E*TRADE FINANCIAL Corporation Announces Strong Third Quarter Results; Narrows 2006 Earnings Guidance Range

Net Income of $153 million Earnings of $0.35 per share, or $0.36(1) per share excluding acquisition-related integration expenses Total Net Revenue of $582 million Record Net Operating Interest Income after Provision for Loan Losses of $343 million Enterprise Net Interest Spread of 286 basis points Organic growth of $1.5 billion in Total Customer Cash and Deposits Total Retail Client Assets of $185 billion Narrowed 2006 earnings guidance to $1.45 - $1.50 per share, excluding $0.05 of acquisition-related integration expenses, resulting in $1.40 - $1.45 per share on a GAAP basis E*TRADE FINANCIAL Corporation (NYSE: ET) today announced results for its third quarter ended September 30, 2006, reporting net income of $153 million, or $0.35 per share compared to $107 million, or $0.28 per share a year ago. Excluding acquisition-related integration expenses, the Company earned $0.36 per share(1). Total net revenue for the third quarter increased 39 percent year over year to $582 million. Net operating interest income after provision for loan losses increased 68 percent year over year to a record $343 million – representing 59 percent of total net revenue. The Company’s record net operating interest income was the combined result of a 42 percent increase in enterprise interest-earning assets and a 34 basis point increase in enterprise net interest spread compared to the year ago period. Non-interest revenue increased 11 percent year over year to $239 million with higher commission-related revenue and lower gain on sales of loans and securities, net. The Company also narrowed its 2006 earnings guidance range to $1.45 - $1.50 per share from the previous range of $1.42 - $1.52. As previously indicated, this range excludes $0.05 per share of acquisition-related integration expenses. This $0.05 was realized throughout the first three quarters of 2006. Including these expenses, the Company now expects to earn $1.40 - $1.45 per share on a GAAP basis in 2006, narrowed from the previous range of $1.37 - $1.47 per share. "In the third quarter we generated growth in client assets and cash, fueled by expanded customer engagement across our suite of value-oriented financial solutions," said Mitchell H. Caplan, Chief Executive Officer, E*TRADE FINANCIAL Corporation. "Our success is a testament to our integrated business model, which delivers quality results through various market conditions. As we expand globally by exporting our proven US value proposition to our international locations, we are extremely optimistic about the long-term growth potential of the franchise." Other selected highlights: Introduced flat $9.99 Canadian equity commissions and strengthened value proposition for Canadian Mass Affluent customers Launched new website and highly competitive flat-fee pricing in Germany Announced a tender offer for an additional 20 percent of the shares of IL&FS Investsmart Limited, one of India's leading financial services organizations, providing a complete range of Financial Management Solutions for Retail and Institutional customers Closed the acquisition of Retirement Advisors of America, a Texas-based asset management firm with over $1 billion in assets under management Received an upgrade to the Company’s senior debt rating from Dominion Bond Rating Service Received top honors for the second year in a row in Keynote Systems’ Annual Brokerage Website rankings for Site Reliability and Site Responsiveness Named Best International Stockbroker by Investor’s Chronicle, a leading UK-based investing magazine Historical monthly metric data from January 2003 to September 2006 can be found on the E*TRADE FINANCIAL investor relations site at www.etrade.com. About E*TRADE FINANCIAL The E*TRADE FINANCIAL family of companies provides financial services including trading, investing, banking and lending for Retail and Institutional customers. Securities products and services are offered by E*TRADE Securities LLC (Member NASD/SIPC). Bank and lending products and services are offered by E*TRADE Bank, a Federal savings bank, Member FDIC, or its subsidiaries. Important Notice E*TRADE