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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number: 0-31049



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TradeStation Group, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Florida                                                        |  | 65-0977576                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|8050 S.W. 10thStreet, Suite 4000, Plantation, Florida          |  | 33324                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

954-652-7000

(Registrants telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)



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

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.    Large accelerated filer ̈Accelerated filer  x    Non-accelerated
filer ̈

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

The registrant had 44,695,155 shares of common stock,
$.01 par value, outstanding as of August 1, 2006.



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TRADESTATION GROUP, INC. AND SUBSIDIARIES

INDEX



|          |  |                                                                                                |  |     
|--------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|          |  |                                                                                                |  | Page
|PART I.   |  | FINANCIAL INFORMATION                                                                          |  |     
|          |  |                                                                                               
|Item 1.   |  | Financial Statements:                                                                          |  |     
|          |  |                                                                                               
|          |  | Consolidated Balance SheetsJune 30, 2006 (unaudited) and December 31, 2005                     |  | 3   
|          |  |                                                                                               
|          |  | Consolidated Statements of IncomeThree and Six Months Ended June 30, 2006 and 2005 (unaudited) |  | 4   
|          |  |                                                                                               
|          |  | Consolidated Statements of Cash FlowsSix Months Ended June 30, 2006 and 2005 (unaudited)       |  | 5   
|          |  |                                                                                               
|          |  | Notes to Consolidated Financial Statements                                                     |  | 7   
|          |  |                                                                                               
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 19  
|          |  |                                                                                               
|Item 3.   |  | Quantitative and Qualitative Disclosures about Market Risk                                     |  | 33  
|          |  |                                                                                               
|Item 4.   |  | Controls and Procedures                                                                        |  | 34  
|          |  |                                                                                               
|PART II.  |  | OTHER INFORMATION                                                                              |  |     
|          |  |                                                                                               
|Item 1A.  |  | Risk Factors                                                                                   |  | 35  
|          |  |                                                                                               
|Item 2.   |  | Unregistered Sales of Equity Securities and Use of Proceeds                                    |  | 35  
|          |  |                                                                                               
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                            |  | 35  
|          |  |                                                                                               
|Item 6.   |  | Exhibits                                                                                       |  | 36  
|          | 
|Signature |  | 37                                                                                            



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PART I  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TRADESTATION GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                          |  |               |             |                  |   |            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | ---------------- | - | -----------
|                                                                                                                                                                          |  | June 30, 2006 |             | December 31,2005
|                                                                                                                                                                          |  | (Unaudited)   |             |                 
|ASSETS:                                                                                                                                                                   |  |               |             |                  |   |            
|                                                                                                                                                                          |  |              
|Cash and cash equivalents, including restricted cash of $1,672,497 at June 30, 2006 and December 31, 2005                                                                 |  | $             | 81,236,499  |                  | $ | 75,101,842 
|Cash segregated in compliance with federal regulations                                                                                                                    |  |               | 410,085,036 |                  |   | 426,061,999
|Receivables from brokers, dealers, clearing organizations and clearing agents                                                                                             |  |               | 22,316,138  |                  |   | 36,033,229 
|Receivables from brokerage customers, net                                                                                                                                 |  |               | 78,889,844  |                  |   | 58,132,743 
|Property and equipment, net                                                                                                                                               |  |               | 8,315,944   |                  |   | 3,212,019  
|Deferred income taxes                                                                                                                                                     |  |               | 1,944,384   |                  |   | 2,150,218  
|Deposits with clearing organizations and clearing agents                                                                                                                  |  |               | 13,207,854  |                  |   | 11,243,184 
|Other assets                                                                                                                                                              |  |               | 5,228,494   |                  |   | 3,198,711  
|                                                                                                                                                                          |  |               |             |                  |   |            
|Total assets                                                                                                                                                              |  | $             | 621,224,193 |                  | $ | 615,133,945
|                                                                                                                                                                          |  |               |             |                  |   |            
|LIABILITIES AND SHAREHOLDERS EQUITY:                                                                                                                                     |  |               |             |                  |   |            
|                                                                                                                                                                          |  |              
|LIABILITIES:                                                                                                                                                              |  |               |             |                  |   |            
|Payables to brokers, dealers and clearing organizations                                                                                                                   |  | $             | 245,953     |                  | $ | 789,824    
|Payables to brokerage customers                                                                                                                                           |  |               | 507,829,423 |                  |   | 523,895,972
|Accounts payable                                                                                                                                                          |  |               | 4,483,699   |                  |   | 2,416,272  
|Accrued expenses                                                                                                                                                          |  |               | 6,957,778   |                  |   | 5,511,153  
|                                                                                                                                                                          |  |               |             |                  |   |            
|Total liabilities                                                                                                                                                         |  |               | 519,516,853 |                  |   | 532,613,221
|                                                                                                                                                                          |  |               |             |                  |   |            
|COMMITMENTS AND CONTINGENCIES                                                                                                                                             |  |               |             |                  |   |            
|                                                                                                                                                                          |  |              
|SHAREHOLDERS 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, 44,658,906 and 44,179,936 shares issued and outstanding at June 30, 2006 and
December 31, 2005, respectively |  |               | 446,589     |                  |   | 441,799    
|Additional paid-in capital                                                                                                                                                |  |               | 72,060,419  |                  |   | 67,524,908 
|Retained earnings                                                                                                                                                         |  |               | 29,146,397  |                  |   | 14,550,950 
|Accumulated other comprehensive income                                                                                                                                    |  |               | 53,935      |                  |   | 3,067      
|                                                                                                                                                                          |  |               |             |                  |   |            
|Total shareholders equity                                                                                                                                                |  |               | 101,707,340 |                  |   | 82,520,724 
|                                                                                                                                                                          |  |               |             |                  |   |            
|Total liabilities and shareholders equity                                                                                                                                |  | $             | 621,224,193 |                  | $ | 615,133,945
|                                                                                                                                                                          |  |               |             |                  |   |            

See accompanying notes.



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TRADESTATION GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



|                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|------------------------------------ |  | --------------------------- | ---------- | ------------------------- | - | ---------- |  | ---- | ---------- |  | - | ----------
|                                     |  | Three Months Ended June 30, |            | Six Months Ended June 30,
|                                     |  | 2006                        |            | 2005                      |   | 2006       |  | 2005
|REVENUES:                            |  |                             |            |                           |   |            |  |      |            |  |   |           
|Brokerage commissions and fees       |  | $                           | 20,007,857 |                           | $ | 16,502,478 |  | $    | 38,640,290 |  | $ | 32,341,397
|                                     |  |                             |            |                          
|Interest income                      |  |                             | 11,162,025 |                           |   | 5,230,337  |  |      | 20,665,866 |  |   | 9,384,147 
|Brokerage interest expense           |  |                             | 1,119,148  |                           |   | 833,799    |  |      | 2,217,958  |  |   | 1,447,490 
|                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|Net interest income                  |  |                             | 10,042,877 |                           |   | 4,396,538  |  |      | 18,447,908 |  |   | 7,936,657 
|                                     |  |                             |            |                          
|Subscription fees and other          |  |                             | 2,400,085  |                           |   | 2,446,318  |  |      | 4,747,300  |  |   | 4,908,274 
|                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|Net revenues                         |  |                             | 32,450,819 |                           |   | 23,345,334 |  |      | 61,835,498 |  |   | 45,186,328
|                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|EXPENSES:                            |  |                             |            |                           |   |            |  |      |            |  |   |           
|Employee compensation and benefits   |  |                             | 7,230,492  |                           |   | 5,682,421  |  |      | 14,197,263 |  |   | 11,272,439
|Clearing and execution               |  |                             | 6,856,437  |                           |   | 5,054,788  |  |      | 12,684,120 |  |   | 9,885,212 
|Data centers and communications      |  |                             | 1,618,377  |                           |   | 1,474,693  |  |      | 3,149,180  |  |   | 3,049,015 
|Advertising                          |  |                             | 1,101,775  |                           |   | 1,007,692  |  |      | 2,058,392  |  |   | 1,969,626 
|Professional services                |  |                             | 678,148    |                           |   | 655,442    |  |      | 1,436,708  |  |   | 1,707,576 
|Occupancy and equipment              |  |                             | 633,532    |                           |   | 603,159    |  |      | 1,255,694  |  |   | 1,204,527 
|Depreciation and amortization        |  |                             | 564,982    |                           |   | 460,435    |  |      | 1,047,593  |  |   | 894,638   
|Other                                |  |                             | 1,165,620  |                           |   | 907,571    |  |      | 1,945,990  |  |   | 1,818,583 
|                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|Total expenses                       |  |                             | 19,849,363 |                           |   | 15,846,201 |  |      | 37,774,940 |  |   | 31,801,616
|                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|Income before income taxes           |  |                             | 12,601,456 |                           |   | 7,499,133  |  |      | 24,060,558 |  |   | 13,384,712
|                                     |  |                             |            |                          
|INCOME TAX PROVISION                 |  |                             | 4,957,880  |                           |   | 2,822,008  |  |      | 9,465,111  |  |   | 4,929,008 
|                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|Net income                           |  | $                           | 7,643,576  |                           | $ | 4,677,125  |  | $    | 14,595,447 |  | $ | 8,455,704 
|                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|EARNINGS PER SHARE:                  |  |                             |            |                           |   |            |  |      |            |  |   |           
|Basic                                |  | $                           | 0.17       |                           | $ | 0.11       |  | $    | 0.33       |  | $ | 0.20      
|                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|Diluted                              |  | $                           | 0.17       |                           | $ | 0.11       |  | $    | 0.32       |  | $ | 0.19      
|                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|WEIGHTED AVERAGE SHARES OUTSTANDING: |  |                             |            |                           |   |            |  |      |            |  |   |           
|Basic                                |  |                             | 44,570,353 |                           |   | 42,173,423 |  |      | 44,444,782 |  |   | 42,020,721
|                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|Diluted                              |  |                             | 45,916,057 |                           |   | 43,789,156 |  |      | 45,919,485 |  |   | 43,565,197
|                                     |  |                             |            |                           |   |            |  |      |            |  |   |           

See accompanying notes.



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TRADESTATION GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                  |  |                           |             |   |      |   |             |  
|--------------------------------------------------------------------------------- |  | ------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                  |  | Six Months Ended June 30, |            
|                                                                                  |  | 2006                      |             |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                           |             |   |      |   |             |  
|Net income                                                                        |  | $                         | 14,595,447  |   |      | $ | 8,455,704   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |             |   |      |   |             |  
|Depreciation and amortization                                                     |  |                           | 1,047,593   |   |      |   | 894,638     |  
|Stock-based compensation                                                          |  |                           | 765,384     |   |      |   |            |  
|Tax benefit on exercise of stock options                                          |  |                           |            |   |      |   | 1,923,587   |  
|Deferred income tax provision                                                     |  |                           | 205,834     |   |      |   | 4,283,660   |  
|Loss from disposal of fixed assets                                                |  |                           | 64,456      |   |      |   |            |  
|Recovery of credit losses                                                         |  |                           | (225,588    | ) |      |   |            |  
|(Increase) decrease in:                                                           |  |                           |             |   |      |   |             |  
|Cash segregated in compliance with federal regulations                            |  |                           | 15,976,963  |   |      |   | (43,564,762 | )
|Receivables from brokers, dealers, clearing organizations and clearing agents     |  |                           | 13,717,091  |   |      |   | (6,303,311  | )
|Receivables from brokerage customers                                              |  |                           | (20,531,513 | ) |      |   | (1,613,847  | )
|Prepaid income taxes                                                              |  |                           | (584,287    | ) |      |   | (3,057,755  | )
|Deposits with clearing organizations and clearing agents                          |  |                           | (1,964,670  | ) |      |   | 5,229,121   |  
|Other assets                                                                      |  |                           | (1,403,999  | ) |      |   | (310,514    | )
|Increase (decrease) in:                                                           |  |                           |             |   |      |   |             |  
|Payables to brokers, dealers and clearing organizations                           |  |                           | (543,871    | ) |      |   | (2,657,665  | )
|Payables to brokerage customers                                                   |  |                           | (16,066,549 | ) |      |   | 42,767,010  |  
|Accounts payable                                                                  |  |                           | (466,660    | ) |      |   | (203,968    | )
|Accrued expenses                                                                  |  |                           | 535,920     |   |      |   | (1,654,594  | )
|                                                                                  |  |                           |             |   |      |   |             |  
|Net cash provided by operating activities                                         |  |                           | 5,121,551   |   |      |   | 4,187,304   |  
|                                                                                  |  |                           |             |   |      |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                           |             |   |      |   |             |  
|Capital expenditures                                                              |  |                           | (2,771,182  | ) |      |   | (1,321,753  | )
|Investment in clearing organizations and exchanges                                |  |                           | (41,497     | ) |      |   |            |  
|                                                                                  |  |                           |             |   |      |   |             |  
|Net cash used in investing activities                                             |  |                           | (2,812,679  | ) |      |   | (1,321,753  | )
|                                                                                  |  |                           |             |   |      |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                           |             |   |      |   |             |  
|Proceeds from issuance of common stock                                            |  |                           | 1,853,074   |   |      |   | 2,199,444   |  
|Excess tax benefits from exercise of stock options                                |  |                           | 1,921,843   |   |      |   |            |  
|Repayment of capital lease obligations                                            |  |                           |            |   |      |   | (3,053      | )
|                                                                                  |  |                           |             |   |      |   |             |  
|Net cash provided by financing activities                                         |  |                           | 3,774,917   |   |      |   | 2,196,391   |  
|                                                                                  |  |                           |             |   |      |   |             |  
|EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS                             |  |                           | 50,868      |   |      |   |            |  
|                                                                                  |  |                           |             |   |      |   |             |  
|NET INCREASE IN UNRESTRICTED CASH AND CASH EQUIVALENTS                            |  |                           | 6,134,657   |   |      |   | 5,061,942   |  
|                                                                                  |  |                          
|UNRESTRICTED CASH AND CASH EQUIVALENTS, beginning of period                       |  |                           | 73,429,345  |   |      |   | 30,199,809  |  
|                                                                                  |  |                           |             |   |      |   |             |  
|UNRESTRICTED CASH AND CASH EQUIVALENTS, end of period                             |  | $                         | 79,564,002  |   |      | $ | 35,261,751  |  
|                                                                                  |  |                           |             |   |      |   |             |  

