 1, 2009		$	44,234
Goodwill adjustment recorded for Open E Cry, LLC for contingent consideration			3,545
Goodwill recorded in purchase of Optionetics, Inc. (Note 4)			33,881
Balance, September 30, 2009		$	81,660

In performing annual impairment tests, the Company utilizes quoted market prices of the Company’s common stock to estimate the fair value of the Company as a whole. The estimated fair value is then allocated to the Company’s reporting units, if applicable, based on operating revenues, and compared to the carrying value of the reporting unit. No impairment of goodwill was determined for the nine months ended September 30, 2009. All of the goodwill has been allocated to the Brokerage Services segment. The Company amortizes goodwill for income tax purposes on a straight-line basis over a period of fifteen years with the exception of the goodwill recognized from the Optionetics acquisition, which is non-deductible for income tax purposes.

5. Other Intangible Assets, Net

Other intangible assets consist of the following at September 30, 2009:

		Gross								Net
		Carrying				Accumulated				Carrying
		Amount				Amortization				Amount
Customer relationships		$	9,000			$	(2,952	)		$	6,048
Customer list			800				(89	)			711
Trade names			690				—				690
Education course content			700				(47	)			653
		$	11,190			$	(3,088	)		$	8,102

The customer relationships intangible assets are being amortized on a straight-line basis over their estimated useful life ranging from five to fifteen years. The customer list intangible asset is being amortized over its estimated life of three years. The educational course content intangible asset is being amortized over its estimated life of five years. The Company evaluates the remaining useful life on an annual basis to determine if events or trends warrant a revision to the remaining period of amortization. There have been no revisions to the original useful life estimates. The other intangible assets associated with trade names are not subject to amortization since they are determined to have indefinite lives. In February 2009, the Company received certain intangible assets valued at $2,490 in the form of customer relationships in exchange for the forgiveness of a debt owed to the Company.

Amortization expense for other intangible assets was $1,157 for the nine months ended September 30, 2009. The Company estimates that the amortization expense for the remainder of 2009 will be $457. The estimated future intangible asset amortization expense for calendar years 2010 and 2011 will be $1,798 for each year. The amortization expense for calendar years 2012 and 2013 is estimated to be $721 and $501, respectively. The Company reviews other intangible assets for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of the Company’s customer relationship assets are evaluated by comparing the current and forecasted cash flows associated with the assets to the assets’ carrying values. The trademark assets are evaluated by using the “relief-from-royalty” method, which compares the carrying amount of the asset to the discounted cash flows that the Company would have had to pay for the use of that trademark. No impairment of other intangible assets was determined for the nine months ended September 30, 2009.

6. Stock-Based Compensation

The Company maintains three stock compensation plans: the 2001 Equity Incentive Plan, the 2005 Equity Incentive Plan, and the 2008 Equity Incentive Plan. All of the options outstanding pursuant to the stock compensation plans at September 30, 2009 are options to buy common stock of the Company granted to employees or directors of the Company.

Stock-based compensation for the nine months ended September 30, 2009 was $2,634. As of September 30, 2009, the total compensation cost related to stock options and deferred shares not yet vested and recognized was estimated to be $5,071. This compensation cost related to stock options and deferred shares is expected to be recognized over a weighted average period of 3.47 years and 3.38 years, respectively. As of September 30, 2009, the aggregate intrinsic value of the total outstanding stock options and deferred shares was $3,801 and $5,750, respectively, and the aggregate intrinsic value of the total exercisable stock options was $1,884. During the nine months ended September 30, 2009, 48 shares were issued pursuant to the Company’s equity incentive plans.

7. Derivative Instruments

Effective January 1, 2009, the Company adopted ASC 815. As part of the UBS AG (“UBS”) settlement agreement accepted by the Company in November 2008 (See note 8), the Company received a “UBS Put Right” to sell certain Auction Rate Securities (“ARS”) to UBS at par beginning in June 2010. The Company adopted the fair value option election under ASC 825 for this instrument in 2008, and treats any respective gain/loss as a component of other income in the condensed consolidated statement of operations. Typically, any gain/loss in the UBS Put Right is offset by an opposite, but equal gain/loss in the value of the ARS eligible for the UBS Put Right. The Company recognized a loss of $2,557, offset by a corresponding gain, on this UBS Put Right for the nine months ending September 30, 2009, and a loss of $410, offset by a corresponding gain, on this UBS Put Right for the three months ending September 30, 2009. This loss was included as a component of other income in the condensed consolidated statement of operations.

To help provide customers with improved trade execution, the Company at times enters into proprietary short-term positions in equity option and equity securities. The Company recognizes the gains/losses from this trading activity as part of other brokerage-related revenue in the condensed consolidated statement of operations. For the nine months ended September 30, 2009 and September 30, 2008, the total gains from the Company’s proprietary trading activities were $698 and $1,582, respectively.