FINANCIAL and the E*TRADE FINANCIAL logo are registered trademarks or trademarks of E*TRADE FINANCIAL Corporation. The statements contained in this news release that are forward-looking are based on current expectations that are subject to a number of uncertainties and risks, and actual results may differ materially. The uncertainties and risks include, but are not limited to, changes in market activity, anticipated increases in the rate of new customer acquisition, the conversion of new visitors to the site to customers, the activity of customers and assets held at the institution, seasonality, the development and enhancement of products and services, competitive pressures (including price competition), system failures, economic and political conditions, changes in consumer behavior and the introduction of competing products having technological and/or other advantages. Further information about these risks and uncertainties can be found in the information included in the annual reports previously filed by E*TRADE FINANCIAL Corporation with the SEC on Form 10-K (including information under the caption "Risk Factors") and quarterly reports on Form 10-Q. © 2006 E*TRADE FINANCIAL Corporation. All rights reserved. FINANCIAL STATEMENTS E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statement of Income (In thousands, except per share amounts) (Unaudited)   Three Months Ended Nine Months Ended September 30, September 30,   2006    2005    2006    2005    Revenue: Operating interest income $ 731,429  $ 424,114  $ 1,986,096  $ 1,148,384  Operating interest expense   (376,293)   (207,101)   (961,569)   (535,532) Net operating interest income 355,136  217,013  1,024,527  612,852  Provision for loan losses   (12,547)   (12,909)   (33,014)   (37,946) Net operating interest income after provision for loan losses   342,589    204,104    991,513    574,906  Commission 133,606  114,278  476,771  323,111  Service charges and fees 33,910  32,893  99,540  100,639  Principal transactions 22,697  23,793  84,979  75,547  Gain on sales of loans and securities, net 16,003  21,850  38,738  84,121  Other revenue   32,961    22,918    99,932    66,596  Total non-interest income   239,177    215,732    799,960    650,014  Total net revenue   581,766    419,836    1,791,473    1,224,920  Expense excluding interest: Compensation and benefits 110,705  103,084  352,334  280,472  Clearing and servicing 62,500  46,930  189,926  132,720  Advertising and market development 23,914  21,188  89,115  74,252  Communications 25,576  18,210  84,818  54,650  Professional services 20,741  16,703  71,715  53,168  Depreciation and amortization 18,565  18,443  56,181  53,310  Occupancy and equipment 22,150  16,249  63,082  50,673  Amortization of other intangibles 12,087  4,382  35,391  13,751  Facility restructuring and other exit activities 16,684  (469) 19,315  495  Other   45,675    23,129    101,888    65,917  Total expense excluding interest   358,597    267,849    1,063,765    779,408  Income before other income (expense), income taxes, minority interest, discontinued operations and cumulative effect of accounting change 223,169  151,987  727,708  445,512  Other income (expense): Corporate interest income 1,942  3,409  6,091  7,796  Corporate interest expense (37,964) (13,783) (114,586) (36,975) Gain on sales and impairment of investments 26,991  22,028  59,897  68,172  Loss on early extinguishment of debt -  -  (703) -  Equity in income of investments and venture funds   2,519    3,103    1,701    7,142  Total other income (expense)   (6,512)   14,757    (47,600)   46,135  Income before income taxes, minority interest, discontinued operations and cumulative effect of accounting change 216,657  166,744  680,108  491,647  Income tax expense 66,429  57,606  230,204  170,862  Minority interest in subsidiaries   -    -    -    58  Net income from continuing operations 150,228  109,138  449,904  320,727  Discontinued operations, net of tax: Loss from discontinued operations -  (3,464) (721) (18,901) Gain (loss) on disposal of discontinued operations   3,021    171    3,021    (2,420) Net gain (loss) from discontinued operations 3,021  (3,293) 2,300  (21,321) Cumulative effect of accounting change, net