(continued)



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TRADESTATION GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(continued)



|                                                          |  |                           |           |      |   |          
|--------------------------------------------------------- |  | ------------------------- | --------- | ---- | - | ---------
|                                                          |  | Six Months Ended June 30,
|                                                          |  | 2006                      |           | 2005
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:         |  |                           |           |      |   |          
|Cash paid for interest                                    |  | $                         | 2,217,958 |      | $ | 1,447,490
|                                                          |  |                           |           |      |   |          
|Cash paid for income taxes                                |  | $                         | 8,502,753 |      | $ | 3,739,100
|                                                          |  |                           |           |      |   |          
|SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: |  |                           |           |      |   |          
|Equipment acquired, but not yet paid for                  |  | $                         | 3,444,792 |      | $ |         
|                                                          |  |                           |           |      |   |          

See accompanying notes.



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TRADESTATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All notes and related disclosures applicable to the three

and six months ended June 30, 2006 and 2005 are unaudited)

(1) NATURE OF OPERATIONS AND BASIS OF
PRESENTATION

TradeStation Group, Inc. (the Company) is listed on The NASDAQ Global Select Market under the symbol
TRAD. TradeStation Securities, Inc. and TradeStation Technologies, Inc. are TradeStation Groups two operating subsidiaries. TradeStation Securities is a securities broker-dealer and futures commission merchant. TradeStation
Technologies develops and offers strategy trading software tools and subscription services. The Company also has a United Kingdom subsidiary, TradeStation Europe Limited, which is currently in its start-up phase.

The accompanying consolidated financial statements include the results of the Company and its subsidiaries, all of which are wholly owned. All
intercompany accounts and transactions have been eliminated.

The accompanying consolidated financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K of TradeStation Group for the year ended December 31, 2005. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Companys consolidated financial position as of June 30, 2006 and the consolidated results of operations and cash flows for each of the periods
presented have been recorded. The results of operations and cash flows for an interim period are not necessarily indicative of the results of operations or cash flows that may be reported for the year or for any subsequent period.

Recently Issued Accounting Standards

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also prescribes guidance on
derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently in the process of
determining the impact, if any, that the adoption of FIN 48 will have on its financial position and results of operations.

The Company
adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment(SFAS 123R), effective January 1, 2006. SFAS 123R, which is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the statement of income based on their fair values. Pro forma disclosure is no longer an alternative. The Company has adopted the fair value provisions of SFAS 123R using the
modified-prospective-transition method. Under the modified-prospective-transition method of adoption, compensation cost is recognized for all stock-based awards issued after the effective date, and for the portion of outstanding awards for which the
requisite service has not yet been rendered (i.e., stock-based awards granted prior to the effective date, but not yet vested as of the effective date). Under this method of transition, results for prior periods are not restated. As a result of
adopting SFAS 123R on January 1, 2006, the charge to income before income taxes for the three and six months ended June 30, 2006 was $365,000 and $765,000, respectively, of stock-based compensation included in employee compensation and
benefits in the Companys consolidated statement of income. The impact of adopting SFAS 123R is a reduction to net income for the three and six months ended June 30, 2006 of $307,000 and $686,000,



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respectively. The impact of adopting SFAS 123R on basic and diluted earnings per share for the three months ended
June 30, 2006 is $0.01 per share and $0.00 per share lower, respectively. The impact of adopting SFAS 123R on both basic and diluted earnings per share for the six months ended June 30, 2006 is $0.01 per share lower.

SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash flow, rather than as
an operating cash flow as required under the previous literature. This requirement reduced net operating cash flows and increased net financing cash flows by approximately $1.9 million during the six months ended June 30, 2006. See Note 2
 STOCK-BASED COMPENSATION for further information regarding the Companys stock-based compensation assumptions and expenses, including pro forma disclosures for prior periods as if we had recorded stock-based compensation expenses.

The Company adopted SFAS No. 154, Accounting Changes and Error Corrections, effective January 1, 2006. SFAS No. 154,
which is a replacement of APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, provides guidance on accounting for and reporting of accounting changes and error
corrections. It requires a voluntary change in accounting principle to be applied retrospectively to all prior periods financial statements as if the principle had always been applied. Previously, voluntary changes in accounting
principles were required to be recognized by including the cumulative effect of changing to the new accounting principle in net income during the period of change. The adoption of SFAS No. 154 did not have any impact on the Companys
consolidated financial position, results of operations or cash flows.

(2) STOCK-BASED COMPENSATION

The Company believes that stock-based compensation is an integral way to provide incentives which will attract and retain highly-competent persons at all
levels of the Company, as independent directors, and as independent contractors providing consulting or advisory services to the Company, by providing them opportunities to acquire the Companys common stock or to receive monetary payments
based on the value of such shares.

Stock Plans

The Company has reserved 12 million shares of its common stock for issuance under the TradeStation Group Incentive Stock Plan, as amended and restated (the Incentive Stock Plan). The Companys
Board of Directors recently authorized, and the Companys shareholders recently approved, an increase in the number of shares to that 12 million number, as well as an extension of the expiration date of the Incentive Stock Plan to
June 5, 2016. 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. Options are generally granted by the Company at an exercise price equal to the fair value (as defined in the Incentive
Stock Plan) at the date of grant, vest over a period of 5 years, and expire 10 years after the grant date. At June 30, 2006, there were 4,746,304 shares available for future grants under the Incentive Stock Plan.

On October 25, 2005, the Company (i) globally amended the terms of all outstanding stock option agreements pursuant to the Incentive Stock Plan
for non-executive employees, and (ii) adopted a new form of stock option agreement for future grants to non-executive employees, in each case, to provide for the accelerated vesting of all unvested options in the event the Company undergoes a
change in control and the optionees employment is terminated by the Company (or its successor) without cause within one year following the change in control. This change did not result in any additional compensation expense during 2005, as the
employees did not receive any additional benefits as a result of the change and the unvested options continued to vest as employees continued to provide services to the Company.

In connection with the 2000 merger of TradeStation Technologies (formerly known as Omega Research, Inc.) and TradeStation Securities (formerly known as
onlinetradinginc.com corp.), the



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Company assumed the outstanding options under TradeStation Securities 1999 Stock Option Plan. Those options
generally vested ratably over a five-year period and their terms are ten years. As part of the 1999 acquisition of Window on WallStreet, the Company assumed all outstanding stock options to purchase Window On WallStreet common stock. Those 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 7,000 non-qualified stock options. The terms of each option grant are determined by the Board of Directors. Options under this plan are generally granted by the Company at an exercise price equal to the fair value
(as defined in the Director Plan) at the date of grant, vest over a period of three years, and expire five years after the grant date. At June 30, 2006, there were 88,000 shares available for future grants under the Director Plan.

See General Stock Option Information below for additional information about options outstanding as of June 30, 2006.

Employee Stock Purchase Plan

The
Company has reserved 500,000 shares of common stock for issuance under the TradeStation Group Employee Stock Purchase Plan, as amended (the Purchase Plan). Under the Purchase Plan, participating employees may purchase common stock
through accumulated payroll deductions. Effective with the offering period beginning January 3, 2006, the Purchase Plan was amended so that the exercise price for the options for each six-month Purchase Plan period is equal to 85% of the fair
market value of the Companys common stock on the exercise date (i.e., the end of the six-month period). During the three and six-month periods ended June 30, 2006 and 2005, 8,874 and 13,474 shares of common stock were issued under the
plan at a price of $10.77 and $5.86, respectively. At June 30, 2006, there were 244,971 shares available for future grants under the Purchase Plan.

Stock 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 statement of income when such equity instruments are issued. There were no stock-based transactions with non-employees
during the three or six months ended June 30, 2006 or 2005; therefore, no such compensation expense was recorded.

As permitted by
SFAS No. 123, prior to January 1, 2006, the Company accounted for its stock-based payments to employees using the intrinsic value method in accordance with the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and recognized no compensation cost for employee stock options because options granted under the Companys plans have had an exercise price equal to the fair value of the underlying common stock
on the date of grant. Effective January 1, 2006, the company adopted the fair value recognition provisions of SFAS 123R using the modified-prospective-transition method. Under the modified-prospective-transition method of adoption, compensation
cost is recognized for all stock-based awards issued after the effective date of adoption, and for the portion of outstanding awards for which the requisite service has not yet been rendered (i.e., the portion of stock-based awards granted prior to
the effective date of adoption that were not vested as of the effective date). Under this method of transition, results for prior periods are not restated.

The Company currently uses the Black-Scholes option pricing model to determine the fair value of stock option awards. The determination of the fair value of stock option awards on the date of grant using an
option-pricing model is affected by the market price of our stock, exercise price of an award, expected term of award, volatility of our stock over the term of the award, risk-free interest rate and expected dividend yield. Separate assumptions are
used for employee options (which vest over a five-year period) and non-employee director options (which vest over a three-year period).



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For both employee and non-employee director stock option awards, the expected term of all options granted
is estimated by taking a weighted average of the following factors: (i) historical holding term from grant date to exercise date; (ii) the historical holding term from grant date to post-vest cancellation date; and (iii) the projected
term for the outstanding options based on a midpoint scenario whereby all vested options would be exercised midway between the valuation date and the contractual term. The expected volatility assumptions are based upon a cumulative look-back of
historical volatility calculated on a daily basis over the expected term of an award. The risk-free interest rate that is used in the option valuation model is based upon the U.S. Treasury note yields with a remaining term similar to the expected
term of the particular options awarded. The Company does not anticipate paying any cash dividends in the foreseeable future and, therefore, an expected dividend yield of zero is used in the valuation model.

In accordance with SFAS 123R, the Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if
actual forfeitures differ from those estimates. Historical data to estimate pre-vesting option forfeitures are used, and stock-based compensation expense is recorded only for those awards that are expected to vest. Estimated forfeitures were not
used in our expense calculation for prior year pro forma footnote disclosures. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

The assumptions used to estimate the fair value of each option grant on the date of grant using the Black-Scholes model is as follows:



|                              |  |                                    |   |  |                                  |   |  |           |   |  |      |  
|----------------------------- |  | ---------------------------------- | - |  | -------------------------------- | - |  | --------- | - |  | ---- | -
|                              |  | For the Three MonthsEnded June 30, |   |  | For the Six MonthsEnded June 30, |  
|                              |  | 2006                               |   |  | 2005                             |   |  | 2006      |   |  | 2005 |  
|Risk free interest rate       |  | 4 - 5                              | % |  | 3                                | % |  | 4 - 5     | % |  | 3    | %
|Volatility factor             |  | 52 - 61                            | % |  | 63                               | % |  | 52 - 63   | % |  | 63   | %
|Weighted average life (years) |  | 3.8 - 5.8                          |   |  | 4.0                              |   |  | 3.8 - 5.8 |   |  | 4.0  |  

As a result of adopting SFAS 123R, the charge to income before income taxes for the three and six
months ended June 30, 2006, was $365,000 and $765,000, respectively, of stock-based compensation included in employee compensation and benefits in the Companys consolidated statement of income. The impact of adopting SFAS 123R is a
reduction to net income for the three and six months ended June 30, 2006 of $307,000 and $686,000, respectively. The impact of adopting SFAS 123R on basic and diluted earnings per share for the three months ended June 30, 2006 is $0.01 per
share and $0.00 per share lower, respectively. The impact of adopting SFAS 123R on both basic and diluted earnings per share for the six months ended June 30, 2006 is $0.01 per share lower.

