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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K x Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 2003 or oTransition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to ____________ Commission file number: 0-31049 TradeStation Group, Inc.  Florida
(State or other jurisdiction of
incorporation or organization)
    
    65-0977576
(I.R.S. Employer Identification No.)
 8050 S.W. 10th Street, Suite 4000, Plantation, Florida
(Address of principal executive offices)
    
    33324
(Zip Code)
 954-652-7000
(Registrants telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share
(Title of class) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
x No o Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (17 CFR 229.405) is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes
x No o The aggregate market value of the registrants common stock held by
non-affiliates of the registrant on June 30, 2003, based upon the closing
market price of the registrants common stock on The Nasdaq National Market on
such date, was approximately $191,445,000. The registrant had 41,486,173 shares of common stock, $.01 par value,
outstanding as of March 1, 2004. DOCUMENTS INCORPORATED BY REFERENCE
NONE.




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSOverview and Recent DevelopmentsIndustry BackgroundProducts and ServicesSales and MarketingStrategic RelationshipsTechnology DevelopmentClient Services and Support and TrainingCompetitionIntellectual PropertyGovernment RegulationEmployeesAvailable InformationITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESCommon Stock InformationDividend PolicyRecent Sales of Unregistered SecuritiesITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOverviewResults of OperationsCritical Accounting Policies and EstimatesYears Ended December 31, 2003 and 2002Years Ended December 31, 2002 and 2001Income TaxesVariability of ResultsLiquidity and Capital ResourcesOff-Balance-Sheet ArrangementsRecently Issued Accounting StandardsIssues, Uncertainties and Risk FactorsITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-KSIGNATURESEXHIBIT INDEXEX-10.10 SUBLEASE AGREEMENTEX-21.1 LIST OF SUBSIDIARIESEX-23.1 CONSENT OF ERNST & YOUNG LLPEX-31.1 CO-CHIEF EXECUTIVE OFFICER CERTIFICATIONEX-31.2 CO-CHIEF EXECUTIVE OFFICER CERTIFICATIONEX-31.2 CHIEF FINANCIAL OFFICER CERTIFICATIONEX-32.1 CERTIFICATION CO-CHIEF EXECUTIVE OFFICEREX-32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER    Table of Contents  TABLE OF CONTENTS PagePART IITEM 1.
    
    BUSINESS
    
    
    1Overview and Recent Developments
    
    
    1Industry Background
    
    
    2Products and Services
    
    
    4Sales and Marketing
    
    
    7Strategic Relationships
    
    
    7Technology Development
    
    
    7Client Services and Support and Training
    
    
    8Competition
    
    
    9Intellectual Property
    
    
    10Government Regulation
    
    
    12Employees
    
    
    14Available Information
    
    
    14ITEM 2.
    
    PROPERTIES
    
    
    15ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    15ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    17PART IIITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    18Common Stock Information
    
    
    18Dividend Policy
    
    
    18Recent Sales of Unregistered Securities
    
    
    18ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    
    19ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    20Overview
    
    
    20Results of Operations
    
    
    21Critical Accounting Policies and Estimates
    
    
    23Years Ended December 31, 2003 and 2002
    
    
    24Years Ended December 31, 2002 and 2001
    
    
    29Income Taxes
    
    
    33Variability of Results
    
    
    34Liquidity and Capital Resources
    
    
    34Off-Balance-Sheet Arrangements
    
    
    36Recently Issued Accounting Standards
    
    
    37Issues, Uncertainties And Risk Factors
    
    
    38ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    46ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    47ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    47
 i




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PageITEM 9A.
    
    CONTROLS AND PROCEDURES
    
    
    47PART IIIITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    48ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    
    52ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    57ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    59ITEM 14.
    
    PRINCIPAL ACCOUNTING FEES AND SERVICES
    
    
    59PART IVITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
    
    
    60SIGNATURES
    
    
    
    
    64
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PART I 
 ITEM 1. BUSINESS 
 Overview and Recent Developments TradeStation Group, Inc., a Florida corporation formed in 2000, is the
successor company to a publicly-held trading software company that was formed
in 1982. TradeStation Group is listed on The Nasdaq National Market under the
symbol TRAD. TradeStation Securities, Inc. and TradeStation Technologies,
Inc. are currently TradeStation Groups two operating subsidiaries. TradeStation Securities, a leading direct-access brokerage firm serving
the active trader and certain institutional trader markets, is the companys
principal operating subsidiary. TradeStation Securities is a licensed
broker-dealer and futures commission merchant, and a member of the National
Association of Securities Dealers (NASD), Securities Investor Protection
Corporation (SIPC), National Futures Association (NFA), American Stock Exchange
(AMEX), Chicago Board Options Exchange (CBOE), International Securities
Exchange (ISE), Philadelphia Stock Exchange (PHLX), Pacific Stock Exchange
(PCX), and Archipelago Exchange (ArcaEx or ARCX), and has pending membership
applications with the New York Stock Exchange (NYSE) and Boston Options
Exchange (BOX). By the end of 2003, TradeStation Securities had more than
12,000 equities, futures and forex accounts, the vast majority of which were
equities and futures accounts. The average equities account made nearly 600
revenue trades during 2003, and the average futures account traded well over
500 round-turn contracts. During the 2003 fourth quarter, TradeStation
Securities brokerage client account base averaged over 26,500 revenue trades
per trading day. The average account asset balance of an equities account was
nearly $120,000 during the 2003 fourth quarter. TradeStation Securities core brokerage service is the TradeStation
electronic trading platform. The TradeStationelectronic trading platform
seamlessly integrates powerful strategy trading software tools, historical and
streaming real-time market data, and intelligent direct-access order-routing
and execution. Direct-access trading means, with respect to equities, equities
options and futures transactions, direct Internet connections to electronic
marketplaces. These include, for stocks and Exchange Traded Funds (ETFs),
electronic communication networks (ECNs), Archipelago, SuperDOT (for listed
securities) and SuperMontage (Nasdaq), for futures, electronic futures
exchanges such as the Chicago Mercantile Exchanges (CMEs) GLOBEX and the
Chicago Board of Trades (CBOTs) a/c/e, and, for equities options, electronic
options exchanges offered by the AMEX, CBOE, ISE, PHLX, PCX and BOX. In each
of these electronic marketplaces, anonymous buyers and sellers participating on
the network are matched, often instantaneously following the placement of their
orders. In addition to strategy trading tools, real-time market data and
direct-access order execution, the TradeStationelectronic trading platform
offers state-of-the-art advanced order placement functions, unique automated
and manual order placement capabilities, and numerous advanced charting and
analytics features. A formal patent application covering the TradeStation
electronic trading platform has been filed with the United States Patent and
Trademark Office. In 2003, we launched TradeStation 7and two updated versions, TradeStation
7.1and 7.2. TradeStation 7and its updates contained significant
enhancements, including seamless, automated order placement and execution of
futures trading strategies, forex analytics and 1




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execution, the companys award-winning OptionStation® and RadarScreen®
analytics software, basket trading, market depth displays for ECNs, CME and
CBOT, and multiple account trade allocation. In March 2004, we launched the
roll-out of TradeStation 8.0, the centerpiece of which is fully-integrated,
direct-access options execution. The release of TradeStation 8.0will be
rolled-out in a controlled manner over the next several months. On March 8, 2004, Barronsmagazine named TradeStation Securities Best
Broker for Active Traders for the second year in a row. In the Technical
Analysis of Stocks and Commoditiesmagazine Readers Choice Awards published
February 20, 2004, TradeStation Securities was named, also for the second year
in a row, best Direct Access Stock Brokerage, best Direct Access Futures
Brokerage, best Institutional Platform, and best Professional Platformover
competitors that included Bloomberg, Reuters, Schwabs CyberTrader, Refco and
Man Financial.TradeStation Securities has won similar first-place awards and
ratings since the 2001 launch of the TradeStationelectronic trading platform. We also provide via our technologies subsidiary, TradeStation
Technologies, subscription services. The subscription version of TradeStation
is an institutional-quality service that offers strategy trading software tools
that generate real-time buy and sell alerts based upon the subscribers
programmed strategies, but does not include order execution. Subscribers are
charged a monthly subscription fee. This subscription service was named best
Subscription Internet Analytical Platform in the Technical Analysis of Stocks
and Commoditiesmagazine Readers Choice Awards published February 20, 2004. Our principal executive offices are located in The TradeStation Building,
8050 S.W. 10th Street, Suite 4000, Plantation, Florida 33324, and our telephone
number is (954) 652-7000. THIS REPORT (PARTICULARLY ITEM 1. BUSINESS AND ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS)
CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. SEE ITEM 7. MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  ISSUES,
UNCERTAINTIES AND RISK FACTORS. 
 Industry Background Active Trader Market The active trader market is usually defined as retail individuals, which
include intra-day or day traders, semi-professionals, active self-directed
traders, people who trade for themselves as a full-time or part-time business
endeavor, or any other individual that trades much more actively than the
typical online trading account. An active trader has historically been defined
as one who trades a minimum of 10 times per month. The average TradeStation
brokerage account trades nearly five times that number. The vast majority of active traders are believed to be with traditional
online brokerage firms (e.g., Ameritrade, E*Trade, Fidelity, Schwab, T.D.
Waterhouse, etc.). It is generally 2




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accepted in the online brokerage industry that 5% to 10% of each large online
brokerage firms client base consists of active traders. Nearly all of the
large online brokerage firms have tried over the past three years to acquire
direct-access firms or technology, and more sophisticated trading analysis
platforms, in order to retain and grow this most valuable segment of their
client bases. According to data and reports published over the last three to
four years, there are estimated to be more than 20 million online accounts, and
direct-access trading accounts have grown and have accounted for a higher
percentage of trading activity of both Nasdaq and listed securities. Based on
industry articles published in the past two years, it appears that the majority
of all order flow  both listed and Nasdaq  is handled electronically. Active
traders are generally believed to account for the majority of online daily
trades and have larger account asset balances (under current regulations, a
minimum account balance of $25,000 is required for very active traders). In
the 2003 fourth quarter, the average account asset balance of a TradeStation
Securities equities account was just under $120,000. We believe an online brokerage focused on active traders, in order to
maximize its potential for successful market penetration, needs to deliver:  
    
    Direct-access order placement and execution, including both
automated and one-click manual order placement capabilities  
    
    State-of-the-art advanced orders capabilities  the ability to use
various order-placement features (limits, trailing stops, simultaneous
orders, contingency orders, reserve orders, hidden orders, pegged
orders, discretionary orders, etc.)  
    
    Intelligent/smart order routing  
    
    Access to most, if not all, major avenues of execution (the major
ECNs, Archipelago, SuperMontage, SuperDOT, GLOBEX, a/c/e, the major
electronic options exchanges, etc.)  
    
    A competitive, per share commission pricing structure  
    
    Strategy testing and automation, as well as advanced charting and
analysis, software tools  
    
    Streaming, real-time quotes, including meaningful market depth displays  
    
    Trade desk, brokerage client and technical support services  
    
    Client training services TradeStation Securities offers each of the above-mentioned features. Institutional Trader Market We see the institutional trader market, as it relates to potential client
relationships for direct-access brokerage firms like TradeStation Securities,
as hedge fund and money managers, commodity trading advisors and commodity pool
operators, and registered investment advisers who use short-term trading
strategies. According to data published in recent years, there are
approximately 6,000 hedge funds today, which are estimated to manage $600
billion of invested assets, 1,700 commodity pool operators, 13,000 registered
investment advisors, 800 registered commodity trading advisors and 8,000
unregistered commodity trading advisors. Many believe that buy side institutional traders have become less and less
pleased with Wall Street (traditional sell side brokerage firms) and are
moving, to one degree or another, towards using direct-access execution of
their trading decisions. The biggest concern institutional traders 3




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are said to have today is
that the cost of their trades  not just
commissions, but mainly the costs that result from adverse market movement
caused by large block trades  is no longer acceptable, particularly given the
market conditions of the past three years. Accordingly, these institutional
traders are looking for systems that provide the fastest execution at the best
prices possible. The fastest execution is provided by robust direct-access
technology, and the best prices possible means an exhaustive list of
execution venues to ensure maximum access to liquidity through intelligent
order routing. It also means that the direct-access platform offers stealthy
execution of large block orders (anonymity) through advanced reserve order,
hidden order, discretionary order and order pegging technology  technology
that enables the trade to be completed with minimal market disturbance. These
basics: (1) effective, robust, speedy execution; (2) full liquidity (access to
all major electronic marketplaces); (3) advanced order capabilities; and (4)
intelligent order routing, must be in place before an institutional fund
manager or other institutional buy side trader will consider using a
direct-access brokerage firm. These are all strengths of the TradeStation
electronic trading platform. Other features and services that are important to many buy side
institutional traders include sophisticated decision-support front ends,
automated trading functionality, intuitive, manual one-click order placement,
advanced portfolio/basket trading, multiple account trade allocation, a
detailed, flexible order management/portfolio management system (or the ability
to integrate their management systems with the direct-access firms order
execution software), and a broad scope of assets (stocks, options, futures and
forex). TradeStationcontains, arguably, the best decision-support and
automated trading and manual order placement functionality on the market,
list/basket trading, multiple account trade allocation, and state-of-the-art
direct-access execution services for stocks, options and futures trading, and
advanced analytics and electronic execution for forex trading, and is working
to complete more advanced portfolio/basket trading features and new order and
risk management system compatibilities and features. 
 Products and Services Overview   TradeStation Our main product/service offering is the TradeStationelectronic trading
platform, complete with direct-access order execution services, for
institutional, professional and serious, active individual traders. A formal
patent application covering what we believe to be the unique, powerful
technology of TradeStationis pending. TradeStationdoes not provide
investment or trading advice or recommendations, or recommend the use of any
particular strategy, but rather enables the trader to design, test, optimize
and automate his own, custom trading strategies. TradeStationis a registered
trademark in the United States, Australia, Canada, the European Union,
Indonesia, Korea, Singapore, South Africa and Taiwan. In addition to offering the TradeStationelectronic trading platform to
the brokerage customers of our TradeStation Securities subsidiary, we offer,
through our TradeStation Technologies subsidiary, TradeStationsubscriptions.
The difference between the TradeStationelectronic trading platform and the
TradeStationsubscription service is that the subscription service does not
include order execution or account management capabilities. 4




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TradeStationhas, since its initial release as a strategy trading software
program in 1991, been our flagship product. From 1996 until October 2001 it
was marketed worldwide to institutional traders on a monthly subscription basis
by Telerate, Inc. as a premium tool for the Telerate data feed service. It has
also served, and continues to serve, as a strategy trading platform for
numerous third-party software applications. Its state-of-the-art technology
empowers the trader to design and develop a trading strategy based upon the
traders objective rules and criteria, test the potential profitability of that
trading strategy against historical data, and then computer-automate it to
monitor the applicable market and alert the trader in real-time when the
criteria of the trading strategy have been met and an order should, therefore,
be placed. The principal features of TradeStationwhich enable the trader to
design and develop trading strategies are EasyLanguageand the PowerEditor.
EasyLanguageis a proprietary computer language we developed consisting of
English-like statements and trading terms which can be input by the trader to
describe particular objective rules and criteria. The PowerEditoris a
compiler of EasyLanguagestatements that provides the trader with considerable
flexibility to modify and combine different trading rules and criteria, which
ultimately result in the design of the traders trading strategies.
EasyLanguageand PowerEditorare also registered trademarks. Brokerage Services TradeStation Securities principal offering today is online brokerage
services, covering equities, equities options, futures and forex transactions,
through the TradeStationelectronic trading platform. TradeStation Securities
targeted customer base for brokerage services includes active individual,
professional and institutional traders, including hedge fund and money managers
and investment advisors who use short-term trading strategies. In addition to
providing direct-access online services through the TradeStationelectronic
trading platform, the brokerage firm offers personal support services by its
registered trade-desk representatives who execute customers orders through
direct-access order execution systems if the customer is for some reason unable
or unwilling to place the order using his or her own computer. Having a direct-access order execution system, whether accessed directly
by the brokerage client through the TradeStationelectronic trading platform or
by a TradeStation Securities broker on behalf of the brokerage client, means
that both the online services and the firms trading desks are directly
connected to stock, futures and options exchanges and ECNs. ECNs, such as
Instinet (INCA)/Island (ISLD), Bloomberg (BTRD) and Brass (BRUT), and
electronic equities exchanges such as the Archipelago Exchange (ARCX) and
SuperMontage (from Nasdaq), directly match anonymous buyers and sellers
participating on the network. This system often results in the simplest, most
direct and speediest execution of orders for equity securities at the best
available price. With respect to electronically-traded futures contracts, the
TradeStationelectronic trading platform is directly connected to the CME
(GLOBEX), CBOT (a/c/e) and OneChicago electronic futures exchanges. With
respect to pit-traded futures contracts, TradeStationis directly connected to
its futures clearing firms online execution system which sends the order
directly to the trading pit. Approximately 90% of the companys futures trades
are on the electronic futures exchanges. With respect to options, the
TradeStationelectronic trading platform is directly connected to major options
exchanges that offer electronic trading, including CBOE, ISE, PHLX and PCX, and
membership applications to AMEX and BOX are pending. With respect to forex
deals, the TradeStationelectronic trading platform is directly connected to a
third-party forex dealers online deal system, which then electronically places
the forex orders. 5




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Client accounts for equity securities and futures currently are carried on
a fully disclosed basis by the brokerages clearing firms. Beginning in the
summer of 2004, TradeStation Securities plans to self-clear equities trades
made by its active trader client base. TradeStation Securities executes its
clients securities and futures transactions on an agency basis only, as
opposed to a principal basis. That is, it acts as the agent for its clients
directly in the market. When brokerage firms perform transactions on a
principal basis, they are permitted to accept a clients order to purchase,
purchase the securities in the market for the brokerage firm, and then sell the
securities to the client. TradeStation Securities does not do this. It always
charges only an agreed-upon commission and never earns income from marking up
or marking down its clients equities or futures transactions. For forex
deals, a forex dealer affiliated with our futures clearing firm acts as
principal/counterparty for, and clears, all deals with the companys forex
clients. For financial information concerning the brokerage services segment of our
operations, see MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS and Note 16 of Notes to Consolidated Financial Statements
 SEGMENT AND RELATED INFORMATION. Software Products and Services In December 2000, we launched the TradeStationelectronic subscription
service. The TradeStationelectronic subscription service includes our
award-winning strategy trading features and functions, streaming real-time
charts and quotes, streaming news, state-of-the-art analytical charting, and
all other features included in the TradeStationelectronic trading platform
other than trade order placement and other trading or brokerage-related
features or services. During 2003, the TradeStationelectronic subscription
service was offered to new subscribers at the monthly rate of $199.95 and to
legacy customers who had upgraded at monthly rates ranging from $79.95 to
$99.95. We evaluate our approach to subscription fee pricing on an ongoing
basis, which may result in different price offerings during 2004. The 2003
version of TradeStationreleased in March 2003 (TradeStation 7) also offers our
OptionStationand RadarScreenfunctions and features as optional services for
an increased monthly fee. OptionStation, also an award-winning technology, is
an options trading analysis product for equities, index and futures options
that enables traders to explore options trading strategies. RadarScreen
enables traders to scan up to hundreds or thousands, depending upon the data
service and computer hardware used, of equities or other securities to identify
potential buying or selling opportunities based upon the traders own trading
strategies. In the 2001 fiscal year, our software products and services operations
were responsible for the majority of our revenues. We stopped marketing our
legacy software products in May 2000 and our subscription software service in
December 2000. Accordingly, in 2002 and 2003, and, we expect, for the
foreseeable future, our brokerage operations produced and should continue to
produce the majority of our revenues. In 2002, brokerage operations accounted
for approximately 80% of our total revenues, and subscription fees accounted
for approximately 14% of our total revenues. In 2003, brokerage operations
accounted for approximately 85% of our total revenues, and subscription fees
accounted for approximately 12% of our total revenues. 6




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For financial information concerning the software products and services
segment of our operations, see MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Note 16 of Notes to
Consolidated Financial Statements  SEGMENT AND RELATED INFORMATION. 
 Sales and Marketing Our marketing in 2003 consisted principally of print advertising in Active
Trader, Futures, SFO,and Technical Analysis of Stocks & Commoditiesmagazines,
direct mail and e-mail, sales seminars, and our Web sites. The mix and
frequency of print, Web-site, direct-mail and in-person marketing methods we
use to try to achieve results will likely be continually modified as we test
such methods and mixtures and analyze and interpret the results. We may also
consider television and radio advertising. Less than 10% of our revenues were derived from customers outside of the
United States for the years ended December 31, 2003, 2002 and 2001.
International revenues are collected in U.S. dollars. 
 Strategic Relationships Clearing Services. Our brokerages clearing services for equities and
equities options, and for futures and futures options, are currently provided
by Bear, Stearns Securities Corp. and R.J. OBrien & Associates, Inc.,
respectively, pursuant to industry-standard clearing agreements. However, we
may, later this year, begin self-clearing or omnibus clearing of equities
and/or equities options trades for our active trader client base using Sungard
Financial Systems Phase3 trade processing and settlement software system to
support those operations. Forex Deal Services. Our forex deal services are currently provided
through an arrangement with R.J. OBrien Foreign Exchange Inc., an affiliate of
our futures clearing firm. Forex clients design, test, optimize and automate
their forex strategies using TradeStation, then, when a deal order is to be
placed, the client connects directly to the online deal system that R.J.
OBrien Foreign Exchange licenses from a third-party software system vendor,
and places the order. R.J. OBrien Foreign Exchange is the
counterparty/principal for each forex deal. 
 Technology Development We believe that our success depends, in large part, on our ability to
offer unique, Internet-based strategy trading technologies with
state-of-the-art, intelligent direct-access order execution technologies, and
continuously enhance those technologies, as well as develop and implement
well-designed and user-friendly Web sites. To date, we have relied primarily
on internal development of our products and services. We currently perform all
quality assurance and develop user education and other training materials
internally. In 2003, 2002 and 2001, technology development expenses were
approximately $7.1 million, $8.9 million, and $9.3 million, respectively. As
of December 31, 2003, our technology development team was comprised of 74
persons, as compared to 79 as of December 31, 2002, a 6% decrease. We view our technology development cycle as a four-step process to achieve
technical feasibility. The first step is to conceptualize in detail the
defining features and functions that we 7




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believe our targeted market requires from the product or service, and to
undertake a cost-benefit analysis to determine the proper scope and integration
of such features and functions. Once the functional requirements of the
product or service have been determined, the second step is to technically
design the product or service. The third step is the detailed implementation,
or engineering, of this technical design. The fourth step is rigorous quality
assurance testing to ensure that the final product or service generally meets
the functional requirements determined in the first step. Several refinements
are typically added and tested in the quality assurance phase of development.
Once this process is completed, technological feasibility has been achieved and
the working model is available for release to our customers. The market for strategy trading software tools, streaming real-time market
data and news services, and online order execution services is characterized
by: rapidly changing technology; evolving industry standards in computer
hardware, programming tools and languages, operating systems, database
technology and information delivery systems; changes in customer requirements;
and frequent new product and service introductions and enhancements. Our
success will depend, in part, upon our ability to develop and maintain
competitive technologies and to develop and introduce new products, services
and enhancements in a timely and cost-effective manner that meets changing
conditions such as evolving customer needs, existing and new competitive
product and service offerings, emerging industry standards and changing
technology. There can be no assurance that we will be able to develop and
market, on a timely basis, if at all, products, services or enhancements that
respond to changing market conditions or that will be accepted by customers.
Any failure by us to anticipate or to respond quickly to changing market
conditions, or any significant delays in the introduction of new products and
services or enhancements, could cause customers to delay using, or decide
against the use of, our products and services and could have a material adverse
effect on our business, financial condition and results of operations. 
 Client Services and Support and Training We provide client services and support and product-use training in the
following ways: Client Services and Support. TradeStation Securities provides telephone
client service to its brokerage customers through a trained client service
team. Technical support to subscription and brokerage customers who use the
TradeStationelectronic platform is provided by TradeStation Technologies
technical support team. Advanced EasyLanguageconsulting services (services
that technically assist customers in the use of EasyLanguageto write the
customers own trading strategies) are available from internal resources and
from unaffiliated, independent EasyLanguage consultants. A substantial amount
of technical support information is also provided on our Web sites,
TradeStationWorld.comand the TradeStation Securities client support Web site. Product-use Training. We consider user education important to try to help
our customers increase their ability to use our products and services fully and
effectively. The majority of our training materials consist of extensive
online documentation and technical assistance information on our Web sites,
including online tutorials, and in-person training seminars, so that our
customers may learn to use and take full advantage of the sophisticated
technology of the TradeStationelectronic trading platform. 8




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TradeStationWorld.com. TradeStationWorld.com, a Web site owned and
operated by TradeStation Technologies, is an interactive community for active
traders who engage or have interest in the development, testing and use of
objective trading strategies. The community provides numerous discussion
forums on a variety of topics related to strategy development and technical
trading as well as TradeStationproduct and service features, articles about
trading from industry leaders, and a library of strategy indicators, rules
and components written in our proprietary EasyLanguage, many of which are
donated by third parties. The company believes that TradeStationWorld.comhas
generated and will continue to generate renewed and intensified interest in
strategy traders who use TradeStationtrading software, as well as a new
generation of traders who wish to embrace strategy trading through
state-of-the-art trading software. As of March 1, 2004, TradeStationWorld.com
had over 8,000 registered users. 
 Competition The market for online brokerage services is intensely competitive and
rapidly evolving, and there appears to be substantial consolidation in the
industry in three different ways. First, there has been over the past several
years and continues to be consolidation of three types of services that
traditionally were offered separately: online brokerage services; real-time
market data services; and trading analysis software products and services.
With the TradeStationelectronic trading platform, we have embraced this
consolidation by offering all three of these services in a fully-integrated,
seamless manner. Second, we believe consolidation is beginning to occur in the
four major online execution markets for active traders  equities, equities
options, futures and forex  meaning that, contrary to specializing in offering
services for only one of those market instruments, more and more firms are
offering or plan to offer three or four of those services. With our offering
of online trading services for all four of these markets, we have embraced this
consolidation as well. Third, as a result of price pressure and competition
over the last two years, we believe barriers of entry to, and the
sustainability of, small online brokerage businesses have become more
challenging. As a result, many small online brokerage firms have, over the
past few years, failed or been acquired by larger firms that are seeking to
increase the size of their account base to help increase their ability to
compete on price. We believe we have advantages in this area. The uniqueness
of our trading technology enables us to charge value-added fees to our clients,
and the scalability and efficiencies made possible by that technology, coupled
with the frequent trading activity of our client base, enable us to grow our
daily average revenue trade activity with minimal increases in our fixed costs. We believe that competition, including price competition, as well as
consolidation, will substantially increase and intensify in the future. We
believe our ability to compete will depend upon many factors both within and
outside our control, including: price pressure; the timing and market
acceptance of new products and services and enhancements developed by us and
our competitors; our ability to design and support efficient, materially
error-free Internet-based systems; market conditions, such as recession; the
size of the active trader market today and in the future; the extent to which
institutional traders are willing to use direct-access brokerage services
offered by firms that have traditionally served mostly retail clients; product
and service functionality; data availability and cost; clearing costs; ease of
use; reliability; customer service and support; and sales and marketing
decisions and efforts. We face direct competition from several publicly-traded and privately-held
companies, principally online brokerages, including providers of direct-access
order execution services. Our 9




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competitors include the many online brokerages currently active in the United
States, including Ameritrade, Inc. (which now includes Datek Online Financial
Services LLC), Charles Schwab & Co., Inc. (including CyberTrader), CSFBdirect
(formerly DLJdirect), E*Trade Securities, Incorporated, Fidelity Brokerage
Services, Inc., Instinet Corporation (a Reuters subsidiary, and an ECN that
also provides direct-access brokerage service), Interactive Brokers, JPMorgan,
Merrill Lynch Direct, Morgan Stanley Online, Quick & Reilly, Inc., Redi
Products, a division of Spear, Leeds & Kellogg (which is owned by Goldman
Sachs), Scottrade, TD Waterhouse Investor Services, Inc., and Terra Nova.
Those brokers currently serve, in the aggregate, more than 90% of existing
online accounts, and many are focusing on attracting and retaining active
traders to and who use their services. Many online brokerages currently claim
to offer direct-access service. Even though we are rated as one of the best,
if not the best, direct-access brokerage firm in the United States, there can
be no assurance that we will be able to maintain such ratings, be rated that
highly in the future, compete effectively with our competitors, adequately
educate potential customers about the benefits our products and services
provide, or continue to offer such products and services. Many of our existing and potential competitors, which include large,
online discount and traditional national brokerages, and financial institutions
that are focusing more closely on online services, including direct-access
services for active traders, have longer operating histories, significantly
greater financial, technical and marketing resources, greater name recognition
and a larger installed customer base than do we. Further, there is the risk
that larger financial institutions which offer online brokerage services as
only one of many financial services may decide to use extremely low commission
pricing as a loss leader to acquire and accumulate customer accounts and
assets to derive interest income and income from their other financial
services. We do not offer other financial services, and have no plans to do
so; therefore, such pricing techniques, should they become common in our
industry, could have a material, adverse effect on our results of operations,
financial condition and business model. Generally, competitors may be able to respond more quickly to new or
emerging technologies or changes in customer requirements or to devote greater
resources to the development, promotion and sale of their products and services
than are we. There can be no assurance that our existing or potential
competitors will not develop products and services comparable or superior to
those developed and offered by us or adapt more quickly than us to new
technologies, evolving industry trends or changing customer requirements, or
that we will be able to timely and adequately complete the implementation, and
appropriately maintain and enhance the operation, of our business model.
Increased competition could result in price reductions, reduced margins,
failure to obtain any significant market share, or loss of market share, any of
which could materially adversely affect our business, financial condition and
results of operations. There can be no assurance that we will be able to
compete successfully against current or future competitors, or that competitive
pressures faced by us will not have a material adverse effect on our business,
financial condition and results of operations. 
 Intellectual Property Our success is and will be heavily dependent on proprietary software
technology, including certain technology currently in development. We view our
software technology as proprietary, and rely, and will be relying, on a
combination of copyright, trade secret and trademark laws, nondisclosure
agreements and other contractual provisions and technical measures to establish 10