of tax   -    1,646    -    1,646  Net income $ 153,249  $ 107,491  $ 452,204  $ 301,052    Basic earnings per share from continuing operations $ 0.35  $ 0.30  $ 1.07  $ 0.88  Basic earnings (loss) per share from discontinued operations 0.01  (0.01) 0.01  (0.06) Basic earnings per share from cumulative effect of accounting change   -    0.00    -    0.00  Basic net earnings per share $ 0.36  $ 0.29  $ 1.08  $ 0.82    Diluted earnings per share from continuing operations $ 0.34  $ 0.29  $ 1.03  $ 0.85  Diluted earnings (loss) per share from discontinued operations 0.01  (0.01) 0.00  (0.06) Diluted earnings per share from cumulative effect of accounting change   -    0.00    -    0.00  Diluted net earnings per share $ 0.35  $ 0.28  $ 1.03  $ 0.79  Shares used in computation of per share data: Basic 423,736  367,342  420,148  366,215  Diluted 438,883  382,031  436,959  379,768  E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statement of Income (In thousands, except per share amounts) (Unaudited)     Three Months Ended September 30, June 30, September 30,   2006    2006    2005  Revenue: Operating interest income $ 731,429  $ 660,373  $ 424,114  Operating interest expense   (376,293)   (315,771)   (207,101) Net operating interest income 355,136  344,602  217,013  Provision for loan losses   (12,547)   (10,270)   (12,909) Net operating interest income after provision for loan losses   342,589    334,332    204,104  Commission 133,606  167,296  114,278  Service charges and fees 33,910  33,640  32,893  Principal transactions 22,697  31,590  23,793  Gain on sales of loans and securities, net 16,003  11,107  21,850  Other revenue   32,961    33,393    22,918  Total non-interest income   239,177    277,026    215,732  Total net revenue   581,766    611,358    419,836  Expense excluding interest: Compensation and benefits 110,705  125,641  103,084  Clearing and servicing 62,500  64,138  46,930  Advertising and market development 23,914  30,420  21,188  Communications 25,576  27,834  18,210  Professional services 20,741  23,219  16,703  Depreciation and amortization 18,565  18,827  18,443  Occupancy and equipment 22,150  20,428  16,249  Amortization of other intangibles 12,087  11,972  4,382  Facility restructuring and other exit activities 16,684  2,884  (469) Other   45,675    25,208    23,129  Total expense excluding interest   358,597    350,571    267,849  Income before other income (expense), income taxes, minority interest, discontinued operations and cumulative effect of accounting change 223,169  260,787  151,987  Other income (expense): Corporate interest income 1,942  2,188  3,409  Corporate interest expense (37,964) (36,114) (13,783) Gain on sales and impairment of investments 26,991  15,290  22,028  Loss on early extinguishment of debt -  (568) -  Equity in income of investments and venture funds   2,519    189    3,103  Total other income (expense)   (6,512)   (19,015)   14,757  Income before income taxes, minority interest, discontinued operations and cumulative effect of accounting change 216,657  241,772  166,744  Income tax expense 66,429  85,080  57,606  Minority interest in subsidiaries   -    -    -  Net income from continuing operations 150,228  156,692  109,138  Discontinued operations, net of tax: Loss from discontinued operations -  (208) (3,464) Gain on disposal of discontinued operations   3,021    -    171  Net gain (loss) from discontinued operations 3,021  (208) (3,293) Cumulative effect of accounting change, net of tax   -    -    1,646  Net income $ 153,249  $ 156,484  $ 107,491    Basic earnings per share from continuing operations $ 0.35  $ 0.37  $ 0.30  Basic earnings (loss) per share from discontinued operations 0.01  (0.00) (0.01) Basic earnings per share from cumulative effect of accounting change   -    -    0.00  Basic net earnings per share $ 0.36  $ 0.37  $ 0.29    Diluted earnings per share from continuing operations $ 0.34  $ 0.36  $ 0.29  Diluted earnings (loss) per share from discontinued operations 0.01  (0.00) (0.01) Diluted earnings per share from cumulative effect of accounting change   -    -    0.00  Diluted net earnings per share $ 0.35  $ 0.36  $ 0.28  Shares used in computation of per share data: Basic 