The following table sets forth the Company’s derivative instruments owned, at fair value, and derivative instruments sold but not yet purchased, at fair value:

		September 30,				December 31,
		2009				2008
Derivative instruments owned, at fair value:
UBS put right included in investments in securities		$	1,890			$	4,447
Equity options included in other assets			6,328				5,166
		$	8,218			$	9,613
Derivative instruments sold but not yet purchased, at fair value:
Equity options included in accounts payable and accrued liabilities		$	4,863			$	4,864
		$	4,863			$	4,864

Please refer to note 8 for information regarding the fair value hierarchy level classification of these derivative instruments.

8. Fair Value Measurements

Effective January 1, 2008, the Company adopted ASC 820. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to the valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under which assets and liabilities measured at fair value will be classified are as follows:

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

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

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

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

Financial Assets and Liabilities

		Level 1(1)				Level 2				Level 3(2)				Total
Financial instruments owned, at fair value:
Money market funds included in cash and cash equivalents		$	62,544			$	—			$	—			$	62,544
U.S. treasury securities included in cash and investments segregated in compliance with federal regulations			11,998				—				—				11,998
Investments in securities			—				—				80,554				80,554
U.S. treasury securities included in deposits with clearing organizations			11,099				—				—				11,099
Money market funds included in deposits with clearing organizations			100,000				—				—				100,000
Corporate equities and derivatives included in other assets			11,235				—				—				11,235
		$	196,876			$	—			$	80,554			$	277,430
Financial instruments sold but not yet purchased, at fair value:
Corporate equities and derivatives included in accounts payables and accrued liabilities		$	8,608			$	—			$	—			$	8,608
		$	8,608			$	—			$	—			$	8,608

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

		Investments
		in
		Securities
		— Assets
Balance, January 1, 2009		$	89,937
Total gains/(losses), realized and unrealized			642
Purchases, issuances, sales and settlements			(10,025	)
Balance, September 30, 2009		$	80,554

The Company’s Level 3 financial assets are comprised of ARS. The Company’s ARS are backed by United States Department of Education-guaranteed student loans issued under the Federal Family Education Loan Program (“FFELP”). The Company’s ARS are marketable securities with long-term stated maturities (during years 2025-2041) for which the interest rates are reset through periodic short-term auctions every 7 or 35 days, depending on the issue. As a result of the current liquidity issues in the global credit and capital markets, all of the auctions for all of the Company’s ARS have failed since February 2008. A failed auction is not a default of the debt instrument and the ARS holder continues to receive interest payments when auctions fail. All of the Company’s ARS are current with respect to the receipt of interest payments according to the stated terms of each ARS indenture. The Company believes it has the ability and intent, if necessary, to hold its ARS investments until such time as the auctions are successful, the issuer redeems the securities, or another market for ARS develops. $10,025 of par value ARS were redeemed by issuers at par during the nine months ended September 30, 2009.

At September 30, 2009, there was insufficient observable ARS market information available to determine the market value of the Company’s investments in ARS. Therefore, the Company has continued to designate the ARS as Level 3 financial assets under ASC 820 and estimated the Level 3 fair values for these securities by using the income method, incorporating assumptions that market participants would use in their estimates of fair value. The Company calculated income by developing a discounted cash flow model based on the expected cash flows from the ARS compared to a market rate. Based on the Company’s analysis, the weighted average economic life was estimated to be approximately four years. For the fair market interest rates used in its discounted cash flow, the Company used a current market rate for liquid debt instruments of similar underlying assets and credit quality, with spreads of approximately 150bps-225bps over the London Interbank Offered Rate.

Of the $82,000 par value of ARS as of September 30, 2009, $57,300 were originally purchased from UBS and have been classified as trading securities. In November 2008, the Company accepted an offer from UBS, entitling it to sell at par value ARS originally purchased from UBS at any time during a two-year period from June 30, 2010 through July 2, 2012 (“UBS Put Right”). The Company’s calculation of the fair value of the ARS originally purchased from UBS at September 30, 2009 implied an impairment of $1,890, which has been recorded as an unrealized loss in other income on the condensed consolidated statement of operations. This impairment has been substantially offset by an unrealized gain in the value of the UBS Put Right recorded in other income in the condensed consolidated statement of operations.

The remaining $24,700 in par value of ARS were originally purchased from another investment advisor, who has not made an offer similar to UBS. Therefore, the Company has continued to classify them as available-for-sale securities. The Company’s calculation of the fair value of the ARS not purchased from UBS as of September 30, 2009 implied an impairment of fair value of $1,446, which has been recorded in other comprehensive income in the condensed consolidated statement of financial condition, and the carrying fair value of those ARS was $23,254.

Non-Financial Assets and Liabilities

Effective January 1, 2009, the Company adopted the FASB update to ASC 820 for certain non-financial assets and non-financial liabilities. The adoption of this portion of the guidance was deferred according to the terms of ASC 820. This deferred portion of ASC 820 pertains to the Company’s recognized goodwill, other intangible assets and contingent liability.