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and protect our proprietary rights. We have a formal patent application
pending for the TradeStationtrading platform, but software patents,
particularly Internet-related software patents, are increasingly difficult to
obtain, and there can be no assurance that we will obtain a patent or patents
broad enough in scope to have value, or obtain a patent at all. We have
registered copyright rights in our EasyLanguagedictionary and documentation
and TradeStationsoftware. We have obtained trademark registrations for the TradeStationmark in the
United States, Australia, Canada, the European Union, Indonesia, Korea,
Singapore, South Africa and Taiwan. We have obtained registrations for the
OptionStationmark in the United States, Canada and the European Union. We
have obtained registrations in the United States for the marks ActivityBar,
EasyLanguage, PositionGraphs, PowerEditor, ProbabilityMap, ProSuite,
RadarScreen, Test Before You Tradeand other marks. We use an online subscription agreement for our Internet trading software
and data services between TradeStation Technologies and each of the users
(whether the users are brokerage customers or monthly subscribers) in order to
protect our copyrights and trade secrets and to prevent such users from
commercially exploiting such copyrights and trade secrets for their own gain.
Since these licenses are not physically signed by the licensees, it is possible
their enforceability is limited under certain state laws and the laws of many
foreign jurisdictions. Despite our efforts to protect our proprietary rights, unauthorized
parties copy or otherwise obtain, use or exploit our software or technology
independently. Policing unauthorized use of our software technology is
difficult, and we are unable to determine the extent to which piracy of our
software technology exists. Piracy can be expected to be a persistent problem,
particularly in international markets and as a result of the growing use of the
Internet. In addition, effective protection of intellectual property rights
may be unavailable or limited in certain countries, including some in which we
may attempt to expand sales efforts. There can be no assurance that the steps
taken by us to protect our proprietary rights will be adequate or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to ours. There has been substantial litigation in the software industry involving
intellectual property rights. We do not believe that we are infringing, or
that any technology in development will infringe, the intellectual property
rights of others. However, there can be no assurance that infringement claims
would not have a material adverse effect on our business, financial condition
and results of operations. There is currently an infringement case pending
against TradeStation Securities and eight other online brokerage firms which,
even though it appears to us to be baseless, could result in substantial
ongoing litigation costs and have materially adverse consequences. See ITEM
3. LEGAL PROCEEDINGS. To the extent that we acquire or license a portion of the software or data
included in our products or services from third parties (some data is licensed
from third parties), or market products licensed from others generally, our
exposure to infringement actions may increase because we must rely upon such
third parties for information as to the origin and ownership of such acquired
or licensed software or data technology. Software patent infringement cases in
financial service industries are becoming more frequent, and we may be subject
to litigation to defend against claimed infringement of the rights of others or
to determine the scope and validity of the intellectual property rights of
others. In the future, litigation (in addition to the pending 11




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infringement case) will likely be necessary to establish, define, enforce,
defend and protect patents, trade secrets, copyrights, trademarks and other
intellectual property rights. Any such litigation would likely be costly and
divert managements attention, which could have a material adverse effect on
our business, financial condition and results of operations. Adverse
determinations in such litigation could result in the loss of proprietary
rights, subject us to significant liabilities, require us to seek licenses from
third parties, which could be expensive, or prevent us from selling our
products or services or using our trademarks, any one of which could have a
material adverse effect on our business, financial condition and results of
operations. 
 Government Regulation Our brokerage subsidiary, TradeStation Securities, is subject to extensive
securities and futures industry regulation under both federal and state laws as
a broker-dealer with respect to its equities and equities options business and
as a futures commission merchant with respect to its futures and forex
business. Broker-dealers and futures commission merchants are subject to
regulations covering all aspects of those businesses, including: sales
methods; trade practices; use and safe-keeping of customers funds and
securities; clearing, processing and settlement of trades, and arrangements
with clearing houses, exchanges and clearing corporations; capital structure;
cash deposit or escrow requirements (or their equivalent); record keeping;
conduct of directors, officers and employees; and supervision. To the extent
TradeStation Securities solicits orders from customers or makes investment
recommendations, it is subject to additional rules and regulations governing,
among other things, sales practices and the suitability of recommendations to
its customers. TradeStation Securities mode of operation and profitability may be
directly affected by: additional legislation; changes in rules promulgated by
the Securities and Exchange Commission (SEC), the National Association of
Securities Dealers (NASD), the Commodity Futures Trading Commission (CFTC),
the National Futures Association (NFA), the Board of Governors of the Federal
Reserve System, the Depository Trust & Clearing Corporation and National
Securities Clearing Corporation (DTCC/NSCC), the Options Clearing Corporation
(OCC), various stock and futures exchanges, and other self-regulatory
associations and organizations; and changes in the interpretation or
enforcement of existing rules and laws, particularly any changes focused on
online brokerages that target an active trader customer base. With respect to active trading, the NASD has adopted rules that require
firms to provide customers with a risk disclosure statement about active
trading. Further, the NASD and NYSEs margin rules impose more restrictive
requirements for pattern active traders (we are subject to the NASD
definition and rules regarding pattern active trading). Governmental concern
is focused in two basic areas: that the customer has sufficient trading
experience and that the customer has sufficient risk capital to engage in
active trading. A minimum equities account balance of $25,000 is required.
TradeStation Securities customer account documentation specifies that being a
brokerage customer of TradeStation Securities is only for traders who have
experience in active trading, are willing to risk considerable amounts of
capital (at least $50,000), and are interested in engaging in high-risk,
short-term, speculative trading activity. We believe our brokerage firms
minimum account opening requirements, as well as the extensive user education
documentation and tutorials offered on our Web site, are consistent with both
the letter and the spirit of current rules and regulations concerning active
trading. 12




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The SEC, the NASD, the CFTC, the NFA and other self-regulatory
associations and organizations and state securities commissions can censure,
fine, enjoin, suspend, expel or issue cease-and-desist orders to a
broker-dealer or futures commission merchant or any of its officers or
employees. Marketing campaigns by TradeStation Securities to bring brand name
recognition to its services and to promote the benefit of those services, such
as the TradeStationelectronic trading platform and its various features, are
regulated by the NASD and NFA, and all marketing materials must be reviewed by
an appropriately-licensed TradeStation Securities principal prior to release,
and must conform to standards articulated by the SEC, NASD and NFA. The NASD
or NFA may request that revisions be made to marketing materials, and can
impose certain penalties for violations of its advertising regulations,
including censures or fines, a requirement of advance regulatory approval of
all advertising, the issuance of cease-and-desist orders, and the suspension or
expulsion of a broker-dealer or futures commission merchant or any of its
officers or employees. The SEC, the NASD, the CFTC and the NFA and various other regulatory
associations and organizations have stringent rules with respect to the
maintenance of specific levels of net capital by securities broker-dealers and
futures commission merchants. Net capital is the net worth of the regulated
company (assets minus liabilities), less deductions for certain types of assets
as well as other charges. If a firm fails to maintain the required net capital
it must cease conducting business and, if it does not do so, it may be subject
to suspension or revocation of registration by the SEC or the CFTC and
suspension or expulsion by the NASD or NFA, and it could ultimately lead to the
firms liquidation. TradeStation Securities is registered as a broker-dealer in every U.S.
state and the District of Columbia, and is subject to regulation under the laws
of those jurisdictions, including registration requirements and being subject
to sanctions if a determination of misconduct is made. TradeStation Securities is a member of the Securities Investor Protection
Corporation (SIPC). SIPC provides protection of up to $500,000 for each
equities account brokerage customer, subject to a limitation of $100,000 for
cash balances, in the event of the financial failure of a broker-dealer. To
the extent TradeStation Securities clears its equities brokerage transactions
through Bear, Stearns Securities Corp., Bear, Stearns has obtained an excess
securities bond issued by Travelers Casualty and Surety Company which provides
additional protection for any loss of securities and/or cash in excess of the
primary SIPC protection. For equities brokerage accounts the custody and trade
clearing of and for which are to be handled by TradeStation Securities, if and
when that occurs, TradeStation has obtained a commitment for an excess
securities bond with HSBC Insurance Brokerage Limited, an insurance company
associated with Lloyds of London. This excess coverage will provide
protection for any loss of securities and/or cash in excess of primary SIPC
protection, up to $200 million in the aggregate. Based upon the asset size per
account and in the aggregate of TradeStation Securities equities client base
as of the date of this report, if TradeStation Securities were to self-clear
all equities trades for its active trader client base this excess-SIPC
protection would, combined with primary SIPC protection, be more than adequate
to cover the loss of 100% of those client assets in the very unlikely event
that TradeStation Securities experienced financial failure and all client
assets were somehow lost. Neither SIPC nor excess-SIPC coverage applies to
fluctuations in the 13




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market value of securities or any losses other than those directly caused by
the financial failure of the broker-dealer. It is possible that other federal or state agencies will attempt to
regulate our current and planned online and other electronic service activities
with rules that may include compliance requirements relating to record keeping,
data processing, other operation methods, privacy, pricing, content, and
quality of goods and services as the market for online commerce evolves.
Because of the growth in the electronic commerce market, Congress had held
hearings on whether to regulate providers of services and transactions in the
electronic commerce market. As a result, federal or state authorities could
enact laws, rules or regulations, not only with respect to online brokerage
services, but other online services we provide or may in the future provide.
Such laws, rules and regulations, if and when enacted, could have a material
adverse effect on our business, financial condition, results of operations and
prospects. 
 Employees As of December 31, 2003, we had 238 full-time equivalent employees,
consisting of 74 in technology development, including software engineering,
product management, user education and quality assurance, 124 in sales and
marketing relating to brokerage services, subscriptions and software products
(including 34 in sales, 16 on the trading desk, 11 in financial operations, 50
in client services and software support and 13 in marketing and fulfillment),
and 40 in general and administrative, including executive management, finance,
information technology services and human resources. Our employees are not
represented by any collective bargaining organization, and we have never
experienced a work stoppage and consider our relations with our employees to be
good. Our future success depends, in significant part, upon the continued
service of our key senior management and technology development personnel. The
loss of the services of one or more of these key employees could have a
material adverse effect on us. There can be no assurance that we will be able
to retain our key personnel. Departures and additions of personnel, to the
extent disruptive, could have a material adverse effect on our business,
financial condition and results of operations. 
 Available Information We maintain our corporate Web site at www.tradestation.com. We make
available free of charge through our Web site this Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission. We also make available, through our Web
site, statements of beneficial ownership filed by our directors, officers,
shareholders who own more than 10% of our issued and outstanding capital stock,
and others under Section 16 of the Securities Exchange Act of 1934, as amended,
as soon as reasonably practicable after such material is filed with, or
furnished to, the Securities and Exchange Commission. 14




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ITEM 2. PROPERTIES We have a ten-year lease (with two 5-year renewal options) that commenced
in the summer of 2002 for an approximately 70,000 square-foot corporate
headquarters in Plantation, Florida. Plantation is just west of Ft.
Lauderdale, Florida (Broward County). This headquarters consolidated the
personnel and operations of our former Miami and Boca Raton offices. Our brokerage operations were formerly headquartered from 11,800 square
feet of office facilities in Boca Raton, Florida pursuant to a lease that
expires in February 2007. All of this space is currently being subleased
through February 2007 at lease rates significantly lower than the rates we pay. Our technologies subsidiary has an approximately 13,500 square foot leased
facility in Richardson, Texas from which certain technology development and
technical operations are conducted. A portion of those facilities serve as a
branch office for TradeStation Securities. That lease expires July 31, 2007.
We also lease exclusive rack space for our data server farms at four sites, one
in Richardson, Texas (expiring in April 2004), two in Chicago, Illinois (one
lease expiring in October 2004 and the other is month to month), and one in
Miami, Florida (expiring in May 2005). The brokerage previously had small branch offices in various locations,
all of which have been closed as of December 31, 2003. We believe that our existing facilities are adequate to support our
existing operations and that, if needed, we will be able to obtain suitable
additional facilities on commercially reasonable terms. 
 ITEM 3. LEGAL PROCEEDINGS On September 5, 2003, Datamize, Inc., a Wyoming corporation, filed an
Original Complaint for Patent Infringement against nine defendants, including
TradeStation Securities, all of whom offer online securities trading services.
The other defendants are Fidelity Brokerage Services, Scottrade, Interactive
Brokers Group, Instinet, Charles Schwab, CyberTrader, E*Trade Securities and
Terra Nova Trading. The complaint was filed in the United States District
Court, Eastern District of Texas. The complaint alleges that the online
trading platforms and services the defendants offer to their customers
infringes United States Patent No. 6,460,040 issued to Datamize on October 1,
2002. The lawsuit seeks injunctive relief, actual damages and attorneys fees.
We believe Datamizes claim is baseless and intend to defend ourselves
vigorously. Three lawsuits have been filed by former principal owners of
onlinetradinginc.com corp. (the predecessor of TradeStation Securities) against
TradeStation Group, certain of our directors and executive officers and certain
family partnerships owned by two of the executive officers. On July 25, 2003,
Benedict S. Gambino, from whom we, as of October 18, 2002, purchased 2,417,000
shares of our common stock in a private transaction, filed a lawsuit against us
and three of our executive officers, William R. Cruz, Ralph L. Cruz and Marc J.
Stone, in the Circuit Court of Broward County, State of Florida. This
lawsuits allegations include violation of the Florida Securities and Investor
Protection Act, common law fraud, negligent misrepresentation, breach of
fiduciary duty and breach of contract. On August 18, 2003, Andrew A. Allen
Family 15




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Limited Partnership (owned and controlled by Andrew A. Allen), from whom we, as
of November 26, 2002, purchased 1,000,000 shares of our common stock in a
private transaction, filed a lawsuit against the same defendants in the same
court. This lawsuits allegations include violation of the Florida Securities
and Investor Protection Act, common law fraud, breach of fiduciary duty,
negligent misrepresentation and fraudulent inducement. On August 28, 2003,
Farshid Tafazzoli and E. Steven zum Tobel filed a lawsuit against us, the
Cruzes, family partnerships owned and controlled by the Cruzes, Mr. Stone,
Charles Wright and David Fleischman in the Circuit Court of Miami-Dade County,
State of Florida. Mr. Tafazzolis claims relate to his family partnerships
sale, as of May 1, 2002, of 3,000,000 shares of our common stock to family
partnerships owned by William and Ralph Cruz, and Mr. zum Tobels claims relate
to his family partnerships sale, as of May 3, 2002, of 133,942 shares of our
common stock to Charles Wright. This lawsuits allegations include violation
of the Florida Securities and Investor Protection Act, common law fraud and
breach of fiduciary duty. Each of the three lawsuits seeks rescission of the
share purchases and/or compensatory damages, plus interest, costs and
attorneys fees. We believe all of the allegations are baseless, intend to
defend ourselves and the other named parties vigorously in court, and expect to
prevail in each of the lawsuits. On February 11, 2003, the plan administrator appointed under the
reorganization plan in the Chapter 11 bankruptcy of Bridge Information Systems,
Inc. and its affiliates filed an adversary complaint against TradeStation
Technologies and TradeStation Group in the United States Bankruptcy Court for
the Eastern District of Missouri demanding that TradeStation Group and
TradeStation Technologies return payments made to TradeStation Technologies by
a Bridge subsidiary in December 2000 and January 2001 totaling approximately
$1.0 million, claiming such payments were preferential transfers under the
federal bankruptcy code as a result of being made to TradeStation Technologies
during the ninety-day period immediately preceding the Chapter 11 bankruptcy
filing. We believe this claim to be without merit on various grounds and
intend to vigorously defend this claim. In October 2002, we received information about alleged fraudulent conduct
by an executive of an unrelated company in no way affiliated with TradeStation
Securities (the Referral Company) that referred individual accounts to
TradeStation Securities. The executive of the Referral Company was authorized
to trade on behalf of such individuals (the Referred Account Holders) and
allegedly issued fraudulent account statements to them. The Referred Account
Holders incurred several million dollars of trading losses, in the aggregate,
during the time the executive of the Referral Company traded on their behalves.
On February 2, 2003, the Referral Company communicated to TradeStation
Securities in writing that it believes TradeStation Securities shares
responsibility for some or all of the alleged losses incurred by the Referred
Account Holders and/or the Referral Company and wishes to make an amicable
settlement. The Referral Company further stated that if an amicable settlement
is not reached it intends to initiate legal action of some kind against
TradeStation Securities in the United States. We believe the Referral
Companys claims are without merit and, to date, no legal action has been
commenced against us by any of the Referred Account Holders or the Referral
Company. TradeStation Securities is also engaged in routine litigation or other
dispute resolution proceedings, such as arbitration, incidental to, and part of
the ordinary course of, its business (claims in pending arbitrations seek, in
the aggregate, between nine and ten million dollars in damages, plus, in
certain cases, punitive or treble damages). 16




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While no assurances can be given, we do not believe that the ultimate
outcome of any of the above legal matters or claims will result in a material
adverse effect on our consolidated financial position, results of operations or
cash flows. We decided, as of June 1, 2002, to no longer carry errors or omissions
insurance that covers third-party claims made by brokerage clients or software
subscribers as a result of alleged human or system errors, failures, acts or
omissions. This decision was made based upon our assessment of the potential
risks and benefits, including significant increases in premium rates,
deductibles and coinsurance amounts, reductions in available per occurrence and
aggregate coverage amounts, and the unavailability of policies that
sufficiently cover the types of risks that relate to our business. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth
quarter of 2003. 17




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PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 
 Common Stock Information Our common stock, par value $.01 per share, is listed on The Nasdaq
National Market under the symbol TRAD. The high and low closing sales prices based on actual transactions on The
Nasdaq National Market during each of the quarters presented are as follows: Closing Sales PriceHigh
    
    Low2002:First Quarter
    
    $
    1.72
    
    
    $
    1.10Second Quarter
    
    
    1.55
    
    
    
    0.99Third Quarter
    
    
    1.49
    
    
    
    1.14Fourth Quarter
    
    
    1.44
    
    
    
    1.152003:First Quarter
    
    $
    3.67
    
    
    $
    1.40Second Quarter
    
    
    11.45
    
    
    
    3.70Third Quarter
    
    
    13.15
    
    
    
    7.47Fourth Quarter
    
    
    10.10
    
    
    
    7.072004:First Quarter (through March 1, 2004)
    
    $
    10.93
    
    
    $
    7.58
 As of March 1, 2004, there were 93 holders of record of our common stock,
and, based upon information previously provided to us by depositories and
brokers, we believe there are more than 8,000 beneficial owners. 
 Dividend Policy We intend to retain future earnings to finance our growth and development
and therefore do not anticipate paying any cash dividends in the foreseeable
future. Payment of any future dividends will depend upon our future earnings
and capital requirements and other factors we consider appropriate. We did not
distribute any dividends during the years ended December 31, 2003, 2002, or
2001. 
 Recent Sales of Unregistered Securities During the three months ended December 31, 2003, we issued to 215
employees (including 3 executive officers) options to purchase an aggregate of
approximately 731,000 shares of common stock. Such options vest ratably in
annual increments over a five-year period and are exercisable at prices ranging
from $9.03 to $9.09 per share, which was the fair market value (as defined in
our Incentive Stock Plan) of our common stock on the date the options were
granted. All of the options were granted under our Incentive Stock Plan in the
ordinary course, and 18




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expire, if they remain unexercised, on the tenth anniversary of the date on
which they were granted. All the foregoing options were issued by us in reliance upon the exemption
from registration available under Section 4(2) of the Securities Act of 1933,
as amended. Other than as described above, we did not issue or sell any
unregistered securities during the fourth quarter of 2003. 
 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data is qualified by
reference to, and should be read in conjunction with, MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, and the
Consolidated Financial Statements and Notes thereto included in this report.
The Consolidated Statement of Operations Data presented below for the years
ended December 31, 2003 and 2002, and the Consolidated Balance Sheet Data as of
December 31, 2003 and 2002, have been derived from our Consolidated Financial
Statements included on pages F-1 through F-31 of this report, which have been
audited by Ernst & Young LLP, independent certified public accountants. The
Consolidated Statement of Operations Data presented below for the year ended
December 31, 2001 have been derived from our Consolidated Financial Statements
included on pages F-1 through F-31 of this report, which were audited by Arthur
Andersen LLP, independent certified public accountants. The Consolidated
Statement of Operations Data presented below for the years ended December 31,
2000 and 1999, and the Consolidated Balance Sheet Data as of December 31, 2001,
2000, and 1999, have been derived from audited financial statements not
included in this report. See also Note 17 of Notes to Consolidated Financial
Statements  UNAUDITED QUARTERLY FINANCIAL INFORMATION for quarterly financial
information for fiscal years 2003 and 2002. YEAR ENDED DECEMBER 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands except per share data)CONSOLIDATED STATEMENT OF OPERATIONS DATA (1):Revenues:Brokerage revenues
    
    $
    50,858
    
    
    $
    38,494
    
    
    $
    18,602
    
    
    $
    17,934
    
    
    $
    9,783Subscription fees
    
    
    7,034
    
    
    
    6,639
    
    
    
    9,566
    
    
    
    8,170
    
    
    
    304Licensing fees
    
    
    525
    
    
    
    1,131
    
    
    
    5,029
    
    
    
    18,343
    
    
    
    16,218Other
    
    
    1,732
    
    
    
    2,127
    
    
    
    7,790
    
    
    
    8,479
    
    
    
    7,214Total revenues
    
    
    60,149
    
    
    
    48,391
    
    
    
    40,987
    
    
    
    52,926
    
    
    
    33,519Operating expenses:Clearing and execution costs
    
    
    17,938
    
    
    
    11,312
    
    
    
    5,772
    
    
    
    4,787
    
    
    
    2,708Data center costs
    
    
    5,110
    
    
    
    5,616
    
    
    
    5,532
    
    
    
    4,002
    
    
    
    81Technology development
    
    
    7,144
    
    
    
    8,851
    
    
    
    9,309
    
    
    
    8,128
    
    
    
    4,932Sales and marketing
    
    
    10,451
    
    
    
    12,473
    
    
    
    11,325
    
    
    
    27,680
    
    
    
    23,909General and administrative
    
    
    8,576
    
    
    
    9,157
    
    
    
    12,695
    
    
    
    11,915
    
    
    
    6,785Amortization of intangible assets
    
    
    202
    
    
    
    891
    
    
    
    6,198
    
    
    
    5,979
    
    
    
    1,033(Recovery of) provision for insurance claim
    
    
    
    
    
    
    (1,250
    )
    
    
    2,707
    
    
    
    
    
    
    
    Impairment of goodwill and intangible assets
    
    
    
    
    
    
    
    
    
    
    5,285
    
    
    
    
    
    
    
    Merger related costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,800
    
    
    
    Total operating expenses
    
    
    49,421
    
    
    
    47,050
    
    
    
    58,823
    
    
    
    66,291
    
    
    
    39,448Income (loss) from operations
    
    
    10,728
    
    
    
    1,341
    
    
    
    (17,836
    )
    
    
    (13,365
    )
    
    
    (5,929
    )Other income, net
    
    
    165
    
    
    
    427
    
    
    
    599
    
    
    
    1,293
    
    
    
    1,653Income (loss) before income taxes
    
    
    10,893
    
    
    
    1,768
    
    
    
    (17,237
    )
    
    
    (12,072
    )
    
    
    (4,276
    )Income tax (benefit) provision
    
    
    (731
    )
    
    
    4
    
    
    
    4,668
    
    
    
    1,403
    
    
    
    (1,634
    )Net income (loss)
    
    $
    11,624
    
    
    $
    1,764
    
    
    $
    (21,905
    )
    
    $
    (13,475
    )
    
    $
    (2,642
    )
 (Continued) 19




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##### Table of Contents



CONSOLIDATED STATEMENT OF OPERATIONS DATA (1): (Continued) YEAR ENDED DECEMBER 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands except per share data)Earnings (loss) per share:Basic
    
    $
    0.29
    
    
    $
    0.04
    
    
    $
    (0.49
    )
    
    $
    (0.31
    )
    
    $
    (0.07
    )Diluted
    
    
    0.27
    
    
    
    0.04
    
    
    
    (0.49
    )
    
    
    (0.31
    )
    
    
    (0.07
    )Dividends declared per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares outstanding:Basic
    
    
    40,467
    
    
    
    43,328
    
    
    
    44,459
    
    
    
    43,956
    
    
    
    40,065Diluted
    
    
    43,390
    
    
    
    43,386
    
    
    
    44,459
    
    
    
    43,956
    
    
    
    40,065
 DECEMBER 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands)CONSOLIDATED BALANCE SHEET DATA (1):Cash and cash equivalents (2)
    
    $
    31,018
    
    
    $
    16,410
    
    
    $
    19,982
    
    
    $
    18,395
    
    
    $
    17,304Total assets
    
    
    38,001
    
    
    
    22,618
    
    
    
    26,821
    
    
    
    50,354
    
    
    
    58,920Capital lease obligations
    
    
    194
    
    
    
    1,382
    
    
    
    1,407
    
    
    
    214
    
    
    
    112Shareholders equity
    
    
    29,746
    
    
    
    12,393
    
    
    
    17,458
    
    
    
    39,025
    
    
    
    51,740
    (1)
    
    The selected financial data as of and for the two years ended
December 31, 2000 were restated to reflect the December 29, 2000 merger
of TradeStation Technologies and TradeStation Securities under the
pooling-of-interests method of accounting.  (2)
    
    Includes restricted cash of $2.7 million, $3.4 million, $3.6
million and $510,000 at December 31, 2003, 2002, 2001 and 2000,
respectively. There was no restricted cash at December 31, 1999. See
Note 15 of Notes to Consolidated Financial Statements  COMMITMENTS AND
CONTINGENCIES  Restricted Cash. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with Selected Financial Data and
the Consolidated Financial Statements and Notes to Consolidated Financial
Statements contained in this report. 
 Overview TradeStation Group, Inc., a Florida corporation formed in 2000, is the
successor company to a publicly-held trading software company that was formed
in 1982. TradeStation Group is listed on The Nasdaq National Market under the
symbol TRAD. TradeStation Securities, Inc. and TradeStation Technologies,
Inc. currently are TradeStation Groups two operating subsidiaries. TradeStation Securities, a leading direct-access brokerage firm serving
the active trader and certain institutional trader markets, is the companys
principal operating subsidiary. TradeStation Securities is a licensed
broker-dealer and futures commission merchant, and a member of the NASD, SIPC,
NFA, AMEX, CBOE, ISE, PHLX, PCX, and ArcaEx, and has pending membership
applications with the NYSE and BOX. 20




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##### Table of Contents



By the end of 2003, TradeStation Securities had more than 12,000 equities,
futures and forex accounts, the vast majority of which were equities and
futures accounts. The average equities account made nearly 600 revenue trades
during 2003, and the average futures account traded well over 500 round-turn
contracts. During the 2003 fourth quarter, TradeStation Securities brokerage
client account base averaged over 26,500 revenue trades per trading day. The
average account asset balance of an equities account was nearly $120,000 during
the 2003 fourth quarter. Brokerage revenues are the key component of our results of operations and
are comprised primarily of brokerage commissions and fees earned from our
clients brokerage transactions and, to a lesser extent, platform fees earned
from brokerage customers using the TradeStationelectronic trading platform and
interest earned from interest revenue sharing arrangements with the brokerages
clearing firms. Brokerage commissions and fees and their related clearing
costs are recorded on a trade date basis as transactions occur. Platform fees
and interest are recorded monthly, when earned. In 2003, we launched TradeStation 7and two updated versions, TradeStation
7.1and 7.2. TradeStation 7and its updates contained significant
enhancements, including seamless, automated order placement and execution of
futures trading strategies, forex analytics and execution, the companys
award-winning OptionStation® and RadarScreen® analytics software, basket
trading, market depth displays for ECNs, CME and CBOT, and multiple account
trade allocation. In March 2004, we launched the roll-out of TradeStation 8.0,
the centerpiece of which is fully-integrated, direct-access options execution.
The release of TradeStation 8.0will be rolled-out in a slow, controlled manner
over the next several months. We also provide via our technologies subsidiary, TradeStation
Technologies, subscription services. The subscription version of TradeStation
is an institutional-quality service that offers strategy trading software tools
that generate real-time buy and sell alerts based upon the subscribers
programmed strategies, but does not include order execution. Subscribers are
charged a monthly subscription fee. 
 Results of Operations For the three years ended December 31, 2003, we operated in two principal
business segments: (i) brokerage services and (ii) software products and
services. The brokerage services segment represents the operations of
TradeStation Securities and the software products and services segment
represents the operations of TradeStation Technologies. For the periods
indicated, the following table presents certain items in our consolidated
statements of operations broken down by segment: 21




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##### Table of Contents



YEAR ENDED
    
    YEAR ENDEDDECEMBER 31, 2003
    
    DECEMBER 31, 2002Software
    
    
    
    
    
    
    
    
    
    
    
    
    
    SoftwareProducts
    
    
    
    
    
    
    
    
    
    
    
    
    
    ProductsBrokerage
    
    and
    
    Elimin-
    
    
    
    
    
    Brokerage
    
    and
    
    Elimin-Services
    
    Services
    
    ations
    
    Total
    
    Services
    
    Services
    
    ations
    
    Total(In thousands)
    
    
    
    
    
    
    
    
    
    (In thousands)Revenues:Brokerage revenues
    
    $
    50,858
    
    
    $
    
    
    
    $
    
    
    
    $
    50,858
    
    
    $
    38,494
    
    
    $
    
    
    
    $
    
    
    
    $
    38,494Subscription fees
    
    
    
    
    
    
    21,276
    
    
    
    (14,242
    )
    
    
    7,034
    
    
    
    
    
    
    
    16,352
    
    
    
    (9,713
    )
    
    
    6,639Licensing fees
    
    
    
    
    
    
    525
    
    
    
    
    
    
    
    525
    
    
    
    
    
    
    
    1,131
    
    
    
    
    
    
    
    1,131Other
    
    
    219
    
    
    
    1,513
    
    
    
    
    
    
    
    1,732
    
    
    
    
    
    
    
    2,127
    
    
    
    
    
    
    
    2,127Total revenues
    
    
    51,077
    
    
    
    23,314
    
    
    
    (14,242
    )
    
    
    60,149
    
    
    
    38,494
    
    
    
    19,610
    
    
    
    (9,713
    )
    
    
    48,391Operating expenses:Clearing and execution costs
    
    
    17,938
    
    
    
    
    
    
    
    
    
    
    
    17,938
    
    
    
    11,312
    
    
    
    
    
    
    
    
    
    
    
    11,312Data center costs
    
    
    15,205
    
    
    
    4,147
    
    
    
    (14,242
    )
    
    
    5,110
    
    
    
    10,534
    
    
    
    4,795
    
    
    
    (9,713
    )
    
    
    5,616Technology development
    
    
    1,403
    
    
    
    5,741
    
    
    
    
    
    
    
    7,144
    
    
    
    644
    
    
    
    8,207
    
    
    
    
    
    
    
    8,851Sales and marketing
    
    
    9,855
    
    
    
    596
    
    
    
    
    
    
    
    10,451
    
    
    
    11,179
    
    
    
    1,294
    
    
    
    
    
    
    
    12,473General and administrative
    
    
    4,165
    
    
    
    4,411
    
    
    
    
    
    
    
    8,576
    
    
    
    4,851
    
    
    
    4,306
    
    
    
    
    
    
    
    9,157Amortization of intangible assets
    
    
    
    
    
    
    202
    
    
    
    
    
    
    
    202
    
    
    
    
    
    
    
    891
    
    
    
    
    
    
    
    891(Recovery of) provision for insurance claim
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,250
    )
    
    
    
    
    
    
    (1,250
    )Total operating expenses
    
    
    48,566
    
    
    
    15,097
    
    
    
    (14,242
    )
    
    
    49,421
    
    
    
    38,520
    
    
    
    18,243
    
    
    
    (9,713
    )
    
    
    47,050Income (loss) from operations
    
    $
    2,511
    
    
    $
    8,217
    
    
    $
    
    
    
    $
    10,728
    
    
    $
    (26
    )
    
    $
    1,367
    
    
    $
    
    
    
    $
    1,341
 YEAR ENDEDDECEMBER 31, 2001SoftwareProductsBrokerage
    
    and
    
    Elimin-Services
    
    Services
    
    ations
    
    Total(In thousands)Revenues:Brokerage revenues
    
    $
    18,602
    
    
    $
    
    
    
    $
    
    
    
    $
    18,602Subscription fees
    
    
    