423,736  421,929  367,342  Diluted 438,883  439,460  382,031  E*TRADE FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheet (In thousands, except share amounts) (Unaudited)     September 30, 2006 December 31, 2005 ASSETS Cash and equivalents $ 1,199,638  $ 844,188  Cash and investments required to be segregated under Federal or other regulations 271,851  610,174  Trading securities 151,835  146,657  Available-for-sale mortgage-backed and investment securities 15,332,963  12,763,438  Loans held-for-sale 208,633  87,371  Brokerage receivables, net 7,230,960  7,174,175  Loans receivable, net 23,215,444  19,424,895  Property and equipment, net 299,261  299,256  Goodwill 2,063,598  2,003,456  Other intangibles, net 498,743  532,108  Other assets   1,050,245    681,968  Total assets $ 51,523,171  $ 44,567,686    LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits $ 22,319,364  $ 15,948,015  Securities sold under agreements to repurchase 10,990,532  11,101,542  Brokerage payables 7,399,279  7,342,208  Other borrowings 4,206,922  4,206,996  Senior notes 1,400,505  1,401,947  Mandatory convertible notes 439,330  435,589  Convertible subordinated notes -  185,165  Accounts payable, accrued and other liabilities   736,982    546,664  Total liabilities   47,492,914    41,168,126    Shareholders' equity: Common stock, $0.01 par value, shares authorized: 600,000,000; issued and outstanding: 427,007,278 at September 30, 2006 and 416,582,164 at December 31, 2005 4,270  4,166  Additional paid-in-capital 3,203,450  2,990,676  Retained earnings 1,032,634  580,430  Accumulated other comprehensive loss   (210,097)   (175,712) Total shareholders' equity   4,030,257    3,399,560  Total liabilities and shareholders' equity $ 51,523,171  $ 44,567,686  SEGMENT REPORTING Three Months Ended September 30, 2006 Retail Institutional Eliminations(2) Total Revenue: (In thousands) Operating interest income $ 397,998  $ 576,258  $ (242,827) $ 731,429  Operating interest expense   (176,939)   (442,181)   242,827    (376,293) Net operating interest income 221,059  134,077  -  355,136  Provision for loan losses   -    (12,547)   -    (12,547) Net operating interest income after provision for loan losses   221,059    121,530    -    342,589  Commission 100,902  32,704  -  133,606  Service charges and fees 28,790  5,120  -  33,910  Principal transactions -  22,697  -  22,697  Gain on sales of loans and securities, net 10,608  5,395  -  16,003  Other revenue   30,942    2,771    (752)   32,961  Total non-interest income   171,242    68,687    (752)   239,177  Total net revenue   392,301    190,217    (752)   581,766  Expense excluding interest: Compensation and benefits 77,002  33,703  -  110,705  Clearing and servicing 18,307  44,945  (752) 62,500  Advertising and market development 22,517  1,397  -  23,914  Communications 22,248  3,328  -  25,576  Professional services 12,140  8,601  -  20,741  Depreciation and amortization 14,175  4,390  -  18,565  Occupancy and equipment 20,434  1,716  -  22,150  Amortization of other intangibles 9,913  2,174  -  12,087  Facility restructuring and other exit activities 16,716  (32) -  16,684  Other   33,775    11,900    -    45,675  Total expense excluding interest   247,227    112,122    (752)   358,597  Segment income $ 145,074  $ 78,095  $ -  $ 223,169    Three Months Ended June 30, 2006 Retail Institutional Eliminations(2) Total Revenue: (In thousands) Operating interest income $ 372,732  $ 503,168  $ (215,527) $ 660,373  Operating interest expense   (144,026)   (387,272)   215,527    (315,771) Net operating interest income 228,706  115,896  -  344,602  Provision for loan losses   -    (10,270)   -    (10,270) Net operating interest income after provision for loan losses   228,706    105,626    -    334,332  Commission 127,567  39,729  -  167,296  Service charges and fees 27,803  5,837  -  33,640  Principal transactions -  31,590  -  31,590  Gain on sales of loans and securities, net 8,958  2,149  -  11,107  Other revenue   35,152    1,751    (3,510)   33,393  Total non-interest income   199,480    81,056    (3,510)   277,026  Total net revenue   428,186    186,682    (3,510)   611,358  Expense excluding interest: Compensation and benefits 80,352  