Effective January 1, 2006, in accordance with SFAS No. 123R, the Company has recorded stock-based compensation related to the Purchase
Plan. The amount related to the Purchase Plan is included in the $365,000 and $765,000 amounts discussed earlier in this footnote. The amount of compensation expense for Purchase Plan transactions is the difference between the fair value of the
stock to be purchased and the purchase price of the stock (i.e., the expense recorded is equal to the 15% discount). The stock-based compensation related to the Purchase Plan is recognized ratably over the six-month purchase period and recognized,
along with any payroll withholdings, as a liability on the consolidated balance sheet.



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The following table illustrates the pro forma effect on net income and earnings per share for the three
and six months ended June 30, 2005, as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee transactions.



|                                                                                                                                       |  |                                          |           |   |                                        |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | --------- | - | -------------------------------------- | - | --------- | -
|                                                                                                                                       |  | For the Three Months Ended June 30,
2005 |           |   | For the Six Months Ended June 30,
2005 |  
|Net income, as reported                                                                                                                |  | $                                        | 4,677,125 |   |                                        | $ | 8,455,704 |  
|                                                                                                                                       |  |                                         
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax
impact |  |                                          | (399,863  | ) |                                        |   | (815,069  | )
|                                                                                                                                       |  |                                          |           |   |                                        |   |           |  
|Pro forma net income                                                                                                                   |  | $                                        | 4,277,262 |   |                                        | $ | 7,640,635 |  
|                                                                                                                                       |  |                                          |           |   |                                        |   |           |  
|Earnings per share:                                                                                                                    |  |                                          |           |   |                                        |   |           |  
|Basic, as reported                                                                                                                     |  | $                                        | 0.11      |   |                                        | $ | 0.20      |  
|                                                                                                                                       |  |                                          |           |   |                                        |   |           |  
|Diluted, as reported                                                                                                                   |  | $                                        | 0.11      |   |                                        | $ | 0.19      |  
|                                                                                                                                       |  |                                          |           |   |                                        |   |           |  
|Basic, pro forma                                                                                                                       |  | $                                        | 0.10      |   |                                        | $ | 0.18      |  
|                                                                                                                                       |  |                                          |           |   |                                        |   |           |  
|Diluted, pro forma                                                                                                                     |  | $                                        | 0.10      |   |                                        | $ | 0.18      |  
|                                                                                                                                       |  |                                          |           |   |                                        |   |           |  

As of June 30, 2006, there was approximately $5.7 million of unrecognized compensation cost,
adjusted for estimated forfeitures, related to non-vested stock-based payments granted to the Companys employees and non-employee directors. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures, and
is expected to be recognized over 3.5 years.

General Stock Option Information

The following table sets forth the summary of option activity under all of our stock option programs for the six months ended June 30, 2006:



|                                   |  |                   |   |  |                              |       |                                                 |     |                         |   |           
|---------------------------------- |  | ----------------- | - |  | ---------------------------- | ----- | ----------------------------------------------- | --- | ----------------------- | - | ----------
|                                   |  | Number of Options |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm (Years) |     | AggregateIntrinsicValue
|Outstanding at beginning of period |  | 3,123,565         |   |  | $                            | 5.19  |                                                 |     |                         |   |           
|Granted                            |  | 277,240           |   |  |                              | 15.90 |                                                 |     |                         |   |           
|Exercised                          |  | (470,096          | ) |  |                              | 3.74  |                                                 |     |                         |   |           
|Canceled                           |  | (39,867           | ) |  |                              | 6.13  |                                                 |     |                         |   |           
|                                   |  |                   |   |  |                              |       |                                                 |     |                         |   |           
|Outstanding at end of period       |  | 2,890,842         |   |  |                              | 6.44  |                                                 | 6.4 |                         | $ | 18,875,113
|                                   |  |                   |   |  |                              |       |                                                 |     |                         |   |           
|Exercisable at end of period       |  | 1,345,337         |   |  |                              | 4.77  |                                                 | 4.9 |                         | $ | 10,629,656
|                                   |  |                   |   |  |                              |       |                                                 |     |                         |   |           

The total intrinsic value of options exercised during the three and six months ended June 30,
2006 was $1.8 million and $5.7 million, respectively, compared to approximately $4.9 million and $5.2 million, respectively, in the same periods last year. This intrinsic value represents the difference between the fair market value of the
Companys common stock on the date of exercise and the exercise price of each option.

During the three and six months ended
June 30, 2006, the benefit of tax deductions in excess of recognized compensation costs (realized through additional paid-in capital) from stock option exercises was approximately $683,000 and $1.9 million, respectively, as compared to $1.8
million and $1.9 million, respectively, in the same periods last year. During the three and six months ended June 30, 2006, the benefits of tax deductions recognized through income were approximately $10,000 and $17,000, respectively.



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Upon the exercise of stock options, the Company issues new shares of common stock from its shares
authorized and available for issuance.

A summary of changes in unvested options in the Companys stock option plans for the six
months ended June 30, 2006 is as follows:



|                                 |  |                   |   |  |                                     |     
|-------------------------------- |  | ----------------- | - |  | ----------------------------------- | ----
|                                 |  | Number of Options |   |  | WeightedAverageGrant DateFair Value
|Nonvested at beginning of period |  | 1,748,745         |   |  | $                                   | 2.83
|Granted                          |  | 277,240           |   |  |                                     | 9.43
|Vested                           |  | (440,699          | ) |  |                                     | 1.67
|Forfeited                        |  | (39,781           | ) |  |                                     | 3.33
|                                 |  |                   |   |  |                                     |     
|Nonvested at end of period       |  | 1,545,505         |   |  |                                     | 4.20
|                                 |  |                   |   |  |                                     |     

During the six months ended June 30, 2005, the Company granted 526,082 options with a
weighted-average grant-date fair value of $3.60 per share.

(3) EARNINGS PER SHARE

Weighted average shares outstanding for the three and six months ended June 30, 2006 and 2005 were calculated as follows:



|                                                                          |  |                                     |  |                                   |  |            |  |           
|------------------------------------------------------------------------- |  | ----------------------------------- |  | --------------------------------- |  | ---------- |  | ----------
|                                                                          |  | For the Three Months Ended June 30, |  | For the Six Months Ended June 30,
|                                                                          |  | 2006                                |  | 2005                              |  | 2006       |  | 2005      
|Weighted average shares outstanding (basic)                               |  | 44,570,353                          |  | 42,173,423                        |  | 44,444,782 |  | 42,020,721
|Impact of dilutive stock options after applying the treasury stock method |  | 1,345,704                           |  | 1,615,733                         |  | 1,474,703  |  | 1,544,476 
|                                                                          |  |                                     |  |                                   |  |            |  |           
|Weighted average shares outstanding (diluted)                             |  | 45,916,057                          |  | 43,789,156                        |  | 45,919,485 |  | 43,565,197
|                                                                          |  |                                     |  |                                   |  |            |  |           

Presented below are stock options outstanding that were not included in the calculation of diluted
earnings per share because their weighted average effect would have been anti-dilutive.



|              |  |                                    |  |                                  |  |         |  |          
|------------- |  | ---------------------------------- |  | -------------------------------- |  | ------- |  | ---------
|              |  | For the Three MonthsEnded June 30, |  | For the Six MonthsEnded June 30,
|              |  | 2006                               |  | 2005                             |  | 2006    |  | 2005     
|Stock options |  | 278,173                            |  | 1,006,546                        |  | 278,173 |  | 1,006,546
|              |  |                                    |  |                                  |  |         |  |          

(4) COMPREHENSIVE INCOME

Comprehensive income 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 foreign currency
translation adjustments and unrealized gains or losses on available-for-sale securities. It includes all changes in equity during a period except those resulting from investments by, or distributions to, owners. A reconciliation of net income to
comprehensive income is as follows:



|                             |  |                                     |           |                                   |   |           |  |      |            |  |   |          
|---------------------------- |  | ----------------------------------- | --------- | --------------------------------- | - | --------- |  | ---- | ---------- |  | - | ---------
|                             |  | For the Three Months Ended June 30, |           | For the Six Months Ended June 30,
|                             |  | 2006                                |           | 2005                              |   | 2006      |  | 2005
|Net income                   |  | $                                   | 7,643,576 |                                   | $ | 4,677,125 |  | $    | 14,595,447 |  | $ | 8,455,704
|Foreign currency translation |  |                                     | 39,168    |                                   |   |          |  |      | 50,868     |  |   |         
|                             |  |                                     |           |                                   |   |           |  |      |            |  |   |          
|Comprehensive income         |  | $                                   | 7,682,744 |                                   | $ | 4,677,125 |  | $    | 14,646,315 |  | $ | 8,455,704
|                             |  |                                     |           |                                   |   |           |  |      |            |  |   |          



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(5) CASH SEGREGATED IN COMPLIANCE WITH FEDERAL REGULATIONS

Cash segregated in compliance with federal regulations, consisting primarily of interest-bearing cash deposits of $410.1 million and $426.1 million as of
June 30, 2006 and December 31, 2005, respectively, have been segregated in special reserve bank accounts at JPMorgan Chase Bank, N.A. or one of its banking affiliates for the exclusive benefit of customers under Rule 15c3-3 of the
Securities Exchange Act of 1934 and other regulations. On the second business day of each month, if required, this amount is adjusted based upon the month-end calculation. On July 5, 2006, cash segregated in compliance with federal regulations
was decreased by $1.6 million, from $410.1 million (the balance as of June 30, 2006) to $408.5 million. Conversely, cash and cash equivalents increased by $1.6 million, from $81.2 million (the balance as of June 30, 2006) to $82.8 million.
On January 4, 2006, cash segregated in compliance with federal regulations was increased by $9.5 million, from $426.1 million (the balance as of December 31, 2005) to $435.6 million. Conversely, cash and cash equivalents decreased by $9.5
million, from $75.1 million (the balance as of December 31, 2005) to $65.6 million.

(6) RECEIVABLES FROM BROKERAGE CUSTOMERS, NET

Receivables from brokerage customers, net, consist primarily of margin loans to TradeStation Securities brokerage customers of approximately
$78.9 million at June 30, 2006 and approximately $58.1 million (net of a $226,000 allowance for a potential credit loss) at December 31, 2005. During the first six months of 2006, the Company collected $200,000 of a previously
fully-reserved receivable (relating to the $226,000 allowance referred to in the previous sentence). Securities owned by brokerage customers are held as collateral for margin loans. Such collateral is not reflected in the consolidated financial
statements. At June 30, 2006 and December 31, 2005, TradeStation Securities was charging a base margin debit interest rate of 8.25% and 8.125% per annum, respectively, on debit balances in equities brokerage customer accounts.

Margin requirements determine the amount of equity required to be held in an account for the purchase of equities on credit.
Margin lending is subject to the margin rules of the Board of Governors of the Federal Reserve System, the margin requirements of the NASD, limits imposed by clearing agent firms, and TradeStation Securities own internal policies. By
permitting customers to purchase and maintain securities positions on margin, TradeStation Securities takes the risk that a market decline will reduce the value of the collateral securing its margin loan to an amount that renders the margin loan
unsecured. Under applicable securities laws and regulations, once a margin account has been established, TradeStation Securities is obligated to require from the customer initial margin of no lower than 50% for purchases of securities and then is
obligated to require the customer to maintain its equity in the account equal to at least 25% of the value of the securities in the account. However, TradeStation Securities current internal requirement is that the customers equity not
be allowed to fall below 35% of the value of the securities in the account. If it does fall below 35%, TradeStation Securities requires the customer to increase the accounts equity to 35% of the value of the securities in the account (if not,
TradeStation Securities will perform closing transactions to bring the customer account above the maintenance requirement). These requirements can be, and often are, raised as TradeStation Securities deems necessary for certain accounts, groups of
accounts, securities or groups of securities. However, there is no assurance that a customer will be willing or able to satisfy a margin call or pay unsecured indebtedness owed to TradeStation Securities.