    
    
    
    9,566
    
    
    
    
    
    
    
    9,566Licensing fees
    
    
    
    
    
    
    5,029
    
    
    
    
    
    
    
    5,029Other
    
    
    
    
    
    
    7,790
    
    
    
    
    
    
    
    7,790Total revenues
    
    
    18,602
    
    
    
    22,385
    
    
    
    
    
    
    
    40,987Operating expenses:Clearing and execution costs
    
    
    5,772
    
    
    
    
    
    
    
    
    
    
    
    5,772Data center costs
    
    
    230
    
    
    
    5,302
    
    
    
    
    
    
    
    5,532Technology development
    
    
    224
    
    
    
    9,085
    
    
    
    
    
    
    
    9,309Sales and marketing
    
    
    7,776
    
    
    
    3,549
    
    
    
    
    
    
    
    11,325General and administrative
    
    
    3,599
    
    
    
    9,096
    
    
    
    
    
    
    
    12,695Amortization of intangible assets
    
    
    661
    
    
    
    5,537
    
    
    
    
    
    
    
    6,198(Recovery of) provision for
insurance claim
    
    
    
    
    
    
    2,707
    
    
    
    
    
    
    
    2,707Impairment of goodwill and
intangible assets
    
    
    1,043
    
    
    
    4,242
    
    
    
    
    
    
    
    5,285Total operating expenses
    
    
    19,305
    
    
    
    39,518
    
    
    
    
    
    
    
    58,823Loss from operations
    
    $
    (703
    )
    
    $
    (17,133
    )
    
    $
    
    
    
    $
    (17,836
    )
 22




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##### Table of Contents



Critical Accounting Policies and Estimates Our significant accounting policies are described in Note 1 of Notes to
Consolidated Financial Statements included in this report  DESCRIPTION OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those estimates. Brokerage Revenues.Brokerage revenues are the key component of our
results of operations and are comprised primarily of brokerage commissions and
fees earned from our clients brokerage transactions and, to a lesser extent,
platform fees earned from brokerage customers using the TradeStationelectronic
trading platform and interest earned from interest revenue sharing arrangements
with the brokerages clearing firms. Brokerage commissions and fees and their
related clearing costs are recorded on a trade date basis as transactions
occur. Platform fees and interest are recorded monthly, when earned. Income Taxes.We have net deferred income tax assets of $8.6 million
which are offset by a valuation allowance of $8.6 million (the full amount) in
accordance with the requirements of Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes. Management must evaluate and
determine, on a periodic basis, if the amount of the valuation allowance should
be adjusted. Of this $8.6 million, $3.2 million relate to net operating loss
carryforwards the benefit of which may be recorded through additional paid-in
capital and not through the consolidated statement of operations should
realization become more likely than not. See Income Taxes below, and Note 12
of Notes to Consolidated Financial Statements  INCOME TAXES. Uninsured Loss Reserves.We decided, as of June 1, 2002, to no longer
carry errors or omissions insurance that covers third-party claims made by
brokerage clients or software subscribers as a result of alleged human or
system errors, failures, acts or omissions. This decision was made based upon
our assessment of the potential risks and benefits, including significant
increases in premium rates, deductibles and coinsurance amounts, reductions in
available per occurrence and aggregate coverage amounts, and the unavailability
of policies that sufficiently cover the types of risks that relate to our
business. Each quarter, we continue to evaluate our accruals for settlements
related to claims and potential claims. Estimates of settlements for such
potential claims, including related legal fees, are accrued in the consolidated
financial statements. The ultimate outcome of such potential claims may be
substantially different than our estimates. During 2003, we reduced our
accruals by $301,000 as a result of the favorable resolution or reassessment of
various claims. See Brokerage Services Segment  Operating Expenses  General
and Administrative and Years Ended December 31, 2003 and 2002  Software
Products and Services Segment  Operating Expenses  General and
Administrative. Sublease of Facilities. During the second quarter of 2002, we completed
the consolidation of our Florida operations to one location. Based upon advice
from our outside real estate advisors, using market factors available at the
time, we estimated the potential losses relating to the sublease of facilities
that we would no longer occupy. During the years ended December 31, 23




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##### Table of Contents



2002 and 2003, we increased our estimated loss accrual by $733,000 and $70,000,
respectively, based on then-current market factors and actual sublease
arrangements. Net payments of $380,000 and $290,000 were applied against this
accrual during 2002 and 2003, respectively, resulting in a balance of $513,000
as of December 31, 2003. See Brokerage Services Segment  Operating Expenses
 General and Administrative. Impairment of Goodwill and Intangible Assets.In December 2001, we
recorded a non-cash charge of $5.3 million for impairment of goodwill and
certain intangible assets due to certain operational decisions made by
management which resulted in the reduction of the fair value of such assets.
The fair value was determined by a qualified independent appraiser,
representing the price at which the assets would change hands between a willing
buyer and seller. This charge was recorded in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of, the effective guidance at that time. See Years Ended December
31, 2002 and 2001  Brokerage Services Segment  Operating Expenses -
Impairment of Goodwill and Intangible Assets and Years Ended December 31,
2002 and 2001  Software Products and Services Segment  Operating Expenses -
Impairment of Goodwill and Intangible Assetsbelow, and Note 5 of Notes to
Consolidated Financial Statements  INTANGIBLE ASSETS, NET. Insurance Claim. In June 2001, we made a claim of $2.7 million with our
insurance carrier relating to a trading error made with respect to a clients
account. In December 2001, the insurance company denied this claim and,
accordingly, the receivable recorded in our consolidated balance sheet was
fully reserved as of December 31, 2001. On July 25, 2002, we entered into an
agreement to settle this claim for $1.25 million, payment of which was received
in August 2002. The effect of this settlement was recorded in the third
quarter of 2002. See Years Ended December 31, 2003 and 2002  Software
Products and Services Segment  Operating Expenses  (Recovery of) Provision
for Insurance Claim. 
 Years Ended December 31, 2003 and 2002 Overall Total revenues were $60.1 million for the year ended December 31, 2003, as
compared to $48.4 million for the year ended December 31, 2002, an increase of
$11.7 million, or 24%, due primarily to an increase in brokerage revenues of
$12.4 million, slightly offset by a decrease in licensing fees and other
revenues (which relate primarily to our legacy software business, which is no
longer an active focus). Income from operations was $10.7 million for the year ended December 31,
2003, as compared to $1.3 million for the year ended December 31, 2002, an
improvement of $9.4 million, or 700%. This improvement was due primarily to
higher brokerage revenues, net of related clearing and execution costs, and
decreases in all other operating expense categories. The increase in income
from operations was partially offset by a $1.25 million recovery of an
insurance claim in the 2002 third quarter which reduced operating expenses for
that period, as well as a decrease in licensing fees and other revenues in
2003. Other income, net consists primarily of interest income earned on our cash
and cash equivalents offset by interest expense related to capital lease
obligations and bank fees, as well as gains or losses on the sale of assets.
Other income, net was $165,000 for the year ended 24




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##### Table of Contents



December 31, 2003, as compared to $427,000 for the year ended December 31,
2002. The decrease of $262,000 was due primarily to a 2002 gain of $287,500
recorded on the sale of legacy customer accounts, a 2003 loss of $55,000 on the
sale of investments in corporate stock, and a decrease in interest income of
$38,000 as a result of lower interest rates, partially offset by a decrease in
interest expense of $146,000 as a result of fewer capital lease obligations. Income tax benefit, net of expense, of $731,000 was recorded during the
year ended December 31, 2003. See Income Taxes below. Brokerage Services Segment Revenues Brokerage Revenues. Brokerage revenues are comprised primarily of
brokerage commissions and fees earned from our clients brokerage transactions
and, to a lesser extent, platform fees earned from brokerage customers using
the TradeStationelectronic trading platform and interest earned from interest
revenue sharing arrangements with the brokerages clearing firms. For the year
ended December 31, 2003, brokerage revenues were $50.9 million (which included
brokerage commissions and fees of $40.4 million), as compared to brokerage
revenues of $38.5 million (which included brokerage commissions and fees of
$34.4 million) for the year ended December 31, 2002. This $12.4 million
increase, or 32%, was due primarily to brokerage client account growth. In April 2002 we offered a new brokerage commission plan  one that
charges traders fees based solely upon the share volume of client trades as
opposed to per ticket charges. This plan, as expected, significantly reduced
our commissions per trade. This reduction was partially offset by charging
brokerage clients monthly platform fees. In August 2002, we modified our price
per share plan by reducing the price per share. Effective March 31, 2003, we
reduced our commission pricing for futures and options trades and, effective
November 1, 2003, we further reduced our commission pricing for futures and our
commission pricing per share for equities trades. These price decreases are
expected to slow our revenue growth in the short-term. The rate and timing at
which these price reductions will, if at all, increase new accounts, client
trading activity and/or market share is not known. Continued price pressure on
online brokerage commissions and fees, as well as our ability to maintain or
improve revenue growth are challenges we expect to face for the foreseeable
future. Other Revenues. Other revenues are comprised primarily of fees for our
training workshops that help customers take full advantage of the
state-of-the-art features of the TradeStationelectronic trading platform.
Other revenues were $219,000 for the year ended December 31, 2003. There were
no other revenues for the year ended December 31, 2002. Operating Expenses Clearing and Execution Costs.Clearing and execution costs are the costs
of executing and clearing customer trades, including commissions paid to
third-party broker-dealers. Clearing and execution costs were $17.9 million
for the year ended December 31, 2003, as compared to $11.3 million for the year
ended December 31, 2002, an increase of $6.6 million, or 59%, due primarily to
increased trading activity related to brokerage client account growth and, to a
lesser extent, an increase in futures clearing costs during the 2003 second
quarter prior to our May 2003 change in futures clearing firms. 25




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Clearing and execution costs, as a percentage of brokerage revenues,
increased to 35% for the year ended December 31, 2003, as compared to 29% for
the year ended December 31, 2002 due primarily to: (i) the lower gross margins
that resulted from our equities per share pricing structure first offered in
the second quarter of 2002; (ii) overall price reductions; and (iii) increased
costs for futures clearing, during the second quarter of 2003, imposed by our
former futures clearing firm. We believe that clearing costs as a percentage
of brokerage revenues will increase in the short-term due to the impact of our
commission price reductions effective November 1, 2003. Sometime in 2004, we
expect to begin self-clearing of equities trades for our active trader client
base, which, while no assurances can be given, we expect will improve our gross
margin. Data Center Costs. Data center costs are primarily intercompany
subscription fees, eliminated upon consolidation, paid on a per user basis to
the software products and services segment for providing streaming real-time,
Internet-based trading analysis software and data services to brokerage clients
and, to a lesser extent, data communications costs necessary to connect our
server farms directly to electronic market places. See Technology
Development below. Data center costs were $15.2 million for the year ended
December 31, 2003, as compared to $10.5 million for the year ended December 31,
2002, an increase of $4.7 million, or 44%, due primarily to the increased
number of brokerage accounts during 2003 as compared to 2002, partially offset
by a 17% decrease in the per account Intercompany Subscription Fee charged by
TradeStation Technologies to TradeStation Securities during 2003. See
Software Products and Services Segment  Revenues  Subscription Fees and -
Operating Expenses - Data Center Costs. Technology Development. Technology development expenses consist primarily
of personnel costs associated with product management of the brokerage products
and services TradeStation Securities offers to its clients and the creation of
documentation and other training and educational materials. Technology
development expenses for the year ended December 31, 2003 were $1.4 million, as
compared to $644,000 for the year ended December 31, 2002, an increase of
$759,000, or 118%, due mainly to increased personnel and related costs as a
result of the transfer to the brokerage services segment of seven positions
from the software products and services segment at the beginning of the 2002
fourth quarter. Most of the technology costs required for our brokerage firm
to offer and operate a highly sophisticated electronic trading platform are
borne by its technology affiliate, which licenses that technology to the
brokerage firm pursuant to an intercompany agreement. See Software Products
and Services Segment  Operating Expenses  Technology Development. Sales and Marketing. Sales and marketing expenses consist primarily of
personnel costs for sales, customer support centers, marketing and order desk,
as well as brokers commissions; marketing programs, including advertising,
brochures, direct mail programs and account opening kits; data and information
tools used by sales and brokerage personnel; and web-site maintenance and
administration costs. Sales and marketing expenses were $9.9 million for the
year ended December 31, 2003, as compared to $11.2 million for the year ended
December 31, 2002, a decrease of $1.3 million, or 12%, due primarily to
decreased advertising and promotional costs. Advertising expenses may increase
and vary during 2004 as we explore and possibly implement different marketing
initiatives and analyze and interpret their results. 26




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General and Administrative. General and administrative expenses consist
primarily of costs for administrative personnel such as executive, human
resources, finance, compliance and information technology employees;
professional fees; telecommunications; rent; insurance; and other facility
expenses. General and administrative expenses were $4.2 million for the year
ended December 31, 2003, as compared to $4.9 million for the year ended
December 31, 2002, a decrease of $686,000, or 14%. This decrease is due
primarily to a decrease in facility costs of $522,000 (related primarily to the
estimated loss on the sublease of facilities recorded during 2002), and the
2003 reversal of certain uninsured loss provisions including related legal fees
in the amount of $201,000 due to the favorable settlement of certain claims,
partially offset by increased communications costs of $148,000. See Critical
Accounting Policies and Estimates  Sublease of Facilities and    Uninsured
Loss Reserves. General and administrative expenses are anticipated to
increase during 2004 due to higher insurance (primarily the cost of directors
and officers liability and excess-SIPC coverage) and increased consulting and
professional fees related to increased securities law requirements and ongoing
litigation and claims. Software Products and Services Segment Revenues Subscription Fees. Subscription fees represent monthly fees earned for
providing streaming real-time, Internet-based trading analysis software tools
and data services. Subscription fees also include intercompany revenue for
licensing to TradeStation Securities, on a per user basis, the right to provide
these software tools and data services to the brokerage customers of
TradeStation Securities (Intercompany Subscription Fees). Subscription fees
were $21.3 million for the year ended December 31, 2003, as compared to $16.4
million for the year ended December 31, 2002, an increase of $4.9 million, or
30%, due primarily to a $4.5 million increase in Intercompany Subscription Fees
which resulted from increased brokerage accounts at TradeStation Securities,
partially offset by a decrease in the per account Intercompany Subscription Fee
charged by TradeStation Technologies to TradeStation Securities during 2003.
Excluding Intercompany Subscription Fees, subscription fees were $7.0 million
for the year ended December 31, 2003, as compared to $6.6 million for the year
ended December 31, 2002, an increase of $395,000, or 6%, as a result of a
change to higher-priced subscription offerings during 2003, partially offset by
a decrease in the number of subscribers. Subscription services have not been
actively marketed since December 2000. Licensing Fees. Licensing fees are derived from direct sales of our
legacy client software products. Licensing fees were $525,000 for the year
ended December 31, 2003, as compared to $1.1 million for the year ended
December 31, 2002, a decrease of $606,000, or 54%. This expected decrease is
the result of no longer offering legacy client software products domestically
since September 2001. Licensing fees are expected to continue to decrease in
future quarters. Other Revenues. Other revenues consist primarily of royalties and
commissions received from third parties whose customers use our legacy software
products. Other revenues were $1.5 million for the year ended December 31,
2003, as compared to $2.1 million for the year ended December 31, 2002, a
decrease of $614,000, or 29%. This expected decrease is the result of no
longer marketing legacy client software since May 2000 and no longer offering
legacy client software products domestically since September 2001. Other
revenues are expected to continue to decrease in future quarters. 27




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Operating Expenses Data Center Costs. Data center costs represent expenses related to the
operation, maintenance and support of our data server farms. These expenses
consist primarily of rent and data communications costs at our facilities where
the data server farms are located, including costs necessary to connect our
data server farms directly to electronic market places, rent or depreciation
for servers, and data distribution and exchange fees. Data center costs for
the year ended December 31, 2003 were $4.1 million, as compared to $4.8 million
for the year ended December 31, 2002, a decrease of $648,000, or 14%. The
decrease is due primarily to lower data distribution and exchange fees of
$448,000, and lower server costs of $240,000, partially offset by increased
rent and data communication charges at our facilities of $40,000. The decrease
in data distribution and exchange fees resulted from approximately $208,000 of
credits received from data providers, increased recovery of exchange fees from
client accounts, and receipt of data directly from exchanges beginning during
the 2003 fourth quarter, partially offset by incremental costs related to
account growth. Technology Development. Technology development expenses include expenses
associated with the development of new products, services and technology;
enhancements to existing products, services and technology; testing of products
and services; and, in 2002, the creation of documentation and other training
and educational materials. Technology development expenses consist primarily
of personnel costs, depreciation of computer and related equipment, facility
expenses and telecommunications costs. TradeStation Technologies owns all
intellectual property rights relating to our businesses, including, but not
limited to, all order execution technology. Technology development expenses
were $5.7 million for the year ended December 31, 2003, as compared to $8.2
million for the year ended December 31, 2002, a decrease of approximately $2.5
million, or 30%, due primarily to decreased personnel and related costs of $2.0
million (due to fewer employees in 2003 as compared to 2002, including ten
terminations and the transfer of seven positions to the brokerage segment at
the beginning of the 2002 fourth quarter) and, to a lesser extent, decreased
facility costs of $253,000 related to the June 2002 consolidation of our
facilities and decreased communications costs of $171,000. Sales and Marketing. We no longer actively market software products and
services, the focus of our business being to continue to build an online
brokerage firm for active and institutional traders. During 2003, sales and
marketing expenses consisted primarily of personnel costs for customer support
centers and facility costs. In prior years, sales and marketing expenses
consisted primarily of marketing programs, including advertising, brochures,
and direct mail programs; sales commissions; personnel costs for marketing and
customer support centers; Web site maintenance and administration costs; and
inventory and handling costs. Sales and marketing expenses were $596,000 for
the year ended December 31, 2003, as compared to $1.3 million for the year
ended December 31, 2002, a decrease of $698,000, or 54%, due primarily to a
decrease in personnel and related costs of $460,000, a favorable resolution of
an event cancellation dispute during 2003 which resulted in a reduction of
expenses of $112,000, and a decrease in technical support costs of $133,000. General and Administrative. General and administrative expenses consist
primarily of costs for administrative personnel such as: executive, human
resources, finance and information technology employees; professional fees;
telecommunications; rent; other facility expenses; and insurance. General and
administrative expenses were $4.4 million for the year ended December 31, 2003,
as compared to $4.3 million for the year ended December 31, 2002, an increase
of 28




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$105,000, or 2%. This increase was due primarily to increased facility costs
of $192,000 and increased consulting and professional fees of $122,000,
partially offset by decreased personnel and related costs of $123,000 and the
2003 reversal of uninsured loss provisions in the amount of $100,000 due to the
reassessment of certain potential claims. See Critical Accounting Policies
and Estimates  Uninsured Loss Reserves. General and administrative expenses
are anticipated to increase during 2004 due to increased insurance (primarily
the cost of directors and officers liability coverage) and increased consulting
and professional fees related to increased securities law requirements. Amortization of Intangible Assets. Amortization of intangible assets
includes amortization related to the October 1999 acquisition of Window On
WallStreet Inc., which was accounted for under the purchase method of
accounting, and amortization of data rights and other intangible assets.
Amortization of intangible assets was $202,000 for the year ended December 31,
2003, as compared to $891,000 for the year ended December 31, 2002, a decrease
of $689,000, or 77%. The decrease was due primarily to certain Window On
WallStreet intangible assets becoming fully amortized in October 2002. (Recovery of) Provision for Insurance Claim. In June 2001, we made a
claim of $2.7 million with our insurance carrier relating to a trading error
made with respect to a clients account. As of the 2001 year end, the
insurance company had formally denied this claim and, accordingly, the
receivable that had been recorded in our consolidated balance sheet was fully
reserved. On July 25, 2002, we entered into an agreement with the insurance
company to settle this claim for $1.25 million, payment of which was received
in August 2002. Accordingly, during the third quarter of 2002, we recorded a
recovery of $1.25 million. 
 Years Ended December 31, 2002 and 2001 Overall Total revenues were $48.4 million for the year ended December 31, 2002, as
compared to $41.0 million for the year ended December 31, 2001, an increase of
$7.4 million, or 18%, due primarily to an increase in brokerage revenues,
partially offset by decreases in other revenues, licensing fees and
subscription fees. Income from operations was $1.3 million for the year ended December 31,
2002, as compared to a loss from operations of $17.8 million for the year ended
December 31, 2001, an improvement of $19.1 million, or 108%. This improvement
related primarily to higher revenues, lower amortization of intangible assets
which resulted from the 2001 fourth quarter impairment charge of $5.3 million
that reduced certain intangible assets to their estimated fair value, lower
general and administrative expense, and a $1.25 million insurance settlement in
the 2002 third quarter relating to a $2.7 million loss that had been fully
reserved during the prior year. See Software Products and Services Segment -
Operating Expenses  (Recovery of) Provision for Insurance Claim.This
improvement was partially offset by the higher clearing and execution costs
associated with higher brokerage revenues. Other income, net was $427,000 for the year ended December 31, 2002, as
compared to $599,000 for the year ended December 31, 2001, a decrease of
$172,000, or 29%, due primarily to a decrease in interest income as a result of
lower interest rates, partially offset by a gain of $287,500 recorded on the
sale of legacy customer accounts during the second quarter of 2002. 29




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Brokerage Services Segment Revenues Brokerage Revenues. For the year ended December 31, 2002, brokerage
revenues were $38.5 million (which included brokerage commissions and fees of
$34.4 million), as compared to brokerage revenues of $18.6 million (which
included brokerage commissions and fees of $17.3 million) for the year ended
December 31, 2001. This increase of $19.9 million, or 107%, was due primarily
to increased trading volume related to customer account growth fueled by our
June 27, 2001 launch of the TradeStationelectronic trading platform. During
the year ended December 31, 2002, 82% of total brokerage revenues were
generated from clients using the TradeStationelectronic trading platform, as
compared to 26% during the year ended December 31, 2001. As of December 31,
2002, substantially all of our brokerage customers had their trades executed
through the TradeStationelectronic trading platform. In April 2002, our new brokerage commission plan  one that charges
traders fees based solely upon the share volume of client trades as opposed to
per ticket charges  became effective. The new plan, as expected,
significantly reduced our commissions per trade. This reduction was partially
offset by charging brokerage clients monthly platform fees. In August 2002, we
modified our price per share plan by reducing the price per share. Operating Expenses Clearing and Execution Costs.Clearing and execution costs were $11.3
million for the year ended December 31, 2002, as compared to $5.8 million for
the year ended December 31, 2001, an increase of $5.5 million, or 96%, due
primarily to increased trading volume related to account growth. Clearing and
execution costs as a percentage of brokerage revenues decreased to 29% for the
year ended December 31, 2002, as compared to 31% for the year ended December
31, 2001, due to improved clearing cost rates provided by our clearing firms,
partially offset by the lower gross margins that resulted from our change to a
per share pricing structure. Data Center Costs. Data center costs for the year ended December 31, 2002
were $10.5 million, as compared to $230,000 for the year ended December 31,
2001. This increase of $10.3 million is primarily due to Intercompany
Subscription Fees paid to the software products and services segment during the
year ended December 31, 2002. No such fees were paid to the software products
and services segment during the year ended December 31, 2001. See Software
Products and Services Segment  Revenues  Subscription Fees and - Operating
Expenses  Data Center Costs. Technology Development. Technology development expenses for the year
ended December 31, 2002 were $644,000, as compared to $224,000 for the year
ended December 31, 2001, an increase of $420,000, or 188%. This increased
because the brokerage did not employ product management personnel until the end
of the 2001 second quarter. Sales and Marketing. Sales and marketing expenses were $11.2 million for
the year ended December 31, 2002, as compared to $7.8 million for the year
ended December 31, 2001, an increase of $3.4 million, or 44%. This increase
was due primarily to increased advertising and promotional costs of $2.6
million and increased personnel and related costs of $722,000. However, we
significantly decreased our media advertising expenditures in the second half
of 2002 as compared to the first half of 2002. 30




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General and Administrative. General and administrative expenses were $4.9
million for the year ended December 31, 2002, as compared to $3.6 million for
the year ended December 31, 2001, an increase of $1.3 million, or 35%. This
change was due primarily to increases in personnel and related costs of $1.2
million and increases in facility costs of $1.2 million (related mainly to an
increase in the estimated loss on the sublease of facilities), partially offset
by a decrease in uninsured loss provisions of $747,000 and, to a lesser extent,
decreases in license and registration fees and insurance. See Critical
Accounting Policies and Estimates - Uninsured Loss Reserves and    Sublease
of Facilities. Amortization of Intangible Assets.Historically, amortization of
intangible assets has been related to the December 1999 acquisition of certain
customer accounts of Newport Discount Brokerage, Inc. (Newport), which was
accounted for under the purchase method of accounting. Based upon our decision
made in December 2001 to sell those accounts (as they did not meet the
requirements of our active and institutional trader business model), we
determined that these intangible assets were impaired and, therefore, they were
reduced to their estimated fair value, as determined by an independent
appraisal. There was no amortization during 2002, as these intangible assets
were held for sale, and then sold during the second quarter of 2002.
Amortization of intangible assets for the year ended December 31, 2001 was
$661,000. See Impairment of Goodwill and Intangible Assets below. Impairment of Goodwill and Intangible Assets.In December of 2001, based
upon our decision to sell the Newport accounts, which did not meet the
requirements of our active and institutional trader business model, we recorded
a non-cash charge of $1.1 million for the impairment of certain intangible
assets associated with the acquisition of those customer accounts. See Note 1
of Notes to Consolidated Financial Statements  DESCRIPTION OF BUSINESS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Impairment of Long-Lived Assets
and Note 5 of Notes to Consolidated Financial Statements  INTANGIBLE ASSETS,
NET. Software Products and Services Segment Revenues Subscription Fees. Subscription fees were $16.4 million for the year
ended December 31, 2002, as compared to $9.6 million for the year ended
December 31, 2001, an increase of $6.8 million, or 71%. This increase was due
primarily to $9.7 million of Intercompany Subscription Fees which resulted from
increased brokerage accounts at TradeStation Securities. Excluding
Intercompany Subscription Fees, subscription fees decreased $2.9 million, or
31%, due to our December 2000 decision not to actively market subscription
services, but rather to focus on the growth of our brokerage business. Licensing Fees. Licensing fees were $1.1 million for the year ended
December 31, 2002, as compared to $5.0 million for the year ended December 31,
2001, a decrease of $3.9 million, or 78%. This expected decrease was due
primarily to the May 2000 termination of active marketing of client software
products and, as of September 2001, no longer offering those products
domestically. 31




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Other Revenues. Other revenues were $2.1 million for the year ended
December 31, 2002, as compared to $7.8 million for the year ended December 31,
2001, a decrease of $5.7 million, or 73%. This expected decrease was due
primarily to a decrease in royalties resulting from the expiration in 2001 of a
minimum royalty arrangement with a third party. Operating Expenses Data Center Costs. Data center costs for the year ended December 31, 2002
were $4.8 million, as compared to $5.3 million for the year ended December 31,
2001, a decrease of $507,000, or 10%. The decrease was due primarily to lower
lease costs associated with the conversion of certain operating leases to
capital leases, and lower data distribution fees resulting from more favorable
rates negotiated in the third quarter of 2001, partially offset by higher
facility costs and exchange fees. Technology Development. Technology development expenses were $8.2 million
for the year ended December 31, 2002, as compared to $9.1 million for the year
ended December 31, 2001, a decrease of $878,000, or 10%, due primarily to lower
personnel and related costs of $662,000 and lower facility costs of $169,000. Sales and Marketing. Sales and marketing expenses were $1.3 million for
the year ended December 31, 2002, as compared to $3.6 million for the year
ended December 31, 2001, a decrease of $2.3 million, or 64%, due primarily to
decreases in advertising and promotional costs of $1.0 million, decreases in
personnel and related costs of $855,000 and decreases in facility costs of
$230,000. General and Administrative. General and administrative expenses were $4.3
million for the year ended December 31, 2002, as compared to $9.1 million for
the year ended December 31, 2001, a decrease of $4.8 million, or 53%, due
primarily to decreases in personnel and related costs of $2.0 million,
decreases in professional fees of $803,000, decreases in facility costs of
$794,000, and decreases in provision for bad debts of $714,000. The entire
2001 provision for bad debts relates to a portion of a TradeStation
Technologies 2001 royalty receivable that was part of a pre-petition estate
in a Chapter 11 bankruptcy filed in February 2001 that was not paid as a result
of the rejection of that agreement in those bankruptcy proceedings. See Note
15 of Notes to Consolidated Financial Statements  COMMITMENTS AND
CONTINGENCIES   Telerate Royalty Agreement. Amortization of Intangible Assets.Amortization of intangible assets was
$891,000 for the year ended December 31, 2002, as compared to $5.5 million for
the year ended December 31, 2001, a decrease of $4.6 million, or 84%. The
decrease was due to the December 2001 impairment that reduced the value of all
of the goodwill and certain intangible assets associated with the acquisition
of Window On WallStreet to their estimated fair value. This resulted from our
decision, made and implemented in the fourth quarter of 2001, to upgrade all
WindowOnWallStreet.comsubscribers to TradeStation. See Impairment of
Goodwill and Intangible Assets below. (Recovery of) Provision for Insurance Claim. In June 2001, we made a
claim of $2.7 million with our insurance carrier relating to a trading error
made with respect to a clients account. In December 2001, the insurance
company formally denied this claim and, accordingly, the receivable recorded in
our consolidated balance sheet was fully reserved. On July 25, 2002, we
entered into an agreement with the insurance company to settle this claim for
$1.25 million, 32




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payment of which was received in August 2002. Accordingly, we recorded a
recovery of insurance claim of $1.25 million during the third quarter of 2002. Impairment of Goodwill and Intangible Assets.In December 2001, we
recorded a non-cash charge of $4.2 million for the impairment of all of the
goodwill and certain intangible assets associated with the acquisition of
Window On WallStreet. This was done as a result of our decision, made and
implemented in the fourth quarter of 2001, to upgrade all
WindowOnWallStreet.com subscribers to TradeStation. See Note 1 of Notes to
Consolidated Financial Statements  DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES  Impairment of Long-Lived Assetsand Note 5 of
Notes to Consolidated Financial Statements  INTANGIBLE ASSETS, NET. 
 Income Taxes During the year ended December 31, 2001, we recorded an income tax
provision of $4.7 million, which included a fourth quarter non-cash charge of
$4.8 million to establish a full valuation allowance against our deferred
income tax assets in accordance with the requirements of SFAS No. 109. See
Note 12 of Notes to Consolidated Financial Statements  INCOME TAXES. At December 31, 2003, we had net deferred income tax assets of $8.6
million, which are offset by a valuation allowance of $8.6 million (the full
amount). Of this $8.6 million, $3.2 million relate to net operating loss
carryforwards the benefit of which may be recorded through additional paid-in
capital and not through the consolidated statement of operations should
realization become more likely than not. As a result of our deferred income tax assets, which include those net
operating loss carryforwards, other than alternative minimum tax and state and
local income taxes where our net operating loss carryforwards could not be
utilized, we have not been obligated to pay income taxes on our earnings since
our return to profitability in the second quarter of 2002. Later in 2004, in
accordance with the requirements of SFAS 109, we anticipate making a reversal
of all or part of the valuation allowance on our net deferred income tax assets
referred to in the previous paragraph, which could generate one-time income of
more than $2.0 million in the quarter the reversal is made, and after which we
will begin to record income tax expense at a 37.6% effective rate. During the year ended December 31, 2003, we recorded a net income tax
benefit of $731,000 consisting of refunds related to prior year federal income
tax returns (see below), and state income tax refunds received during 2003 for
the overpayment of a prior years income tax, partially offset by an increase
to the valuation allowance established for the amount due under the current
years alternative minimum tax calculation. Other than the increase to the
valuation allowance for the amount due under the current years alternative
minimum tax calculation, the income tax expense associated with net operating
income generated during the year ended December 31, 2003 was totally offset by
a reduction to the previously established valuation allowance associated with
deferred income tax assets referred to in the paragraph above, including the
net operating loss carryforwards. 33