The following table summarizes the non-financial assets and liabilities subject to fair value measurements along with the total impairment, if any, recognized:

		Level 1				Level 2				Level 3				Impairment
Non-financial Assets:
Goodwill		$	—			$	—			$	81,660			$	—
Customer relationships included in other intangible assets			—				—				6,048				—
Customer lists included in other intangible assets			—				—				711				—
Trade names included in other intangible assets			—				—				690				—
Education course content included in other intangible assets			—				—				653				—
		$	—			$	—			$	89,762			$	—
Non-financial Liabilities:
Contingent consideration included in accounts payables and accrued liabilities		$	—			$	—			$	14,160
		$	—			$	—			$	14,160

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

9. Contingencies and Guarantees

General Contingencies

The Company extends margin credit and leverage to its customers, which are subject to various regulatory and clearing firm margin requirements. Cash and securities in the customers’ accounts collateralize margin credit balances. Leverage involves securing a large potential future obligation with a lesser amount of cash or securities. The risks associated with margin credit and leverage increase during periods of fast market movements, or in cases where leverage or collateral is concentrated and market movements occur. During such times, customers who utilize margin credit or leverage and who have collateralized their obligations with securities may find that the securities have a rapidly depreciating value and may not be sufficient to cover their obligations in the event of liquidation. The Company is exposed to credit risk when its customers execute transactions, such as short sales of options and equities or futures transactions that can expose them to risk beyond their invested capital. As of September 30, 2009, the Company had $130,252 in credit extended to its customers. In addition, the Company may be obligated for margin extended to the Company’s customers by its third-party clearing agents on collateralized securities and futures positions.

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

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

Other assets and accounts payable and accrued liabilities on the condensed consolidated statement of financial condition include premiums on unrealized gains and losses for written and purchased options contracts. These contracts are subject to varying degrees of market risk. In addition, the Company has sold securities that it does not currently own and will therefore be obligated to purchase such securities at a future date. The Company has recorded these obligations in the condensed consolidated financial statements as of September 30, 2009, at the fair values of the related securities, and will incur losses if the fair values of these securities increase subsequent to September 30, 2009.

Legal Contingencies

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

Guarantees

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

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

10. Capitalization

Common Stock

At September 30, 2009, the Company had 250,000 shares of $0.0001 par value common stock authorized. Of the authorized common stock, 57,719 shares were issued and outstanding.

On February 24, 2009, the Company’s Board of Directors approved a stock repurchase program that authorized the Company to repurchase up to $20,000 of the Company’s outstanding common stock. On February 12, 2008, the Company’s Board of Directors approved a stock repurchase program that authorized the Company to repurchase up to $100,000 of the Company’s outstanding common stock. In addition, on February 14, 2008, the Company entered into an agreement with Ned Bennett, Executive Vice Chairman and founder of optionsXpress, pursuant to which, the Company may repurchase up to an additional 200 shares annually from Mr. Bennett. The Company’s Board of Directors may terminate the stock repurchase program at any time. In 2009, the Company has repurchased 1,193 shares of its common stock in aggregate under these programs at a total cost of $14,380, or an average cost of $12.05 per share. Since inception, the Company has repurchased 5,729 shares of its common stock in aggregate under these programs at a total cost of $101,918, or an average cost of $17.79 per share. The repurchased shares were retired to authorized, but unissued shares.

Dividends

On March 5, 2009, the Company declared a cash dividend of $0.08 per share to stockholders of record as of March 20, 2009, which was paid on March 30, 2009.

11. Regulatory Requirements

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

optionsXpress, Inc. is also subject to the CFTC Regulation 1.17 (“Reg. 1.17”) under the Commodity Exchange Act, administered by the CFTC and the NFA, which also requires the maintenance of minimum net capital. optionsXpress, Inc., as a futures commission merchant, is required to maintain minimum net capital equal to the greater of its net capital requirement under Rule 15c3-1 ($500), or the sum of 8% of the total risk margin requirements for all positions carried in customer accounts, as defined in Reg. 1.17, and 4% of the total risk margin requirements for all positions carried in non-customer accounts.

As of September 30, 2009, optionsXpress, Inc. had net capital requirements of $11,723 and net capital of $87,870. As of September 30, 2008, optionsXpress, Inc. had net capital requirements of $10,694 and net capital of $71,631. All of the Company’s other broker-dealers also exceeded the net capital requirements for their respective jurisdictions. The net capital rules may effectively restrict the payment of cash distributions or other equity withdrawals.