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(7) RECEIVABLES FROM BROKERS, DEALERS, CLEARING ORGANIZATIONS AND CLEARING AGENTS

Amounts receivable from brokers, dealers, clearing organizations and clearing agents consist of the following as of June 30, 2006 and
December 31, 2005:



|                                                               |  |               |            |                  |   |           
|-------------------------------------------------------------- |  | ------------- | ---------- | ---------------- | - | ----------
|                                                               |  | June 30, 2006 |            | December 31,2005
|Securities borrowed from broker-dealers                        |  | $             | 20,955,900 |                  | $ | 35,005,845
|Fees and commissions receivable from clearing agents and other |  |               | 1,360,238  |                  |   | 1,027,384 
|                                                               |  |               |            |                  |   |           
|                                                               |  | $             | 22,316,138 |                  | $ | 36,033,229
|                                                               |  |               |            |                  |   |           

Securities borrowed transactions require TradeStation Securities to provide the counterparty with
collateral in the form of cash and are recorded at the amount of cash collateral advanced to the lender. TradeStation Securities monitors the market value of securities borrowed on a daily basis, and collateral is adjusted as necessary based upon
market prices. See Note 10  COMMITMENTS AND CONTINGENCIES  General Contingencies and Guarantees.

As of June 30,
2006 and December 31, 2005, TradeStation Securities serviced its institutional equities accounts through Bear, Stearns Securities Corp., futures trades were cleared through R.J. OBrien & Associates and forex trades were cleared
through Gain Capital Group, Inc., all on a fully-disclosed basis (Bear, Stearns Securities Corp., R.J. OBrien & Associates, and Gain Capital Group, Inc. are collectively referred to as clearing agents or clearing
agent firms). These clearing agents provide services, handle TradeStation Securities customers funds, hold securities, futures and forex positions, and remit monthly activity statements to the customers on behalf of TradeStation
Securities.

(8) PAYABLES TO BROKERAGE CUSTOMERS

As of June 30, 2006, payables to brokerage customers consisted primarily of cash balances in brokerage customer accounts. At June 30, 2006 and December 31, 2005, payables to customers totaled $507.8
million and $523.9 million, respectively. These funds are the principal source of funding for margin lending. At June 30, 2006 and December 31, 2005, TradeStation Securities was paying interest at the rate of 1.25% and 1.125% per
annum, respectively, on the portion of cash balances in excess of $10,000 in equities brokerage customer accounts.

(9) NET CAPITAL REQUIREMENTS

TradeStation Securities is subject to the net capital requirements of the SECs Uniform Net Capital Rule (Rule 15c3-1) and the
Commodity Futures Trading Commissions financial requirement (Regulation 1.17). TradeStation Securities calculates its net capital requirements using the alternative method, which requires the maintenance of minimum net capital, as
defined by the rules, equal to the greater of (i) $250,000 and (ii) 2.0% of aggregate customer debit balances. Customer debit items are a function of customer margin receivables and may fluctuate significantly, resulting in a significant
fluctuation in the Companys net capital requirements. At June 30, 2006, TradeStation Securities had net capital of approximately $43.3 million (40.3% of aggregate debit items), which was approximately $41.2 million in excess of its
required net capital of approximately $2.1 million. At December 31, 2005, TradeStation Securities had net capital of approximately $35.3 million (36.6% of aggregate debit items), which was approximately $33.4 million in excess of its required
net capital of approximately $1.9 million.



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##### Table of Contents

(10) COMMITMENTS AND CONTINGENCIES

Restricted Cash

As of June 30, 2006, the Company had $1.7 million of restricted cash supporting
a ten-year lease agreement for its corporate headquarters.

Line of Credit

In June 2005, TradeStation Securities entered into a loan agreement for a revolving credit facility which provided for borrowings up to $10 million. This
credit facility expired on June 16, 2006. There were no borrowings under this line of credit, and the Company did not incur any unused line of credit fees through the expiration of this agreement.

Operating Leases

The Company has a
ten-year lease expiring in August 2012 (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. Rent escalations, free rent, and leasehold and
other incentives are recognized on a straight-line basis over the initial term of this lease.

In addition to its corporate headquarters,
the Company has four non-cancelable operating leases for facilities (including our recently-opened Chicago office) with expirations ranging from February 2007 to February 2011. In addition to the leases for facilities, the Company leases
certain office equipment and furniture. Future minimum lease payments as of June 30, 2006 under all operating leases are as follows:



|           |  |               |            |                 |   |         |              |  |   |           
|---------- |  | ------------- | ---------- | --------------- | - | ------- | ------------ |  | - | ----------
|           |  | GrossPayments |            | SubleaseRentals |   |         | Net Payments
|2006       |  | $             | 1,567,067  |                 | $ | (64,972 | )            |  | $ | 1,502,095 
|2007       |  |               | 2,560,503  |                 |   | (22,050 | )            |  |   | 2,538,453 
|2008       |  |               | 2,129,175  |                 |   |        |              |  |   | 2,129,175 
|2009       |  |               | 2,209,038  |                 |   |        |              |  |   | 2,209,038 
|2010       |  |               | 2,252,208  |                 |   |        |              |  |   | 2,252,208 
|Thereafter |  |               | 3,481,629  |                 |   |        |              |  |   | 3,481,629 
|           |  |               |            |                 |   |         |              |  |   |           
|           |  | $             | 14,199,620 |                 | $ | (87,022 | )            |  | $ | 14,112,598
|           |  |               |            |                 |   |         |              |  |   |           

Total rent expense (which is included in occupancy and equipment and data centers and
communications in the accompanying consolidated statements of income) for the three months ended June 30, 2006 and 2005 was $858,000 and $785,000, respectively. Total rent expense for the six months ended June 30, 2006 and 2005 was $1.7
million and $1.6 million, respectively.

Purchase Obligations

As of June 30, 2006, the Company had various purchase obligations totaling $1.9 million through May 2010 as follows: $1.0 million, $741,000, $72,000,
$72,000 and $30,000 for 2006 (last six months), 2007, 2008, 2009 and 2010, respectively, related primarily to back office systems and telecommunications services.

Litigation and Claims

Three lawsuits were filed in 2003 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



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##### Table of Contents

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, William and Ralph Cruz, family partnerships owned and controlled by William and Ralph Cruz,
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 Tafazzoli/zum Tobel case is well into the discovery phase of litigation and, in the Allen and Gambino cases, the discovery phase has been substantially completed. In the Allen case, motions for summary
judgment filed by both the plaintiffs and defendants have been denied, and plaintiffs motion to amend their complaint to add a claim for punitive damages was also denied. The Company continues to believe all of the claims in all three cases
are baseless; however, no assurances can be given that a judge or jury will agree with the Companys assessment.

TradeStation
Securities is also engaged in routine regulatory matters and civil litigation or other dispute resolution proceedings, including matters which are currently pending relating to NASD OATS reporting, short sales procedures and short interest
reporting, and one pending NASD arbitration, incidental to, and part of the ordinary course of, its business. The NASD regulatory matters could ultimately result in censures, sanctions, fines and other negative consequences.

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 customers 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. The Company recently reviewed this insurance with insurance agents and the Companys view remains unchanged.

Management Continuity Agreements

In
December 2005, the Company entered into a management continuity agreement with three of its executive officers. Each management continuity agreement provides for potential severance payments during the 100-day period following a change in control,
as that term is defined in the agreement, in an amount equal to up to two years of the executives annual compensation (in the aggregate for all three executive officers, currently approximately $2.0 million). The management continuity
agreements do not commit the Company to retain any executives services for any fixed period of time, do not provide for severance payments unless the Company undergoes a change in control, and do not represent new hires or appointments, as
each executive has been serving in his current positions for several years.

General Contingencies and Guarantees

In the ordinary course of business, there are various contingencies which are not reflected in the consolidated financial statements. These include
customer activities involving the execution, settlement and financing of various customer securities and futures transactions. These activities may expose the Company to off-balance sheet credit risk in the event the customers are unable to fulfill
their contractual obligations.



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In margin transactions, TradeStation Securities may be obligated for credit extended to its customers by
TradeStation Securities or its clearing agents that is collateralized by cash and securities in the customers accounts. In connection with securities activities, TradeStation Securities also executes customer transactions involving the
sale of securities not yet purchased (short sales), all of which are transacted on a margin basis subject to federal, self-regulatory organization and individual exchange regulations and TradeStation Securities internal policies.
Additionally, TradeStation Securities may be obligated for credit extended to its customers by its clearing agents for futures transactions that are collateralized by cash and futures positions in the customers accounts. In all cases, such
transactions may expose TradeStation Securities to significant off-balance sheet credit risk in the event customer collateral is not sufficient to fully cover losses that customers may incur. In the event customers fail to satisfy their obligations,
TradeStation Securities may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customers obligations.

TradeStation Securities seeks to manage the risks associated with its customers activities by requiring customers to maintain collateral in their margin accounts in compliance with various regulatory
requirements, internal requirements, and the requirements of clearing agents. TradeStation Securities and its clearing agents monitor required margin levels on an intra-day basis and, pursuant to such guidelines, require the customers to deposit
additional collateral or to reduce positions when necessary. For further discussion, see Note 6  RECEIVABLES FROM BROKERAGE CUSTOMERS, NET.

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

The customers financing and securities settlement activities may require TradeStation Securities and its
clearing agents to pledge customer securities as collateral in support of various secured financing sources, which may include bank loans. 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 needing to acquire the securities at prevailing market prices in order to satisfy its obligations. TradeStation Securities seeks to manage this risk by monitoring the
market value of securities pledged on a daily basis.

TradeStation Securities provides guarantees to its clearing organization and
exchanges under their standard membership agreements, which require members to guarantee the performance of other members. Under the agreements, if another member becomes unable to satisfy its obligations to the clearing organization or exchange,
other members would be required to meet shortfalls. TradeStation Securities liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, management believes that the
possibility of the Company being required to make payments under these arrangements is remote. Accordingly, no liability has been recorded for these potential events.

(11) INCOME TAXES

During the three and six months ended June 30, 2006, the Company recorded an
income tax provision of $5.0 million and $9.5 million, respectively, based upon its current estimated annual effective income tax rate of approximately 39%. During the three and six months ended June 30, 2005, the Company recorded an income tax
provision of $2.8 million and $4.9 million, respectively, based upon its then-estimated annual effective income tax rate of approximately 38%, which was partially offset by adjustments to its deferred income tax assets to reflect its anticipated
federal income tax rate and other deferred income tax adjustments.



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As of June 30, 2006, for financial reporting purposes, the Company estimates that it had available
for federal income tax purposes total net operating loss carryforwards and income tax credit carryforwards of approximately $2.5 million and $124,000, respectively (expiring between 2010 and 2019). These amounts are subject to annual usage
limitations of approximately $545,000. These limitations are cumulative to the extent they are not utilized in any year.

(12) SEGMENT AND RELATED
INFORMATION

For the three and six months ended June 30, 2006 and 2005, 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 income before income taxes. The brokerage services segment represents the operations of
TradeStation Securities and the software products and services segment represents the operations of TradeStation Technologies. Intercompany transactions between segments are based upon an intercompany licensing and support agreement and an
expense-sharing agreement which reflect current business relationships and seek to address applicable regulatory requirements regarding expense sharing. All significant intercompany transactions and balances have been eliminated in consolidation.