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In February 2003, in connection with an Internal Revenue Service (IRS)
audit of a prior years federal income tax return, we learned that we were
entitled to a $72,000 refund related to research and development tax credits.
We recorded that benefit in the 2003 first quarter. Also in conjunction with
the IRS audit, in late April 2003 we were advised that we were due a refund
relating to our 1997 income taxes paid. Accordingly, during the 2003 second
quarter, we recorded a benefit of approximately $802,000. The full amount of
the income tax receivable and related interest thereon was received during
October 2003. 
 Variability of Results The operating results for any quarter are not necessarily indicative of
results for any future period or for the full year. Our quarterly revenues and
operating results have varied in the past, and are likely to vary in the
future. Such fluctuations are likely to result in volatility in the price of
our common stock. See Issues, Uncertainties and Risk Factors below and Note 17
of Notes to Consolidated Financial Statements  UNAUDITED QUARTERLY FINANCIAL
INFORMATION. 
 Liquidity and Capital Resources As of December 31, 2003, we had cash and cash equivalents and marketable
securities of approximately $33.0 million, of which $2.7 million was
restricted. Restricted cash supports a facility lease and certain customer
agreements. See Note 15 of Notes to Consolidated Financial Statements

COMMITMENTS AND CONTINGENCIES  Restricted Cash. A summary of our capital lease obligations (net of interest and sales
tax), operating lease obligations (net of subleases), and minimum purchase
obligations as of December 31, 2003 is as follows: Payments Due By PeriodLess than
    
    1-3
    
    4-5
    
    More thanContractual Obligations
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    5 YearsCapital lease obligations
    
    $
    194,002
    
    
    $
    186,482
    
    
    $
    7,520
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    17,972,265
    
    
    
    2,616,717
    
    
    
    6,231,580
    
    
    
    3,811,515
    
    
    
    5,312,453Purchase obligations
    
    
    2,644,652
    
    
    
    918,772
    
    
    
    1,725,880
    
    
    
    
    
    
    
    Total
    
    $
    20,810,919
    
    
    $
    3,721,971
    
    
    $
    7,964,980
    
    
    $
    3,811,515
    
    
    $
    5,312,453
 Purchase obligations are related to back-office systems and
telecommunications services. See Note 7 of Notes to Consolidated Financial
Statements  CAPITAL LEASE OBLIGATIONS and Note 15 of Notes to Consolidated
Financial Statements  COMMITMENTS AND CONTINGENCIES  Operating Leasesand -
Purchase Obligationsfor a further discussion of our outstanding capital lease,
operating lease and purchase obligations. In addition to the purchase obligations set forth in the table above, we
anticipate, in connection with the expected growth of our brokerage business,
capital expenditures of approximately $2.0 million through December 31, 2004
primarily for the purchase of computer hardware and software. These
expenditures are expected to be funded through operating cash flows, capital
leases, or a combination of the two. 34




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We anticipate that our available cash resources and cash flows from
operations will be sufficient to meet our presently anticipated working capital
and capital expenditure requirements through at least the next twelve months.
In connection with our plan for TradeStation Securities to begin self-clearing
equities trades later in 2004, we will be required to make security deposits
with clearing corporations of several millions of dollars. Cash provided by operating activities totaled $13.4 million, $5.2 million
and $2.8 million for the years ended December 31, 2003, 2002 and 2001,
respectively. Net cash provided by operating activities during 2003 was due
primarily to a significant improvement in operating income (including $874,000
received for income tax refunds). Net cash provided by operating activities
during 2002 was due primarily to improved operating income (including $1.25
million received in an insurance settlement), as adjusted for non-cash items,
and an increase in accounts payable and accrued expenses, partially offset by
an increase in receivables from clearing firms. Net cash provided by operating
activities during 2001 was due primarily to the receipt of income tax
receivables of $8.5 million in April 2001 and a decrease in receivables from
clearing firms, partially offset by operating losses as adjusted for non-cash
items and decreases in merger-related and other non-recurring accounts payable
and in income taxes payable. Investing activities used cash of $2.6 million, $331,000 and $4.0 million
during 2003, 2002 and 2001, respectively. During 2003, net cash used in
investing activities consisted primarily of a purchase of marketable securities
of $2.0 million and capital expenditures of $1.3 million, primarily computer
hardware and software to support the growth of our business operations,
partially offset by a decrease in restricted cash of $745,000. During 2002,
net cash used in investing activities was primarily capital expenditures of
$1.7 million, partially offset by cash proceeds of $1.0 million from the sale
of the Newport accounts during the second quarter of 2002 (see Note 5 of Notes
to Consolidated Financial Statements  INTANGIBLE ASSETS, NET). During 2001,
cash used in investing activities was mainly an increase in restricted cash of
$3.1 million, supporting a facility lease and an equipment lease, and $546,000
in capital expenditures. Financing activities provided cash of $4.5 million during 2003 and used
cash of $8.2 million and $300,000 during 2002 and 2001, respectively. Proceeds
from issuance of common stock from exercises of stock options from our
incentive stock plans, and purchases under our employee stock purchase plan,
provided cash of $4.8 million, $43,000 and $109,000 during 2003, 2002 and 2001,
respectively. Net proceeds from issuance of common stock associated with
exercise of warrants were $914,000 during 2003. In connection with the initial public offering of the predecessor to
TradeStation Securities, warrants to purchase up to 225,000 shares of that
predecessor companys common stock, at an exercise price of $11.55, were
granted to the underwriters, with an expiration date of June 9, 2004. We
assumed such warrants in connection with the merger between TradeStation
Technologies and TradeStation Securities, and, based on the 1.7172 to 1 merger
conversion ratio, the underwriters were granted rights to purchase up to
386,369 shares of the companys common stock at an exercise price of $6.73. In
July 2003, we filed a registration statement with the Securities and Exchange
Commission to register the warrants and the 386,369 shares of common stock
issuable upon the exercise of such warrants, which was declared effective by
the Securities and Exchange Commission on August 13, 2003. During the second
half of 2003, we issued 196,807 shares of common stock associated with the
exercise of warrants in exchange for net 35




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cash proceeds of $914,000 and the delivery and cancellation of 123,027
warrants. As of December 31, 2003, warrants to purchase up to 66,535 shares of
the companys common stock at $6.73 were outstanding. Net cash used in financing activities during 2002 was primarily $6.9
million of cash paid for the purchase and retirement of 5 million shares of our
common stock. In July 2002, we announced a stock repurchase program
authorizing, at the discretion of management, the use of available cash to
purchase from time to time up to 4 million shares of our common stock in the
open market or through privately-negotiated transactions. Through October
2002, we had purchased and retired all 4 million shares at prices ranging from
$1.35 to $1.40 per share, for a total purchase price of $5.5 million. This
included two private transactions with a former principal shareholder of
onlinetradinginc.com corp. for the purchase of 1.5 million shares at a price of
$1.35 per share and 2.4 million shares at a price of $1.40 per share. In
November 2002, we purchased and retired an additional 1 million shares at a
price of $1.35 per share in a private transaction with another former principal
shareholder of onlinetradinginc.com corp., bringing the total shares of common
stock purchased and retired for the year to 5 million, for a total purchase
price of $6.9 million. During the third quarter of 2003, those former principal
shareholders of onlinetradinginc.com corp. filed lawsuits seeking rescission of
the share purchases and/or compensatory damages, plus interest, costs and
attorneys fees. We believe all of the allegations are baseless. See Note 15
of Notes to Consolidated Financial Statements  COMMITMENTS AND
CONTINGENCIES 
Litigation and Claimsfor further discussion. Repayments of capital lease obligations were $1.2 million, $1.4 million
and $410,000 during 2003, 2002 and 2001, respectively. 
 Off-Balance-Sheet Arrangements TradeStation Securities customers trading activities are transacted on
either a cash or margin basis. In margin transactions, TradeStation Securities
may be obligated for credit extended to its customers by TradeStation
Securities clearing firms that is collateralized by cash and securities in the
customers accounts. In connection with these activities, TradeStation
Securities also executes customer transactions involving the sale of securities
not yet purchased, substantially all of which are transacted on a margin basis
subject to individual exchange regulations. Such transactions may expose
TradeStation Securities to significant off-balance-sheet risk in the event
margin requirements are not sufficient to fully cover losses that customers may
incur. In the event the customer fails to satisfy its obligations,
TradeStation Securities may be required to purchase or sell financial
instruments at prevailing market prices to fulfill the customers obligations. TradeStation Securities seeks to control the risks associated with its
customers activities by requiring customers to maintain margin collateral in
compliance with its clearing firms requirements as well as various regulatory
requirements. TradeStation Securities and its clearing firms monitor required
margin levels daily and, pursuant to such guidelines, require the customers to
deposit additional collateral or to reduce positions when necessary. The customers financing and securities settlement activities require
TradeStation Securities clearing firms to pledge customer securities as
collateral in support of various secured financing sources such as bank loans
and securities loaned. In the event the counterparty is unable to meet 36




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its contractual obligation to return customer securities pledged as collateral,
TradeStation Securities may be exposed to the risk of needing to acquire the
securities at prevailing market prices in order to satisfy its customers
obligations. TradeStation Securities controls this risk by monitoring the
market value of securities pledged on a daily basis and by requiring
adjustments of collateral levels in the event of excess market exposure. In
addition, TradeStation Securities establishes credit limits for such activities
and monitors compliance on a daily basis. 
 Recently Issued Accounting Standards In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN No.
45). FIN No. 45 elaborates on the disclosures to be made by a guarantor in
its financial statements about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN No. 45 should be applied only on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantors fiscal year end. The disclosure requirements were effective
for financial statements ending after December 15, 2002. The adoption of FIN
No. 45 did not have any impact on our consolidated financial position, results
of operations or cash flows. We adopted SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, effective January 1, 2003. SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or
disposal plan. SFAS No. 146 nullifies Emerging Issues Task Force Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring).The adoption of SFAS No. 146 did not have any impact on our
consolidated financial position, results of operations or cash flows. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. Most of
the guidance in SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, applied prospectively. The adoption of SFAS No.
149 did not have any impact on our consolidated financial position, results of
operations or cash flows. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 improves the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. SFAS No. 150
requires that those instruments be classified as liabilities in statements of
financial position. Most of the guidance in SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 did not have any impact on
our consolidated financial position, results of operations or cash flows. 37




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In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN No. 46), and then, in December 31, 2003,
issued a revised version of Fin No. 46. FIN No. 46 clarifies the application
of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated support from
other parties. FIN No. 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entitys activities or entitled to receive a
majority of the entitys residual returns or both. FIN No. 46 also requires
disclosures about variable interest entities that the company is not required
to consolidate but in which it has a significant variable interest.
Application of FIN No. 46 is required in financial statements of public
entities that have interests in variable interest entities or potential
variable interest entities commonly referred to as special-purpose entities for
periods ending after December 15, 2003. Application by public entities (other
than small business issuers) for all other types of entities is required in
financial statements for periods ending after March 15, 2004. The adoption of
FIN No. 46 did not have any impact on our consolidated financial position,
results of operations or cash flows as we do not have any variable interest
entities. 
 Issues, Uncertainties and Risk Factors The Consolidated Financial Statements and Managements Discussion and
Analysis of Financial Condition and Results of Operations, and the BUSINESS
section of this report, should be read and evaluated together with the issues,
uncertainties and risk factors relating to our business described below. While
we have been and continue to be confident in our business and business
prospects, we believe it is very important that anyone who reads this report
consider these issues, uncertainties and risk factors, which include business
risks relevant both to our industry and to us in particular. These issues,
uncertainties and risk factors are not intended to be exclusive. Issues,
uncertainties and risk factors are also included in other sections of this
report when specifically relevant to a statement we have made about an aspect
of our business, or our financial condition or results of operations. This report also contains statements that are forward-looking within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. When used in this report, the words
anticipate(s), anticipated, anticipation, assume(s), assumption(s),
become(s), belief, believe(s), believed, could, designed,
estimate, estimates, estimated, expect(s), expected,
expectation(s), going forward, hopeful, intend(s), intended, look
forward, may, opportunity, opportunities, outlook(s), pending,
plan(s), planned, potential, scheduled, shall, should, think(s),
to be, upcoming, well-positioned, will, would, and similar
expressions, if and to the extent used, are intended to identify the
forward-looking statements. All forward-looking statements are based on
current expectations and beliefs concerning future events that are subject to
risks and uncertainties, including the risks and uncertainties described below
and elsewhere in this report. Actual results may differ materially from the
results suggested in this report. Factors that may cause or contribute to such
differences, and our business risks and uncertainties generally, include, but
are not limited to, the items described below, as well as those described in
other sections of this report, our other public filings and our press releases. 38




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There Are Several Factors That May Cause Fluctuations In Our Quarterly
Operating Results, Which Could Result In Significant Volatility In Our Stock
Price Quarterly revenues and operating results of TradeStation Group and its
predecessor companies have fluctuated significantly in the past, and our
quarterly revenues and operating results are likely to fluctuate in the future.
Causes of such significant fluctuations may include, but are not limited to:  
    
    the effect of an anticipated reversal, later in 2004, of an income
tax valuation allowance relating to net deferred income tax assets,
which could generate one-time income of more than $2.0 million in the
quarter the reversal is made;  
    
    the effect, on the companys net income and earnings per share, of
income tax expense at an effective rate of 37.63% estimated to be
applied beginning in the quarter following our reversal of the income
tax valuation allowance (which is significantly higher than the
effective income tax rate over the last seven fiscal quarters);  
    
    the timing (i.e., number and length of delays), success and other
effects of our anticipated self-clearing operations, or our inability
to commence self-clearing as a result of a failure to obtain final
regulatory or other third-party approvals or to satisfy conditions
required to obtain a needed regulatory or other third-party approval;  
    
    the effect, in the event we decide that the commencement of
self-clearing operations will be delayed for a long period of time, or
decide not to self-clear, of the decisions we then make about clearing
(i.e., whether to enter into an omnibus clearing arrangement or
continue to use a fully-disclosed clearing agent for each equities
brokerage account);  
    
    the effect of changes to our commission pricing or other fee
structures (since the 2002 second quarter we have continuously reduced
commission pricing), and of additional price reductions that may be
implemented in the future (our most recent reduction to our commission
pricing for equities and futures trades became effective November 1,
2003);  
    
    market or competitive pressure to continue to lower commissions and
fees charged to customers;  
    
    the timing, success, volatility and other characteristics or
effects that develop concerning our new forex and online options trade
execution services;  
    
    the appeal of our products and services to the institutional trader
market (given our limited experience selling to that market), and the
cost of technology development and sales, marketing, compliance,
technical, administrative and other infrastructure that may be required
to improve our chance of success in the institutional trader market;  
    
    general economic and market factors that affect active trading,
including trade volume, market volatility, market direction, the level
of confidence and trust in the markets, and seasonality (summer months
and holiday seasons typically being slower periods);  
    
    pending or potential third-party claims that turn out to be
significantly more (or less) costly, in terms of both judgment or
settlement amounts and legal expenses, than we currently estimate or
expect, including, but not necessarily limited to, the three claims
filed in 2003 by the co-founders of the predecessor company to
TradeStation Securities against the company, certain of its executive
officers and directors and certain family partnerships owned by two of
the executive officers (which seek, in the aggregate, tens of 39




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millions of dollars in damages), a recently-filed patent infringement
case against the company and other online brokerage firms and other
potential patent infringement claims, pending NASD arbitrations
concerning brokerage customer claims seeking damages, in the aggregate,
between nine and ten million dollars, and a million dollar claim by the
bankruptcy estate of Bridge Information Systems;  
    
    the quality and success of, and potential continuous changes in,
sales or marketing strategies (which continue to evolve) and the costs
allocated to marketing campaigns and the timing of those campaigns;  
    
    variations from our expectations with respect to hiring and
retention of personnel, sales and marketing expenditures, product
development, customer account growth, customer trading activity and the
share volume of their trades, or other revenue or expense items;  
    
    if revenues are lower than budgeted expectations, our inability to
make in a timely fashion commensurate expense reductions (as a large
amount of our expenses do not vary with revenues in the short term);  
    
    the effect of recent enhancements to the TradeStationelectronic
trading platform, including the possibility of less-than-anticipated
appeal to customers and unexpected technical issues or difficulties;  
    
    changes in demand for our products and services due to the rapid
pace at which new technology is offered to customers in our industry;  
    
    costs or adverse financial consequences that may occur with respect
to regulatory compliance or other regulatory issues, or exchange or
clearing membership issues; and  
    
    the size and frequency of any trading errors for which we may
ultimately suffer the economic burden, in whole or in part (including
losses from third party claims that may arise from time to time  as of
June 1, 2002, we have not carried errors or omissions insurance for
third party claims). Conditions In The Securities And Financial Markets May Affect Our Rates Of
Customer Acquisition, Retention And Trading Activity Our products and services are, and will continue to be, designed for
customers who trade actively in the securities and financial markets. There
has been, since mid-year 2000, and, despite improved conditions in 2003 there
may continue to be, unfavorable conditions in the securities and financial
markets. To the extent that interest in active trading decreases due to low
trading volumes, lack of volatility, or significant downward movement in the
securities or financial markets, such as has recently occurred, or future tax
law changes, recessions, depressions, wars, terrorism (including
cyberterrorism), or otherwise, our business, financial condition, results of
operations and prospects could be materially adversely affected. Unfavorable
market conditions have, historically, seemed to severely negatively impact the
share price of publicly-held online brokerage firms, and also may result in
more losses for our clients, which could result in increases in quantity and
size of errors or omissions claims that may be made against us by clients. We
do not currently carry any errors or omissions insurance that might cover, in
part, some of those potential claims. See The Nature Of Our Business Results
In Potential Liability To Customersbelow. 40




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We May Need to Make Decisions About When (Or If) We Will Begin
Self-Clearing Equity Trades For Active Trader Accounts We have planned for some time to begin self-clearing equities trades for
our active trader accounts as soon as possible in 2004. Currently, all of our
clients equities trades are cleared through Bear Stearns, our clearing agent.
There can be no assurance that we will obtain all of the approvals and
memberships required to conduct self-clearing operations as a broker-dealer.
There is also a significant risk that we will encounter substantial delays in
launching self-clearing operations due to difficulties in satisfying conditions
or requirements attached to membership or approvals (such as requirements
regarding large financial or security deposits, or the requirement that we
obtain further changes to our NASD membership agreement), or as a result of
technical issues or other third-party acts or failures to act outside of our
control. In fact, the Depository Trust & Clearing Corporation/National
Securities Clearing Corporation (DTCC/NSCC) has very recently expressed some
concerns that need to be addressed before we will be considered for approval.
There can be no assurance that we will ultimately commence self-clearing
operations (for example, we may decide that an omnibus clearing arrangement is
more suitable in the circumstances, or that continuing to use a fully-disclosed
clearing agent for the foreseeable future is the best decision). If we do
commence self-clearing, or an omnibus clearing arrangement, we have no such
experience, and the cost savings and efficiencies of self-clearing or omnibus
clearing, assuming either occurs, may be less favorable than we expect as a
result of unanticipated increased fixed, infrastructure or incremental costs,
mistakes or other factors. Also, such anticipated savings may be more than
offset by account losses or reduced trading activity if any self-clearing
mistakes or failures occur which undermine our clients or prospects
confidence in our ability to conduct reliable self-clearing operations. Our Industry Is Intensely Competitive, Which Makes It Difficult To Attract
And Retain Customers The markets for online brokerage services, trading software tools, and
real-time market data services are intensely competitive and rapidly evolving,
and there has been substantial consolidation of those three products and
services occurring in the industry, as well as consolidation of the types of
financial instruments (equities, equities options, futures, forex) offered by
firms, and of online brokerage firms generally. We believe that competition
from large online and other large brokerage firms and smaller brokerage firms
focused on active traders, as well as consolidation, will substantially
increase and intensify in the future. Competition may be further intensified
by the size of the active trader market, which is generally thought to be
comprised of less than 10% of all online brokerage accounts. We believe our
ability to compete will depend upon many factors both within and outside our
control. Factors outside of our control include: price pressure; the timing
and market acceptance of new products and services and enhancements developed
by our competitors; market conditions, such as recession; the size of the
active trader market today and in the future; the extent to which institutional
traders are willing to use direct-access brokerage services from firms that
have traditionally served mostly retail clients; data availability and cost;
and third-party clearing costs. Factors over which we have more control, but
which are subject to substantial risks and uncertainties with respect to our
ability to effectively compete, include: timing and market acceptance of new
products and services and enhancements we develop; our ability to design,
improve and support materially error-free Internet-based systems; ease-of-use
of our products and services; reliability of our products and services; pricing
decisions; self-clearing costs; and sales and other marketing decisions and
efforts. 41




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Systems Failures May Result In Our Inability To Deliver Accurately, On
Time, Or At All, Important And Time-Sensitive Services To Our Customers The online electronic trading platform we provide to our clients is based
upon the integration of our sophisticated front-end software technology with
our equally-sophisticated, Internet-based server farm technology. Our server
farm technology is the foundation upon which online trading clients receive
real-time market data and place buy and sell orders. However, in order for
this technology to provide a live, real-time trading platform, it requires
integration with real-time market data, which are currently provided directly
by the exchanges or by systems of independent third-party market data vendors
(who obtain the data directly from the exchanges), the electronic order book
systems of electronic communication networks (ECNs) and electronic systems
offered by the exchanges, the clearing and back-office systems of the clearing
firms we use, and the forex deal order placement, settlement and back-office
systems of or licensed by the forex dealer firm which is responsible for all of
our clients forex trades. Accordingly, our ability to offer a platform that
enables the development, testing and automation of trading strategies and the
placement and execution of buy and sell orders depends heavily on the
effectiveness, integrity, reliability and consistent performance of all of
these systems and technologies. In particular, the stress that is placed on
these systems during peak trading times could cause one or more of these
systems to operate too slowly or fail. We have experienced several delays and
outages since we launched our online trading platform, many of which related to
data vendor, exchange, clearing firm, exchange and ECN outages or issues which
are beyond our control. Also, a hardware or software failure, software design
limitations or errors that exist in our and others technologies, power or
telecommunications interruption or natural disaster could cause a systems
failure or other potentially damaging results. When systems in the trading process slow down significantly or fail, even
for a short time, our brokerage customers could suffer delays in trading, or
unintended results or other problems, potentially causing losses and possibly
subjecting us to claims for such losses. Such failures or delays, depending
upon how often they occur and how serious they are, could also result in our
clients and client prospects losing or failing to gain confidence in our
trading platform. Additionally, as a general matter not applicable only to our
company, the integrity of these types of systems is increasingly being attacked
by persons sometimes referred to as hackers who intentionally introduce
viruses or other defects to cause damage, inaccuracies or complete failure.
Also, cyberterrorism, should it occur, may significantly affect peoples
willingness to use Internet-based services, particularly ones that involve
their personal or companys assets. During a system outage or failure, our brokerage may be able to take
orders by telephone; however, only associates with appropriate licenses,
knowledge and experience can accept telephone orders, and an adequate number of
associates likely would not be available to take customer calls in the event of
a system outage or failure. System delays, errors, outages and failures,
depending upon how serious and how often they occur, could have a material
adverse effect on our business, financial condition, results of operations and
prospects. See The Nature Of Our Business Results In Potential Liability To
Customersbelow. 42




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The Nature Of Our Business Results In Potential Liability To Customers Many aspects of the securities brokerage business, including online
trading services, 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. Our proprietary
order routing technology is designed to automatically locate, with immediacy,
the best available price in the appropriate market in completing execution of a
trade triggered by programmed market entry and exit rules. There are risks
that the electronic communications and other systems upon which these products
and services rely, and will continue to rely, or our products and services
themselves, as a result of flaws or other imperfections or limitations in their
designs or performance, may operate too slowly, fail, cause confusion or
uncertainty to the user, or operate or produce results not understood or
intended by the user. An investor or trader using either the full electronic
trading platform or our subscription service might claim that investment or
trading losses or lost profits resulted from use of a flawed version of one of
our trading software tools or systems, or inaccurate assumptions made by the
trading software tools regarding data, or inaccurate data. Major failures of
this kind may affect all customers who are online simultaneously. Any such
litigation could have a material adverse effect on our business, financial
condition, results of operations and prospects. We do not currently carry any
errors or omissions insurance that might cover, in part, some of the
above-described risks. While our contracts with customers are, we believe,
clear that customers who do business with us must knowingly assume all of the
risks described above, there can be no assurance that a judge, arbitrator or
regulator would enforce or honor such contractual provisions. See Conditions
In The Securities And Financial Markets May Affect Our Rates Of Customer
Acquisition, Retention And Trading Activity, and Systems Failures May Result
In Our Inability To Deliver Accurately, On Time, Or At All, Important And
Time-Sensitive Services To Our Customers above. Dependence Upon Outside Data Sources And Clearing Relationships Creates
Risks Outside Of Our Control Which May Affect Our Ability To Provide, And Our
Cost To Provide, Market Data And Clearing And Account Services Our business is currently dependent upon our ability to maintain contracts
with private market and news data vendors and clearing and dealer firms in
order to provide certain market data and news, and clearing and account
services, respectively, to our customers. We currently obtain New York Stock
Exchange (NYSE), American Stock Exchange (AMEX), Nasdaq, Options Price
Reporting Authority (OPRA), Chicago Mercantile Exchange (CME), Chicago Board of
Trade (CBOT) and OneChicago real-time market data directly from those
exchanges, but obtain other market data (such as forex data and data of smaller
futures exchanges) and news pursuant to non-exclusive licenses from private
data vendors who in turn obtain the data from exchanges or other sources.
Clearing and back-office account services for our brokerage clients are
obtained from established brokerage clearing firms. For our forex services, we
rely on a third-party forex dealer firm for all trade activity account
services. The data and news contracts typically provide for royalties based on
usage or minimums, the clearing contracts provide for transactional clearing
fees and charges, and the contract with our forex dealer provides for sharing a
fixed amount of the spread made by the forex dealer firm in each deal. There
can be no assurance that we will be able to renew or maintain contracts or
acceptable clearing cost or vendor fee rates. In fact, in 2003 we needed to
quickly change our futures clearing firm in response to a substantial increase
in our clearing costs imposed by our former futures clearing 43




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firm. We have also decided, due principally to clearing cost considerations,
to begin self-clearing active trader equities accounts as soon as possible in
2004. Changes (or, in some cases, failure or inability to make changes) in our
relationships with one or more of these third parties, or involuntary
termination of one of more of those relationships, could have a material
adverse effect on our business, financial condition, results of operations and
prospects. We Are Subject To Intellectual Property Litigation There has been substantial litigation in the software industry involving
intellectual property rights. Although we do not believe that we are or will
be infringing upon the intellectual property rights of others, there has been
an infringement claim asserted against us and eight other online brokerage
firms by a company named Datamize, Inc. which would have a material adverse
effect on our business, financial condition, results of operations and
prospects if it is successful. Such a case, as well as any other infringement
case that may be brought against us, could result in our being unable to use
intellectual property which is integral to one or more of our products or
services. While we believe Datamize, Inc.s claim is meritless, no assurances
can be made about the outcome of this litigation or the magnitude of the cost
to defend the claims made in this litigation. We May Not Be Able To Adequately Protect Or Preserve Our Rights In
Intellectual Property Our success is and will continue to be heavily dependent on proprietary
technology, including existing trading software, Internet, Web-site and
order-execution technology, and those types of technology currently in
development. We view our technology as proprietary, and rely, and will be
relying, on a combination of copyright, trade secret and trademark laws,
nondisclosure agreements and other contractual provisions and technical
measures to protect our proprietary rights. We also have a pending patent
application covering the TradeStationelectronic platform, but we do not yet
know if the patent will be issued. Policing unauthorized use of our products
and services is difficult, however, and we may be unable to prevent, or
unsuccessful in attempts to prevent, theft, copying or other unauthorized use
or exploitation of our product and service technologies. There can be no
assurance that the steps taken by us to protect (or defend) our proprietary
rights will be adequate or that our competitors will not independently develop
technologies that are substantially equivalent or superior to our technologies
or products and services. We May Need Cash In The Foreseeable Future While we anticipate having sufficient cash to meet our needs over the next
12 months, our future liquidity and capital requirements will depend upon
numerous factors, including: the rate of customer acceptance of our products
and services, including the number of new brokerage accounts acquired and the
number and volume of trades made by our brokerage customers; our recent price
reduction; price competition that may result in our continuing to charge lower
commissions and fees to customers; significant, increased infrastructure costs
as our business grows, including unanticipated costs for self-clearing and/or
omnibus clearing operations (such as large cash or security deposits);
unanticipated costs relating to our new forex and options execution services;
costs of technology development and sales, marketing, compliance, technical and
administrative operations relating to increased and intensified pursuit of
institutional clients; substantial legal costs and/or unexpected unfavorable
outcomes in lawsuits and arbitrations currently pending against us; and
competing technological and market developments. Funds, if and when needed,
may be raised through debt financing and/or the issuance of equity securities, 44




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there being no assurance that any such type of financing on terms satisfactory
to us will be available or otherwise occur. Any equity financing or debt
financing which requires issuance of equity securities or warrants to the
lender would reduce the percentage ownership of the shareholders of the
company. Shareholders also may, if issuance of equities occurs, experience
additional dilution in net book value per share, or the issued equities may
have rights, preferences or privileges senior to those of existing
shareholders. Operation In A Highly-Regulated Industry And Compliance Failures May
Result In Severe Penalties And Other Harmful Governmental Actions Against Us The securities and commodity futures industries are subject to extensive
regulation covering all aspects of those businesses. Regulation of forex
dealer and brokerage services is increasing as well. The various governmental
authorities and industry self-regulatory organizations that supervise and
regulate (and may soon supervise and regulate) our brokerage firm have broad
enforcement powers to censure, fine, suspend, enjoin, expel or issue
cease-and-desist orders to our brokerage firm or any of its officers or
employees who violate applicable laws or regulations. Additionally, rules
relating specifically to active traders have been enacted and more may be
enacted which severely limit the operations and potential success of our
business. Our ability to comply with all applicable laws and rules is largely
dependent on our brokerages maintenance of compliance and reporting systems,
as well as its ability to attract and retain qualified compliance and other
personnel. Our brokerage could be subject to disciplinary or other regulatory
or legal actions in the future due to noncompliance. The Loss Of Key Employees Could Decrease The Quality Of Our Management And
Operations Our success depends to a very significant extent on the continued
availability and performance of a number of senior management and product
development personnel. The loss of one or more of these key employees could
have a material adverse effect on our company. There Are Risks Relating To Our Ability To Maintain Customer Privacy And
Security And That Increased Government Regulation Of Internet Business May
Occur Customers may refuse to transact business over the Internet, particularly
business, such as ours, that involves the handling of significant amounts of
customers funds, due to privacy or security concerns. This risk will grow if,
as and to the extent cyberterrorism occurs or is perceived to be a viable,
prominent threat or likelihood to occur. We currently incorporate and plan to
continue to incorporate security measures into our privacy policies. However,
a major breach of customer privacy or security could have serious consequences
for our Internet-based operations. Use of the Internet, particularly for
commercial transactions, may not continue to increase as rapidly as it has
during the past few years as a result of privacy or security concerns, or for
other reasons. If this occurs, the growth of our operations would be
materially hindered. If Internet activity becomes heavily regulated in these
respects or otherwise, that could also have significant negative consequences
for the growth of our current and planned operations. 45