12. Earnings Per Share

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net income		$	16,268			$	23,994			$	45,897			$	71,131
Weighted-average number of common shares outstanding — basic			57,743				60,022				58,011				60,873
Effect of dilutive securities			193				155				143				170
Weighted-average number of common shares outstanding — diluted			57,936				60,177				58,154				61,043
Basic EPS		$	0.28			$	0.40			$	0.79			$	1.17
Diluted EPS		$	0.28			$	0.40			$	0.79			$	1.17

13. Segment Reporting

The operations of Optionetics have been included in the consolidated financial statements since the date of the acquisition, May 4, 2009. As a result of the acquisition, the Company operates in the following two principal business segments (See Note 2):

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

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

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net Revenues
Brokerage Services		$	53,138			$	66,852			$	156,909			$	189,241
Education Services			9,640				—				16,944				—
Eliminations			(491	)			—				(557	)			—
Total		$	62,287			$	66,852			$	173,296			$	189,241
Income (Loss) before Income Taxes
Brokerage Services		$	26,292			$	37,717			$	73,001			$	112,218
Education Services			(1,017	)			—				(1,293	)			—
Non-controlling interests			21				73				51				196
Total		$	25,296			$	37,790			$	71,759			$	112,414

		As of				As of
		September 30,				December 31,
		2009				2008
Assets
Brokerage Services		$	1,423,033			$	972,333
Education Services			10,759				—
Eliminations			(2,304	)			—
Total		$	1,431,488			$	972,333

14. Subsequent Events

Subsequent events have been evaluated through the issue date of the condensed consolidated financial statements, November 9, 2009. The Company has no subsequent events to be disclosed for the period ending September 30, 2009.

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

FORWARD-LOOKING STATEMENTS

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, and the Condensed Consolidated Financial Statements and Notes thereto contained in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. You are urged to carefully consider these risks and factors included in this Quarterly Report on Form 10-Q. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made, and we undertake no ongoing obligation, other than any imposed by law, to update these statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Important factors that may cause such differences include, but are not limited to: risks related to general economic conditions, regulatory developments, the competitive landscape, the volume of securities trading generally or by our customers specifically, competition, systems failures and capacity constraints and the other risks and uncertainties set forth under the heading “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

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

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

Results of Operations

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Results of Operations
Net revenues (in thousands)		$	62,287			$	66,852			$	173,296			$	189,241
Compensation and benefits			19.1	%			11.9	%			17.7	%			11.5	%
Brokerage, clearing, and other related expenses			12.5				13.4				13.3				10.4
Brokerage advertising			5.1				7.4				8.1				7.8
Education marketing and fulfillment			9.6				—				6.2				—
Depreciation and amortization			3.8				3.0				3.8				2.9
Other general and administrative			9.3				7.9				9.5				8.1
Income before income taxes			40.6				56.4				41.4				59.3
Income taxes			14.5				20.5				14.9				21.7
Net income			26.1				35.9				26.5				37.6

Statistical Data

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Statistical Data
Number of customer accounts (at period end) (1)			343,900				305,200				343,900				305,200
Daily average revenue trades (“DARTs”) (2) Retail DARTs			30,600				36,000				31,800				37,000
Institutional DARTs (3)			11,300				11,800				12,800				4,000
Total DARTs			41,900				47,800				44,600				41,000
Customer trades per account (4)			32				41				34				36
Average commission per trade		$	15.07			$	14.87			$	14.38			$	16.17
Option trades as a % of total trades			43	%			48	%			41	%			59	%
Brokerage advertising expense per net new customer account (5)		$	486			$	454			$	553			$	371
Total client assets (000s)		$	6,349,342			$	5,297,285			$	6,349,342			$	5,297,285
Client margin balances (000s)		$	130,283			$	200,471			$	130,283			$	200,471

Three Months Ended September 30, 2009 versus Three Months Ended September 30, 2008

Overview

Our results for the period reflect the following principal factors:

•		total customer accounts increased by 38,700 to 343,900, or 12.7%;
•		total trades decreased by 344,900 to 2,687,900, or 11.4% and
•		average commission per trade increased by $0.20 to $15.07, or 1.3%.

Commissions

Commissions decreased $4.6 million, or 10.2%, for the three months ended September 30, 2009 to $40.5 million compared to $45.1 million for the three months ended September 30, 2008. The decrease in commissions was primarily the result of the 11.4% decrease in total trades which was slightly offset by the 1.3% increase of the average commission per trade.

Other brokerage-related revenue

Other brokerage-related revenue decreased $1.3 million, or 15.9%, for the three months ended September 30, 2009 to $7.4 million compared to $8.7 million for the three months ended September 30, 2008. The decrease in other brokerage-related revenue was due to reductions in the rate per contract collected and total option contracts traded.

Net interest revenue and fees

Net interest revenue and fees decreased $8.1 million, or 66.0%, to $4.2 million for the three months ended September 30, 2009 compared to $12.3 million for the three months ended September 30, 2008. The decrease in net interest revenue and fees was the result of the decline in short-term interest rates.

Education revenues

Education revenue was $9.2 million for the three months ended September 30, 2009. Prior to the acquisition of Optionetics on May 4, 2009, we did not have any material education revenue.

Other income

Other income increased $0.4 million, or 53.5%, to $1.1 million for the three months ended September 30, 2009 compared to $0.7 million for the three months ended September 30, 2008. The increase in other income is due to an increase in a number of miscellaneous items.