|                                                                   |  |                                     |            |   |                                   |   |            |                     |  |   |                         |   |  |   |             |  
|------------------------------------------------------------------ |  | ----------------------------------- | ---------- | - | --------------------------------- | - | ---------- | ------------------- |  | - | ----------------------- | - |  | - | ----------- | -
|                                                                   |  | For the Three Months Ended June 30, |            |   | For the Six Months Ended June 30, |  
|                                                                   |  | 2006                                |            |   | 2005                              |   |            | 2006                |  |   | 2005                    |  
|Revenues:                                                          |  |                                     |            |   |                                   |   |            |                     |  |   |                         |   |  |   |             |  
|Brokerage services                                                 |  |                                     |            |   |                                   |   |            |                     |  |   |                         |   |  |   |             |  
|Revenues, excluding interest                                       |  | $                                   | 20,086,049 |   |                                   | $ | 16,583,709 |                     |  | $ | 38,807,637              |   |  | $ | 32,511,548  |  
|Interest income                                                    |  |                                     | 10,771,044 |   |                                   |   | 5,126,287  |                     |  |   | 19,961,722              |   |  |   | 9,210,606   |  
|Interest expense                                                   |  |                                     | (1,119,148 | ) |                                   |   | (833,799   | )                   |  |   | (2,217,958              | ) |  |   | (1,447,490  | )
|                                                                   |  |                                     |            |   |                                   |   |            |                     |  |   |                         |   |  |   |             |  
|                                                                   |  |                                     | 29,737,945 |   |                                   |   | 20,876,197 |                     |  |   | 56,551,401              |   |  |   | 40,274,664  |  
|Software products and services                                     |  |                                     |            |   |                                   |   |            |                     |  |   |                         |   |  |   |             |  
|Revenues, excluding interest                                       |  |                                     | 9,218,518  |   |                                   |   | 7,421,587  |                     |  |   | 17,746,953              |   |  |   | 14,538,998  |  
|Interest income                                                    |  |                                     | 390,981    |   |                                   |   | 104,050    |                     |  |   | 704,144                 |   |  |   | 173,541     |  
|                                                                   |  |                                     |            |   |                                   |   |            |                     |  |   |                         |   |  |   |             |  
|                                                                   |  |                                     | 9,609,499  |   |                                   |   | 7,525,637  |                     |  |   | 18,451,097              |   |  |   | 14,712,539  |  
|Eliminations of intercompany charges to brokerage services segment |  |                                     | (6,896,625 | ) |                                   |   | (5,056,500 | )                   |  |   | (13,167,000             | ) |  |   | (9,800,875  | )
|                                                                   |  |                                     |            |   |                                   |   |            |                     |  |   |                         |   |  |   |             |  
|                                                                   |  | $                                   | 32,450,819 |   |                                   | $ | 23,345,334 |                     |  | $ | 61,835,498              |   |  | $ | 45,186,328  |  
|                                                                   |  |                                     |            |   |                                   |   |            |                     |  |   |                         |   |  |   |             |  
|Income before income taxes:                                        |  |                                     |            |   |                                   |   |            |                     |  |   |                         |   |  |   |             |  
|Brokerage services                                                 |  | $                                   | 7,977,476  |   |                                   | $ | 4,098,989  |                     |  | $ | 15,677,141              |   |  | $ | 7,355,702   |  
|Software products and services                                     |  |                                     | 4,623,980  |   |                                   |   | 3,400,144  |                     |  |   | 8,383,417               |   |  |   | 6,029,010   |  
|                                                                   |  |                                     |            |   |                                   |   |            |                     |  |   |                         |   |  |   |             |  
|                                                                   |  | $                                   | 12,601,456 |   |                                   | $ | 7,499,133  |                     |  | $ | 24,060,558              |   |  | $ | 13,384,712  |  
|                                                                   |  |                                     |            |   |                                   |   |            |                     |  |   |                         |   |  |   |             |  
|                                                                   |  |                                     |            |  
|                                                                   |  |                                     |            |   |                                   |   |            | As of June 30, 2006 |  |   | As of December 31, 2005 |  
|Identifiable assets:                                               |  |                                     |            |   |                                   |   |            |                     |  |   |                         |   |  |   |             |  
|Brokerage services                                                 |  |                                     |            |   |                                   |   |            |                     |  | $ | 577,702,920             |   |  | $ | 575,763,557 |  
|Software products and services                                     |  |                                     |            |   |                                   |   |            |                     |  |   | 43,521,273              |   |  |   | 39,370,388  |  
|                                                                   |  |                                     |            |   |                                   |   |            |                     |  |   |                         |   |  |   |             |  
|                                                                   |  |                                     |            |   |                                   |   |            |                     |  | $ | 621,224,193             |   |  | $ | 615,133,945 |  
|                                                                   |  |                                     |            |   |                                   |   |            |                     |  |   |                         |   |  |   |             |  



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This
discussion should be read and evaluated in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements of TradeStation Group and its subsidiaries contained herein and with the issues, uncertainties and
risk factors related to our business and industry described in ITEM 1A. RISK FACTORS of PART I of the Annual Report on Form 10-K of TradeStation Group for the year ended December 31, 2005. The results of operations for an interim period
are not necessarily indicative of results for the year, or for any subsequent period.

Overview and Recent Developments

TradeStation Securities is a leading online brokerage firm that serves the active trader and certain institutional trader markets, and is the
companys principal operating subsidiary. TradeStation Securities is a registered broker-dealer and futures commission merchant, and is a member of the NASD, New York Stock Exchange (NYSE), Securities Investor Protection Corporation (SIPC),
National Futures Association (NFA), National Securities Clearing Corporation and the Depository Trust Company (together, the Depository Trust & Clearing Corporation or DTCC), Options Clearing Corporation (OCC), American Stock Exchange
(AMEX), Archipelago Exchange (ARCX), Boston Options Exchange (BOX), Chicago Board Options Exchange (CBOE), Eurex US, International Securities Exchange (ISE), Pacific Exchange (PCX) and Philadelphia Stock Exchange (PHLX). TradeStation
Securities business is also subject to the rules and requirements of the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) and state regulatory authorities (the firm is registered to conduct its brokerage
business in all 50 states and the District of Columbia). TradeStation Securities self-clears most of its equities and equity options business, and uses an established futures clearing firm and an established forex dealer firm to clear its futures
and forex business.

TradeStation Securities revenues consist primarily of transactional commissions and fees (including monthly
platform fees) and interest derived from customer balances and margin lending to customers. With respect to monthly platform fees (a $99.95 charge made to less active brokerage customers for being granted access to use the TradeStationtrading platform), effective September 1, 2005 we launched a strategic marketing initiative which reduced materially the trading activity thresholds that need to be met to qualify for a waiver of the monthly platform fee. Effective
December 1, 2005, we launched two additional strategic marketing initiatives designed mainly to accelerate growth in our futures business. The first of the December 2005 initiatives, designed to attract high-volume futures traders, was the
change from our one-price-fits-all futures commission structure to a tiered commission structure that rewards more active traders with lower pricing. Under the new pricing structure, the commission charged over the applicable exchange fee ranges
from $1.20 down to 25 cents per contract (per side). Also, our old price plan charged an all-in-one futures commission that included both exchange and brokerage fees. Under the new plan, these charges are unbundled, so that the customer pays the
applicable exchange fees for the contracts traded, plus the tiered TradeStation fees applicable to that customer. This enables customers to see how much each exchange charges for trades, and to better understand and take advantage of reduced fees
for exchange members. The second of the December 2005 initiatives was to further reduce the trading activity thresholds that futures, forex and equity options customers need to meet to qualify for a waiver of the monthly platform fee. We believe
such marketing initiatives have contributed to our account growth during the first half of 2006. However, we cannot measure specifically how many accounts have been added because of these initiatives and no assurances can be given that material
offsetting benefits have been or will be achieved from any of these initiatives.

Beginning in September 2004, TradeStation Securities
commenced equities self-clearing operations for its active trader client base and commenced omnibus clearing of its standardized equity option trades through Broadcort, a division of Merrill Lynch. Beginning March 29, 2005, following issuance
of its membership in the OCC, TradeStation Securities commenced full self-clearing of its standardized equity options trades for its active trader client base and terminated Broadcorts clearing services. Self-clearing has provided substantial
cost savings and efficiencies. TradeStation Securities currently clears



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institutional account securities trades through Bear, Stearns Securities Corp. on a fully-disclosed basis. Futures trades
are cleared through R.J. OBrien & Associates, and forex trades, through July 15, 2005, were cleared through R.J. OBrien Foreign Exchange, each on a fully-disclosed basis. Subsequent to July 15, 2005, forex trades have
been cleared through Gain Capital Group, Inc. on a fully-disclosed basis (Bear, Stearns Securities Corp., Broadcort, R.J. OBrien & Associates, R.J. OBrien Foreign Exchange, and Gain Capital Group, Inc. are collectively referred
to as clearing agents or clearing agent firms). In connection with an extension of its futures clearing agreement (which was set to expire December 31, 2005) and the agreement with its new forex clearing agent,
TradeStation Securities began receiving in July 2005 materially more favorable interest-sharing and clearing fee/deal-spread sharing arrangements. These benefits are not based on growth in trading volume or any other contingency.

As of June 30, 2006, TradeStation Securities had 28,682 equities, futures and forex accounts (the vast majority of which were equities and futures
accounts). Effective January 1, 2006, a brokerage account has been defined as an account that either has a positive asset balance of at least $200 or has had activity within the past 180 days. In other words, an account is deemed inactive and
is not included in counting total brokerage accounts if it has less than a $200 balance and has had no activity within the past 180 days. The effect of this modified account definition was a net positive adjustment of 511 accounts as of
January 1, 2006 (i.e., a positive adjustment to the number of futures and forex accounts exceeded a negative adjustment to the number of equities accounts by 511). Prior periods have not been and will not be restated to reflect the modification
to the definition. The June 30, 2006 number of accounts represented a net increase of 1,885 and 4,198 accounts during the three and six months ended June 30, 2006. TradeStation brokerage clients generated the following client account
metrics in the three and six months ended June 30, 2006:



|                                             |  |                             |       |                             |   |      
|-------------------------------------------- |  | --------------------------- | ----- | --------------------------- | - | -----
|                                             |  | 3 Months EndedJune 30, 2006 |       | 6 Months EndedJune 30, 2006
|Annualized trades                            |  |                             | 567   |                             |   | 574  
|Annualized net revenue per brokerage account |  | $                           | 4,300 |                             | $ | 4,300



|                                      |  |                     |       
|------------------------------------- |  | ------------------- | ------
|                                      |  | As of June 30, 2006
|Average assets per account  equities |  | $                   | 82,500
|Average assets per account  futures  |  | $                   | 16,800

During the three and six months ended June 30, 2006, TradeStation Securities brokerage
customer account base averaged 62,461 and 60,773 daily average revenue trades (often called DARTs), an increase of 52% and 50% when compared to the 41,086 and 40,459 DARTs during the three and six months ended June 30, 2005.

We compute DARTs as follows: For equities and equity options, a revenue trade included to calculate DARTs is a commissionable trade order
placed by the customer and executed, regardless of the number of shares or contracts included in the trade order. For futures and forex, a revenue trade included to calculate DARTs is one round-turn commissionable futures contract traded, or one
round-turn lot (or forex deal) traded, regardless of the number of individual orders made and executed (i.e., one futures or forex order may contain numerous contracts or deals, but each round-turn contract and deal is counted as a separate revenue
trade). When viewing our DARTs, it should be taken into account that, for equities and equity options, we charge commissions based on share volume and number of contracts traded (and not by revenue trade used to calculate DARTs). For futures, we
charge commissions on a per contract basis (so each futures revenue trade included to calculate DARTs represents a round-turn commissionable contract traded). It should be noted that as we continue to acquire futures customers who trade larger
volumes, and seek to accelerate our acquisition of higher-volume futures accounts, such as futures traders who may be attracted by our new tiered commission pricing structure and institutional traders, the number of futures revenue trades included
in DARTs on a per order basis will likely grow. Also, it should be noted that all DARTs are not equal. The revenue we derive from each revenue trade depends on the asset in question (equities, equity options, futures, forex  each has a
different per unit revenue structure), and, within each asset class, revenue per equity, contract or deal varies to the extent higher volume traders receive more favorable pricing, which they often do.



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TradeStation Technologies, the companys other operating subsidiary, owns all of our intellectual
property. TradeStation Technologies also provides subscription services for TradeStation. The subscription version of TradeStationis 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.

We also have a United Kingdom subsidiary, TradeStation Europe Limited, which is currently in its start-up phase. In February 2006, TradeStation Europe became authorized by the United Kingdoms Financial Services
Authority (FSA) to act as a Securities and Futures Firm in the United Kingdom to introduce accounts to TradeStation Securities. The FSA category of authorization is ISD Category D Arranger, meaning that TradeStation Europe
may now solicit and introduce UK clients who are active, experienced traders to its US affiliate for equities, options, futures and forex account services. TradeStation Europe is now in the process of putting together what are known as
European Passport filings for various countries in the European Union, pursuant to which the company may use its FSA authorization to qualify to conduct similar business throughout the European Union. We do not anticipate revenues from
TradeStation Europes operations until, at the earliest, late 2006.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Note 2 of Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K of
TradeStation Group for the year ended December 31, 2005  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 Commissions and Fees and
Net Interest Income.Brokerage commissions and fees and net interest income are the key components of our results of operations and are comprised mainly of: (i) brokerage commissions and fees earned from securities, futures and forex
transactions and, to a lesser extent, monthly platform fees earned from brokerage customers using the TradeStationonline trading platform; and (ii) net interest earned and paid from self-clearing operations (primarily interest earned on
brokerage customer cash balances and interest earned from brokerage customer margin debit balances), interest revenue sharing arrangements with clearing agent firms, and interest on corporate cash and cash equivalents. Brokerage commission income
and related clearing costs are recorded on a trade date basis as transactions occur. Platform fees are recorded on an accrual basis as monthly services are provided. Interest revenue and interest expense are recorded on an accrual basis as interest
is earned or incurred.

Income Taxes. In accordance with Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes,deferred income tax assets should be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Management
evaluates and determines on a periodic basis the amount of the valuation allowance required and adjusts the valuation allowance as needed. As of June 30, 2006 and December 31, 2005, we had no valuation allowance on our deferred income tax
assets. On a periodic basis, we will continue to evaluate our deferred income tax assets to determine if a valuation allowance is required.