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Our Brokerage Must Meet Net Capital Requirements As A Broker-Dealer That,
If Not Satisfied, Could Result In Severe Penalties, And Which At All Times
Limit Our Right To Use All Of The Brokerages Cash The SEC, the NASD, the NFA and other regulatory agencies have stringent
rules with respect to the maintenance of specific levels of net capital by
securities broker-dealers and futures commission merchants. Net capital is the
net worth of the regulated company (assets minus liabilities), less deductions
for certain types of assets as well as other charges. If a firm fails to
maintain the required net capital it may be subject to suspension or revocation
of registration by the SEC or CFTC and suspension or expulsion by the NASD or
NFA, and it could ultimately lead to the firms liquidation. If such net
capital rules are changed or expanded, or if there is an unusually large charge
against net capital, operations that require the use of capital would be
limited. Also, our ability to withdraw capital from our TradeStation
Securities brokerage subsidiary is subject to SEC rules, which in turn could
materially impact our available working capital and materially impact or limit
our ability to repay debt as and when due, redeem or purchase shares of our
outstanding stock, if required or desirable, and pay dividends in the future.
A large operating loss or charge against net capital could adversely affect our
ability to expand or even maintain our then present levels of business, which
could have a material adverse effect on our business, financial condition,
results of operations and prospects. See We May Need Cash In The Foreseeable
Futureabove. Control Of TradeStation Group By The Cruzes Means That Important Decisions
Affecting The Company Are Concentrated In The Judgment Of Two Related
Individuals As of March 1, 2004, affiliates of William R. Cruz and Ralph L. Cruz (the
Co-Chairmen and Co-Chief Executive Officers of our company) own 21,720,306
shares of our common stock, representing more than 50% of the outstanding
shares of our common stock. Therefore, the Cruzes control TradeStation Group.
Any and all decisions and votes of our shareholders (including the election of
our Board of Directors and any merger, consolidation or sale of all or
substantially all of TradeStation Groups assets) will be determined by the
Cruzes. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to changes in interest rates. Changes in interest rates
affect the interest earned on our cash and cash equivalents, marketable
securities and the interest earned from interest revenue sharing arrangements
with our clearing firms. In order to reduce this interest rate risk, we are
currently invested in investments with short maturities. As of December 31,
2003, our cash and cash equivalents and marketable securities consist primarily
of money market funds, overnight investments, U.S. Treasury Bills and
obligations of a U.S. government agency. The interest earned on those investments is relatively
low based upon current market interest rates. A significant increase in interest rates would have
a positive impact on our financial results. Any decrease in those rates would not have a material
impact on our financial results. 46




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements and notes thereto and the reports of
the independent certified public accountants set forth on pages F-1 through
F-31 are filed as part of this report and incorporated herein by reference. The Consolidated Financial Statement Schedule and the reports of the
independent certified public accountants set forth on pages S-1 through S-4 are
filed as part of this report and incorporated herein by reference. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE Not applicable. 
 ITEM 9A. CONTROLS AND PROCEDURES As of the end of the period covered by this report, an evaluation of the
effectiveness of the design and operation of the companys disclosure controls
and procedures was made under the supervision and with the participation of the
companys management, including the Co-Chief Executive Officers and the Chief
Financial Officer. Based on that evaluation, the companys management,
including the Co-Chief Executive Officers and the Chief Financial Officer,
concluded that the companys disclosure controls and procedures have been
designed and are being operated in a manner that provides reasonable assurance
that the information required to be disclosed by the company in reports filed
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the SECs rules
and forms. A system of controls, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the system of controls
are met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected. There have been no changes in the companys internal controls over
financial reporting that occurred during the fourth quarter of 2003 that
have materially affected, or are reasonably likely to materially affect, the
companys internal controls over financial reporting. 47




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors and Executive Officers The executive officers and directors of TradeStation Group and their
respective ages and positions as of March 1, 2004 are as follows: NAME
    
    AGE
    
    POSITION WITH THE COMPANYWilliam R. Cruz
    
    
    42
    
    
    Co-Chairman of the Board and Co-Chief Executive OfficerRalph L. Cruz
    
    
    40
    
    
    Co-Chairman of the Board and Co-Chief Executive OfficerSalomon Sredni
    
    
    36
    
    
    President and Chief Operating Officer and DirectorDavid H. Fleischman
    
    
    58
    
    
    Chief Financial Officer, Vice President of Finance and TreasurerMarc J. Stone
    
    
    43
    
    
    Vice President of Corporate Development, General Counsel and SecretaryMichael W. Fipps (1)
    
    
    61
    
    
    DirectorStephen C. Richards (1)(2)
    
    
    50
    
    
    DirectorCharles F. Wright (1)(2)
    
    
    53
    
    
    Director
   (1)
    
    Member of the Audit Committee of the board of directors.(2)
    
    Member of the Compensation Committee of the board of directors. The directors hold office until the next annual meeting of shareholders.
Executive officers serve at the discretion of the board of directors. WILLIAM R. CRUZ co-founded the company with his brother, Ralph Cruz, in
1982 and has been a director since that time. He served as President from 1982
to September 1999. Mr. Cruz was appointed Co-Chairman of the Board and
Co-Chief Executive Officer of the company in 1996. Mr. Cruz studied classical
violin at the University of Miami, which he attended on a full scholarship, and
the Juilliard School of Music, during which time he won numerous classical
violin competitions. Mr. Cruz has been primarily responsible for the
conception and management of the companys products and product strategies. RALPH L. CRUZ co-founded the company in 1982 and has been a director since
that time. Mr. Cruz was Vice President of the company from 1982 until 1996, at
which time he was appointed Co-Chairman of the Board and Co-Chief Executive
Officer. Mr. Cruz also serves as a director of the companys two operating
subsidiaries. Mr. Cruz studied classical violin at the University of Miami,
which he attended on a full scholarship, and Indiana University, during which
time he won numerous classical violin competitions. Mr. Cruz has been
primarily responsible for the companys marketing strategies. SALOMON SREDNI joined the company in December 1996 as its Vice President
of Operations and Chief Financial Officer and was named Treasurer and a
director of the company in July 1997. In August 1999, he was named President
and Chief Operating Officer. Mr. Sredni also serves as a director of the
companys two operating subsidiaries. Before joining the company, Mr. Sredni
was, from August 1994 to November 1996, Vice President of Accounting
and Corporate Controller at IVAX Corporation, a publicly-held pharmaceutical
company. Prior to that time, Mr. Sredni was, from January 1988 to August 1994,
with Arthur Andersen LLP. 48




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Mr. Sredni is a Certified Public Accountant and a
member of the American Institute of Certified Public Accountants and the
Florida Institute of Certified Public Accountants. He has a bachelors degree
in accounting from The Pennsylvania State University. DAVID H. FLEISCHMAN joined the company as Chief Financial Officer, Vice
President of Finance and Treasurer in February 2001. Prior to joining the
company, Mr. Fleischman was engaged as a Director of Crossroads LLC, a firm
that provides financial and management expertise and services to companies
seeking to maximize the efficiencies and performance of their management teams.
From January 1997 until September 2000, Mr. Fleischman served as Senior Vice
President, Chief Financial Officer and member of the Board of Advisors of The
SeaSpecialties Group. From 1992 to 1996, he served as Senior Vice President
and Treasurer of The Kislak Organization  J.I. Kislak, Inc., an organization
that, during those years, included the largest privately-held mortgage-banking
company in the United States. From 1983 to 1992, Mr. Fleischman served as a
Director, Vice President and Chief Financial Officer of the U.S. group of
Berisford International plc, a publicly-held United Kingdom company. From 1969
to 1983, he held several positions with subsidiaries of Midland Bank plc,
including London American Finance Corporation and Drake America Corporation.
He began his career in 1967 in the audit division of a predecessor firm of
Ernst & Young LLP. Mr. Fleischman has a bachelors of science degree in
accounting from The New York Institute of Technology. MARC J. STONE joined the company in May 1997 as its Vice President of
Corporate Development, General Counsel and Secretary. Mr. Stone also serves as
a director of the companys two operating subsidiaries, and as an executive
registered principal of TradeStation Securities, the companys principal
operating subsidiary. From January 1993 to May 1997, Mr. Stone was a partner
at a predecessor law firm of Bilzin Sumberg Baena Price & Axelrod LLP, which
currently serves as the companys regular outside counsel. Prior to that time,
from 1985 to 1992, Mr. Stone was an associate with that predecessor law firm.
Mr. Stone has bachelors degrees in English and American Literature and Theatre
Arts and Dramatic Literature from Brown University, and received his law degree
from University of California (Boalt Hall) School of Law at Berkeley. Mr.
Stone is a member of the Bar of the State of New York, The Florida Bar, the
American Bar Association and the New York State Bar Association. MICHAEL W. FIPPS joined the Board, and became a member of the Audit
Committee, in March 2002. Since October 1997, he has been semi-retired,
working occasionally as an independent consultant, including associations with
Endeavor Pharmaceuticals, a specialty pharmaceutical start up company, from
April 2002 to July 2003, and Connally and Associates, a profit recovery firm,
from December 1998 through April 2000. From June 1994 to October 1997, he
served as Chief Financial Officer and Senior Vice President of IVAX
Corporation, a publicly-held pharmaceutical company. Before going to IVAX, Mr.
Fipps served, from 1973 to 1994, as Vice President-Finance and Treasurer of
Bergen Brunswig Corporation, a large wholesale distributor of prescription
pharmaceuticals and other health care products. Mr. Fipps is a Certified
Public Accountant and a member of the American Institute of Certified Public
Accountants and the California Society of Certified Public Accountants. He has
a bachelor of arts degree from University of North Carolina. STEPHEN C. RICHARDS is Chief Operating Officer and Chief Financial Officer
of Network Associates, Inc. (NYSE:NET), a provider of network security and
availability solutions for e-business. He served as Chief Online Trading
Officer of E*TRADE Group, Inc., a position 49




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he held from March 1999 to June
2000. From 1998 to February 1999, Mr. Richards served as Senior Vice
President, Corporate Development and New Ventures at E*TRADE, following two
years as E*Trades Senior Vice President of Finance, Chief Financial Officer
and Treasurer. Prior to joining E*TRADE in April 1996, Mr. Richards was
Managing Director and Chief Financial Officer of Correspondent Clearing at Bear
Stearns & Companies, Inc., where he was employed for more than 11 years. He is
also a former Vice President/Deputy Controller of Becker Paribas, and former
First Vice President/Controller of Jefferies and Company, Inc. Mr. Richards
has served on the board of governors of the Pacific Stock Exchange since
January of 2003. He received a Bachelor of Arts in Statistics and Economics
from the University of California at Davis and an MBA in Finance from the
University of California at Los Angeles. Mr. Richards is a Certified Public
Accountant. Mr. Richards became a director of the company in August 1999, at
which time he was also elected to the Compensation Committee and the Audit
Committee of the board of directors. CHARLES F. WRIGHT is the Chairman of Fall River Group, Inc., which owns
and operates a group of foundries in Wisconsin. He has been Chairman since
1984, and has been associated with Fall River Group since 1973. He is also the
Chairman and a Principal of Fall River Capital, LLC, an investment advisory
firm that specializes in the trading of global financial and natural resource
futures. He has held these positions since 1999. Since 1997, Mr. Wright has
also been Chairman and a co-owner of Quaestus & Co., Inc., a merchant banking
firm located in Milwaukee, Wisconsin. Since 2001 he has been Chairman and
co-owner of Kilbourn Capital Management, Inc., which manages the Kilbourn
Diversified Strategy Fund, a hedge fund of funds. From 1992 until its
acquisition by Cumulus Media, Inc. in 1997, Mr. Wright served as Chairman of
Caribbean Communications Company Ltd., a developer and operator of a radio
network throughout the English-speaking Caribbean Islands. Mr. Wright serves
as Chairman of Goodwill Industries of Southeastern Wisconsin and Metropolitan
Chicago, President of Second Harvest Food Bank Foundation, and a member of
Greater Milwaukee Committee. Mr. Wright is registered with the CFTC and the
NFA as a Commodity Trading Advisor, and holds a Masters Degree in Business
Administration from Harvard University Graduate School of Business. Mr. Wright
became a director of the company in June 2001, at which time he was also
elected to the Compensation Committee and Audit Committee of the board of
directors. Mr. Wright occasionally performed consulting services for the
company under a 3-year agreement that expired in 2002. All compensation
payable under that agreement was paid in 1999, two years before he joined our
board. Independent Directors; Committees of the Board of Directors The companys board of directors currently includes three (3) nonemployee,
independent members, Michael W. Fipps, Stephen C. Richards and Charles F.
Wright, all of whom serve on the Audit Committee of the board of directors.
The Audit Committee monitors and oversees the companys financial reporting
process on behalf of the board of directors. It reviews the independence of
our auditors and is responsible for authorizing or approving the engagement of
our auditors for both audit services and permitted other services, the scope of
audit and other assignments, related fees, the accounting principles used in
financial reporting, internal financial auditing procedures, the adequacy of
the internal control procedures, critical accounting policies, and the overall
quality of our financial reporting. Mr. Richards and Mr. Wright also serve on
the
Compensation Committee of the board of directors. The Compensation Committee
determines executive officers salaries and bonuses and administers our
Incentive Stock Plan and Employee Stock Purchase Plan. 50




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The board of directors does not currently have a nominating committee or a
committee that performs similar functions. Audit Committee Financial Experts The Audit Committee of the Board of Directors of TradeStation Group has
three members, two of whom, Michael W. Fipps and Stephen C. Richards, we
believe are financial experts. Each is a certified public accountant. Mr.
Fipps previously served as chief financial officer of an American Stock
Exchange listed company. Mr. Richards is currently the chief financial officer
of a NYSE listed company and formerly served as chief financial officer of a
Nasdaq National Market listed company that later became a NYSE listed company.
Mr. Fipps and Mr. Richards are both independent, as that term is used in Item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as
amended (the Exchange Act). Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires officers (as defined under the
Exchange Act) and directors, and persons who own more than ten percent of a
registered class of a companys equity securities, to file reports of ownership
and changes in ownership with the SEC. Our officers, directors and greater
than ten percent shareholders are required by SEC regulations to furnish us
with copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms furnished to us and our
understanding that no Forms 5 were required, we believe that during the fiscal
year ended December 31, 2003 all Section 16(a) filing requirements applicable
to our officers, directors and greater than ten percent beneficial owners were
satisfied. Recommendation of Nominees Since the date of our proxy statement for our 2003 annual meeting, there
has not been any material change to the procedures by which security holders
may recommend nominees to our board of directors. Code of Ethics We have a Code of Ethics and Business Conduct that applies to all
directors, officers and employees, including our principal executive officers,
our principal financial and accounting officer, and our corporate controller.
You can find our Code of Ethics and Business Conduct on our Web site,
www.tradestation.com. We will post any amendments to the Code of Ethics and
Business Conduct, and any waivers that are required to be disclosed by the
rules of the SEC or any other regulatory agency, on our Web site. 51




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##### Table of Contents



ITEM 11. EXECUTIVE COMPENSATION Executive Compensation Tables The following tables provide information about executive compensation. SUMMARY COMPENSATION TABLE The following table sets forth information with respect to all
compensation paid or earned for services rendered to us in the three years
ended December 31, 2003 by our Co-Chief Executive Officers and our three other
most highly compensated executive officers who, as a group, comprise all of the
executive officers of the company (together, the Named Executive Officers).
We did not have a pension plan or a long-term incentive plan, had not issued
any restricted stock awards and had not granted any stock appreciation rights
as of December 31, 2003. The value of all perquisites and other personal
benefits received by each Named Executive Officer did not exceed 10% of the
Named Executive Officers total annual compensation. Long-TermCompensationAnnual Compensation
    
    AwardsSecurities
    
    All OtherFiscal
    
    
    
    
    
    
    
    
    
    Underlying
    
    Compen-NAME AND PRINCIPAL POSITION
    
    Year
    
    Salary ($)
    
    Bonus ($)(1)
    
    Options (#) (2)
    
    sation ($)(3)William R. Cruz
    
    
    2003
    
    
    $
    165,000
    
    
    $
    20,000
    
    
    
    
    
    
    $
    3,960Co-Chief Executive Officer
    
    
    2002
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    5,4002001
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    Ralph L. Cruz
    
    
    2003
    
    
    $
    165,000
    
    
    $
    20,000
    
    
    
    
    
    
    $
    3,960Co-Chief Executive Officer
    
    
    2002
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    5,4002001
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    Salomon Sredni
    
    
    2003
    
    
    $
    283,500
    
    
    $
    75,000
    
    
    
    200,000
    
    
    $
    4,800President and Chief Operating
    
    
    2002
    
    
    
    268,750
    
    
    
    54,000
    
    
    
    130,000
    
    
    
    6,600Officer
    
    
    2001
    
    
    
    238,208
    
    
    
    20,000
    
    
    
    80,000
    
    
    
    David H. Fleischman
    
    
    2003
    
    
    $
    218,500
    
    
    $
    25,000
    
    
    
    20,000
    
    
    $
    4,800Chief Financial Officer,
    
    
    2002
    
    
    
    208,562
    
    
    
    20,900
    
    
    
    60,000
    
    
    
    6,600Vice President of Finance
    
    
    2001
    (4)
    
    
    181,945
    (4)
    
    
    20,000
    
    
    
    75,000
    
    
    
    and TreasurerMarc J. Stone
    
    
    2003
    
    
    $
    206,500
    
    
    $
    23,000
    
    
    
    20,000
    
    
    $
    4,800Vice President of Corporate
    
    
    2002
    
    
    
    198,485
    
    
    
    19,850
    
    
    
    55,000
    
    
    
    6,600Development, General Counsel
    
    
    2001
    
    
    
    198,017
    
    
    
    
    
    
    
    40,000
    
    
    
    and Secretary
   (1)
    
    Represents bonus earned during the year but paid in subsequent year.(2)
    
    Represents shares of common stock issuable upon the exercise of options
granted under our Incentive Stock Plan.(3)
    
    Represents 401(k) plan company contributions on behalf of the Named
Executive Officer earned during the year but paid in the subsequent year.(4)
    
    Mr. Fleischman began his employment with TradeStation Group on February
1, 2001. 52




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OPTION GRANTS IN 2003 FISCAL YEAR The following table summarizes the options that were granted during the
fiscal year ended December 31, 2003 to the Named Executive Officers. Individual Grants
    
    
    
    
    
    Potential RealizablePercent of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Value at AssumedNumber
    
    Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Annual Rate ofOf
    
    Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock PriceSecurities
    
    Granted to
    
    Exercise
    
    Market
    
    
    
    
    
    Value at
    
    Appreciation forUnderlying
    
    Employees
    
    or Base
    
    Price
    
    
    
    
    
    Grant-Date
    
    Option Term (1)Options
    
    In Fiscal
    
    Price
    
    on Grant
    
    Expiration
    
    MarketName
    
    Granted (#)(2)
    
    Year (%)
    
    ($/sh)(3)
    
    Date ($/sh)
    
    Date
    
    Price 0% ($)(3)
    
    5%
    
    10%William R. Cruz
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Ralph L. Cruz
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Salomon Sredni
    
    
    200,000
    
    
    
    25.51
    %
    
    
    9.03
    
    
    
    9.01
    
    
    
    12-29-13
    
    
    
    
    
    
    
    1,129,268
    
    
    
    2,867,924David H. Fleischman
    
    
    20,000
    
    
    
    2.55
    %
    
    
    9.03
    
    
    
    9.01
    
    
    
    12-29-13
    
    
    
    
    
    
    
    112,927
    
    
    
    286,792Marc J. Stone
    
    
    20,000
    
    
    
    2.55
    %
    
    
    9.03
    
    
    
    9.01
    
    
    
    12-29-13
    
    
    
    
    
    
    
    112,927
    
    
    
    286,792
   (1)
    
    Potential realizable value is based on the assumption that the common
stock price appreciates at the annual rate shown (compounded annually)
from the date of grant until the end of the option term. The amounts have
been calculated based on the requirements promulgated by the SEC. The
actual value, if any, a Named Executive Officer may realize will depend on
the excess, if any, of the stock price over the exercise price on the date
the option is exercised (if the executive officer were to sell the shares
on the date of exercise), so there is no assurance that the value realized
will be at or near the potential realizable value as calculated in this
table.(2)
    
    These options vest and become exercisable ratably on an annual basis over
five years, beginning on the anniversary of the date of grant date, and
have a term of ten years from the date of grant, subject to acceleration
under certain circumstances.(3)
    
    All options were granted at fair market value as defined under our
Incentive Stock Plan, which is the average of the high and low sales
prices of a share of common stock on The Nasdaq National Market on the
trading day immediately preceding the date of grant. The Compensation
Committee believes this calculation more accurately reflects fair market
value of our common stock on any given day as compared to simply using
the closing market price on the date of grant. As a result, the closing
market price on the date of grant may be different than the exercise price
per share. AGGREGATED OPTION EXERCISES IN 2003 FISCAL YEAR
AND 2003 FISCAL YEAR-END OPTION VALUES The following table provides information regarding the value of all
options exercised during 2003 by the Named Executive Officers and of all
unexercised options held at December 31, 2003 by the Named Executive Officers
measured in terms of the closing market price of our common stock on December
31, 2003. Number ofSecurities Underlying
    
    Value of UnexercisedUnexercised Options At
    
    In-the-Money Options AtSharesAcquired On
    
    Value
    
    December 31, 2003 (#)
    
    December 31, 2003 ($)(1)Name
    
    Exercise (#)
    
    Realized ($)
    
    Exercisable
    
    Unexcercisable
    
    Exercisable
    
    UnexcercisableWilliam R. Cruz
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    Ralph L. Cruz
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Salomon Sredni
    
    
    46,877
    
    
    
    411,212
    
    
    
    397,123
    
    
    
    396,000
    
    
    
    2,032,326
    
    
    
    1,152,840David H. Fleischman
    
    
    
    
    
    
    
    
    
    
    42,000
    
    
    
    113,000
    
    
    
    262,700
    
    
    
    616,550Marc J. Stone
    
    
    68,100
    
    
    
    496,580
    
    
    
    182,900
    
    
    
    104,000
    
    
    
    1,010,817
    
    
    
    523,320
   (1)
    
    Based on a per share price of $8.86 on December 31, 2003, which was the
closing market price of our common stock on the last day of the 2003
fiscal year. 53




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##### Table of Contents



Other Compensation Arrangements Executive Officer Bonus Plan. The Compensation Committee of the company
put in place an incentive bonus compensation program for certain executive
officers of the company for the 2001, 2002 and 2003 fiscal years. Under the
program, an executive officer is eligible to earn an annual bonus as determined
by, and at the discretion of, the Compensation Committee. See SUMMARY
COMPENSATION TABLE above. Incentive Stock Plan. Pursuant to the TradeStation Group, Inc. Incentive
Stock Plan, officers, employees and nonemployee consultants may be granted
stock options, stock appreciation rights, stock awards, performance shares and
performance units. The authorized number of shares of common stock for
issuance under the Incentive Stock Plan is 7,500,000, subject to future
antidilution adjustments. As of December 31, 2003, options to purchase
5,120,424 shares were outstanding and 732,625 shares were available for
issuance under the TradeStation Group Incentive Stock Plan. The Incentive Stock Plan is administered by the Compensation Committee of
the board of directors whose members must qualify as nonemployee directors
(as such term is defined in Rule 16b-3 under the Exchange Act). The
Compensation Committee is authorized to determine, among other things, the
employees to whom, and the times at which, options and other benefits are to be
granted, the number of shares subject to each option, the applicable vesting
schedule and the exercise price (provided that, for incentive stock options,
the exercise price shall not be less than 100% of the fair market value of the
common stock on the date of grant). The Compensation Committee also determines
the treatment to be afforded to a participant in the Incentive Stock Plan in
the event of termination of employment for any reason, including death,
disability or retirement, or change in control. Under the Incentive Stock
Plan, the maximum term of an incentive stock option is ten years and the
maximum term of a nonqualified stock option is fifteen years. The Compensation Committee may delegate to the companys Co-CEOs the
authority to grant options under the Incentive Stock Plan to employees (other
than officers) of the company identified by the Co-CEOs. The Compensation
Committee has historically delegated to the Co-CEOs the authority to grant
options covering up to 250,000 shares of common stock per annum, and retains
the ability to revoke the delegation at any time. No such authority is
currently delegated to the Co-CEOs. The board of directors has the power to amend the Incentive Stock Plan
from time to time. Shareholder approval of a material amendment is generally
required. TradeStation Securities Assumed Options. In connection with the December
29, 2000 merger acquisition of TradeStation Securities, we assumed the
outstanding options under TradeStation Securities 1999 incentive stock plan.
Each option issued under TradeStation Securities plan was assumed and
converted to 1.7172 options to purchase the companys common stock at the
original exercise price divided by 1.7172. As of December 31, 2003, options to
purchase 225,539 shares were outstanding. 54




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##### Table of Contents



Window On WallStreet Assumed Options. In October 1999, in connection with
our merger acquisition of Window On WallStreet, TradeStation Technologies
assumed all outstanding stock options to purchase Window On WallStreet common
stock (WOW Options), which, based on an exchange ratio of .210974 shares of
the TradeStation Technologies common stock for each share of Window On
WallStreet common stock, were exercisable at the time of assumption for an
aggregate of 182,529 shares of common stock (82,783 shares of common stock at
an exercise price of $.48 per share, and 99,746 shares of common stock at an
exercise price of $8.06 per share). The WOW Options generally vested ratably
over a four-year period and their terms are ten years. After giving effect to
the companys assumption of the WOW Options pursuant to the companys December
29, 2000 merger acquisition of TradeStation Securities, as of December 31, 2003
there were 25,950 WOW Options outstanding. Nonemployee Director Stock Option Plan. Our Nonemployee Director Stock
Option Plan, pursuant to which initial and annual grants of nonqualified stock
options are made to each nonemployee director, became operative December 29,
2000 upon the closing of the merger by, on that date, assumption of the
TradeStation Technologies Nonemployee Director Stock Option Plan and all
options and option agreements issued thereunder. Upon initial election to the
board of directors, each nonemployee director may be granted options to
purchase up to 75,000 shares of common stock as determined by the board of
directors at such time. Upon each re-election to the board of directors at the
annual meeting of shareholders, each nonemployee director will be granted
additional options to purchase 7,000 shares of common stock. Each option will
be granted at an exercise price equal to the fair market value of the common
stock on the date of grant. We have reserved 350,000 shares of common stock
for issuance under the Nonemployee Director Stock Option Plan, subject to
antidilution adjustments. Options granted to date have a term of five years
and vest in equal installments over three years. As of December 31, 2003,
options to purchase 117,000 shares were outstanding and 158,000 shares were
available for issuance under the Nonemployee Director Stock Option Plan. The board of directors has the power to amend the Nonemployee Director
Stock Option Plan from time to time. Shareholder approval of a material
amendment is generally required. Outstanding Options.As of December 31, 2003, options to purchase a total
of 5,488,913 shares were outstanding under all stock option plans (inclusive of
all options assumed under the plans discussed above), of which options to
purchase 1,235,023 shares had been granted to and are currently held by
executive officers. During 2003, options granted to executive officers totaled
240,000, which were granted at an exercise price of $9.03 per share. In
general, options granted under the Incentive Stock Plan and the other incentive
stock plans described above vest at the rate of 20% per year and have a total
term of ten years (except for the WOW Options, which vested ratably over 4
years and the Nonemployee Director stock options which vest ratably over 3
years). Options which have been granted under the Incentive Stock Plan to
certain executive officers may immediately vest and become exercisable in
certain circumstances. The options to purchase the shares granted and assumed
under all plans discussed above that were outstanding as of December 31, 2003
have a weighted average exercise price of $3.72 per share. See Note 8 of Notes
to Consolidated Financial Statements  SHAREHOLDERS EQUITY. 55




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Employee Stock Purchase Plan. Our Employee Stock Purchase Plan provides
for the issuance of a maximum of 500,000 shares of common stock pursuant to the
exercise of nontransferable options granted to participating employees. The
Employee Stock Purchase Plan is administered by the Compensation Committee of
the board of directors. All employees whose customary employment is more than 20 hours per week
and more than five months in any calendar year and who have completed at least
three months of employment are eligible to participate in the Employee Stock
Purchase Plan. Employees who would immediately after the grant own 5% or more
of the total combined voting power or value of our stock, and the nonemployee
directors, may not participate in the Employee Stock Purchase Plan. To
participate in the Employee Stock Purchase Plan, an employee must authorize us
to deduct an amount (not less than one percent nor more than ten percent of a
participants total cash compensation) from his or her pay during six-month
periods (each, a Plan Period). The maximum number of shares of common stock
an employee may purchase in any Plan Period is 500 shares. The exercise price
for the option for each Plan Period is 85% of the lower of the market price of
the common stock on the first and last business day of the Plan Period. If an
employee is not a participant on the last day of the Plan Period, such employee
is not entitled to exercise his or her option, and the amount of his or her
accumulated payroll deductions is refunded. An employees rights under the
Employee Stock Purchase Plan terminate upon his or her voluntary withdrawal
from the Employee Stock Purchase Plan or upon termination of employment. The
first Plan Period (giving effect to the assumption of the predecessor companys
plan) began January 1, 1998. During the years ended December 31, 2003, 2002
and 2001, 37,976, 41,565 and 50,470 shares, respectively, of common stock were
issued under the plan at average prices of $3.26, $1.03 and $1.49,
respectively. As of December 31, 2003, there were 303,688 shares available for
issuance under the Employee Stock Purchase Plan. The board of directors has the power to amend or terminate the Employee
Stock Purchase Plan. Shareholder approval of an amendment is only required to
the extent that it is necessary to maintain the Employee Stock Purchase Plans
status as a protected plan under applicable securities laws or as a qualified
plan under applicable tax laws. 401(k)Plan. We have a defined contribution retirement plan which
complies with Section 401(k) of the Internal Revenue Code. All employees with
at least three months of continuous service are eligible to participate and may
contribute up to 60% of their compensation subject to the annual limit set by
the Internal Revenue Service. Company contributions are vested 20% for each
year of service. For the years ended December 31, 2003 and 2002, company
contributions accrued under this plan were approximately $210,000 and $265,000,
respectively. There were no matching contributions accrued in 2001. Non-Competition Agreements Virtually all employees, including the Named Executive Officers, have
entered into agreements with the company which contain certain non-competition,
non-disclosure and non-solicitation restrictions and covenants, including a
provision prohibiting such employees from competing with the company during
their employment with us and for a period of at least two years thereafter. 56