Compensation and benefits

Compensation and benefits expenses increased $3.9 million, or 49.3%, to $11.9 million for the three months ended September 30, 2009 from $8.0 million for the three months ended September 30, 2008. The increase in compensation and benefits expenses was primarily due to an increase of the number of employees from 303 at September 30, 2008 to 433 at September 30, 2009, which was primarily driven by the acquisition of Optionetics on May 4, 2009.

Brokerage, clearing, and other related expenses

Brokerage, clearing and other related expenses decreased $1.2 million, or 12.9%, to $7.8 million for the three months ended September 30, 2009 from $9.0 million for the three months ended September 30, 2008. Brokerage, clearing and other related expenses were lower primarily due to the lower overall number of trades.

Brokerage advertising

Brokerage advertising expenses decreased $1.7 million, or 35.1%, to $3.2 million for the three months ended September 30, 2009 from $4.9 million for the three months ended September 30, 2008. The decrease in advertising expense was due to a decrease in spending across all advertising channels. Brokerage advertising expenses per net new customer account increased to $486 for the three months ended September 30, 2009 from $454 for the three months ended September 30, 2008.

Education marketing and fulfillment

Education marketing and fulfillment expenses were $6.0 million for the three months ended September 30, 2009. Prior to the acquisition of Optionetics on May 4, 2009, we did not have any material education marketing and fulfillment expenses.

Depreciation and amortization

Depreciation and amortization expenses increased $0.4 million or 17.7%, to $2.4 million for the three months ended September 30, 2009 from $2.0 million for the three months ended September 30, 2008. Increased depreciation and amortization expenses were primarily due to the acquisition of Optionetics on May 4, 2009.

Other general and administrative

Other general and administrative expenses increased $0.5 million, or 9.2%, to $5.8 million for the three months ended September 30, 2009 from $5.3 million for the three months ended September 30, 2008. Increased other general and administrative expenses were primarily due to the incorporation of other general and administrative costs resulting from the acquisition of Optionetics on May 4, 2009.

Income taxes

Income taxes decreased $4.7 million, or 34.4%, to $9.0 million for the three months ended September 30, 2009 from $13.7 million for the three months ended September 30, 2008. Lower income taxes were primarily due to the 33.0% reduction of income before taxes.

Net income

As a result of the foregoing, we reported $16.3 million in net income for the three months ended September 30, 2009, compared to $24.0 million in net income for the three months ended September 30, 2008, a decrease of $7.7 million, or 32.2%.

Segment information

Brokerage Services

Brokerage Services net revenues decreased $13.7 million, or 20.5% for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 due primarily to the decrease in net interest revenues and fees, which was driven by a decline in short-term interest rates and a decrease in commissions due to lower overall trade volume. Income before taxes decreased $11.4 million, or 30.3% for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 due primarily to the decline in revenues, which were partially offset by the declines of brokerage advertising and brokerage clearing and other related expenses.

Education Services

Education Services net revenues were $9.6 million and the loss before taxes was $1.0 million for the three months ended September 30, 2009. The Company began reporting revenues and losses before taxes in Education Services as a result of the acquisition of Optionetics, which closed on May 4, 2009.

Nine Months Ended September 30, 2009 versus Nine Months Ended September 30, 2008

Overview

Our results for the period reflect the following principal factors:

•		total customer accounts increased by 38,700 to 343,900, or 12.7%;
•		total trades increased by 655,700 to 8,385,100, or 8.5%; and
•		average commission per trade decreased by $1.79 to $14.38, or 11.1%.

Commissions

Commissions decreased $4.4 million, or 3.5%, for the nine months ended September 30, 2009 to $120.6 million compared to $125.0 million for the nine months ended September 30, 2008. The decrease in commissions was primarily the result of the 11.1% decrease in the average commission per trade, which was partially offset by the 8.5% increase in total trades. Both impacts were primarily the result of the inclusion of OEC institutional trades, which have a significantly lower average commission per trade than our retail business.

Other brokerage-related revenue

Other brokerage-related revenue decreased $3.6 million, or 15.0%, for the nine months ended September 30, 2009 to $20.8 million compared to $24.4 million for the nine months ended September 30, 2008. The decrease in other brokerage-related revenue was due to reductions in the rate per contract collected and total option contracts traded.

Net interest revenue and fees

Net interest revenue and fees decreased $24.5 million, or 65.4%, to $12.9 million for the nine months ended September 30, 2009 compared to $37.4 million for the nine months ended September 30, 2008. The decrease in net interest revenue and fees was the result of the decline in short-term interest rates.

Education revenue

Education revenue was $16.4 million for the nine months ended September 30, 2009. Prior to the acquisition of Optionetics on May 4, 2009, we did not have any material revenue in education.

Other income

Other income increased $0.2 million, or 8.7%, to $2.6 million for the nine months ended September 30, 2009 from $2.4 million for the nine months ended September 30, 2008. The increase in other income is due to an increase in a number of miscellaneous items.