Allowance for Potential Credit Losses. We perform periodic credit evaluations and provide allowances based upon our assessment of specifically identified unsecured receivables and other factors, including the customers
likelihood to pay and payment history. As of December 31, 2005, we had an allowance for a potential credit loss of $226,000. There was no allowance as of June 30, 2006, since we collected $200,000 and wrote-off the balance of this
receivable (mostly accrued interest) against this reserve during the first quarter of 2006. See Note 6 of Notes to Consolidated Financial Statements  RECEIVABLES FROM BROKERAGE CUSTOMERS, NET, and Note 10  COMMITMENTS AND CONTINGENCIES
 General Contingencies and Guarantees. See Six Months Ended June 30, 2006 and 2005  Expenses  Other.



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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 customers 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. We recently reviewed this insurance with insurance agents and our view remains unchanged. Each quarter, we continue to evaluate our accruals, if any, 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, as necessary. The ultimate outcome of such potential claims may be substantially different than our estimates. We
have not created any uninsured loss reserves for any of the lawsuits or arbitrations described in Note 10  COMMITMENTS AND CONTINGENCIES  Litigation and Claims, or to which the company is otherwise subject.

Results of Operations

For the three and six months
ended June 30, 2006 and 2005, 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. We ceased marketing our legacy software products and subscription software services in 2000. Our primary source of consolidated revenue is the brokerage
services segment, and the brokerage services segment should continue to produce the majority of our revenues for the foreseeable future. For the three and six months ended June 30, 2006, the brokerage services segment accounted for
approximately 91% of our total consolidated net revenues, as compared to 89% for the three and six months ended June 30, 2005. Given the size of those percentages, other than our discussion and table in Note 12  SEGMENT AND RELATED
INFORMATION, we will discuss our results of operations for the overall company instead of on a segmented basis. The following table presents, for the periods indicated, our consolidated statements of income data and presentation of that data as a
percentage of change from period to period (unaudited):



|                                   |  |                                     |        |      |                                   |        |  |   |       |   |  |      |        |      |   |        |  |   |        |  |   |        |   |  |     |  
|---------------------------------- |  | ----------------------------------- | ------ | ---- | --------------------------------- | ------ |  | - | ----- | - |  | ---- | ------ | ---- | - | ------ |  | - | ------ |  | - | ------ | - |  | --- | -
|                                   |  | For the Three Months Ended June 30, |        |      | For the Six Months Ended June 30, |       
|                                   |  |                                     |        |      |                                   | Change |  |   |       |   |  |      | Change |     
|                                   |  | 2006                                |        | 2005 |                                   | $      |  |   | %     |   |  | 2006 |        | 2005 |   | $      |  |   | %      | 
|                                   |  | (In thousands)                      |        |      | (In thousands)                    |       
|Revenues:                          |  |                                     |        |      |                                   |        |  |   |       |   |  |      |        |      |   |        |  |   |        |  |   |        |   |  |     |  
|Brokerage commissions and fees     |  | $                                   | 20,008 |      | $                                 | 16,502 |  | $ | 3,506 |   |  | 21   |        |      | $ | 38,640 |  | $ | 32,341 |  | $ | 6,299  |   |  | 19  |  
|                                   |  |                                     |        |      |                                   |        |  |  
|Interest income                    |  |                                     | 11,162 |      |                                   | 5,231  |  |   | 5,931 |   |  | 113  |        |      |   | 20,666 |  |   | 9,384  |  |   | 11,282 |   |  | 120 |  
|Brokerage interest expense         |  |                                     | 1,119  |      |                                   | 834    |  |   | 285   |   |  | 34   |        |      |   | 2,218  |  |   | 1,447  |  |   | 771    |   |  | 53  |  
|                                   |  |                                     |        |      |                                   |        |  |   |       |   |  |      |        |      |   |        |  |   |        |  |   |        |   |  |     |  
|Net interest income                |  |                                     | 10,043 |      |                                   | 4,397  |  |   | 5,646 |   |  | 128  |        |      |   | 18,448 |  |   | 7,937  |  |   | 10,511 |   |  | 132 |  
|                                   |  |                                     |        |      |                                   |        |  |  
|Subscriptions and other            |  |                                     | 2,400  |      |                                   | 2,446  |  |   | (46   | ) |  | (2   | )      |      |   | 4,747  |  |   | 4,908  |  |   | (161   | ) |  | (3  | )
|                                   |  |                                     |        |      |                                   |        |  |   |       |   |  |      |        |      |   |        |  |   |        |  |   |        |   |  |     |  
|Net revenues                       |  |                                     | 32,451 |      |                                   | 23,345 |  |   | 9,106 |   |  | 39   |        |      |   | 61,835 |  |   | 45,186 |  |   | 16,649 |   |  | 37  |  
|                                   |  |                                     |        |      |                                   |        |  |   |       |   |  |      |        |      |   |        |  |   |        |  |   |        |   |  |     |  
|Expenses:                          |  |                                     |        |      |                                   |        |  |   |       |   |  |      |        |      |   |        |  |   |        |  |   |        |   |  |     |  
|Employee compensation and benefits |  |                                     | 7,230  |      |                                   | 5,682  |  |   | 1,548 |   |  | 27   |        |      |   | 14,197 |  |   | 11,272 |  |   | 2,925  |   |  | 26  |  
|Clearing and execution             |  |                                     | 6,856  |      |                                   | 5,055  |  |   | 1,801 |   |  | 36   |        |      |   | 12,684 |  |   | 9,885  |  |   | 2,799  |   |  | 28  |  
|Data centers and communications    |  |                                     | 1,618  |      |                                   | 1,475  |  |   | 143   |   |  | 10   |        |      |   | 3,149  |  |   | 3,049  |  |   | 100    |   |  | 3   |  
|Advertising                        |  |                                     | 1,102  |      |                                   | 1,008  |  |   | 94    |   |  | 9    |        |      |   | 2,058  |  |   | 1,970  |  |   | 88     |   |  | 4   |  
|Professional services              |  |                                     | 678    |      |                                   | 655    |  |   | 23    |   |  | 4    |        |      |   | 1,437  |  |   | 1,708  |  |   | (271   | ) |  | (16 | )
|Occupancy and equipment            |  |                                     | 634    |      |                                   | 603    |  |   | 31    |   |  | 5    |        |      |   | 1,256  |  |   | 1,204  |  |   | 52     |   |  | 4   |  
|Depreciation and amortization      |  |                                     | 565    |      |                                   | 460    |  |   | 105   |   |  | 23   |        |      |   | 1,048  |  |   | 895    |  |   | 153    |   |  | 17  |  
|Other                              |  |                                     | 1,166  |      |                                   | 908    |  |   | 258   |   |  | 28   |        |      |   | 1,946  |  |   | 1,818  |  |   | 128    |   |  | 7   |  
|                                   |  |                                     |        |      |                                   |        |  |   |       |   |  |      |        |      |   |        |  |   |        |  |   |        |   |  |     |  
|Total expenses                     |  |                                     | 19,849 |      |                                   | 15,846 |  |   | 4,003 |   |  | 25   |        |      |   | 37,775 |  |   | 31,801 |  |   | 5,974  |   |  | 19  |  
|                                   |  |                                     |        |      |                                   |        |  |   |       |   |  |      |        |      |   |        |  |   |        |  |   |        |   |  |     |  
|Income before income taxes         |  |                                     | 12,602 |      |                                   | 7,499  |  |   | 5,103 |   |  | 68   |        |      |   | 24,060 |  |   | 13,385 |  |   | 10,675 |   |  | 80  |  
|                                   |  |                                     |        |      |                                   |        |  |  
|Income tax provision               |  |                                     | 4,958  |      |                                   | 2,822  |  |   | 2,136 |   |  | 76   |        |      |   | 9,465  |  |   | 4,929  |  |   | 4,536  |   |  | 92  |  
|                                   |  |                                     |        |      |                                   |        |  |   |       |   |  |      |        |      |   |        |  |   |        |  |   |        |   |  |     |  
|Net income                         |  | $                                   | 7,644  |      | $                                 | 4,677  |  | $ | 2,967 |   |  | 63   |        |      | $ | 14,595 |  | $ | 8,456  |  | $ | 6,139  |   |  | 73  |  
|                                   |  |                                     |        |      |                                   |        |  |   |       |   |  |      |        |      |   |        |  |   |        |  |   |        |   |  |     |  



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Three Months Ended June 30, 2006 and 2005

Net revenues were $32.5 million for the three months ended June 30, 2006, as compared to $23.3 million for the three months ended June 30, 2005,
an increase of $9.1 million, or 39%. The primary reasons were increased net interest income of $5.6 million, or 128%, as a result of higher interest rates, higher aggregate cash and margin balances and a more favorable interest-sharing arrangement
with our futures clearing firm, and increased brokerage commissions and fees of approximately $3.5 million, or 21%, as a result of higher trade volume related mostly to growing our brokerage account base.

Income before income taxes was $12.6 million (39% of net revenues) for the three months ended June 30, 2006, as compared to $7.5 million (32% of net
revenues) for the three months ended June 30, 2005, an increase of $5.1 million, or 68%. Our improvement in income before income taxes was due primarily to our increased net interest income of $5.6 million and our increased brokerage
commissions and fees of $3.5 million, partially offset by increased employee compensation and benefits of $1.5 million and increased clearing and execution costs of $1.8 million. The increase in our income before income taxes margin from 32% to 39%
was due primarily to our increased net interest income.

During the three months ended June 30, 2006, we recorded an income tax
provision of $5.0 million based upon our current estimated annual effective income tax rate of approximately 39%. During the three months ended June 30, 2005, we recorded an income tax provision of $2.8 million based upon our then-estimated
annual effective income tax rate of approximately 38%, which was partially offset by adjustments to our deferred income tax assets to reflect our anticipated federal income tax rate and other deferred income tax adjustments. See Income
Taxes below.

Net income was approximately $7.6 million for the three months ended June 30, 2006, as compared to $4.7 million
for the three months ended June 30, 2005, an increase of approximately $3.0 million, or 63%, due primarily to our 39% year-over-year increase in net revenues and the increase of our income before income taxes margin from 32% to 39%, partially
offset by a higher effective tax rate in the 2006 second quarter.

Revenues

Brokerage Commissions and Fees  Brokerage commissions and fees are comprised mainly of commissions for securities, futures and forex
transactions and, to a lesser extent, monthly platform and other fees earned from brokerage customers using the TradeStationonline trading platform. For the three months ended June 30, 2006, brokerage commissions and fees were
approximately $20.0 million, as compared to $16.5 million for the three months ended June 30, 2005. This $3.5 million, or 21%, increase was due primarily to increased brokerage commissions of $4.1 million from higher trading volume related
mostly to growing our brokerage customer account base partially offset by reduced futures commission pricing. This $4.1 million increase was partially offset by a decrease in platform and other fees of $589,000 as a result of reduced trading
activity thresholds that needed to be met to qualify for a waiver of our monthly platform fee, as further discussed in this paragraph. The industry has been experiencing price pressure and some of our competitors continue to reduce their online
brokerage commissions and fees. We continuously review and assess our pricing  both commissions and platform fees. With respect to monthly platform fees (a $99.95 charge made to less active brokerage customers for being granted access to use
the TradeStationtrading platform), effective September 1, 2005 we launched a strategic marketing initiative which reduced materially the trading activity thresholds that need to be met to qualify for a waiver of the monthly platform
fee. Effective December 1, 2005, we launched two other strategic marketing initiatives designed mainly to accelerate growth in our futures business. The first of the December 2005 initiatives, designed to attract high-volume futures traders,
was the change from our one-price-fits-all futures commission structure to a tiered commission structure that rewards more active traders with lower pricing. Under the new pricing structure, the commission charged over the applicable exchange fee
ranges from $1.20 down to 25 cents per contract (per side). Also, our old price plan charged an all-in-one futures commission that included both exchange and brokerage fees. Under the new plan, these charges are unbundled, so that the customer pays
the applicable exchange fees for the contracts traded, plus the tiered TradeStation fees applicable to that customer. This enables customers to see how much each exchange charges for trades, and to better understand and take advantage of reduced
fees for



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exchange members. The second of the December 2005 initiatives was to further reduce the trading activity thresholds
futures, forex and equity options customers need to meet to qualify for a waiver of the monthly platform fee. We believe such marketing initiatives have contributed to our account growth during the first half of 2006. However, we cannot measure
specifically how many accounts have been added because of these initiatives and no assurances can be given that material offsetting benefits have been or will be achieved from any of these initiatives.