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Compensation Committee Interlocks And Insider Participation We formed the Compensation Committee of the board of directors in December
2000, at which time two independent directors were appointed as members.
During 2003, Stephen C. Richards and Charles F. Wright, both of whom are
independent directors, served on the Compensation Committee. The compensation
(including salaries, bonuses and stock options) of the companys executive
officers for 2003 was determined by the Compensation Committee. In 2003, no
member of the Compensation Committee of the board of directors of our company
had any relationship with the company requiring disclosure under Item 404 of
Regulation S-K. Director Compensation Our independent directors currently receive $750 for attendance at each
meeting of the board of directors and, if held on a separate date, committees
thereof, with an additional $150 paid to the chairman of the committee meeting.
Pursuant to the Nonemployee Director Stock Option Plan, each independent
director receives options to purchase up to 75,000 shares of common stock upon
initial election as a director, as determined by the board of directors at such
time, and options to purchase 7,000 shares of common stock upon each
re-election as an independent director at our annual meeting of shareholders.
See EXECUTIVE COMPENSATION  Other Compensation Arrangements  Nonemployee
Director Stock Option Plan. Directors may also be reimbursed for certain
expenses in connection with attendance at board of directors and committee
meetings. Other than with respect to reimbursement of expenses, directors who
are employees or officers did not in 2003 receive additional compensation for
service as a director. 
  ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
 The following table sets forth certain information regarding the
beneficial ownership of our common stock as of March 1, 2004 by (i) each person
who is known to us to own beneficially more than 5% of our common stock, (ii)
each director, (iii) each Named Executive Officer, and (iv) all directors and
executive officers as a group. Except as otherwise described in the footnotes
below, we believe that the beneficial owners of the common stock listed below,
based on information provided by such owners, have sole investment and voting
power with respect to such shares. Shares Beneficially Owned (1)Name of Beneficial Owner (1)
    
    Number
    
    PercentWilliam R. Cruz (2)
    
    
    10,928,838
    
    
    
    26.3
    %Ralph L. Cruz (3)
    
    
    10,791,468
    
    
    
    26.0
    %Salomon Sredni
    
    
    445,873
    
    
    
    1.1
    %Charles F. Wright (4)
    
    
    296,079
    
    
    
    *Marc J. Stone
    
    
    206,900
    
    
    
    *David H. Fleischman (5)
    
    
    92,500
    
    
    
    *Stephen C. Richards
    
    
    45,999
    
    
    
    *Michael W. Fipps
    
    
    16,916
    
    
    
    *All executive officers and
directors as a group(8 persons)(6)
    
    
    22,824,573
    
    
    
    54.0
    %
 57




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##### Table of Contents



*
    
    Less than 1%.(1)
    
    The address of William R. Cruz and Ralph L. Cruz is TradeStation Group,
Inc., 8050 S.W. 10th Street, Suite 4000, Plantation, Florida 33324.
Beneficial ownership is determined in accordance with the rules of the SEC
that deem shares to be beneficially owned by any person who has or shares
voting or investment power with respect to such shares. It includes
options held by executive officers and/or directors which are exercisable
within 60 days of March 1, 2004.(2)
    
    All but 100 shares are held by two Texas limited partnerships over which
William R. Cruz possesses sole voting and dispositive powers through his
direct and/or indirect 100% ownership of the sole general partner of each
of such limited partnerships. In both limited partnerships, William R.
Cruz is the sole limited partner. Does not include 900 shares owned by
the spouse of William R. Cruz with respect to which Mr. Cruz disclaims
beneficial ownership.(3)
    
    The shares are held by two Texas limited partnerships over which Ralph L.
Cruz possesses sole voting and dispositive powers through his direct
and/or indirect 100% ownership of the sole general partner of each of such
limited partnerships. In one limited partnership Ralph L. Cruz is the
sole limited partner and in the other Ralph L. Cruz and his spouse are the
limited partners.(4)
    
    Includes 6,500 shares held as custodian for the benefit of the sons of
Charles F. Wright.(5)
    
    Includes 17,500 shares held by the wife of David H. Fleischman.(6)
    
    See other footnotes above. Equity Compensation Plan Information The following sets forth information as of December 31, 2003 with respect
to compensation plans under which the Companys Common Stock is authorized for
issuance: Number ofsecuritiesremaining availableNumber of
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    under equityissued upon
    
    Weighted-average
    
    compensation plansexercise of
    
    exercise price of
    
    (excludingoutstanding
    
    outstanding
    
    securitiesoptions, warrants
    
    options, warrants
    
    reflected in columnand rights
    
    and rights
    
    (a))Plan category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
    
    
    (1
    )
    
    
    
    
    
    
    (2
    )security holders
    
    
    5,488,913
    
    
    $
    3.72
    
    
    
    1,194,313Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total (1)
    
    
    5,488,913
    
    
    $
    3.72
    
    
    
    1,194,313
   (1)
    
    Includes outstanding options to purchase 25,950 shares of common
stock at a weighted-average exercise price of $4.55 assumed in the 1999
acquisition of Window On Wall Street and options to purchase 225,539
shares of common stock at a weighted-average exercise price of $5.12
assumed in the 2000 acquisition of TradeStation Securities. Does not
include warrants to purchase up to 66,535 shares of common stock at an
exercise price of $6.73, granted to underwriters in connection with
TradeStation Securities initial public offering.(2)
    
    Includes 732,625, 158,000, and 303,688 shares of common stock
available for issuance under the Incentive Stock Plan, Nonemployee
Director Stock Option Plan and Employee Stock Purchase Plan,
respectively. 58




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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES TradeStation Group and its audit committee are committed to ensuring the
independence of its independent auditor. As such, it is our policy that all
engagements of Ernst & Young LLP by TradeStation be pre-approved by the audit
committee. During the companys 2003 and 2002 fiscal years, Ernst & Young LLP
performed services for the company for fees and expenses as follows: 2003
    
    2002Audit Fees (1)
    
    $
    136,222
    
    
    $
    117,676Audit-Related Fees
    
    
    0
    
    
    
    0Tax Fees
    
    
    0
    
    
    
    0All Other Fees
    
    
    0
    
    
    
    0
 In addition to the amounts included above, during the companys 2002
fiscal year Arthur Andersen LLP performed audit services for the company for
fees totaling $6,000. Arthur Andersen was the former independent auditor for
the company prior to it ceasing operations.   (1)
    
    Audit fees consisted of services rendered for the audits of
TradeStation Group and its subsidiaries annual consolidated financial
statements, quarterly reviews of TradeStation Groups interim financial
statements, consents, and reviews of documents filed with the
Securities and Exchange Commission. 59




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PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K  (a)
    
    Documents filed as part of this report.  1.
    
    Financial Statements. The Financial Statements and notes
thereto and the reports of the independent certified public accountants thereon set
forth on pages F-1 through F-31 herein are filed as part of this
report and incorporated herein by reference.2.
    
    Financial Statement Schedules. The Financial Statement
Schedule and the reports of the independent certified public accountants thereon set
forth on pages S-1 through S-4 herein are filed as part of this
report and incorporated herein by reference.3.
    
    Exhibits. ExhibitNumber
    
    Description3.1
    
    TradeStation Groups Articles of Incorporation, as amended **3.2
    
    TradeStation Groups Bylaws **4.1
    
    Form of Specimen Certificate for TradeStation
Groups Common Stock (incorporated by reference to Exhibit 4.1
to OnlineTrading.com Group, Inc.s Amendment No. 3 to
Registration Statement No. 333-34922 on Form S-4 filed with
the Commission on November 21, 2000)10.1
    
    onlinetradinginc.com corp. 1999 Stock Option Plan***#10.2
    
    Window On WallStreet Inc. 1997 Long Term Incentive Plan***#10.3
    
    TradeStation Group, Inc. Employee Stock Purchase Plan***#10.4
    
    TradeStation Group, Inc. Incentive Stock Plan ***#10.5
    
    TradeStation Group, Inc. Amended and Restated
Nonemployee Director Stock Option Plan (incorporated by
reference to Exhibit 10.5 to TradeStation Groups Annual
Report on Form 10-K for the fiscal year ended December 31,
2001) #10.6
    
    Form of Indemnification Agreement +10.7
    
    Lease Agreement, dated November 13, 2001, between
Crossroads Business Park Associates LLP and TradeStation
Group, Inc. (without exhibits and schedules) (incorporated by
reference to Exhibit 10.27 to TradeStation Groups Annual
Report on Form 10-K for the fiscal year ended December 31,
2001)10.8
    
    Office Lease dated August 13, 1998 between
onlinetradinginc.com corp. and Highwood/Florida Holdings, L.P.
++10.9
    
    Sublease Agreement, dated June 21, 2002, between
TradeStation Securities, Inc. and Steflind, Inc. (incorporated
by reference to Exhibit
10.21 to TradeStation Groups Annual Report on Form 10-K
for the fiscal year ended December 31, 2002)
 60




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##### Table of Contents



ExhibitNumber
    
    Description10.10
    
    Sublease Agreement, dated January 6, 2004,
between TradeStation Securities, Inc. and JVB Financial, Inc.
(filed herewith)10.11
    
    Form of Non-Competition and Non-Disclosure
Agreement*10.12
    
    Form of Non-Competition Agreement +10.13
    
    Office/Showroom/Warehouse Lease Agreement dated
June 12, 1996 between Springcreek Place Ltd. and Window On
WallStreet Inc. (then named MarketArts, Inc.), as amended by
Addendum to Lease dated October 12, 1998, and as further
amended by Addendum to Lease dated May 28, 1999 (incorporated
by reference to Exhibit 10.13 to Omega Research, Inc.s Annual
Report on Form 10-K for the fiscal year ended December 31,
1999)10.14
    
    Modification and Ratification of Lease
Agreement, dated July 25, 2002, between Springcreek Place Ltd.
and TradeStation Technologies, Inc. (incorporated by reference
to Exhibit 10.14 to TradeStation Groups Annual Report on Form
10-K for the fiscal year ended December 31, 2002)10.15
    
    Lease Agreement, dated November 16, 1999,
between Fairfax Boca 92, L.P. and Omega Research, Inc.
(incorporated by reference to Exhibit 10.14 to Omega Research,
Inc.s Annual Report on Form 10-K for the fiscal year ended
December 31, 1999)10.16
    
    Lease Termination and Surrender Agreement, dated
December 11, 2002, between Fairfax Boca 92, L.P. and
TradeStation Technologies, Inc. (incorporated by reference to
Exhibit 10.16 to TradeStation Groups Annual Report on Form
10-K for the fiscal year ended December 31, 2002)10.17
    
    Remote Processing Agreement, dated June 10,
2003, with SunGard Financial Systems, Inc. to provide the
SunGard Phase3 System for the processing, clearing and
settlement of trades (pricing schedules omitted) (incorporated
by reference to Exhibit 10.1 to TradeStation Groups Report on
Form 10-Q for the quarter ended June 30, 2003)10.18
    
    Clearing Agreement with Bear, Stearns Securities
Corp. ++10.19
    
    Stock Purchase Agreement, dated as of August 8,
2002, between Benedict Gambino and TradeStation Group, Inc.
(incorporated by reference to Exhibit 10.23 to TradeStation
Groups Annual Report on Form 10-K for the fiscal year ended
December 31, 2002)10.20
    
    Stock Purchase Agreement, dated as of October
18, 2002, between Benedict S. Gambino and TradeStation Group,
Inc. (incorporated by reference to Exhibit 10.24 to
TradeStation Groups Annual Report on Form 10-K for the fiscal
year ended December 31, 2002)
 61




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##### Table of Contents



ExhibitNumber
    
    Description10.21
    
    Stock Purchase Agreement, dated as of November
26, 2002, between Andrew A. Allen Family Limited Partnership
and TradeStation Group, Inc. (incorporated by reference to
Exhibit 10.25 to TradeStation Groups Annual Report on Form
10-K for the fiscal year ended December 31, 2002)21.1
    
    List of Subsidiaries (filed herewith)23.1
    
    Consent of Ernst & Young LLP, Independent
Certified Public Accountants, with respect to TradeStation
Group, Inc.s consolidated financial statements (filed
herewith)31.1
    
    Certifications of Co-Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith)31.2
    
    Certifications of Co-Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith)31.3
    
    Certifications of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith)32.1
    
    Certification of Co-Chief Executive Officers
under 18 U.S.C. §1350 (filed herewith)32.2
    
    Certification of Chief Financial Officer under 18
U.S.C. §1350 (filed herewith)
   *
    
    Previously filed as part of the Rule 424(b)(1)
Proxy Statement/Prospectus of TradeStation Group filed with
the Securities and Exchange Commission (the Commission) on
December 12, 2000.**
    
    Previously filed as part of Registration
Statement No. 333-34922 on Form S-4 of OnlineTrading.com
Group, Inc. filed with the Commission on April 17, 2000.***
    
    Previously filed as part of Registration
Statement No. 333-53222 on Form S-8 of TradeStation Group,
Inc. filed with the Commission on January 5, 2001.+
    
    Previously filed as part of Registration
Statement No. 333-32077 on Form S-1 of Omega Research, Inc.
filed with the Commission on July 25, 1997.++
    
    Previously filed as part of Registration
Statement No. 333-75119 of Form SB-2 of onlinetradinginc.com
corp. filed with the Commission on March 26, 1999.#
    
    Indicates a management contract or compensatory
plan or arrangement. 62




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##### Table of Contents



(b)
    
    Reports onForm 8-K.  (i)
    
    On October 14, 2003, we filed a Current Report on Form 8-K
for an event that occurred on October 14, 2003, reporting in Items
12 and 9 thereof, the release of our financial results for
the third quarter and nine months ended September 30, 2003.(ii)
    
    On February 10, 2004, we filed a Current Report on Form 8-K
for an event that occurred on February 10, 2004, reporting in Item
12 thereof, the release of our financial results for the fourth
quarter and year ended December 31, 2003, and a 2004 Business
Outlook. 63




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. Dated: March 12, 2004
    
    
    
    TradeStation Group, Inc.By:
    
    /s/ William R. CruzWilliam R. CruzCo-Chairman of the Board of Directors andCo-Chief Executive OfficerBy:
    
    /s/ Ralph L. CruzRalph L. CruzCo-Chairman of the Board of Directors andCo-Chief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated: /s/ William R. Cruz

William R. Cruz
    
    Co-Chairman of the Board of Directors
and Co-Chief Executive Officer
(Co-Principal Executive Officer)
    
    March 12, 2004/s/ Ralph L. Cruz

Ralph L. Cruz
    
    Co-Chairman of the Board of Directors
and Co-Chief Executive Officer
(Co-Principal Executive Officer)
    
    March 12, 2004/s/ Salomon Sredni
Salomon Sredni
    
    Chief Operating Officer, President
and Director (Principal Operating Officer)
    
    March 12, 2004/s/ David H. Fleischman

David H. Fleischman
    
    Chief Financial Officer, Vice President
of Finance and Treasurer (Principal
Financial and Accounting Officer)
    
    March 12, 2004/s/ Michael W. Fipps

Michael W. Fipps
    
    Director
    
    March 12, 2004/s/ Stephen C. Richards

Stephen C. Richards
    
    Director
    
    March 12, 2004/s/ Charles F. Wright

Charles F. Wright
    
    Director
    
    March 12, 2004
 64




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##### Table of Contents



TRADESTATION GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Certified Public Accountants
    
    
    F-2Consolidated Balance Sheets as of December 31, 2003 and 2002
    
    
    F-4Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001
    
    
    F-5Consolidated Statements of Shareholders Equity for the Years Ended
December 31, 2003, 2002 and 2001
    
    
    F-6Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-9
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To TradeStation Group, Inc.: We have audited the accompanying consolidated balance sheet of
TradeStation Group, Inc. (a Florida corporation) and subsidiaries as of
December 31, 2003 and 2002, and the related consolidated statements of
operations, shareholders equity and cash flows for the years then ended.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits. The consolidated financial statements of TradeStation Group,
Inc. and subsidiaries for the year ended December 31, 2001, were audited by
other auditors who have ceased operations. Those auditors expressed an
unqualified opinion on those financial statements in their report dated
February 8, 2002. We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of TradeStation
Group, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States. As discussed above, the financial statements of TradeStation Group, Inc.
and subsidiaries for the year ended December 31, 2001, were audited by other
auditors who have ceased operations. As described in Note 5, these
consolidated financial statements have been revised to include the transitional
disclosures required by Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, which was adopted by the Company as of
January 1, 2002. Our audit procedures with respect to the transitional
disclosures in Note 5 with respect to 2001 included (a) agreeing the previously
reported net loss to the previously issued financial statements and the
adjustments to reported net loss representing amortization expense (including
any related tax effects) recognized in those periods related to goodwill and
intangible assets that are no longer being amortized (including any related tax
effects) to the Companys underlying records obtained from management, and (b)
testing the mathematical accuracy of the reconciliation of reported net loss to
adjusted net loss, and the related per share amounts. In our opinion, the
transitional disclosures for 2001 in Note 5 are appropriate. However, we were
not engaged to audit, review, or apply any procedures to the 2001 consolidated
financial statements of the Company other than with respect to such disclosures
and, accordingly, we do not express an opinion or any other form of assurance
on the 2001 consolidated financial statements taken as a whole. /s/ Ernst & Young LLP
 Fort Lauderdale, Florida,
    January 23, 2004. F-2




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##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS * To TradeStation Group, Inc.: We have audited the accompanying consolidated balance sheets of
TradeStation Group, Inc. (a Florida corporation) and subsidiaries as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, shareholders equity and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TradeStation Group, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted
in the United States. ARTHUR ANDERSEN LLP Miami, Florida,   
February 8, 2002. * NOTE: Arthur Andersen LLP ceased operations in 2002. Its auditors report
has not been revised and the above is a copy of that report as issued. The
inclusion of this previously issued report is pursuant to the Temporary Final
Rule and Final Rule: Requirements for Arthur Andersen LLP auditing clients,
issued by the United States Securities and Exchange Commission in March 2002.
This audit report has not been reissued by Arthur Andersen LLP in connection
with this filing on Form 10-K. F-3




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##### Table of Contents



TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS December 31,2003
    
    2002ASSETS:Cash and cash equivalents, including restricted
cash of $2,682,627 and $3,427,290 at December
31, 2003 and 2002, respectively
    
    $
    31,017,502
    
    
    $
    16,410,146Marketable securities
    
    
    1,997,060
    
    
    
    66,000Receivables from clearing firms
    
    
    526,832
    
    
    
    751,220Accounts receivable
    
    
    120,482
    
    
    
    181,826Property and equipment, net
    
    
    3,628,773
    
    
    
    4,348,752Intangible assets, net
    
    
    57,756
    
    
    
    244,337Other assets
    
    
    652,147
    
    
    
    615,513Total assets
    
    $
    38,000,552
    
    
    $
    22,617,794LIABILITIES AND SHAREHOLDERS EQUITY:LIABILITIES:Accounts payable
    
    $
    2,047,332
    
    
    $
    1,947,602Accrued expenses
    
    
    6,013,192
    
    
    
    6,894,616Capital lease obligations
    
    
    194,002
    
    
    
    1,382,264Total liabilities
    
    
    8,254,526
    
    
    
    10,224,482COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Preferred stock, $.01 par value; 25,000,000
shares authorized, none issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 200,000,000
shares authorized, 41,446,436 and 39,588,881
issued and outstanding at December 31, 2003 and
2002, respectively
    
    
    414,464
    
    
    
    395,889Additional paid-in capital
    
    
    50,540,630
    
    
    
    44,866,130Accumulated deficit
    
    
    (21,209,068
    )
    
    
    (32,833,307
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (35,400
    )Total shareholders equity
    
    
    29,746,026
    
    
    
    12,393,312Total liabilities and shareholders equity
    
    $
    38,000,552
    
    
    $
    22,617,794
 See accompanying notes. F-4




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##### Table of Contents



TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31,2003
    
    2002
    
    2001REVENUES:Brokerage revenues
    
    $
    50,857,943
    
    
    $
    38,493,928
    
    
    $
    18,601,627Subscription fees
    
    
    7,033,557
    
    
    
    6,638,516
    
    
    
    9,566,566Licensing fees
    
    
    525,562
    
    
    
    1,131,193
    
    
    
    5,028,830Other
    
    
    1,732,261
    
    
    
    2,127,474
    
    
    
    7,790,120Total revenues
    
    
    60,149,323
    
    
    
    48,391,111
    
    
    
    40,987,143OPERATING EXPENSES:Clearing and execution costs
    
    
    17,937,741
    
    
    
    11,311,828
    
    
    
    5,771,610Data center costs
    
    
    5,109,718
    
    
    
    5,616,397
    
    
    
    5,531,674Technology development
    
    
    7,144,491
    
    
    
    8,850,858
    
    
    
    9,308,563Sales and marketing
    
    
    10,451,588
    
    
    
    12,473,344
    
    
    
    11,325,049General and administrative
    
    
    8,576,350
    
    
    
    9,156,732
    
    
    
    12,694,677Amortization of intangible assets
    
    
    201,581
    
    
    
    891,259
    
    
    
    6,198,264(Recovery of) provision for insurance claim
    
    
    
    
    
    
    (1,250,000
    )
    
    
    2,707,249Impairment of goodwill and intangible assets
    
    
    
    
    
    
    
    
    
    
    5,285,497Total operating expenses
    
    
    49,421,469
    
    
    
    47,050,418
    
    
    
    58,822,583Income (loss) from operations
    
    
    10,727,854
    
    
    
    1,340,693
    
    
    
    (17,835,440
    )OTHER INCOME, net
    
    
    165,564
    
    
    
    427,063
    
    
    
    598,708Income (loss) before income taxes
    
    
    10,893,418
    
    
    
    1,767,756
    
    
    
    (17,236,732
    )INCOME TAX (BENEFIT) PROVISION
    
    
    (730,821
    )
    
    
    3,605
    
    
    
    4,668,132Net income (loss)
    
    $
    11,624,239
    
    
    $
    1,764,151
    
    
    $
    (21,904,864
    )EARNINGS (LOSS) PER SHARE:Basic
    
    $
    0.29
    
    
    $
    0.04
    
    
    $
    (0.49
    )Diluted
    
    $
    0.27
    
    
    $
    0.04
    
    
    $
    (0.49
    )WEIGHTED AVERAGE SHARES
OUTSTANDING:Basic
    
    
    40,467,309
    
    
    
    43,328,103
    
    
    
    44,458,689Diluted
    
    
    43,390,208
    
    
    
    43,386,250
    
    
    
    44,458,689
 See accompanying notes. F-5




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##### Table of Contents



TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AccumulatedOtherCommon Stock
    
    Additional
    
    
    
    
    
    Compre-Preferred
    
    
    
    Paid-In
    
    Accumulated
    
    hensiveStock
    
    Shares
    
    Amount
    
    Capital
    
    Deficit
    
    Loss
    
    TotalBALANCE, December 31, 2000
    
    $
    
    
    
    
    44,476,501
    
    
    $
    444,765
    
    
    $
    51,272,899
    
    
    $
    (12,692,594
    )
    
    $
    
    
    
    $
    39,025,070Issuance of common stock
    
    
    
    
    
    
    70,815
    
    
    
    708
    
    
    
    108,494
    
    
    
    
    
    
    
    
    
    
    
    109,202Compensation expense on
stock option grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    228,105
    
    
    
    
    
    
    
    
    
    
    
    228,105Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,904,864
    )
    
    
    
    
    
    
    (21,904,864
    )BALANCE, December 31, 2001
    
    
    
    
    
    
    44,547,316
    
    
    
    445,473
    
    
    
    51,609,498
    
    
    
    (34,597,458
    )
    
    
    
    
    
    
    17,457,513Issuance of common stock
    
    
    
    
    
    
    41,565
    
    
    
    416
    
    
    
    42,341
    
    
    
    
    
    
    
    
    
    
    
    42,757Repurchase and retirement of
common stock
    
    
    
    
    
    
    (5,000,000
    )
    
    
    (50,000
    )
    
    
    (6,823,401
    )
    
    
    
    
    
    
    
    
    
    
    (6,873,401
    )Compensation expense on
stock option grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,692
    
    
    
    
    
    
    
    
    
    
    
    37,692Unrealized holding losses on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,400
    )
    
    
    (35,400
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,764,151
    
    
    
    
    
    
    
    1,764,151BALANCE, December 31, 2002
    
    
    
    
    
    
    39,588,881
    
    
    
    395,889
    
    
    
    44,866,130
    
    
    
    (32,833,307
    )
    
    
    (35,400
    )
    
    
    12,393,312Issuance of common stock
    
    
    
    
    
    
    1,857,555
    
    
    
    18,575
    
    
    
    5,674,500
    
    
    
    
    
    
    
    
    
    
    
    5,693,075Unrealized holding losses on
available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,423
    )
    
    
    (19,423
    )Reclassification adjustment for
loss on available-for-sale
securities included in net
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,823
    
    
    
    54,823Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,624,239
    
    
    
    
    
    
    
    11,624,239BALANCE, December 31, 2003
    
    $
    
    
    
    
    41,446,436
    
    
    $
    414,464
    
    
    $
    50,540,630
    
    
    $
    (21,209,068
    )
    
    $
    
    
    
    $
    29,746,026
 See accompanying notes. F-6




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##### Table of Contents



TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31,2003
    
    2002
    
    2001CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    11,624,239
    
    
    $
    1,764,151
    
    
    $
    (21,904,864
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    2,256,250
    
    
    
    2,854,192
    
    
    
    7,772,935Loss on sale of marketable securities
    
    
    54,823
    
    
    
    
    
    
    
    Compensation expense on stock option grants
    
    
    
    
    
    
    37,692
    
    
    
    228,105Gain on sale of intangible assets
    
    
    
    
    
    
    (287,500
    )
    
    
    Deferred income tax provision
    
    
    
    
    
    
    
    
    
    
    4,805,651Impairment of goodwill and intangible assets
    
    
    
    
    
    
    
    
    
    
    5,285,497Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    714,286(Increase) decrease in:Receivables from clearing firms
    
    
    224,388
    
    
    
    (496,074
    )
    
    
    713,251Accounts receivable
    
    
    61,344
    
    
    
    148,474
    
    
    
    (400,386
    )Income tax receivable
    
    
    
    
    
    
    
    
    
    
    8,542,413Other assets
    
    
    (36,634
    )
    
    
    249,911
    
    
    
    225,730Increase (decrease) in:Accounts payable
    
    
    99,730
    
    
    
    351,358
    
    
    
    (1,983,718
    )Accrued expenses
    
    
    (881,424
    )
    
    
    534,242
    
    
    
    (170,761
    )Income tax payable
    
    
    
    
    
    
    
    
    
    
    (1,003,912
    )Net cash provided by operating activities
    
    
    13,402,716
    
    
    
    5,156,446
    
    
    
    2,824,227CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures
    
    
    (1,334,690
    )
    
    
    (1,735,588
    )
    
    
    (545,788
    )Decrease (increase) in restricted cash
    
    
    744,663
    
    
    
    189,992
    
    
    
    (3,107,282
    )Purchases of marketable securities
    
    
    (1,997,060
    )
    
    
    
    
    
    
    (317,828
    )Proceeds from sale/maturity of marketable securities
    
    
    46,577
    
    
    
    314,528
    
    
    
    151,323Acquisition of intangible assets
    
    
    (15,000
    )
    
    
    (100,000
    )
    
    
    (225,000
    )Proceeds from sale of intangible assets
    
    
    
    
    
    
    1,000,000
    
    
    
    Net cash used in investing activities
    
    
    (2,555,510
    )
    
    
    (331,068
    )
    
    
    (4,044,575
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock, net
    
    
    5,693,075
    
    
    
    42,757
    
    
    
    109,202Repurchase and retirement of common stock
    
    
    
    
    
    
    (6,873,401
    )
    
    
    Repayment of capital lease obligations
    
    
    (1,188,262
    )
    
    
    (1,376,187
    )
    
    
    (409,541
    )Net cash provided by (used in) financing activities
    
    
    4,504,813
    
    
    
    (8,206,831
    )
    
    
    (300,339
    )NET INCREASE (DECREASE) IN UNRESTRICTED
CASH AND CASH EQUIVALENTS
    
    
    15,352,019
    
    
    
    (3,381,453
    )
    
    
    (1,520,687
    )UNRESTRICTED CASH AND CASH EQUIVALENTS,
beginning of year
    
    
    12,982,856
    
    
    
    16,364,309
    
    
    
    17,884,996UNRESTRICTED CASH AND CASH EQUIVALENTS,
end of year
    
    $
    28,334,875
    
    
    $
    12,982,856
    
    
    $
    16,364,309
 (continued) F-7




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##### Table of Contents



TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) For the Years Ended December 31,2003
    
    2002
    
    2001SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:Cash paid for interest
    
    $
    72,293
    
    
    $
    217,924
    
    
    $
    198,935Cash paid (received) for income taxes, net
    
    $
    (745,374
    )
    
    $
    (19,914
    )
    
    $
    916,252SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:Equipment acquired under capital lease obligations
    
    $
    
    
    
    $
    1,351,579
    
    
    $
    1,602,344
 See accompanying notes. F-8




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##### Table of Contents



TRADESTATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business TradeStation Group, Inc. (the Company), a Florida corporation formed in
2000, is the successor company to a publicly-held trading software company that
was formed in 1982. TradeStation Group is listed on The Nasdaq National Market
under the symbol TRAD. TradeStation Securities, Inc. and TradeStation
Technologies, Inc. are TradeStation Groups two operating subsidiaries. TradeStation Securities offers the TradeStationplatform to institutional,
professional and serious, active individual traders. TradeStationis an
electronic trading platform that enables clients to design, test and monitor
their own custom trading strategies and then automate them with direct-access
order execution. The trading platform currently offers streaming real-time
equities, options, futures and forex market data. TradeStation Technologies
develops and offers strategy trading software tools and subscription services,
and owns and operates the TradeStationWorld.com strategy trading and
development community. The following is a summary of significant accounting policies followed in
the preparation of these consolidated financial statements: Principles of Consolidation The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, TradeStation Securities and TradeStation
Technologies. All significant intercompany transactions have been eliminated
in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents consist primarily of money market funds, overnight investments and
U.S. Treasury Bills. Cash and cash equivalents at December 31, 2003 and 2002
include restricted cash of $2.7 million and $3.4 million, respectively. See
Note 15  COMMITMENTS AND CONTINGENCIES  Restricted Cash. F-9