Compensation and benefits

Compensation and benefits expenses increased $9.0 million, or 41.5%, to $30.7 million for the nine months ended September 30, 2009 from $21.7 million for the nine months ended September 30, 2008. The increase in compensation and benefits expenses was primarily due to an increase of the number of employees from 303 at September 30, 2008 to 433 at September 30, 2009, which was primarily driven by the acquisitions of Optionetics on May 4, 2009 and OEC on July 1, 2008.

Brokerage, clearing, and other related expenses

Brokerage, clearing and other related expenses increased $3.3 million, or 17.2%, to $23.0 million for the nine months ended September 30, 2009 from $19.7 million for the nine months ended September 30, 2008. Brokerage, clearing and other related expenses were higher primarily due to the incorporation of brokerage expenses from OEC.

Brokerage advertising

Brokerage advertising expenses decreased $0.9 million, or 5.7%, to $14.0 million for the nine months ended September 30, 2009 from $14.9 million for the nine months ended September 30, 2008. The increase in advertising expense was due to a decrease in spending across all advertising channels. Brokerage advertising expenses per net new customer account increased to $553 for the nine months ended September 30, 2009 from $371 for the nine months ended September 30, 2008.

Education marketing and fulfillment

Education marketing and fulfillment expenses were $10.8 million for the three months ended September 30, 2009. Prior to the acquisition of Optionetics on May 4, 2009, we did not have any material education marketing and fulfillment expenses.

Depreciation and amortization

Depreciation and amortization expenses increased $1.2 million, or 22.0%, to $6.6 million for the nine months ended September 30, 2009 from $5.4 million for the nine months ended September 30, 2008. Increased depreciation and amortization expenses were primarily due to the acquisition of Optionetics on May 4, 2009 and the acquisition of OEC on July 1, 2008.

Other general and administrative

Other general and administrative expenses increased $1.0 million, or 6.7%, to $16.4 million for the nine months ended September 30, 2009 from $15.4 million for the nine months ended September 30, 2008. Increased other general and administrative expenses were primarily due to the incorporation of other general and administrative costs resulting from the acquisition of Optionetics on May 4, 2009 partially offset by lower quotation services expenses due to lower rates paid for these services and lower customer activity.

Income taxes

Income taxes decreased $15.3 million, or 37.2%, to $25.8 million for the nine months ended September 30, 2009 from $41.1 million for the nine months ended September 30, 2008. Lower income taxes were primarily due to the 36.1% reduction of income before taxes.

Net income

As a result of the foregoing, we reported $45.9 million in net income for the nine months ended September 30, 2009, compared to $71.1 million in net income for the nine months ended September 30, 2008, a decrease of $25.2 million, or 35.5%.

Segment information

Brokerage Services

Brokerage Services net revenues decreased $32.3 million, or 17.1% for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 primarily due to the decrease in net interest revenues and fees, which was driven by a decline in short term interest rates and lower commissions due to lower retail trade volume. Income before taxes decreased $39.2 million, or 34.9% for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 primarily due to the decline in revenues, and the increase in expenses that resulted from the acquisition of OEC.

Education Services

Education Services net revenues were $16.9 million and the loss before taxes was $1.3 million for the nine months ended September 30, 2009. The Company began reporting revenues and losses before taxes in Education Services as a result of the acquisition of Optionetics, which closed on May 4, 2009.

Liquidity and Capital Resources

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

We invest company cash in a variety of high credit quality investment vehicles including U.S. Government Treasury Bills, bank-issued commercial paper, AAA-rated institutional money market funds and tax-free ARS backed by United States Department of Education-guaranteed student loans issued under the FFELP. Our ARS are marketable securities with long-term stated maturities (during years 2025-2041) for which the interest rates are reset through periodic short-term auctions every 7 or 35 days, depending on the issue. As a result of the liquidity issues in the global credit and capital markets, all of the auctions for all our ARS have failed since February 2008. Failed auctions limit liquidity for ARS holders until there is a successful auction, the issuer redeems the security, or another market for ARS develops. Our ARS portfolio consists entirely of securities backed by student loans issued under the FFELP program, which are individually guaranteed by the United States Department of Education. All of our ARS are AAA-rated with the exception of two issues totaling $6.0 million in par value and all of our ARS are current with respect to receipt of interest payments according to the stated terms of each ARS indenture. As of the date of this report, we have no reason to believe that any of the underlying issuers of our ARS will be unable to satisfy the terms of the indentures or that the underlying credit quality of the assets backing our ARS investments has deteriorated. Since the ARS markets began failing on February 14, 2008, $25.6 million of our ARS securities have been redeemed by issuers at par. We believe we have the ability and intent, if necessary, to hold our ARS investments until such time as the auctions are successful, the issuer redeems the securities, or another market for ARS develops.