Interest Income Interest income is comprised of interest earned from self-clearing operations (primarily interest earned on brokerage
customer cash balances and interest earned from brokerage customer margin debit balances), interest revenue-sharing arrangements with clearing agent firms, and interest on corporate cash and cash equivalents. For the three months ended June 30,
2006, interest income was $11.2 million, as compared to approximately $5.2 million for the three months ended June 30, 2005. This $5.9 million, or 113%, increase was due primarily to increased interest rates (primarily increases in the federal
funds target rate of interest, more favorable interest income-sharing with our futures clearing agent and, to a lesser extent, increased base margin debit interest rates) and account growth. Since the beginning of 2005, the federal funds target rate
of interest was increased by 25 basis points twelve times, from 2.25% to 5.25% at June 30, 2006. These increases resulted in increases in the amounts we earned on our clients cash account balances. During the three months ended
June 30, 2006, the weighted average federal funds target rate of interest was approximately 4.90%, an increase of 68% as compared with the weighted average rate of 2.91% for the same period in 2005. Also, during the three months ended
June 30, 2006, the weighted average interest rate from income-sharing revenue earned from our futures clients was approximately 4.65%, an increase of approximately 204% as compared with the weighted average rate of 1.53% for the same period in
2005. During the three months ended June 30, 2006, the weighted average base margin debit rate that we charge our customers was 8.13%, which was 15% higher than the weighted average rate of 7.04% that we charged to our customers during the same
period of 2005. Interest income for future periods may be materially affected by further increases, no actions or decreases regarding the federal funds target rate and the extent, if any, by which our customer cash account balances
increase or decrease, as well as any decisions we may make to provide more or less favorable debit or credit rates to our customers.

Brokerage Interest Expense Brokerage interest expense consists of amounts paid or payable to brokerage customers based on credit balances maintained in brokerage accounts and other brokerage-related interest expense. Brokerage
interest expense does not include interest on company borrowings, if any, which is included in Expenses  Other Expenses below. For the three months ended June 30, 2006, brokerage interest expense was $1.1 million, as compared to
$834,000 for the three months ended June 30, 2005. This $285,000, or 34%, increase was due primarily to increased interest rates and account growth. During the three months ended June 30, 2006, the average annual credit interest rate paid
to our equities customers increased 18% to approximately 1.13%, as compared to approximately 0.96% during the three months ended June 30, 2005. As of June 30, 2006 and through the date of this report, our equities customers earn interest
at the rate of 1.25% per annum on the portion, if any, of their cash balances in excess of $10,000, and futures and forex customers earn no interest on their cash balances. Factors that will affect brokerage interest expense in the future
include: the growth, and mix of growth, of our brokerage customer base in equities, futures and forex; average assets per account and the portion of account assets held in cash; and future decisions concerning credit or debit interest rates offered
to our equities, futures and forex customers.

Subscription Fees and Other Subscription fees and other revenues are comprised
primarily of monthly fees earned for providing streaming real-time, Internet-based trading analysis software tools and data services to non-brokerage customers and, to a lesser extent, royalties and commissions received from third parties whose
customers use our legacy software products and direct sales of our legacy customer software products. Subscription fees and other revenues were approximately $2.4 million during both the three months ended June 30, 2006 and 2005. Royalties and
commissions received from third parties decreased by approximately $233,000, partially offset by increased subscription fees of $187,000. The decrease in royalties is the result of not having marketed legacy customer software products since 2000.
The increase in subscription fees was due to a monthly price increase effective May 1, 2006, of $50. The



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increase in price was partially offset by a decrease in the number of subscribers. The continued impact, if any, of this
price increase will depend upon how many customers terminate their subscription service or do not buy new subscriptions as a result of the price increase, and how many (if any) decide to become brokerage customers instead of continuing their
subscriptions. We expect royalties and commissions from third parties to continue to decrease and to reach a de minimus amount by year end.

Expenses

Employee Compensation and Benefits Employee compensation and benefits expenses are comprised
primarily of employee salaries, sales commissions and bonuses (and, beginning in 2006, stock-based compensation) and, to a lesser extent, payroll taxes, employee benefits (including group health insurance and employer contributions to benefit
programs), recruitment, temporary employee services and other related employee costs. Employee compensation and benefits expenses were $7.2 million for the three months ended June 30, 2006, as compared to $5.7 million for the three months ended
June 30, 2005, an increase of $1.5 million, or 27%. This increase was due primarily to increases in wages paid to employees of $608,000 and stock-based compensation of $365,000 and, to a lesser extent, increases in sales commissions, accrued
bonuses, employee benefits and recruitment and related expenses. The increase in wages was due to annual merit increases and increased headcount. During the three months ended June 30, 2006, there was an average of 279 full-time equivalent
employees, as compared to 263 full-time equivalent employees during the three months ended June 30, 2005. Employee compensation and benefits expenses are anticipated to increase during 2006 as a result of planned additions to employee headcount
to support expansion of our business operations, including our recently-opened Chicago office. For further discussion of stock-based compensation expense, see Recently Issued Accounting Standardsbelow.

Clearing and Execution  Clearing and execution expenses include the costs associated with executing and clearing customer trades, including
fees paid to clearing agents and clearing organizations, exchanges and other market centers, fees and royalties paid for the licensing of self-clearing, back-office software systems and related services, and commissions paid to third-party
broker-dealers. Clearing and execution expenses were approximately $6.9 million for the three months ended June 30, 2006, as compared to $5.1 million for the three months ended June 30, 2005, an increase of approximately $1.8 million, or
36%, as a result of higher trade volume. Clearing and execution costs as a percentage of brokerage commissions and fees increased to 34% during the three months ended June 30, 2006, as compared to 31% during the three months ended June 30,
2005. This increase in clearing and execution expenses, as a percentage of brokerage commissions and fees, was due primarily to lower platform fees as a result of reduced trading activity thresholds that needed to be met to qualify for a waiver of
the monthly platform fee, a new futures brokerage commission structure that rewards more active traders with lower pricing, and a change in mix (i.e., futures versus equities) to lower margin trades, partially offset by the continued benefits of
equities self-clearing and reduced clearing fee rates for futures.

Data Centers and Communications  Data centers and
communications expenses are comprised of: (i) data communications costs necessary to connect our server farms directly to electronic marketplaces, data sources and to each other; (ii) data communications costs and rack space at our
facilities where the data server farms are located; (iii) data distribution and exchange fees; and (iv) telephone, internet and other communications costs. Data centers and communications expenses were $1.6 million for the three months
ended June 30, 2006, as compared to $1.5 million for the three months ended June 30, 2005, an increase of $143,000, or 10% due primarily to increased exchange fees.

Advertising  Advertising expenses are comprised of marketing programs, primarily: advertising in various media, including direct mail,
television and print media; account opening kits, including postage; brochures; and other promotional items, including exhibit costs for industry events. Advertising expenses for the three months ended June 30, 2006 were $1.1 million, as
compared to $1.0 million for the three months ended June 30, 2005, an increase of $94,000, or 9%. The quality and success of, and potential continuous changes in, sales or marketing strategies (which continue to evolve), including the effects
of our recent decisions to lower futures commissions and the trade activity thresholds that need to be met for a brokerage customers monthly platform fee to be waived, are factors that may impact the level of advertising in the future.



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Professional Services  Professional services expenses are comprised of fees for legal,
accounting, tax, and other professional and consulting services. Professional services expenses were approximately $678,000 for the three months ended June 30, 2006, as compared to $655,000 for the three months ended June 30, 2005, an
increase of $23,000, or 4%, due primarily to increased legal fees.

Occupancy and Equipment Occupancy and equipment expenses
include rent, utilities, property taxes, repairs, maintenance and other expenses pertaining to our office space. Occupancy and equipment expenses were $634,000 for the three months ended June 30, 2006, as compared to $603,000 for the three
months ended June 30, 2005, an increase of $31,000, or 5%, due primarily to expenses related to our recently-opened Chicago office.

Depreciation and Amortization  Depreciation and amortization expenses consist primarily of depreciation on property and equipment and, to a lesser extent, amortization of intangible assets (in 2005 only). Depreciation and
amortization expenses were $565,000 for the three months ended June 30, 2006, as compared to $460,000 for the three months ended June 30, 2005, an increase of $105,000, or 23%. This increase was due primarily to higher depreciation of
fixed assets related to capital expenditures. We anticipate depreciation expense to increase during the third and fourth quarters of 2006 due to recent and planned hardware and software purchases for our data server farms and telephone
systemswhich we deem necessary to support the growth in our business and enhance and improve the quality and reliability of our brokerage services.

Other  Other expenses include insurance, regulatory fees and related costs, employee travel and entertainment, settlements for legal matters, costs related to training workshops, software maintenance,
public company expenses, supplies, postage, exchange memberships, customer debits and errors, bank charges and other administrative expenses. Other expenses were $1.2 million for the three months ended June 30, 2006, as compared to $908,000 for
the three months ended June 30, 2005, an increase of $258,000, or 28%. This increase was due primarily to increases in regulatory fees and expenses of $92,000, customer debits and errors of $68,000, loss on the write-off of fixed assets of
$64,000, travel-related expenses of $63,000 and software maintenance costs of $52,000, partially offset by decreased insurance expenses of $90,000.

Six
Months Ended June 30, 2006 and 2005

Net revenues were $61.8 million for the six months ended June 30, 2006, as compared to
$45.2 million for the six months ended June 30, 2005, an increase of $16.6 million, or 37%. The primary reasons were increased net interest income of $10.5 million, or 132%, as a result of higher interest rates, higher aggregate cash and margin
balances and a more favorable interest-sharing arrangement with our futures clearing firm, and increased brokerage commissions and fees of approximately $6.3 million, or 19%, as a result of higher trade volume related mostly to growing our brokerage
account base.

Income before income taxes was $24.1 million (39% of net revenues) for the six months ended June 30, 2006, as compared
to $13.4 million (30% of net revenues) for the six months ended June 30, 2005, an increase of $10.7 million, or 80%. Our improvement in income before income taxes was due primarily to our increased net interest income of $10.5 million and our
increased brokerage commissions and fees of $6.3 million, partially offset by increased employee compensation and benefits of $2.9 million and increased clearing and execution costs of $2.8 million. The increase in our income before income taxes
margin from 30% to 39% was due primarily to our increased net interest income.

During the six months ended June 30, 2006, we recorded
an income tax provision of $9.5 million based upon our current estimated annual effective income tax rate of approximately 39%. During the six months ended June 30, 2005, we recorded an income tax provision of $4.9 million based upon our
then-estimated annual effective income tax rate of approximately 38%, which was partially offset by adjustments to our deferred income tax assets to reflect our anticipated federal income tax rate and other deferred income tax adjustments. See
Income Taxes below.



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Net income was approximately $14.6 million for the six months ended June 30, 2006, as compared to
$8.5 million for the six months ended June 30, 2005, an increase of $6.1 million, or 73%, due primarily to our 37% year-over-year increase in net revenues and the increase of our income before income taxes margin from 30% to 39%, partially
offset by a higher effective tax rate in 2006.

Revenues

Brokerage Commissions and Fees  For the six months ended June 30, 2006, brokerage commissions and fees were approximately $38.6 million, as compared to $32.3 million for the six months ended
June 30, 2005. This $6.3 million, or 19%, increase was due primarily to increased brokerage commissions of $7.6 million from higher trading volume related mostly to growing our brokerage customer account base partially offset by reduced futures
commission pricing. This $7.6 million increase was partially offset by a decrease in platform and other fees of $1.3 million as a result of reduced trading activity thresholds that needed to be met to qualify for a waiver of our monthly platform
fee, as further discussed in this paragraph. The industry has been experiencing price pressure and some of our competitors continue to reduce their online brokerage commissions and fees. We continuously review and assess our pricing  both
commissions and platform fees. With respect to monthly platform fees (a $99.95 charge made to less active brokerage customers for being granted access to use the TradeStationtrading platform), effective September 1, 2005 we launched a
strategic marketing initiative which reduced materially the trading activity thresholds that need to be met to qualify for a waiver of the monthly platform fee. Effective December 1, 2005, we launched two other strategic marketing initiatives
designed mainly to accelerate growth in our futures business. The first of the December 2005 initiatives, designed to attract high-volume futures traders, was the change from our one-price-fits-all futures commission structure to a tiered commission
structure that rewards more active traders with lower pricing. Under the new pricing structure, the commission charged over the applicable exchange fee ranges from $1.20 down to 25 cents per contract (per side). Also, our old price plan charged an
all-in-one futures commission that included both exchange and brokerage fees. Under the new plan, these charges are unbundled, so that the customer pays the applicable exchange fees for the contracts traded, plus the tiered TradeStation fees
applicable to that customer. This enables customers to see how much each exchange charges for trades, and to better understand and take advantage of reduced fees for exchange members. The second of the December 2005 initiatives was to further reduce
the trading activity thresholds futures, forex and equity options customers need to meet to qualify for a waiver of the monthly platform fee. We believe such marketing initiatives have contributed to our account growth during the first half of 2006.
However, we cannot measure specifically how many accounts have been added because of these initiatives and no assurances can be given that material offsetting benefits have been or will be achieved from any of these initiatives.