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##### Table of Contents



Marketable Securities Marketable securities are carried at market value. As of December 31,
2003, marketable securities consisted solely of obligations of a U.S.
government agency, which management designated as held-to-maturity securities,
reported at amortized cost, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities. As of December 31, 2002, marketable securities
consisted solely of corporate stock, which management had designated as
available-for-sale securities, and, accordingly, unrealized holding losses were
excluded from earnings and reported in other comprehensive income (loss), prior
to the sale of such securities, as required by SFAS No. 115. In June 2003, the
Company sold the corporate stock and recorded a loss of approximately $55,000,
included in the consolidated statement of operations. See Note 3  MARKETABLE
SECURITIES. Receivables from Clearing Firms Receivables from clearing firms consist of receivables from the
brokerages clearing organizations. The Company services its securities
customer accounts through Bear, Stearns Securities Corp. and its futures and
forex customer accounts currently through R.J. OBrien (collectively, the
Clearing Firms) on a fully disclosed basis. The Clearing Firms provide
services, handle the Companys customers funds, hold securities and remit
monthly activity statements to the customers on behalf of the Company. The
receivables from the Clearing Firms relate primarily to commissions earned by
the Company for trades executed by the Clearing Firms on behalf of the Company.
See Revenue Recognition: Brokerage Revenues below. Accounts Receivable As of December 31, 2003 and 2002, accounts receivable were comprised
primarily of receivables earned under royalty agreements with entities that
market and sell financial market data subscriptions (see Other Revenuesbelow).
The Company performs periodic credit evaluations and no allowances for
potential credit losses were deemed necessary at December 31, 2003 or 2002. Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, marketable securities,
receivables from clearing firms, accounts receivable and accounts payable
approximate fair value as of December 31, 2003 and 2002. Property and Equipment Property and equipment are stated at cost less accumulated depreciation
and amortization. Property and equipment are depreciated or amortized using
the straight-line method over the estimated useful lives of the assets.
Maintenance and repairs are charged to expense when incurred; betterments are
capitalized. Upon the sale or retirement of assets, the cost and accumulated
depreciation are removed from the accounts, and any gain or loss is recognized
currently. See Note 4 - PROPERTY AND EQUIPMENT, NET. F-10




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##### Table of Contents



Software Development Costs In accordance with SFAS No. 86, Accounting for the Cost of Capitalized
Software to be Sold, Leased or Otherwise Marketed, the Company examines its
software development costs after technological feasibility has been established
to determine the amount of capitalization that is required. Based on the
Companys technology development process, technological feasibility is
established upon completion of a working model. The costs that are capitalized
are amortized over the period of benefit of the related products. For the
periods presented, the technological feasibility of the Companys products and
the general release of such software substantially coincide, and, as a result,
software development costs qualifying for capitalization are not significant.
There were no capitalized software development costs at December 31, 2003 or
2002. Intangible Assets Intangible assets are stated at cost less accumulated amortization and are
amortized using the straight-line method over their estimated useful lives of
one to five years. See Impairment of Long-Lived Assets, below, and Note 5 -
INTANGIBLE ASSETS, NET. Impairment of Long-Lived Assets The Company evaluates long-lived assets for recoverability whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable. Impairment losses are recognized if the carrying amount exceeds
the sum of the undiscounted cash flows estimated to be generated by those
assets. The amount of impairment loss is calculated as the amount by which the
carrying value exceeds fair value. No impairment occurred in 2003 or 2002. In
December 2001, an impairment of goodwill and certain intangible assets was
recorded. See Note 5 - INTANGIBLE ASSETS, NET. Revenue Recognition: Brokerage Revenues Brokerage revenues are comprised mainly of commission income for
securities and futures transactions and, to a lesser extent, monthly platform
fees earned from brokerage customers using the TradeStationonline trading
platform and interest earned from interest revenue sharing arrangements with
the Clearing Firms. Brokerage commission income and related clearing costs are
recorded on a trade date basis as transactions occur, while such transactions
are reported to the customer on a settlement date basis. Platform fees and
interest are recorded monthly, when earned. Subscription Fees The Company provides investment analysis trading tools, including
streaming real-time market information, via the Internet through its
subscription services in exchange for monthly subscription fee payments. In
addition to these services, payment of subscription fees gives customers access
to certain customer support services such as telephone and electronic mail
support. Revenue is recognized on a monthly basis as the service is provided.
Payments received in advance of service are deferred and recognized on a
monthly basis as service is provided. F-11




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##### Table of Contents



Licensing Fees The Companys client software product sales are recognized in accordance
with the provisions of the American Institute of Certified Public Accountants
Statement of Position 97-2, Software Revenue Recognition. Other Revenues Other revenues are comprised mainly of royalties. The Company has, with
respect to its client software products, entered into certain agreements with
entities that market and sell financial market data subscriptions. Except for
the agreement described in Note 15  COMMITMENTS AND CONTINGENCIES  Telerate
Royalty Agreement(which is a royalty arrangement), the Company receives
monthly commission payments based on its client software customers use of
financial market data feed subscriptions that are accessed through one of its
client software products. The Company records these revenues monthly as they
are earned, in accordance with the terms of the applicable contracts. Advertising Costs Advertising costs are expensed when the initial advertisement takes place,
and are included in sales and marketing expenses in the accompanying
consolidated statements of operations. Advertising costs for the years ended
December 31, 2003, 2002 and 2001 were $1.1 million, $2.1 million and $663,000,
respectively. Stock-Based Compensation In accordance with SFAS No. 123, Accounting for Stock-Based Compensation,
in accounting for stock-based transactions with non-employees, the Company
records compensation expense in the consolidated statement of operations when
such equity instruments are issued. No such compensation expense was recorded
for the year ended December 31, 2003. Such compensation expense for the years
ended December 31, 2002 and 2001 was approximately $38,000 and $63,000,
respectively. As permitted by SFAS No. 123, the Company accounts for its stock-based
compensation paid to employees using the intrinsic value method in accordance
with the recognition and measurement principles of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees,and related
Interpretations. Generally, no stock-based employee compensation cost is
reflected in net income (loss), as all options granted under the Companys
plans have an exercise price equal to the fair value of the underlying common
stock on the date of grant. However, certain stock options granted during 1996
and 1997 were issued below fair value, as determined by an independent
appraisal and, accordingly, compensation expense was recorded during 2001, as
such differences were amortized over the five-year vesting period of the
related stock options. See the table below. All such differences were fully
amortized as of December 31, 2002. The following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation. F-12




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##### Table of Contents



2003
    
    2002
    
    2001Net income (loss), as reported
    
    $
    11,624,239
    
    
    $
    1,764,151
    
    
    $
    (21,904,864
    )Add: Stock-based employee
compensation expense included in
reported net income (loss), determined
under the intrinsic value method, net
of tax impact
    
    
    
    
    
    
    
    
    
    
    165,526Deduct: Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of tax impact
    
    
    (1,807,083
    )
    
    
    (1,947,348
    )
    
    
    (2,375,136
    )Pro forma net income (loss)
    
    $
    9,817,156
    
    
    $
    (183,197
    )
    
    $
    (24,114,474
    )Earnings (loss) per share:As reported:Basic
    
    $
    0.29
    
    
    $
    0.04
    
    
    $
    (0.49
    )Diluted
    
    $
    0.27
    
    
    $
    0.04
    
    
    $
    (0.49
    )Pro forma:Basic
    
    $
    0.24
    
    
    $
    0.00
    
    
    $
    (0.54
    )Diluted
    
    $
    0.23
    
    
    $
    0.00
    
    
    $
    (0.54
    )
 The fair value of each option grant is estimated on the date of grant
using the Black-Scholes model with the following assumptions: 2003
    
    2002
    
    2001Risk free interest rate
    
    
    2
    %
    
    
    4
    %
    
    
    5
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    Volatility factor
    
    
    68
    %
    
    
    66
    %
    
    
    75
    %Weighted average life (years)
    
    
    4
    
    
    
    4
    
    
    
    4
 See Note 8  SHAREHOLDERS EQUITY  Stock Option Plans. Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires that deferred income tax
balances be recognized based on the differences between the financial statement
and income tax bases of assets and liabilities using the enacted tax rates.
See Note 12 - INCOME TAXES. F-13




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##### Table of Contents



Earnings (Loss) Per Share Earnings (loss) per share is calculated in accordance with SFAS No. 128,
Earnings per Share, which requires presentation of basic and diluted earnings
(loss) per share. Basic earnings (loss) per share is computed by dividing the
net income (loss) available to common shareholders by the weighted average
shares of outstanding common stock during the period. The calculation of
diluted earnings (loss) per share is similar to basic earnings (loss) per share
except that the denominator includes dilutive common stock equivalents such as
stock options and warrants. See Note 11  EARNINGS (LOSS) PER SHARE. Comprehensive Income (Loss) Comprehensive income (loss) is defined as the change in a business
enterprises equity during a period arising from transactions, events or
circumstances relating to non-owner sources, such as unrealized holding gains
or losses on available-for-sale securities and foreign currency translation
adjustments. It includes all changes in equity during a period except those
resulting from investments by, or distributions to, owners. See Note 10 
COMPREHENSIVE INCOME (LOSS). Segment Information Segment information is required to be presented in accordance with SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information.
SFAS No. 131 requires segmentation if warranted by managements approach to the
Companys business and the Companys internal organization and disclosure of
revenue and operating income based upon internal accounting methods. During
the three years ended December 31, 2003, management evaluated and operated its
business as two segments. See Note 16 - SEGMENT AND RELATED INFORMATION. Reclassifications Certain prior year amounts have been reclassified to conform to the
current year presentation. Recently Issued Accounting Standards In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN No.
45). FIN No. 45 elaborates on the disclosures to be made by a guarantor in
its financial statements about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN No. 45 should be applied only on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantors fiscal year end. The disclosure requirements were effective
for financial statements ending after December 15, 2002. The adoption of FIN
No. 45 did not have any impact on the Companys consolidated financial
position, results of operations or cash flows. F-14




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##### Table of Contents



The Company adopted SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, effective January 1, 2003. SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or
disposal plan. SFAS No. 146 nullifies Emerging Issues Task Force Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring).The adoption of SFAS No. 146 did not have any impact on the
Companys consolidated financial position, results of operations or cash flows. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. Most of
the guidance in SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, applied prospectively. The adoption of SFAS No.
149 did not have any impact on the Companys consolidated financial position,
results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 improves the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. SFAS No. 150
requires that those instruments be classified as liabilities in statements of
financial position. Most of the guidance in SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 did not have any impact on
the Companys consolidated financial position, results of operations or cash
flows. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN No. 46), and then, in December 31, 2003,
issued a revised version of FIN No. 46. FIN No. 46 clarifies the application
of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated support from
other parties. FIN No. 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entitys activities or entitled to receive a
majority of the entitys residual returns or both. FIN No. 46 also requires
disclosures about variable interest entities that the company is not required
to consolidate but in which it has a significant variable interest.
Application of FIN No. 46 is required in financial statements of public
entities that have interests in variable interest entities or potential
variable interest entities commonly referred to as special-purpose entities for
periods ending after December 15, 2003. Application by public entities (other
than small business issuers) for all other types of entities is required in
financial statements for periods ending after March 15, 2004. The adoption of
FIN No. 46 did not have any impact on the Companys consolidated financial
position, results of operations or cash flows as the Company does not have any
variable interest entities. F-15




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(2) COMMON STOCK REPURCHASES AND RETIREMENT In July 2002, the Company announced a stock repurchase program
authorizing, at the discretion of management, the use of available cash to
purchase from time to time up to 4 million shares of the Companys common stock
in the open market or through privately-negotiated transactions. Through
October 2002, the Company had purchased and retired all 4 million shares at
prices ranging from $1.35 to $1.40 per share, for a total purchase price of
$5.5 million. This included two private transactions with a former principal
shareholder of onlinetradinginc.com corp. for the purchase of 1.5 million
shares at a price of $1.35 per share and 2.4 million shares at a price of $1.40
per share. In November 2002, the Company purchased and retired an additional 1
million shares at a price of $1.35 per share in a private transaction with
another former principal shareholder of onlinetradinginc.com corp., bringing
the total shares of common stock purchased and retired for the year to 5
million, for a total purchase price of $6.9 million. During the third quarter of 2003, former principal shareholders of
onlinetradinginc.com corp. filed lawsuits seeking rescission of the share
purchases and/or compensatory damages, plus interest, costs and attorneys
fees. The Company believes all of the allegations are baseless, intends to
defend itself and the other named parties vigorously in court, and expects to
prevail in each of the lawsuits. See Note 15 - COMMITMENTS AND CONTINGENCIES -
Litigation and Claimsfor further discussion. (3) MARKETABLE SECURITIES Marketable securities consist of the following as of December 31, 2003 and
2002: 2003
    
    2002U.S. government agency obligations
    
    $
    1,997,060
    
    
    $
    Corporate stock
    
    
    
    
    
    
    66,000$
    1,997,060
    
    
    $
    66,000
 The U.S. government agency obligations have been designated by management
as held-to-maturity securities, with a maturity date of February 23, 2004, and
are reported at amortized cost. The corporate stock, classified as an available-for-sale security, was
sold in June 2003 at market value, at which time the Company recorded a loss of
approximately $55,000. Prior to the sale of such investment, temporary
unrealized holding gains and losses were excluded from earnings and reported in
comprehensive income (loss). F-16




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##### Table of Contents



(4) PROPERTY AND EQUIPMENT, NET Property and equipment, net, consist of the following as of December 31,
2003 and 2002: Estimated UsefulLife In Years
    
    2003
    
    2002Computers and software
    
    3-5
    
    $
    9,941,790
    
    
    $
    8,770,635Furniture and equipment
    
    3-7
    
    
    1,670,166
    
    
    
    1,556,464Leasehold improvements
    
    10
    
    
    647,396
    
    
    
    658,76012,259,352
    
    
    
    10,985,859Accumulated depreciation and amortization
    
    
    
    
    (8,630,579
    )
    
    
    (6,637,107
    )$
    3,628,773
    
    
    $
    4,348,752
 Depreciation and amortization expense that related to property and
equipment, including equipment under capital leases, was approximately $2.1
million, $2.0 million and $1.6 million, for the years ended December 31, 2003,
2002 and 2001, respectively. (5) INTANGIBLE ASSETS, NET Intangible assets, net, consist of the following as of December 31, 2003
and 2002: Estimated
    
    December 31, 2003Useful
    
    Gross
    
    
    
    
    
    NetLife
    
    Carrying
    
    Accumulated
    
    CarryingIn Years
    
    Amount
    
    Amortization
    
    AmountData rights
    
    
    3-5
    
    
    $
    567,900
    
    
    $
    (510,144
    )
    
    $
    57,756Other
    
    
    1-4
    
    
    
    215,000
    
    
    
    (215,000
    )
    
    
    Total intangible assets
    
    
    
    
    
    $
    782,900
    
    
    $
    (725,144
    )
    
    $
    57,756
 Estimated
    
    December 31, 2002Useful
    
    Gross
    
    
    
    
    
    NetLife
    
    Carrying
    
    Accumulated
    
    CarryingIn Years
    
    Amount
    
    Amortization
    
    AmountData rights
    
    
    3-5
    
    
    $
    682,900
    
    
    $
    (480,230
    )
    
    $
    202,670Other
    
    
    4
    
    
    
    200,000
    
    
    
    (158,333
    )
    
    
    41,667Total intangible assets
    
    
    
    
    
    $
    882,900
    
    
    $
    (638,563
    )
    
    $
    244,337
 During the years ended December 31, 2003 and 2002, certain fully amortized
intangible assets were written-off. In December 2001, the Company recorded a non-cash charge of $5.3 million
for impairment of goodwill and certain intangible assets, reducing such assets
to their estimated fair value, as determined by a qualified independent
appraiser, representing the price at which the assets would change hands
between a willing buyer and seller. Approximately $1.1 million of this impairment charge related to the
brokerage services segment, and resulted from the Companys December 2001
decision to sell accounts that did not meet the requirements of its active and
institutional trader business model. Accordingly, the F-17




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##### Table of Contents



value of the intangible assets acquired from Newport Discount Brokerage, Inc.
(Newport), including customer lists, was reduced to its estimated fair value
of $712,500. Beginning January 1, 2002, the remaining Newport assets were held
for sale and amortization was discontinued. During the second quarter of 2002,
the Company sold these intangible assets for $1.0 million in cash, and recorded
a gain of $287,500 on the sale, which is included in other income, net in the
accompanying consolidated statement of operations. The remaining $4.2 million of this impairment charge related to the
software products and services segment and resulted from the Companys
decision, made and implemented in the fourth quarter of 2001, to upgrade all
WindowOnWallStreet.com subscribers to TradeStation 6. Accordingly, all
goodwill and certain intangible assets associated with the 1999 acquisition of
Window On WallStreet, including purchased technology, trade names, patents,
customer lists and non-compete agreements, were determined to be impaired and
were reduced to their estimated fair value. The following reconciliation adjusts the net loss in 2001 to remove
amortization expense related to goodwill and workforce that is no longer
amortized effective January 1, 2002 under the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets: 2001 net loss, as reported
    
    $
    (21,904,864
    )Add back goodwill amortization
    
    
    408,252Add back workforce amortization
    
    
    666,6672001 net loss, as adjusted
    
    $
    (20,829,945
    )2001 basic and diluted loss per share, as reported
    
    $
    (0.49
    )Add back goodwill amortization
    
    
    0.01Add back workforce amortization
    
    
    0.012001 basic and diluted loss per share, as adjusted
    
    $
    (0.47
    )
 (6) ACCRUED EXPENSES Accrued expenses consist of the following as of December 31, 2003 and
2002: 2003
    
    2002Payroll and related accruals
    
    $
    953,844
    
    
    $
    923,896Deferred rent and related concessions
    
    
    861,789
    
    
    
    770,205Data and exchange fees
    
    
    753,638
    
    
    
    768,000Uninsured loss reserves
    
    
    525,000
    
    
    
    750,000Estimated loss on sublease of facilities
    
    
    512,888
    
    
    
    732,839Consulting and professional fees
    
    
    465,132
    
    
    
    607,740Clearing deposits
    
    
    455,138
    
    
    
    416,731Other
    
    
    1,485,763
    
    
    
    1,925,205$
    6,013,192
    
    
    $
    6,894,616
 Other includes, for both periods, customer credits, commissions to third
parties, returns, and other accrued expenses and reserves, as well as event
termination fees, technical support costs and advertising at December 31, 2002,
none of which individually exceeds 5% of total liabilities. F-18




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##### Table of Contents



(7) CAPITAL LEASE OBLIGATIONS The Company has various capital leases for computer equipment and office
furniture and equipment. The leases were capitalized at interest rates ranging
from 6.0% to 12.1% and are paid monthly over periods ranging from 24 to 36
months. The following is a schedule by years of future minimum lease payments
under capital leases together with the present value of the net minimum lease
obligations as of December 31, 2003: 2004
    
    $
    205,3572005
    
    
    8,213Total payments
    
    
    213,570Less amount representing estimated executory costs (primarily sales tax)
    
    
    (12,978
    )Net minimum lease payments
    
    
    200,592Less amount representing interest
    
    
    (6,590
    )Present value of net minimum lease payments
    
    $
    194,002
 The following is an analysis of the leased property under capital leases
by major classes as of December 31, 2003 and 2002: Estimated UsefulLife In Years
    
    2003
    
    2002Computers and software
    
    3
    
    $
    169,109
    
    
    $
    2,503,965Furniture and equipment
    
    3-5
    
    
    491,966
    
    
    
    742,481661,075
    
    
    
    3,246,446Accumulated depreciation
    
    
    
    
    (237,629
    )
    
    
    (1,198,491
    )$
    423,446
    
    
    $
    2,047,955
 (8) SHAREHOLDERS EQUITY Preferred Stock The Company has authorized 25 million shares of preferred stock with a par
value of $.01 per share. No specific preferences or rights have been
established to date with respect to any of these shares, nor have any of these
shares been issued. Common Stock The Company has authorized 200 million shares of common stock with a par
value of $.01 per share. As of December 31, 2003 and 2002, 41,446,436 and
39,588,881 shares were issued and outstanding, respectively. See Note 2 -
COMMON STOCK REPURCHASES AND RETIREMENT. F-19




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##### Table of Contents



Warrants In connection with TradeStation Securities initial public offering,
warrants to purchase up to 225,000 shares of TradeStation Securities common
stock, at an exercise price of $11.55, were granted to the underwriters, with
an expiration date of June 9, 2004. TradeStation Group assumed such warrants
in connection with the merger and, based on the 1.7172 to 1 merger conversion
ratio, the underwriters were granted rights to purchase up to 386,369 shares of
the Companys common stock at an exercise price of $6.73. In July 2003, the
Company filed a registration statement with the Securities and Exchange
Commission to register the warrants and the 386,369 shares of common stock
issuable upon the exercise of such warrants, which registration statement was
declared effective by the Securities and Exchange Commission on August 13,
2003. During the second half of 2003, the Company issued 196,807 shares of
common stock associated with the exercise of warrants in exchange for net cash
proceeds of $914,000 and the delivery and cancellation of 123,027 warrants. As
of December 31, 2003, warrants to purchase up to 66,535 shares of the Companys
common stock at $6.73 were outstanding. Stock Option Plans The Company has reserved 7,500,000 shares of its common stock for issuance
under the TradeStation Group Incentive Stock Plan (the Incentive Stock Plan).
Under the Incentive Stock Plan, incentive and nonqualified stock options,
stock appreciation rights, stock awards, performance shares and performance
units are available to employees or consultants. Currently, only stock options
have been granted. The terms of each option agreement are determined by the
Compensation Committee of the Board of Directors. The exercise price of
incentive stock options may not be less than fair value at the date of grant
and their terms may not exceed ten years. In connection with the 2000 merger of TradeStation Technologies (formerly
known as Omega Research, Inc.) and TradeStation Securities (formerly known as
onlinetradinginc.com corp.), TradeStation Group assumed the outstanding options
under TradeStation Securities 1999 Stock Option Plan. Each option issued
under TradeStation Securities plan was assumed and converted to 1.7172 options
to purchase TradeStation Groups common stock at the original exercise price
divided by 1.7172. As part of the 1999 acquisition of Window on WallStreet, TradeStation
Group assumed all outstanding stock options to purchase Window On WallStreet
common stock (WOW Options). The WOW Options generally vested ratably over a
four-year period and their terms are ten years. The Company has reserved 350,000 shares of its common stock for issuance
under the TradeStation Group Amended and Restated Nonemployee Director Stock
Option Plan (the Director Plan). Under the Director Plan, an independent
director is awarded an initial grant of up to 75,000 non-qualified stock
options and annual grants of up to 7,000 non-qualified stock options. The
terms of each option grant are determined by the Board of Directors. F-20




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##### Table of Contents



A summary of all stock option activity is as follows: Number
    
    Option Price Per Shareof Shares
    
    Low
    
    High
    
    WeightedOutstanding, December 31, 2000
    
    
    4,990,388
    
    
    $
    .48
    
    
    $
    11.00
    
    
    $
    3.90Granted
    
    
    1,327,690
    
    
    
    1.88
    
    
    
    4.08
    
    
    
    2.24Canceled
    
    
    (553,067
    )
    
    
    1.66
    
    
    
    11.00
    
    
    
    4.26Exercised
    
    
    (20,345
    )
    
    
    1.25
    
    
    
    2.88
    
    
    
    1.66Outstanding, December 31, 2001
    
    
    5,744,666
    
    
    
    .48
    
    
    
    11.00
    
    
    
    3.49Granted
    
    
    1,909,287
    
    
    
    1.12
    
    
    
    1.47
    
    
    
    1.43Canceled
    
    
    (1,062,495
    )
    
    
    1.25
    
    
    
    11.00
    
    
    
    3.36Outstanding, December 31, 2002
    
    
    6,591,458
    
    
    
    .48
    
    
    
    11.00
    
    
    
    2.92Granted
    
    
    805,053
    
    
    
    2.08
    
    
    
    9.09
    
    
    
    8.66Canceled
    
    
    (284,957
    )
    
    
    1.39
    
    
    
    11.00
    
    
    
    3.90Exercised
    
    
    (1,622,641
    )
    
    
    .48
    
    
    
    11.00
    
    
    
    2.87Outstanding, December 31, 2003
    
    
    5,488,913
    
    
    
    .48
    
    
    
    11.00
    
    
    
    3.72
 Additional information regarding options outstanding at December 31, 2003 is as follows: Range of

    
    Options Outstanding
    
    Options ExercisableExercise
    
    Number
    
    Weighted
    
    Weighted
    
    Number
    
    WeightedPrices
    
    Outstanding
    
    Average
    
    Average
    
    Exercisable
    
    AverageAs of
    
    Contractual
    
    Exercise
    
    As of
    
    ExerciseLow
    
    High
    
    12/31/03
    
    Life in Years
    
    Price
    
    12/31/03
    
    Price$.48
    
    $
    .48
    
    
    
    12,009
    
    
    
    1.0
    
    
    $
    .48
    
    
    
    12,009
    
    
    $
    .481.12
    
    
    1.66
    
    
    
    2,257,115
    
    
    
    7.0
    
    
    
    1.44
    
    
    
    964,371
    
    
    
    1.461.88
    
    
    2.82
    
    
    
    910,790
    
    
    
    6.8
    
    
    
    2.27
    
    
    
    268,269
    
    
    
    2.352.85
    
    
    4.22
    
    
    
    586,396
    
    
    
    5.0
    
    
    
    3.28
    
    
    
    482,348
    
    
    
    3.254.53
    
    
    6.63
    
    
    
    622,945
    
    
    
    5.7
    
    
    
    5.62
    
    
    
    400,327
    
    
    
    5.456.95
    
    
    10.25
    
    
    
    1,080,408
    
    
    
    8.6
    
    
    
    8.76
    
    
    
    272,291
    
    
    
    8.1611.00
    
    
    11.00
    
    
    
    19,250
    
    
    
    3.8
    
    
    
    11.00
    
    
    
    19,250
    
    
    
    11.00.48
    
    
    11.00
    
    
    
    5,488,913
    
    
    
    6.9
    
    
    
    3.72
    
    
    
    2,418,865
    
    
    
    3.40
 At December 31, 2003, there were approximately 733,000 shares available
for future grants under the Incentive Stock Plan, and 158,000 shares available
for future grants under the Director Plan. Employee Stock Purchase Plan The Company has reserved 500,000 shares of common stock for issuance under
the TradeStation Group Employee Stock Purchase Plan (the Purchase Plan).
Under the Purchase Plan, participating employees may purchase common stock
through accumulated payroll deductions. The exercise price for the options for
each six-month Purchase Plan period is 85% of the lower of the fair market
value of the Companys common stock on the first and last business day of the
Purchase Plan period. During the years ended December 31, 2003, 2002 and 2001,
37,976, 41,565 and 50,470 shares of common stock were issued under the plan at
an average price of $3.26, $1.03 and $1.49, respectively. At December 31,
2003, there were approximately 304,000 shares available for future grants under
the Purchase Plan. F-21




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##### Table of Contents



(9) EMPLOYEE BENEFIT PLANS The Company provides retirement benefits through a defined contribution
401(k) plan (the 401(k) Plan) established during 1994. All employees with at
least three months of continuous service are eligible to participate and may
contribute up to 60% of their compensation up to the annual limit set by the
Internal Revenue Service. Employer matching contributions are discretionary,
as defined in the 401(k) Plan, and are vested 20% for each year of service.
Matching contributions accrued under this plan were approximately $210,000 and
$265,000 for the years ended December 31, 2003 and 2002, respectively. There
were no matching contributions paid or accrued in 2001. From January 2000 through June 2001, eligible TradeStation Securities
employees could contribute up to 15% of their eligible salary into a defined
contribution 401(k) plan (the Old Plan). TradeStation Securities would match
50 percent of such contributions, up to $2,500. Matching contributions made
under this plan were approximately $57,000 for the year ended December 31,
2001. Effective July 1, 2001, the assets of the Old Plan were transferred to
the 401(k) Plan. (10) COMPREHENSIVE INCOME (LOSS) A reconciliation of net income (loss) to comprehensive income (loss) is as
follows: 2003
    
    2002
    
    2001Net income (loss)
    
    $
    11,624,239
    
    
    $
    1,764,151
    
    
    $
    (21,904,864
    )Unrealized holding losses on
available-for-sale securities
arising during period, net of tax
    
    
    (19,423
    )
    
    
    (35,400
    )
    
    
    Reclassification adjustment for
loss on available-for-sale
securities included in net income,
net of tax
    
    
    54,823
    
    
    
    
    
    
    
    Comprehensive income (loss)
    
    $
    11,659,639
    
    
    $
    1,728,751
    
    
    $
    (21,904,864
    )
 In June 2003, the Company recorded a loss of approximately $55,000 when it
sold an investment in corporate stock, classified as an available-for-sale
security, at market value. Prior to the sale of such investment, temporary
unrealized holding gains and losses were excluded from earnings and reported in
comprehensive income (loss). (11) EARNINGS (LOSS) PER SHARE Weighted average shares outstanding for the years ended December 31, 2003,
2002 and 2001 are calculated as follows: 2003
    
    2002
    
    2001Weighted average shares outstanding (basic)
    
    
    40,467,309
    
    
    
    43,328,103
    
    
    
    44,458,689Impact of dilutive stock options and warrants
after applying the treasury stock method
    
    
    2,922,899
    
    
    
    58,147
    
    
    
    Weighted average shares outstanding (diluted)
    
    
    43,390,208
    
    
    
    43,386,250
    
    
    
    44,458,689
 F-22




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##### Table of Contents



Stock options and warrants outstanding for the years ended December 31,
2003, 2002 and 2001, which were not included in the calculation of diluted loss
per share because their impact was antidilutive are as follows: 2003
    
    2002
    
    2001Stock options
    
    
    759,208
    
    
    
    6,011,768
    
    
    
    5,744,666Warrants
    
    
    
    
    
    
    386,369
    
    
    
    386,369
 During the year ended December 31, 2002, the Company purchased and retired
5,000,000 shares of common stock. These shares are weighted for the portion of
the year for which they were outstanding. See Note 2 - COMMON STOCK
REPURCHASES AND RETIREMENT. (12) INCOME TAXES The components of income tax (benefit) provision for the years ended
December 31, 2003, 2002, and 2001 are as follows: 2003
    
    2002
    
    2001Current tax (benefit) provision:Federal
    
    $
    (725,085
    )
    
    $
    
    
    
    $
    (100,312
    )State
    
    
    (5,736
    )
    
    
    3,605
    
    
    
    (37,207
    )Total current tax (benefit) provision
    
    
    (730,821
    )
    
    
    3,605
    
    
    
    (137,519
    )Deferred tax provision:Federal
    
    
    
    
    
    
    
    
    
    
    4,230,651State
    
    
    
    
    
    
    
    
    
    
    575,000Total deferred tax provision
    
    
    
    
    
    
    
    
    
    
    4,805,651Total income tax (benefit) provision
    
    $
    (730,821
    )
    
    $
    3,605
    
    
    $
    4,668,132
 Deferred income taxes are recorded when revenues and expenses are
recognized in different periods for financial and income tax reporting
purposes. The temporary differences that created deferred income taxes are as
follows as of December 31, 2003 and 2002: 2003
    
    2002Deferred income tax assets (liabilities):Net operating loss carryforwards
    
    $
    3,352,068
    
    
    $
    8,702,107Tax credit carryforwards
    
    
    1,138,662
    
    
    
    727,603Tax benefit of stock option exercises
(recorded through additional paid-in capital)
    
    
    3,175,309
    
    
    
    Deferred revenue and accrued liabilities
    
    
    984,920
    
    
    
    852,119Property and equipment depreciation
    
    
    (238,694
    )
    
    
    96,439Stock option expense
    
    
    145,557
    
    
    
    238,358Difference in revenue recognition
    
    
    36,908
    
    
    
    89,509Reserves and allowances
    
    
    32,369
    
    
    
    33,714Intangible asset amortization
    
    
    4,514
    
    
    
    12,3658,631,613
    
    
    
    10,752,214Valuation allowance
    
    
    (8,631,613
    )
    
    
    (10,752,214
    )$
    
    
    