45,289  -  125,641  Clearing and servicing 20,124  47,524  (3,510) 64,138  Advertising and market development 28,388  2,032  -  30,420  Communications 24,520  3,314  -  27,834  Professional services 18,168  5,051  -  23,219  Depreciation and amortization 14,570  4,257  -  18,827  Occupancy and equipment 18,483  1,945  -  20,428  Amortization of other intangibles 9,814  2,158  -  11,972  Facility restructuring and other exit activities 2,824  60  -  2,884  Other   21,452    3,756    -    25,208  Total expense excluding interest   238,695    115,386    (3,510)   350,571  Segment income $ 189,491  $ 71,296  $ -  $ 260,787    Three Months Ended September 30, 2005 Retail Institutional Eliminations(2) Total Revenue: (In thousands) Operating interest income $ 175,330  $ 362,547  $ (113,763) $ 424,114  Operating interest expense   (63,223)   (257,641)   113,763    (207,101) Net operating interest income 112,107  104,906  -  217,013  Provision for loan losses   -    (12,909) -    (12,909) Net operating interest income after provision for loan losses   112,107    91,997    -    204,104  Commission 83,755  30,523  -  114,278  Service charges and fees 26,933  5,960  -  32,893  Principal transactions -  23,793  -  23,793  Gain on sales of loans and securities, net 17,534  4,316  -  21,850  Other revenue   27,927    2,901    (7,910)   22,918  Total non-interest income   156,149    67,493    (7,910)   215,732  Total net revenue   268,256    159,490    (7,910)   419,836  Expense excluding interest: Compensation and benefits 58,899  44,185  -  103,084  Clearing and servicing 10,690  44,150  (7,910) 46,930  Advertising and market development 19,363  1,825  -  21,188  Communications 15,390  2,820  -  18,210  Professional services 10,757  5,946  -  16,703  Depreciation and amortization 14,379  4,064  -  18,443  Occupancy and equipment 14,271  1,978  -  16,249  Amortization of other intangibles 2,193  2,189  -  4,382  Facility restructuring and other exit activities (270) (199) -  (469) Other   13,264    9,865    -    23,129  Total expense excluding interest   158,936    116,823    (7,910)   267,849  Segment income $ 109,320  $ 42,667  $ -  $ 151,987  KEY PERFORMANCE METRICS(3) CORPORATE METRICS Qtr ended 9/30/06 Qtr ended 6/30/06 Qtr ended 9/30/06 vs. 6/30/06 Qtr ended 9/30/05 Qtr ended 9/30/06 vs. 9/30/05   Operating  margin %(4) Consolidated 38 % 43 % (5)% 36 % 2 % Retail 37 % 44 % (7)% 41 % (4)% Institutional 41 % 38 % 3 % 27 % 14 %   Employees 4,180  4,140  1 % 3,039  38 % Consultants and other   455    565  (19)%   413  10 % Total headcount 4,635  4,705  (1)% 3,452  34 %   Revenue per headcount $ 125,516  $ 129,938  (3)% $ 121,621  3 %   Revenue per compensation and benefits Dollar $ 5.26  $ 4.87  8 % $ 4.07  29 %   Book value per share $ 9.44  $ 9.03  5 % $ 6.72  40 % Tangible book value per share $ 3.44  $ 3.11  11 % $ 5.33  (35)%   Cash &  equivalents ($MM) $ 1,199.6  $ 876.4  37 % $ 1,389.6  (14)% Free cash ($MM) $ 580.1  $ 650.8  (11)% $ 784.3  (26)%   Enterprise net interest spread (basis points)(5) 286  291  (2)% 252  13 % Enterprise interest-earning assets, average ($MM) $ 46,400  $ 44,064  5 % $ 32,690  42 %   Earnings before interest, taxes, depreciation & amortization ("EBITDA") ($MM) Net income from continuing operations $ 150.2  $ 156.7  (4)% $ 109.2  38 % Tax expense 66.4  85.1  (22)% 57.6  15 % Depreciation & amortization 30.7  30.8  0 % 22.8  35 % Corporate interest expense   38.0    36.1  5 %   13.8  175 % EBITDA $ 285.3  $ 308.7  (8)% $ 203.4  40 %   Interest coverage 7.5  8.5  (12)% 14.8  (49)%   RETAIL METRICS   Trading days 62.5  63.0  (1)% 64.0  (2)%   Daily Average Revenue Trades ("DARTs") US 116,459  142,621  (18)% 79,257  47 % International   18,671    22,981  (19)%   14,619  28 % Total DARTs 135,130  165,602  (18)% 93,876  44 %   Total retail  trades (MM) 8.4  10.4  (19)% 6.0  40 %   Retail average commission per trade $ 11.95  $ 12.23  (2)% $ 13.94  (14)%   End of period margin debt ($B) $ 6.42  $ 7.15  (10)% $ 2.43  164 % Average margin  debt ($B) $ 6.66  $ 6.99  (5)% $ 2.27  193 %   Gross new trading/investing accounts 151,344  169,595  (11)% 155,304  (3)% Gross new deposit/lending accounts 102,658  97,739  5 % 68,560  50 % Inactive accounts (142,415) (164,166) (13)% (121,107) 18 % Customer closed accounts   (60,670)   (61,689) (2)%   (54,029) 12 % Net new retail accounts 50,917  41,479  23 % 48,728  4 %   End of period trading/investing accounts 3,627,414  3,626,963  0 % 3,014,467  20 % End of period deposit/lending accounts   799,416    748,950  7 %   678,449  18 % End of period retail accounts 4,426,830  4,375,913  1 % 3,692,916  20 %   Net new customers 29,209  11,040  165 % 33,205  (12)% End of period total retail customers 3,444,851  3,415,642  1 % 2,934,406  17 %   End of period assets per customer $ 53,632  $ 52,741  2 % $ 36,243  48 % Consolidated net revenue per customer $ 169  $ 179  (6)% $ 143  18 % Consolidated segment income per customer $ 65  $ 76  (14)% $ 52  25 % Products per customer 2.1  2.1  0 % 2.0  5 %   Total Retail Client Assets ($B)(6) Security holdings $ 123.4  $ 121.6  1 % $ 57.2  116 % Cash (including money market funds) 9.8  9.5  3 % 5.4  81 % Unexercised options (vested)   29.8    28.4  5 %   29.8  0 % Client assets in trading/investing accounts   163.0    159.5  2 %   92.4  76 % Sweep Deposit Account 10.4  10.5  (1)% 7.4  41 % Transaction accounts 6.8  6.1  11 % 4.2  62 % CDs   4.6    4.0  15 %   2.4  92 % Client assets in deposit accounts   21.8    20.6  6 %   14.0  56 % Total retail client assets $ 184.8  $ 180.1  3 % $ 106.4  74 %   Total customer  cash and  deposits ($B)(6) $ 31.6  $ 30.1  5 % $ 19.4  63 %   Unexercised options (unvested) ($B) $ 18.7  $ 16.5  13 % $ 18.7  0 %     INSTITUTIONAL METRICS   Market Making Equity shares traded (MM) 54,472  69,537  (22)% 35,125  55 % Average revenue capture per 1,000 equity shares $ 0.382  $ 0.387  (1)% $ 0.535  (29)% % of Bulletin Board equity shares to total equity shares 92.5% 92.7% (0.2)% 86.0% 6.5 %   End of Period Enterprise Loans Receivable  Detail ($MM) Mortgage and home equity loans, net $ 19,825  $ 17,256  15 % $ 13,556  46 % Margin receivables 6,424  7,146  (10)% 2,426  165 % Consumer loans, net 3,420  3,610  (5)% 4,081  (16)% Other   179    151  19 %   48  273 % Total enterprise loans receivable, net $ 29,848  $ 28,163  6 % $ 20,111  48 %   Credit Quality and Reserve Metrics Net charge-offs as a % of average held-for-investment loans, net (annualized) 0.17 % 0.15 % 0.02 % 0.20 % (0.03)% Provision as a % of average held-for-investment loans, net (annualized) 0.22 % 0.20 % 0.02 % 0.30 % (0.08)% Allowance as a % of total ending gross held-for-investment loans 0.30 % 0.32 % (0.02)% 0.34 % (0.04)% Total non-performing loans, net, as a % of total gross held-for-investment loans 0.23 % 0.22 % 0.01 % 0.13 % 0.10 % Total loan loss allowance as a % of total non-performing loans, net 133 % 144 % (11)% 256 % (123)% Tier 1 Capital Ratio(7) 5.80 % 5.85 % (0.05)% 5.87 % (0.07)% Risk Weighted Capital Ratio(7) 10.61 % 11.01 % (0.40)% 11.13 % (0.52)% ACTIVITY IN ALLOWANCE FOR LOAN LOSSES   Three Months Ended September 30, 2006 Mortgage Consumer Total (In thousands) Allowance for loan losses, ending 6/30/06 $ 34,461  $ 32,660  $ 67,121  Provision for loan losses 5,892  6,655  12,547  Charge-offs, net   (3,290)   (6,470)   (9,760) Allowance for loan losses, ending 9/30/06 $ 37,063  $ 32,845  $ 69,908  AVERAGE ENTERPRISE BALANCE SHEET DATA Three Months Ended September 30, 2006 June 30, 2006 Average Balance Operating Interest Inc./Exp. Average Yield/Cost Average Balance Operating Interest Inc./Exp. Average Yield/Cost Enterprise interest-earning assets: (In thousands) Loans, net(8) $ 22,955,022  $ 364,744  6.36% $ 20,419,936  $ 303,499  5.95% Margin receivables 6,645,017  123,855  7.39% 6,982,867  123,390  7.09% Mortgage-backed and related available-for-sale securities 12,068,052  159,199  5.28% 11,715,510  147,374  5.03% Available-for-sale investment securities 3,220,054  51,885  6.44% 3,048,166  47,287  6.21% Trading securities 114,806  2,600  9.06% 142,452  2,946  8.27% Cash and cash equivalents(9) 974,738  11,272  4.59% 1,260,684  13,421  4.27% Stock borrow and other   422,010    8,690  8.17%   493,981    8,795  7.14% Total enterprise interest-earning assets $ 46,399,699    722,245  6.22% $ 44,063,596    646,712  5.87% Enterprise interest-bearing liabilities: Retail deposits $ 20,992,962  141,035  2.67% $ 19,848,322  115,062  