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

optionsXpress, Inc. is also subject to the CFTC Regulation 1.17 (“Reg. 1.17”) under the Commodity Exchange Act, administered by the CFTC and the NFA, which also requires the maintenance of minimum net capital. optionsXpress, Inc., as a futures commission merchant, is required to maintain minimum net capital equal to the greater of its net capital requirement under Rule 15c3-1 ($0.5 million), or the sum of 8% of the total risk margin requirements for all positions carried in customer accounts and 4% of the total risk margin requirements for all positions carried in non-customer accounts, as defined in Reg. 1.17.

As of September 30, 2009, optionsXpress, Inc. had net capital requirements of $11.7 million and net capital of $87.9 million. As of September 30, 2008, optionsXpress, Inc. had net capital requirements of $10.7 million and net capital of $71.6 million. All of our other broker-dealers also exceeded the net capital requirements for their respective jurisdictions. We believe that we currently have sufficient capital to satisfy these ongoing requirements.

In addition to net capital requirements, as a self-clearing broker-dealer, optionsXpress, Inc. is subject to Depository Trust & Clearing Corporation (“DTCC”), Options Clearing Corporation (“OCC”), and other cash deposit requirements, which may fluctuate significantly from time to time based upon the nature and size of our customers’ trading activity. At September 30, 2009, we had interest-bearing security deposits and short-term treasury bills totaling $132.6 million deposited with clearing organizations for the self-clearing of equities and option trades.

At September 30, 2009, we had $798.5 million of cash segregated in compliance with federal regulations in special reserve bank accounts for the exclusive benefit of customers under Rule 15c3-3 of the Securities Exchange Act of 1934 and other regulations. Liquidity needs relating to client trading and margin borrowing activities are met primarily through cash balances in customer brokerage accounts, which were $1,080.2 million as of September 30, 2009.

Credit Facility

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

To support our self-clearing activities, we have an unsecured, uncommitted credit facility with JPMorgan Chase Bank, NA that is callable on demand. We anticipate that the credit facility will only be used occasionally, addressing potential timing issues with the flow of customer funds, and will only be used to facilitate transactions for which customers already have sufficient funds in brokerage accounts. As of September 30, 2009, there was no balance outstanding on this credit facility.

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

Cash Flow

Cash provided by operating activities was $23.5 million for the nine months ended September 30, 2009, compared to cash provided by operating activities of $54.9 million for the nine months ended September 30, 2008. The primary reasons for the decrease in cash provided by operating activities was due to the increases of cash segregated in compliance with federal regulations and receivables from brokers, dealers and clearing organizations which was largely offset by the decrease of payables to brokerage customers.

Cash used in investing activities was $16.6 million for the nine months ended September 30, 2009, compared to cash provided by investing activities of $38.3 million for the nine months ended September 30, 2008. The primary reason for the decrease in cash provided by investing activities was the decrease in net proceeds received from the redemption of investments in securities.

Cash used in financing activities was $20.1 million for the nine months ended September 30, 2009, compared to cash used in financing activities of $87.2 million for the nine months ended September 30, 2008. Cash used in financing activities decreased primarily due to the reduction of cash used to repurchase our outstanding common stock.

Capital Expenditures

Capital expenditures were $1.2 million for the three months ended September 30, 2009, compared to $1.5 million for the three months ended September 30, 2008. Capital expenditures for the periods ended September 30, 2009 and 2008 included capitalized software costs, which we capitalize in accordance with FASB ASC Topic 350-50, Website Development Costs, primarily related to the development of our technology.

Item 3.	—	Quantitative and Qualitative Disclosures about Market Risk

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

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

We expect this kind of exposure to increase with the growth in our overall business. The use of margin credit, leverage and short sales may expose us to significant off-balance-sheet risk in the event that collateral requirements are not sufficient to fully cover losses that customers may incur and those customers fail to satisfy their obligations. As of September 30, 2009, we had $130.3 million in credit extended to our customers either directly or through our clearing firms. The amount of risk to which we are exposed from the leverage we extend to our customers and from short sale transactions by our customers is unlimited and not quantifiable as the risk is dependent upon analysis of a potential significant and undeterminable rise or fall in stock or futures prices. Our account level margin credit and leverage requirements meet or exceed those required by Regulation T of the Board of Governors of the Federal Reserve. We have a comprehensive policy implemented in accordance with SRO standards to assess and monitor the suitability of investors to engage in various trading activities. To mitigate our risk, we also continuously monitor customer accounts to detect excessive concentration, large orders or positions, patterns of day trading and other activities that indicate increased risk to us.

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

Item 4.	—	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the nine months ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II — OTHER INFORMATION

Item 1.	—	Legal Proceedings

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

Item 1A	—	Risk Factors

Our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 lists in more detail various important risk factors facing our business in Part I, Item 1A under the heading “Risk Factors.” Except as set forth below, there have been no material changes from the risk factors disclosed in that section of our Annual Report on Form 10-K. We encourage you to review that information and to review our other reports filed periodically with the Securities and Exchange Commission for any further information regarding risks facing our business.