    $
    
 F-23




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##### Table of Contents



The following is a roll-forward of the valuation allowance for the years
ended December 31, 2003, 2002, and 2001: Valuation allowance at December 31, 2000
    
    $
    5,248,500Increase in deferred income tax assets
    
    
    2,523,722Increase valuation allowance to 100% of deferred income tax assets
    
    
    4,805,651Valuation allowance at December 31, 2001
    
    
    12,577,873Decrease in deferred income tax assets
    
    
    (1,825,659
    )Valuation allowance at December 31, 2002
    
    
    10,752,214Deferred income tax assets applied to carryback filing
(cash received October 2003)
    
    
    (873,949
    )Decrease in deferred income tax assets
    
    
    (4,421,961
    )Deferred income tax assets generated by stock option exercises
(recorded through additional paid-in capital)
    
    
    3,175,309Valuation allowance at December 31, 2003
    
    $
    8,631,613
 The change in the valuation allowance in 2003 and 2002 includes decreases
of approximately $380,000 and $952,000, respectively, relating to adjustments
made to the deferred income tax assets and valuation allowance in connection
with the filing of the 2002 and 2001 income tax returns. During the fourth quarter of 2001, in accordance with the requirements of
SFAS No. 109, the Company recorded a $4.8 million non-cash charge establishing
a full valuation allowance against its deferred income tax assets. The Company
has continued to apply a full valuation allowance against its net deferred
income tax assets in 2002 and 2003. As of December 31, 2003, the Company has available, for federal tax
purposes, total net operating loss carryforwards and tax credit carryforwards
estimated at $16.6 million and $1.1 million, respectively, which expire between
2010 and 2023. The benefit and valuation allowance related to $8.4 million of
the net operating loss carryforwards is recorded through additional paid-in
capital and not through the consolidated statement of operations. Within the
remaining $8.2 million of net operating loss carryforwards and the $1.1 million
tax credit carryforwards are approximately $4.1 million and $124,000,
respectively, of net operating loss carryforwards and tax credits, which expire
between 2010 and 2014, and pertain to TradeStation Technologies 1999
acquisition of Window On WallStreet. This $4.1 million and $124,000 of net
operating loss carryforwards and tax credits, respectively, are subject to
annual usage limitations of approximately $545,000. These limitations are
cumulative to the extent they are not utilized in any year. For state tax
purposes, the available net operating loss carryforwards are estimated at $24.3
million, the benefit related to $8.4 million of which is recorded through
additional paid-in capital and not the consolidated statement of operations.
At December 31, 2003, net deferred income tax assets were reduced to zero by a
full valuation allowance of approximately $8.6 million of which the portion
relating to the statement of operations will be utilized prior to the
additional paid-in capital portion, subject to the limitations discussed above. A reconciliation of the difference between the expected income tax
provision (benefit) using the statutory federal tax rate of 34% and the
Companys actual income tax (benefit) provision is as follows: F-24




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##### Table of Contents



2003
    
    2002
    
    2001Income tax provision (benefit) using
statutory federal tax rate
    
    $
    3,703,762
    
    
    $
    601,037
    
    
    $
    (5,860,489
    )State income tax provision before change in
valuation allowance
    
    
    612,477
    
    
    
    147,000
    
    
    
    Change in valuation allowance
    
    
    (4,041,592
    )
    
    
    (873,546
    )
    
    
    7,329,373Federal refund received not previously recorded
    
    
    (873,949
    )
    
    
    
    
    
    
    State refunds received not previously recorded
    
    
    (26,905
    )
    
    
    
    
    
    
    Nondeductible amortization of goodwill and
other intangible assets
    
    
    18,815
    
    
    
    249,129
    
    
    
    1,784,270Nondeductible impairment of goodwill and
other intangible assets
    
    
    
    
    
    
    
    
    
    
    1,442,319Other, net
    
    
    (123,429
    )
    
    
    (120,015
    )
    
    
    (27,341
    )Total income tax (benefit) provision
    
    $
    (730,821
    )
    
    $
    3,605
    
    
    $
    4,668,132
 (13) NET CAPITAL REQUIREMENTS TradeStation Securities is subject to the net capital requirements of the
Securities and Exchange Commissions Uniform Net Capital Rule (Rule 15c3-1) and
the Commodity Futures Trading Commissions financial requirement (Regulation
1.17). To satisfy each requirement, TradeStation Securities is required to
maintain net capital equal to the greater of $250,000 or 1/15th of aggregate
indebtedness. Also, the ratio of aggregate indebtedness to net capital cannot
exceed 15 to 1. As of December 31, 2003, TradeStation Securities had net
capital of $11.3 million, which was $10.9 million in excess of its required net
capital of $415,000, and a ratio of aggregate indebtedness to net capital of
0.55 to 1. As of December 31, 2002, TradeStation Securities had net capital of
$8.3 million, which was $8.0 million in excess of its required net capital of
$273,000, and a ratio of aggregate indebtedness to net capital of 0.49 to 1. (14) CONCENTRATIONS AND CREDIT RISKS Financial Instruments With Off-Balance-Sheet Risk TradeStation Securities customer securities, futures and forex activities
are transacted on either a cash or margin basis. In margin transactions,
TradeStation Securities may be obligated for credit extended to its customers
by TradeStation Securities Clearing Firms, subject to various regulatory and
Clearing Firms margin requirements, collateralized by cash and securities in
the customers accounts. In connection with these activities, TradeStation
Securities also executes customer transactions involving the sale of securities
not yet purchased, substantially all of which are transacted on a margin basis
subject to individual exchange regulations. Such transactions may expose
TradeStation Securities to significant off-balance-sheet risk in the event
margin requirements are not sufficient to fully cover losses that customers may
incur. In the event the customer fails to satisfy its obligations,
TradeStation Securities may be required to purchase or sell financial
instruments at prevailing market prices to fulfill the customers obligations. TradeStation Securities seeks to control the risks associated with its
customer activities by requiring customers to maintain margin collateral in
compliance with its Clearing Firms requirements as well as various regulatory
requirements. TradeStation Securities and its F-25




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##### Table of Contents



Clearing Firms monitor required margin levels daily and, pursuant to such
guidelines, require the customers to deposit additional collateral or to reduce
positions when necessary. The customer financing and securities settlement activities require
TradeStation Securities Clearing Firms to pledge customer securities as
collateral in support of various secured financing sources such as bank loans
and securities loaned. In the event the counterparty is unable to meet its
contractual obligation to return customer securities pledged as collateral,
TradeStation Securities may be exposed to the risk of acquiring the securities
at prevailing market prices in order to satisfy its customers obligations.
TradeStation Securities controls this risk by monitoring the market value of
securities pledged on a daily basis and by requiring adjustments of collateral
levels in the event of excess market exposure. In addition, TradeStation
Securities establishes credit limits for such activities and monitors
compliance on a daily basis. Concentrations of Credit Risk TradeStation Securities is engaged in various trading and brokerage
activities with counterparties, primarily broker-dealers, banks, and other
financial institutions. In the event counterparties do not fulfill their
obligations, TradeStation Securities may be exposed to risk. The risk of
default depends on the creditworthiness of the counterparty or issuer of the
instrument. It is TradeStation Securities policy to review, as necessary, the
credit standing of each counterparty. (15) COMMITMENTS AND CONTINGENCIES Restricted Cash As of December 31, 2003, the Company has $2.7 million of restricted cash
which is broken down as follows: (i) $2.2 million of cash supporting a ten-year
lease agreement; and (ii) $532,000 of cash reserved for the benefit of certain
customers. Insurance Claim In June 2001, the Company made a claim of $2.7 million with its insurance
carrier relating to a trading error made with respect to a clients account.
In December 2001, the insurance company denied this claim and, accordingly, the
receivable recorded in the consolidated balance sheet was fully reserved as of
December 31, 2001. On July 25, 2002, the Company entered into an agreement to
settle this claim for $1.25 million, payment of which was received in August
2002. Operating Leases The Company has a ten-year lease (with two 5-year renewal options) that
commenced in the summer of 2002 for an approximately 70,000 square foot
corporate headquarters in Plantation, Florida. In addition to this lease, the
Company has six non-cancelable operating leases for facilities (including 3
data centers) with expirations ranging from April 2004 through July 2007. In
addition to the leases for facilities, the Company leases certain office
equipment and furniture. Future minimum lease payments as of December 31, 2003
under all operating leases are as follows: F-26




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##### Table of Contents



Gross
    
    Sublease
    
    NetPayments
    
    Rentals
    
    Payments2004
    
    $
    2,825,051
    
    
    $
    (208,334
    )
    
    $
    2,616,7172005
    
    
    2,451,805
    
    
    
    (257,293
    )
    
    
    2,194,5122006
    
    
    2,348,900
    
    
    
    (264,689
    )
    
    
    2,084,2112007
    
    
    1,998,020
    
    
    
    (45,163
    )
    
    
    1,952,8572008
    
    
    1,887,553
    
    
    
    
    
    
    
    1,887,553Thereafter
    
    
    7,236,415
    
    
    
    
    
    
    
    7,236,415$
    18,747,744
    
    
    $
    (775,479
    )
    
    $
    17,972,265
 Total rent expense for 2003, 2002 and 2001 was approximately $3.1 million,
$3.6 million and $4.5 million, respectively. In addition, beginning in 2001,
with adjustments continuing through 2003, the Company recorded charges for
future rental payments related to facilities, net of subleases, which the
Company no longer occupies. Purchase Obligations As of December 31, 2003, the Company had various purchase obligations
through June 2007, related to back office systems and telecommunications
services totaling approximately $2.6 million. Data Services Provider Agreement The Company has an agreement with its data services provider that may
require the payment of a termination fee of $600,000 if terminated under
certain circumstances prior to December 31, 2004. No minimum obligation exists
under the agreement. Telerate Royalty Agreement The Company was party to a Software License, Maintenance and Development
Agreement (the Agreement) with Telerate, Inc., a subsidiary of Bridge
Information Systems, Inc. (Telerate). Under the Agreement, the Company
modified one of its software products to create a Telerate version and granted
Telerate a license to promote, market, sublicense and distribute the Telerate
version for six years. The minimum royalty requirement under the terms of this
Agreement for 2001 was $8.0 million. However in February 2001, Telerate and
its parent company filed a Chapter 11 reorganization proceeding under the
federal bankruptcy code. In October 2001, the assets of Telerate were sold to
MoneyLine Network, Inc. Effective October 17, 2001, the Company entered into a
new royalty agreement with MoneyLine that expired December 31, 2002, under
which the guaranteed royalty minimums for the 2001 fourth quarter were $230,000
per month (as compared to the $666,667 per month minimum payments under the
Telerate agreement that was rejected in the bankruptcy). Accordingly, only
$6.7 million in royalties were recorded in 2001 (however, see Litigation and
Claimsbelow). Of this amount, approximately $714,000 was considered part of
the pre-petition estate in Telerates Chapter 11 bankruptcy, and was not paid
as a result of the rejection of the Agreement in those bankruptcy proceedings.
A $714,000 provision for bad debts was recognized in the first quarter of 2001.
There were no guaranteed royalty minimums in 2002 or 2003. F-27




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##### Table of Contents



Litigation and Claims On September 5, 2003, Datamize, Inc., a Wyoming corporation, filed an
Original Complaint for Patent Infringement against nine defendants, including
TradeStation Securities, all of whom offer online securities trading services.
The other defendants are Fidelity Brokerage Services, Scottrade, Interactive
Brokers Group, Instinet, Charles Schwab, CyberTrader, E*Trade Securities and
Terra Nova Trading. The complaint was filed in the United States District
Court, Eastern District of Texas. The complaint alleges that the online
trading platforms and services the defendants offer to their customers
infringes United States Patent No. 6,460,040 issued to Datamize on October 1,
2002. The lawsuit seeks injunctive relief, actual damages and attorneys fees.
The Company believes Datamizes claim is baseless and intends to defend itself
vigorously. Three lawsuits have been filed by former principal owners of
onlinetradinginc.com corp. (the predecessor of TradeStation Securities) against
the Company, certain of its directors and executive officers and certain family
partnerships owned by two of the executive officers. On July 25, 2003,
Benedict S. Gambino, from whom the Company, as of October 18, 2002, purchased
2,417,000 shares of its common stock in a private transaction, filed a lawsuit
against the Company and three of its executive officers, William R. Cruz, Ralph
L. Cruz and Marc J. Stone, in the Circuit Court of Broward County, State of
Florida. This lawsuits allegations include violation of the Florida
Securities and Investor Protection Act, common law fraud, negligent
misrepresentation, breach of fiduciary duty and breach of contract. On August
18, 2003, Andrew A. Allen Family Limited Partnership (owned and controlled by
Andrew A. Allen), from whom the Company, as of November 26, 2002, purchased
1,000,000 shares of its common stock in a private transaction, filed a lawsuit
against the same defendants in the same court. This lawsuits allegations
include violation of the Florida Securities and Investor Protection Act, common
law fraud, breach of fiduciary duty, negligent misrepresentation and fraudulent
inducement. On August 28, 2003, Farshid Tafazzoli and E. Steven zum Tobel
filed a lawsuit against the Company, the Cruzes, family partnerships owned and
controlled by the Cruzes, Mr. Stone, Charles Wright and David Fleischman in the
Circuit Court of Miami-Dade County, State of Florida. Mr. Tafazzolis claims
relate to his family partnerships sale, as of May 1, 2002, of 3,000,000 shares
of Company common stock to family partnerships owned by William and Ralph Cruz,
and Mr. zum Tobels claims relate to his family partnerships sale, as of May
3, 2002, of 133,942 shares of Company common stock to Charles Wright. This
lawsuits allegations include violation of the Florida Securities and Investor
Protection Act, common law fraud and breach of fiduciary duty. Each of the
three lawsuits seeks rescission of the share purchases and/or compensatory
damages, plus interest, costs and attorneys fees. The Company believes all of
the allegations are baseless, intends to defend itself and the other named
parties vigorously in court, and expects to prevail in each of the lawsuits. On February 11, 2003, the plan administrator appointed under the
reorganization plan in the Chapter 11 bankruptcy of Bridge Information Systems,
Inc. and its affiliates filed an adversary complaint against TradeStation
Technologies and the Company in the United States Bankruptcy Court for the
Eastern District of Missouri demanding that the Company and TradeStation
Technologies return payments made to TradeStation Technologies by a Bridge
subsidiary in December 2000 and January 2001 totaling approximately $1.0
million, claiming such payments were preferential transfers under the federal
bankruptcy code as a result of being made to TradeStation Technologies during
the ninety-day period immediately preceding the Chapter 11 bankruptcy filing.
The Company believes this claim to be without merit on various grounds and
intends to vigorously defend this claim. F-28




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##### Table of Contents



In October 2002, the Company received information about alleged fraudulent
conduct by an executive of an unrelated company in no way affiliated with
TradeStation Securities (the Referral Company) that referred individual
accounts to TradeStation Securities. The executive of the Referral Company was
authorized to trade on behalf of such individuals (the Referred Account
Holders) and allegedly issued fraudulent account statements to them. The
Referred Account Holders incurred several million dollars of trading losses, in
the aggregate, during the time the executive of the Referral Company traded on
their behalves. On February 2, 2003, the Referral Company communicated to
TradeStation Securities in writing that it believes TradeStation Securities
shares responsibility for some or all of the alleged losses incurred by the
Referred Account Holders and/or the Referral Company and wishes to make an
amicable settlement. The Referral Company further stated that if an amicable
settlement is not reached it intends to initiate legal action of some kind
against TradeStation Securities in the United States. The Company believes the
Referral Companys claims are without merit and, to date, no legal action has
been commenced against the Company by any of the Referred Account Holders or
the Referral Company. TradeStation Securities is also engaged in routine litigation or other
dispute resolution proceedings, such as arbitration, incidental to, and part of
the ordinary course of, its business (claims in pending arbitrations seek, in
the aggregate, between nine and ten million dollars in damages, plus, in
certain cases, punitive or treble damages). While no assurances can be given, the Company does not believe that the
ultimate outcome of any of the above legal matters or claims will result in a
material adverse effect on its consolidated financial position, results of
operations or cash flows. The Company decided, as of June 1, 2002, to no longer carry errors or
omissions insurance that covers third-party claims made by brokerage clients or
software subscribers as a result of alleged human or system errors, failures,
acts or omissions. This decision was made based upon the Companys assessment
of the potential risks and benefits, including significant increases in premium
rates, deductibles and coinsurance amounts, reductions in available per
occurrence and aggregate coverage amounts, and the unavailability of policies
that sufficiently cover the types of risks that relate to the Companys
business. F-29




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##### Table of Contents



(16) SEGMENT AND RELATED INFORMATION For the three years ended December 31, 2003, TradeStation Group operated
in two principal business segments: (i) brokerage services and (ii) software
products and services. The Company evaluates the performance of its segments
based on revenue and operating income. The brokerage services segment
represents the operations of TradeStation Securities and the software products
and services segment represents the operations of TradeStation Technologies. As of or for the Years Ended December 31,2003
    
    2002

    
    2001Revenues:Brokerage services
    
    $
    51,077,565
    
    
    $
    38,493,673
    
    
    
    $
    18,601,627Software products and services
    
    
    23,314,133
    
    
    
    19,610,988
    
    
    
    
    22,385,516Eliminations
    
    
    (14,242,375
    )
    
    
    (9,713,550
    )
    
    
    
    $
    60,149,323
    
    
    $
    48,391,111
    
    
    
    $
    40,987,143Income (loss) from operations:Brokerage services
    
    $
    2,510,729
    
    
    $
    (26,014
    )
    
    
    $
    (703,128
    )Software products and services
    
    
    8,217,125
    
    
    
    1,366,707
    *
    
    
    
    (17,132,312
    ) *$
    10,727,854
    
    
    $
    1,340,693
    
    
    
    $
    (17,835,440
    )Identifiable assets:Brokerage services
    
    $
    19,551,368
    
    
    $
    14,585,643
    
    
    
    $
    20,144,278Software products and services
    
    
    18,449,184
    
    
    
    8,032,151
    
    
    
    
    6,676,725$
    38,000,552
    
    
    $
    22,617,794
    
    
    
    $
    26,821,003Depreciation and amortization:Brokerage services
    
    $
    640,086
    
    
    $
    423,383
    
    
    
    $
    815,356Software products and services
    
    
    1,616,164
    
    
    
    2,430,809
    
    
    
    
    6,957,579$
    2,256,250
    
    
    $
    2,854,192
    
    
    
    $
    7,772,935Capital expenditures:Brokerage services
    
    $
    272,916
    
    
    $
    188,877
    
    
    
    $
    17,952Software products and services
    
    
    1,061,774
    
    
    
    1,546,711
    
    
    
    
    527,836$
    1,334,690
    
    
    $
    1,735,588
    
    
    
    $
    545,788
  *
    
    Includes a $2.7 million provision for insurance claim in 2001 and a $1.25
million recovery of that insurance claim in 2002. F-30




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##### Table of Contents



(17) UNAUDITED QUARTERLY FINANCIAL INFORMATION The following tables summarize selected unaudited quarterly financial data
for the years ended December 31, 2003 and 2002. 2003First
    
    Second
    
    Third
    
    Fourth
    
    FullQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    YearRevenues
    
    $
    13,312,563
    
    
    $
    14,969,456
    
    
    $
    16,086,039
    
    
    $
    15,781,265
    
    
    $
    60,149,323Income from operations
    
    
    2,154,723
    
    
    
    2,171,050
    
    
    
    3,426,763
    
    
    
    2,975,318
    
    
    
    10,727,854Net income
    
    
    2,252,200
    
    
    
    2,855,816
    
    
    
    3,469,485
    
    
    
    3,046,738
    
    
    
    11,624,239Earnings per share:Basic
    
    
    0.06
    
    
    
    0.07
    
    
    
    0.08
    
    
    
    0.07
    
    
    
    0.29Diluted
    
    
    0.06
    
    
    
    0.07
    
    
    
    0.08
    
    
    
    0.07
    
    
    
    0.27Weighted average shares
outstanding:Basic
    
    
    39,593,389
    
    
    
    40,092,803
    
    
    
    40,863,350
    
    
    
    41,319,696
    
    
    
    40,467,309Diluted
    
    
    40,597,919
    
    
    
    43,588,162
    
    
    
    44,746,892
    
    
    
    44,627,860
    
    
    
    43,390,208
 2002First
    
    Second
    
    Third
    
    Fourth
    
    FullQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    YearRevenues
    
    $
    9,679,188
    
    
    $
    12,222,789
    
    
    $
    13,101,512
    
    
    $
    13,387,622
    
    
    $
    48,391,111(Loss) income from
operations
    
    
    (2,239,019
    )
    
    
    (19,477
    )
    
    
    1,739,230
    *
    
    
    1,859,959
    
    
    
    1,340,693Net (loss) income
    
    
    (2,251,802
    )
    
    
    341,278
    
    
    
    1,794,526
    *
    
    
    1,880,149
    
    
    
    1,764,151(Loss) earnings per share:Basic and diluted
    
    
    (0.05
    )
    
    
    0.01
    
    
    
    0.04
    
    
    
    0.05
    
    
    
    0.04Weighted average shares
outstanding:Basic
    
    
    44,547,816
    
    
    
    44,547,816
    
    
    
    43,698,342
    
    
    
    40,623,764
    
    
    
    43,328,103Diluted
    
    
    44,547,816
    
    
    
    44,600,584
    
    
    
    43,791,189
    
    
    
    40,710,736
    
    
    
    43,386,250
  *
    
    Includes a $1.25 million recovery of insurance claim. F-31




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##### Table of Contents



TRADESTATION GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL SCHEDULE Reports of Independent Certified Public Accountants on Schedule
    
    S-2Schedule II  Valuation and Qualifying Accounts for the
Years Ended December 31, 2003, 2002 and 2001
    
    S-4
 S-1




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##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE To TradeStation Group, Inc.: We have audited the consolidated financial statements of TradeStation
Group, Inc. and subsidiaries as of December 31, 2003 and 2002 and for the years
then ended and have issued our report thereon dated January 23, 2004 (included
elsewhere in this Form 10-K). Our audits also included the financial statement
schedule listed in Item 15(a) of this Form 10-K. This schedule is the
responsibility of the Companys management. Our responsibility is to express
an opinion based on our audits. In our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein. The consolidated financial statements of TradeStation Group, Inc. and
subsidiaries for the year ended December 31, 2001, were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those financial statements in their report dated February 8, 2002. /s/ Ernst & Young LLP Fort Lauderdale, Florida,
       January 23, 2004. S-2




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##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
SCHEDULE* To TradeStation Group, Inc.: We have audited in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements included in this
Form 10-K and have issued our report thereon dated February 8, 2002. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying Schedule II is the
responsibility of the Companys management and is presented for purposes of
complying with the Securities and Exchange Commissions rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole. ARTHUR ANDERSEN LLP Miami, Florida,
   February 8, 2002. * NOTE: Arthur Andersen LLP ceased operations in 2002. Its auditors report
has not been revised and the above is a copy of that report as issued. The
inclusion of this previously issued report is pursuant to the Temporary Final
Rule and Final Rule: Requirements for Arthur Andersen LLP auditing clients,
issued by the United States Securities and Exchange Commission in March 2002.
This audit report has not been reissued by Arthur Andersen LLP in connection
with this filing on Form 10-K. S-3




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##### Table of Contents



TRADESTATION GROUP INC. AND SUBSIDIARIES
SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS Charged toBalance at
    
    Costs and
    
    
    
    
    
    Additional
    
    Balance atBeginning of
    
    Expenses
    
    
    
    
    
    Paid-In
    
    End ofPeriod
    
    (Income)
    
    Deductions
    
    Capital
    
    PeriodYear ended December 31, 2003:Allowance for doubtful accounts
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Deferred tax valuation allowance
    
    
    10,752,214
    
    
    
    (873,949
    )
    
    
    (4,421,961
    )
    
    
    3,175,309
    (1)
    
    
    8,631,613$
    10,752,214
    
    
    $
    (873,949
    )
    
    $
    (4,421,961
    )
    
    $
    3,175,309
    
    
    $
    8,631,613Year ended December 31, 2002:Allowance for doubtful accounts
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Deferred tax valuation allowance
    
    
    12,577,873
    
    
    
    
    
    
    
    (1,825,659
    )
    
    
    
    
    
    
    10,752,214$
    12,577,873
    
    
    $
    
    
    
    $
    (1,825,659
    )
    
    $
    
    
    
    $
    10,752,214Year ended December 31, 2001:Allowance for doubtful accounts
    
    $
    
    
    
    $
    714,286
    
    
    $
    (714,286
    )
    
    $
    
    
    
    $
    Deferred tax valuation allowance
    
    
    5,248,500
    
    
    
    7,329,373
    
    
    
    
    
    
    
    
    
    
    
    12,577,873$
    5,248,500
    
    
    $
    8,043,659
    
    
    $
    (714,286
    )
    
    $
    
    
    
    $
    12,577,873
   (1)
    
    Within the Consolidated Statements of Shareholders Equity, as of
December 31, 2003, the entire tax benefit
relating to stock option exercises is offset by this $3,175,309
valuation allowance. S-4




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    Description3.1
    
    TradeStation Groups Articles of Incorporation, as amended **3.2
    
    TradeStation Groups Bylaws **4.1
    
    Form of Specimen Certificate for TradeStation Groups Common Stock
(incorporated by reference to Exhibit 4.1 to OnlineTrading.com Group,
Inc.s Amendment No. 3 to Registration Statement No. 333-34922 on Form
S-4 filed with the Commission on November 21, 2000)10.1
    
    onlinetradinginc.com corp. 1999 Stock Option Plan***#10.2
    
    Window On WallStreet Inc. 1997 Long Term Incentive Plan***#10.3
    
    TradeStation Group, Inc. Employee Stock Purchase Plan***#10.4
    
    TradeStation Group, Inc. Incentive Stock Plan***#10.5
    
    TradeStation Group, Inc. Amended and Restated Nonemployee Director
Stock Option Plan (incorporated by reference to Exhibit 10.5 to
TradeStation Groups Annual Report on Form 10-K for the fiscal year
ended December 31, 2001) #10.6
    
    Form of Indemnification Agreement +10.7
    
    Lease Agreement, dated November 13, 2001, between Crossroads Business
Park Associates LLP and TradeStation Group, Inc. (without exhibits and
schedules) (incorporated by reference to Exhibit 10.27 to TradeStation
Groups Annual Report on Form 10-K for the fiscal year ended December
31, 2001)10.8
    
    Office Lease dated August 13, 1998 between onlinetradinginc.com corp.
and Highwood/Florida Holdings, L.P. ++10.9
    
    Sublease Agreement, dated June 21, 2002, between TradeStation
Securities, Inc. and Steflind, Inc. (incorporated by reference to
Exhibit 10.21 to TradeStation Groups Annual Report on Form 10-K for the
fiscal year ended December 31, 2002)10.10
    
    Sublease Agreement, dated January 6, 2004, between TradeStation
Securities, Inc. and JVB Financial, Inc. (filed herewith)10.11
    
    Form of Non-Competition and Non-Disclosure Agreement*10.12
    
    Form of Non-Competition Agreement +
 i




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##### Table of Contents



ExhibitNumber
    
    Description10.13
    
    Office/Showroom/Warehouse Lease Agreement dated June 12, 1996 between
Springcreek Place Ltd. and Window On WallStreet Inc. (then named
MarketArts, Inc.), as amended by Addendum to Lease dated October 12,
1998, and as further amended by Addendum to Lease dated May 28, 1999
(incorporated by reference to Exhibit 10.13 to Omega Research, Inc.s
Annual Report on Form 10-K for the fiscal year ended December 31, 1999)10.14
    
    Modification and Ratification of Lease Agreement, dated July 25, 2002,
between Springcreek Place Ltd. and TradeStation Technologies, Inc.
(incorporated by reference to Exhibit 10.14 to TradeStation Groups
Annual Report on Form 10-K for the fiscal year ended December 31, 2002)10.15
    
    Lease Agreement, dated November 16, 1999, between Fairfax Boca 92,
L.P. and Omega Research, Inc. (incorporated by reference to Exhibit 10.14
to Omega Research, Inc.s Annual Report on Form 10-K for the fiscal year
ended December 31, 1999)10.16
    
    Lease Termination and Surrender Agreement, dated December 11, 2002,
between Fairfax Boca 92, L.P. and TradeStation Technologies, Inc.
(incorporated by reference to Exhibit 10.16 to TradeStation Groups
Annual Report on Form 10-K for the fiscal year ended December 31, 2002)10.17
    
    Remote Processing Agreement, dated June 10, 2003, with SunGard
Financial Systems, Inc. to provide the SunGard Phase3 System for the
processing, clearing and settlement of trades (pricing schedules omitted)
(incorporated by reference to Exhibit 10.1 to TradeStation Groups Report
on Form 10-Q for the quarter ended June 30, 2003)10.18
    
    Clearing Agreement with Bear, Stearns Securities Corp. ++10.19
    
    Stock Purchase Agreement, dated as of August 8, 2002, between Benedict
Gambino and TradeStation Group, Inc. (incorporated by reference to
Exhibit 10.23 to TradeStation Groups Annual Report on Form 10-K for the
fiscal year ended December 31, 2002)10.20
    
    Stock Purchase Agreement, dated as of October 18, 2002, between
Benedict S. Gambino and TradeStation Group, Inc. (incorporated by
reference to Exhibit 10.24 to TradeStation Groups Annual Report on Form
10-K for the fiscal year ended December 31, 2002)10.21
    
    Stock Purchase Agreement, dated as of November 26, 2002, between
Andrew A. Allen Family Limited Partnership and TradeStation Group, Inc.
(incorporated by reference to Exhibit 10.25 to TradeStation Groups
Annual Report on Form 10-K for the fiscal year ended December 31, 2002)21.1
    
    List of Subsidiaries (filed herewith)
 ii




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##### Table of Contents



ExhibitNumber
    
    Description23.1
    
    Consent of Ernst & Young LLP, Independent Certified Public
Accountants, with respect to TradeStation Group, Inc.s consolidated
financial statements (filed herewith)31.1
    
    Certifications of Co-Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (filed herewith)31.2
    
    Certifications of Co-Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (filed herewith)31.3
    
    Certifications of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith)32.1
    
    Certification of Co-Chief Executive Officers under 18 U.S.C. §1350
(filed herewith)32.2
    
    Certification of Chief Financial Officer under 18 U.S.C. §1350 (filed
herewith)
 *
    
    Previously filed as part of the Rule 424(b)(1) Proxy
Statement/Prospectus of TradeStation Group filed with the Securities and
Exchange Commission (the Commission) on December 12, 2000.**
    
    Previously filed as part of Registration Statement No. 333-34922 on
Form S-4 of OnlineTrading.com Group, Inc. filed with the Commission on
April 17, 2000.***
    
    Previously filed as part of Registration Statement No. 333-53222 on
Form S-8 of TradeStation Group, Inc. filed with the Commission on January
5, 2001.+
    
    Previously filed as part of Registration Statement No. 333-32077 on
Form S-1 of Omega Research, Inc. filed with the Commission on July 25,
1997.++
    
    Previously filed as part of Registration Statement No. 333-75119 of
Form SB-2 of onlinetradinginc.com corp. filed with the Commission on
March 26, 1999.#
    
    Indicates a management contract or compensatory plan or arrangement.
 iii