2.33% Brokered certificates of deposit 618,681  7,453  4.78% 577,068  6,696  4.65% Free credits(10) 5,794,586  18,326  1.25% 6,416,136  16,957  1.06% Repurchase agreements and other borrowings 11,586,260  150,837  5.09% 10,580,283  129,103  4.83% FHLB advances 3,583,663  43,950  4.80% 2,842,198  32,207  4.48% Stock loan and other   1,283,026    11,617  3.59%   1,133,694    8,487  3.00% Total enterprise interest-bearing liabilities $ 43,859,178    373,218  3.36% $ 41,397,701    308,512  2.96% Enterprise net interest income/spread(5) $ 349,027  2.86% $ 338,200  2.91% Three Months Ended September 30, 2005 Average Balance Operating Interest Inc./Exp. Average Yield/Cost Enterprise interest-earning assets: (In thousands) Loans, net(8) $ 17,024,600  $ 232,004  5.45% Margin receivables 2,267,918  37,844  6.62% Mortgage-backed and related available-for-sale securities 9,059,130  97,537  4.31% Available-for-sale investment securities 1,937,276  25,888  5.35% Trading securities 186,377  2,792  5.99% Cash and cash equivalents(9) 1,793,028  14,950  3.31% Stock borrow and other   422,076    5,654  5.31% Total enterprise interest-earning assets $ 32,690,405    416,669  5.10% Enterprise interest-bearing liabilities: Retail deposits $ 13,095,471  57,710  1.75% Brokered certificates of deposit 540,575  4,815  3.53% Free credits(10) 3,406,685  4,733  0.55% Repurchase agreements and other borrowings 9,510,214  91,520  3.77% FHLB advances 4,093,294  40,914  3.91% Stock loan and other   426,729    2,025  1.88% Total enterprise interest-bearing liabilities $ 31,072,968    201,717  2.58% Enterprise net interest income/spread(5) $ 214,952  2.52% RECONCILIATION FROM ENTERPRISE NET INTEREST INCOME TO NET OPERATING INTEREST INCOME Three Months Ended September 30, June 30, September 30,   2006    2006    2005  (In thousands) Enterprise net interest income $ 349,027  $ 338,200  $ 214,952  Taxable equivalent interest adjustment(11) (5,246) (4,306) (2,599) Stock conduit, net(12) 14  132  339  Customer cash held by third parties(13)   11,341    10,576    4,321  Net operating interest income $ 355,136  $ 344,602  $ 217,013  SUPPLEMENTAL INFORMATION AND ENDNOTES Explanation of Non-GAAP Measures and Certain Metrics Management believes free cash, EBITDA, interest coverage, EPS excluding acquisition-related integration expenses, enterprise net interest income and enterprise interest-earning assets are appropriate measures for evaluating the operating and liquidity performance of the Company. We believe that the elimination of certain items from the related GAAP measures is helpful to investors and analysts who may wish to use some or all of this information to analyze our current performance, prospects and valuation. Our management uses non-GAAP information internally to evaluate our operating performance and in formulating our budget for future periods. Free Cash Free cash represents cash held at the Company and its non-Bank and non-Brokerage subsidiaries, less discretionary reserves, plus excess capital at Bank and Brokerage after application of regulatory capital requirements and the Company’s own regulatory capital guidelines. The Company believes that free cash is a useful measure of the Company’s liquidity as it excludes cash reflected on the balance sheet that may not be freely available to the Company. EBITDA EBITDA represents net income from continuing operations before corporate interest expense, taxes and depreciation and amortization. Management believes that EBITDA provides a useful additional measure of our performance by excluding certain non-cash charges and expenses that are not directly related to the performance of our business. Interest Coverage Interest coverage represents EBITDA divided by corporate interest expense. Management believes that by excluding the charges and expenses that are excluded from EBITDA, interest coverage provides a useful additional measure of our ability to continue to meet our interest obligations and our liquidity. EPS Excluding Acquisition-Related Integration Expenses EPS excluding acquisition-related integration expenses represents net income plus acquisition-related integration expenses, net of tax divided by diluted shares. Management believes