If we fail to attract brokerage customers and education students in a cost-effective manner, our profitability and growth may be impaired.

Our profitability and growth depends on increasing our customer base in a cost-effective manner. Although we have spent significant financial resources on advertising and related expenses and plan to continue to do so, there are no assurances that these efforts will be cost-effective at attracting new brokerage customers and education students or converting education students into brokerage customers. We believe that rates for desirable advertising and marketing placements are likely to increase in the foreseeable future, and we may be disadvantaged relative to our larger competitors in our ability to expand or maintain our advertising and marketing commitments. Additionally, filter software programs that limit or prevent our advertisements and other communications from being displayed on or delivered to our current and potential customers’ computers are becoming increasingly available. If this type of software becomes widely accepted, it would negatively affect our Internet advertising. Finally, our brokerage sales and marketing methods are subject to regulation by the CBOE, FINRA and the NFA. The rules and regulations of these organizations impose specific limitations on our sales methods, including our advertising and payments to nonbroker-dealers. If we do not achieve our advertising objectives, our profitability and growth may be impaired.

Acquisitions involve risks that could adversely affect our business.

We have completed a number of acquisitions and will continue to pursue strategic acquisitions of businesses and technologies. Acquisitions entail numerous risks, including:

	•		difficulties in the integration of acquired operations, services and products;
	•		failure to achieve expected synergies;
	•		diversion of management’s attention from other business concerns;
	•		assumption of unknown material liabilities of acquired companies;
	•		amortization of acquired intangible assets, which could reduce future reported earnings;
	•		potential loss of clients or key employees of acquired companies;
	•		increased litigation risk with transaction parties; and
	•		dilution to existing stockholders.

As part of our growth strategy, we regularly consider strategic transactions such as acquisitions, mergers and combinations within our industry. We cannot be certain that we will be able to continue to identify and to consummate strategic transactions, and no assurance can be given with respect to the timing, likelihood or business effect of any possible transaction. Any transactions that we have consummated or will consummate involve risks and uncertainties to us. These risks could cause the failure of any anticipated benefits of an acquisition to be realized, which could have a material adverse effect on our business.

We are subject to litigation and legal compliance risks.

Because of the extent and complexity of our regulatory environment and the products we offer, many aspects of our business involve substantial risks of liability. In recent years, there has been an increasing incidence of litigation involving the securities brokerage industry, including class action and other suits that generally seek substantial damages, including in some cases punitive damages. Any such litigation brought in the future could have a material adverse effect on our business, financial condition and operating results. We also face potential indirect liability for claims of defamation, negligence, copyright, patent or trademark infringement, violation of the securities laws and other claims based upon the third-party content that we distribute online. Computer failures may also result in our widely publishing and distributing incorrect data. Our insurance may not necessarily cover any of these claims or may not be adequate to protect us against all liability that may be imposed. Any such litigation brought in the future could have a material adverse effect on our business, financial condition and operating results.

In addition, we and our subsidiaries, our business and the industries in which we operate are at times being reviewed or investigated by regulators, which could lead to enforcement actions, fines and penalties or the assertion of private litigation claims and damages. While we believe that we have adopted appropriate risk management and compliance programs, the nature of our operations means that legal compliance risk will continue to exist and additional legal proceedings and other contingencies, the outcome of which cannot be predicted with certainty, will arise from time to time.

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

(c) Purchases of Equity Securities by the Issuer

The following table provides information about our repurchases of our common stock during the three months ended September 30, 2009:

										Total
										Number of				Approximate
										Shares				Dollar Value of
										Purchased				Shares that
										as Part of				May Yet Be
		Total				Average				Publicly				Purchased
		Number of				Price				Announced				Under the Plans
		Shares				Paid per				Plans				or Programs
Period		Purchased				Share				or Programs				(2)(3)(4)
July 1, 2009 through July 31, 2009			—			$	—				—			$	25,797,801
August 1, 2009 through August 31, 2009			—				—				—				25,797,801
September 1, 2009 through September 30, 2009			100,000				17.17				100,000				25,797,801
			100,000	(1)		$	17.17				100,000			$	25,797,801

Item 6.	—	Exhibits

Exhibit				Description
	13.1			Consolidated Financial Statements as set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008(1)
	31.1			Certification of David A. Fisher, Principal Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2			Certification of Adam J. DeWitt, Principal Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1			Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Signatures

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

Dated: November 9, 2009		optionsXpress Holdings, Inc.
		(Registrant)
		By:		/s/ DAVID A. FISHER   David A. Fisher
				Chief Executive Officer
				(Principal Executive Officer)
		By:		/s/ ADAM J. DEWITT   Adam J. DeWitt
				Chief Financial Officer
				(Principal Financial and Accounting Officer)

Exhibit Index

Exhibit				Description
	13.1			Consolidated Financial Statements as set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008(1)
	31.1			Certification of David A. Fisher, Principal Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2			Certification of Adam J. DeWitt, Principal Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1			Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002