that excluding charges associated with the integration of our acquisitions from EPS provides a useful measure to assess the ongoing operating performance of the Company without the impact of nonrecurring charges associated with acquisitions. Enterprise Net Interest Income Enterprise Net Interest Income is taxable equivalent basis net operating interest income excluding corporate interest income and corporate interest expense, stock conduit interest income and expense and interest earned on customer cash held by third parties. Management believes this non-GAAP measure is useful to investors and analysts as it is a measure of the net operating interest income generated by our core operations. Enterprise Interest-Earning Assets Enterprise interest-earning assets consists of the primary interest-earning assets of the Company and includes: loans receivable, mortgage-backed and available-for-sale securities, margin loans, stock borrow balances, and cash required to be segregated under regulatory guidelines that earn interest for the Company. Management believes that this non-GAAP measure is useful to investors and analysts as it is a measure of the primary assets from which the Company generates net operating interest income. It is important to note these metrics and other non-GAAP measures may involve judgment by management and should be considered in addition to, not as a substitute for, or superior to, net income, consolidated statements of cash flows, or other measures of financial performance prepared in accordance with GAAP. For complete information on the items excluded from these non-GAAP measures, please see our financial statements and "Management’s Discussion and Analysis of Results of Operations and Financial Condition” that will be included in the periodic report we expect to file with the SEC with respect to the financial periods discussed herein. (1) EPS excluding acquisition-related integration expenses is a non-GAAP financial measure per applicable SEC regulations. The earnings of $0.36 per share was calculated as Net Income as reported of $153,249,000 plus the after-tax impact of acquisition-related integration expenses of $2,577,000 for pro forma Net Income of $155,826,000 divided by 438,883,000 diluted shares. (2) Reflects elimination of transactions between Retail and Institutional segments, which include deposit transfer pricing, servicing and order flow rebates. (3) Amounts and percentages may not calculate due to rounding. (4) Operating margin is the percentage of net revenue that goes to net income before other income (expense), income taxes, minority interest, discontinued operations and cumulative effect of accounting change. The percentage is calculated by dividing our income before other income (expense), income taxes, minority interest, discontinued operations and cumulative effect of accounting change by our total net revenue. (5) Enterprise net interest spread is the taxable equivalent rate earned on average enterprise interest-earning assets less the rate paid on average enterprise interest-bearing liabilities, excluding corporate interest-earning assets and liabilities, stock conduit and cash held by third parties. (6) Total customer cash and deposits, as well as total retail client assets, have been re-presented to account for a methodology change to settlement date from trade date reporting as of 12/31/05. (7) Q3-06 estimate. (8) Excludes loans to customers on margin. (9) Includes segregated cash balances. (10) Free credits are balances held in Brokerage customer accounts arising from deposits of funds and sales of securities. (11) Gross-up for tax-exempt securities. (12) Net operating interest income earned on average stock conduit assets of $0.03 billion, $0.4 billion and $0.7 billion for the quarters ended September 30, 2006, June 30, 2006, and September 30, 2005, respectively. (13) Includes interest earned on average customer assets of $3.6 billion, $3.4 billion and $1.7 billion for the quarters ended September 30, 2006, June 30, 2006 and September 30, 2005, respectively, held by parties outside E*TRADE FINANCIAL, including third party money market funds and sweep deposit accounts at unaffiliated financial institutions.