Interest Income For the six months ended June 30, 2006, interest income was $20.7 million, as compared to approximately $9.4 million
for the six months ended June 30, 2005. This $11.3 million, or 120%, increase was due primarily to increased interest rates (increases in the federal funds target rate of interest, more favorable interest income-sharing with our futures
clearing agent and increased base margin debit interest rates) and account growth. Since the beginning of 2005, the federal funds target rate of interest was increased by 25 basis points twelve times, from 2.25% to 5.25% at June 30, 2006. These
increases resulted in increases in the amounts we earned on our clients cash account balances. During the six months ended June 30, 2006, the weighted average federal funds target rate of interest was approximately 4.66%, an increase of
74% as compared with the weighted average rate of 2.68% for the same period in 2005. Also, during the six months ended June 30, 2006, the weighted average interest rate from income-sharing revenue earned from our futures clients was
approximately 4.41%, an increase of approximately 224% as compared with the weighted average rate of 1.36% for the same period in 2005. During the six months ended June 30, 2006, the weighted average base margin debit rate that we charge our
customers was 8.13%, which was 20% higher than the weighted average rate of 6.80% that we charged to our customers during the same period of 2005. Interest income for future periods may be materially affected by further increases, no
actions or decreases regarding the federal funds target rate and the extent, if any, by which our customer cash account balances increase or decrease, as well as any decisions we may make to provide more or less favorable debit or credit rates
to our customers.



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Brokerage Interest Expense For the six months ended June 30, 2006, brokerage interest
expense was $2.2 million, as compared to $1.4 million for the six months ended June 30, 2005. This $771,000, or 53%, increase was due primarily to increased interest rates and account growth. During the six months ended June 30, 2006, the
average annual credit interest rate paid to our equities customers increased 31% to approximately 1.13%, as compared to approximately 0.86% during the three months ended June 30, 2005. As of June 30, 2006 and through the date of this
report, our equities customers earn interest at the rate of 1.25% per annum on the portion, if any, of their cash balances in excess of $10,000, and futures and forex customers earn no interest on their cash balances. Factors that will affect
brokerage interest expense in the future include: the growth, and mix of growth, of our brokerage customer base in equities, futures and forex; average assets per account and the portion of account assets held in cash; and future decisions
concerning credit or debit interest rates offered to our equities, futures and forex customers.

Subscription Fees and Other
Subscription fees and other revenues were approximately $4.7 million during the six months ended June 30, 2006, as compared to $4.9 million during the six months ended June 30, 2005, a decrease of approximately $161,000, or 3%, due
primarily to a decrease in royalties and commissions received from third parties of $308,000, partially offset by increased subscription fees of $147,000. The decrease in royalties is the result of not having marketed legacy customer software
products since 2000. The increase in subscription fees was due to a monthly price increase, effective May 1, 2006, of $50. The increase in price was partially offset by a decrease in the number of subscribers. The continued impact, if any, of
this price increase will depend upon how many customers terminate their subscription service or do not buy new subscriptions as a result of the price increase, and how many (if any) decide to become brokerage customers instead of continuing their
subscriptions. We expect royalties and commissions from third parties to continue to decrease and to reach a de minimus amount by year end.

Expenses

Employee Compensation and Benefits Employee compensation and benefits expenses were $14.2 million
for the six months ended June 30, 2006, as compared to $11.3 million for the six months ended June 30, 2005, an increase of $2.9 million, or 26%. This increase was due primarily to increases in wages paid to employees of $1.1 million,
stock-based compensation of $765,000, sales commissions of $336,000, accrued bonus of $320,000 and, to a lesser extent, increases in employee benefits, recruitment and related expenses, and payroll taxes. The increase in wages was due to annual
merit increases and increased headcount. During the six months ended June 30, 2006, there was an average of 274 full-time equivalent employees, as compared to 260 full-time equivalent employees during the six months ended June 30, 2005.
Employee compensation and benefits expenses are anticipated to increase during 2006 as a result of planned additions to employee headcount to support expansion of our business operations, including our recently-opened Chicago office. For further
discussion of stock-based compensation expense, see Recently Issued Accounting Standardsbelow.

Clearing and Execution
 Clearing and execution expenses were approximately $12.7 million for the six months ended June 30, 2006, as compared to $9.9 million for the six months ended June 30, 2005, an increase of approximately $2.8 million, or 28%, as a
result of higher trade volume. Clearing and execution costs as a percentage of brokerage commissions and fees increased to 33% during the six months ended June 30, 2006, as compared to 31% during the six months ended June 30, 2005. This
increase in clearing and execution expenses, as a percentage of brokerage commissions and fees, was due primarily to lower platform fees as a result of reduced trading activity thresholds that needed to be met to qualify for a waiver of the monthly
platform fee, a new futures brokerage commission structure that rewards more active traders with lower pricing, and a change in mix (i.e., futures versus equities) to lower margin trades, partially offset by the benefits received from self-clearing
of equity option trades for the entire period in 2006 (as opposed to one quarter in the same period of 2005) and the continued benefits of equities self-clearing and reduced clearing fee rates for futures.



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Data Centers and Communications  Data centers and communications expenses were $3.1 million
for the six months ended June 30, 2006, as compared to $3.0 million for the six months ended June 30, 2005, an increase of $100,000, or 3%, due primarily to increased data re-vending and exchange fees of $293,000, partially offset by
decreased circuit costs of $193,000.

Advertising  Advertising expenses for the six months ended June 30, 2006 were $2.1
million, as compared to $2.0 million for the six months ended June 30, 2005, an increase of $88,000, or 4%. The quality and success of, and potential continuous changes in, sales or marketing strategies (which continue to evolve), including the
effects of our recent decisions to lower futures commissions and the trade activity thresholds that need to be met for a brokerage customers monthly platform fee to be waived, are factors that may impact the level of advertising in the future.

Professional Services  Professional services expenses were approximately $1.4 million for the six months ended June 30,
2006, as compared to $1.7 million for the six months ended June 30, 2005, a decrease of $271,000, or 16%, due primarily to decreased legal fees.

Occupancy and Equipment Occupancy and equipment expenses were $1.3 million for the six months ended June 30, 2006, as compared to $1.2 million for the six months ended June 30, 2005, an
increase of $52,000, or 4%, due primarily to expenses related to our recently-opened Chicago office.

Depreciation and Amortization
 Depreciation and amortization expenses were $1.0 million for the six months ended June 30, 2006, as compared to $895,000 for the six months ended June 30, 2005, an increase of $153,000, or 17%. This increase was due primarily to
higher depreciation of fixed assets related to capital expenditures. We anticipate depreciation expense to increase during the third and fourth quarters of 2006 due to recent hardware and software purchases for our data server farms and telephone
systems - which we deem necessary to support the growth in our business and to enhance and improve the quality and reliability of our brokerage services.

Other  Other expenses were $1.9 million for the six months ended June 30, 2006, as compared to $1.8 million for the six months ended June 30, 2005, an increase of $128,000, or 7%. This increase
was due primarily to increases in regulatory fees and expenses of $126,000, travel-related expenses of $81,000, loss on the write-off of fixed assets of $64,000, software maintenance costs of $59,000, public company expenses of $54,000, and cost of
supplies of $35,000, partially offset by decreased insurance expenses of $172,000 and decreased customer debits and errors of $118,000. The decrease in customer debits and errors was due primarily to the collection of $200,000 of a receivable from a
brokerage customer, previously considered uncollectible and fully reserved, partially offset by customer credits related to outages.

Variability of
Quarterly 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 may result in volatility in the price of our common stock. For information regarding the risks related to the
variability of quarterly results, see ITEM 1A. RISK FACTORS of PART I of the Annual Report on Form 10-K of TradeStation Group for the year ended December 31, 2005.

Income Taxes

During the three and six months ended June 30, 2006, we recorded income tax
provisions of $5.0 million and $9.5 million, respectively, based upon our estimated annual effective income tax rate of approximately 39%. During the three and six months ended June 30, 2005, we recorded income tax provisions of $2.8 million
and $4.9 million, respectively, based upon our then-estimated annual effective income tax rate of approximately 38%, which was partially offset by adjustments to our deferred income tax assets to reflect our anticipated federal income tax rate and
other deferred income tax adjustments.



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As of June 30, 2006, for financial reporting purposes, we estimate that we had available for federal
income tax purposes total net operating loss carryforwards and income tax credit carryforwards of approximately $2.5 million and $124,000, respectively (expiring between 2010 and 2019). These amounts are subject to annual usage limitations of
approximately $545,000. These limitations are cumulative to the extent they are not utilized in any year.

See Note 11 of Notes to
Consolidated Financial Statements  INCOME TAXES.

Liquidity and Capital Resources

As of June 30, 2006, we had cash and cash equivalents of approximately $81.2 million, of which $1.7 million was restricted, supporting a facility
lease. On July 5, 2006, as a result of TradeStation Securities June 30, 2006 month-end calculation under Rule 15c3-3 of the Securities Exchange Act of 1934 (see below), $1.6 million of the $410.1 million of cash segregated in
compliance with federal regulations shown on our consolidated balance sheet at June 30, 2006 was transferred to cash and cash equivalents.

As of June 30, 2006, TradeStation Securities had: $410.1 million of cash segregated in compliance with federal regulations in special reserve bank accounts for the exclusive benefit of customers under Rule 15c3-3 of the Securities
Exchange Act of 1934 and other regulations; receivables from brokerage customers of $78.9 million; and receivables from brokers, dealers, clearing organizations and clearing agents of $22.3 million. Client margin loans are demand loan obligations
secured in part by cash and/or readily marketable securities. Receivables from and payables to brokers, dealers, clearing organizations and clearing agents represent primarily current open transactions, which usually settle, or can be closed out,
within a few business days.

Liquidity needs relating to client trading and margin borrowing activities are met primarily through cash
balances in brokerage client accounts, which were $507.8 million at June 30, 2006. Management believes that brokerage cash balances and operating earnings will continue to be the primary source of liquidity for TradeStation Securities in the
future.

TradeStation Securities is subject to the net capital requirements of the SECs Uniform Net Capital Rule (Rule 15c3-1) and
the CFTCs financial requirement (Regulation 1.17). TradeStation Securities calculates net capital requirements using the alternative method, which requires the maintenance of minimum net capital, as defined by the rules, equal to
the greater of (i) $250,000 and (ii) 2.0% of aggregate customer debit balances. Customer debit items are a function of customer margin receivables and may fluctuate significantly, resulting in a significant fluctuation in our net capital
requirements. At June 30, 2006, TradeStation Securities had net capital of approximately $43.3 million (40.3% of aggregate debit items), which was approximately $41.2 million in excess of its required net capital of approximately $2.1 million.

In addition to net capital requirements, as a self-clearing broker-dealer TradeStation Securities is subject to DTCC, OCC, and other cash
deposit requirements, which are and may continue to be large in relation to TradeStation Groups total liquid assets, and which may fluctuate significantly from time to time based upon the nature and size of TradeStation Securities active
trader clients securities trading activity. As of June 30, 2006, we had interest-bearing security deposits and short-term treasury bills totaling $13.2 million with clearing organizations for the self-clearing of equities and standardized
equity option trades.

As of June 30, 2006, we have no long-term debt obligations or capital lease obligations. A summary of our
operating lease obligations (net of subleases) and minimum purchase obligations (related to back-office systems and telecommunications services) is as follows:



|                            |  |                        |            |      |   |             |  |             |           |            |   |           |  |   |          
|--------------------------- |  | ---------------------- | ---------- | ---- | - | ----------- |  | ----------- | --------- | ---------- | - | --------- |  | - | ---------
|                            |  | Payments Due By Period
|Contractual Obligations     |  | Total                  |            | 2006 |   | 2007 - 2009 |  | 2010 - 2011 |           | Thereafter
|Operating lease obligations |  | $                      | 14,112,598 |      | $ | 1,502,095   |  | $           | 6,876,666 |            | $ | 4,346,551 |  | $ | 1,387,286
|Purchase obligations        |  |                        | 1,948,189  |      |   | 1,033,643   |  |             | 884,546   |            |   | 30,000    |  |   |         
|                            |  |                        |            |      |   |             |  |             |           |            |   |           |  |   |          
|Total                       |  | $                      | 16,060,787 |      | $ | 2,535,738   |  | $           | 7,761,212 |            | $ | 4,376,551 |  | $ | 1,387,286
|                            |  |                        |            |      |   |             |  |             |           |            |   |           |  |   |          



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In addition to the purchase obligations set forth in the table above, we currently anticipate, in order
to provide for additional growth of our brokerage business (there being no assurance additional growth will occur) and to enhance and improve the quality and reliability of our brokerage services, capital expenditures of up to $1.8 million for the
remainder of 2006. These capital expenditures are primarily for the purchase of computer hardware and software for our data server farms and back-office systems. In addition, during June 2006, we acquired approximately $3.4 million of fixed assets
that had not yet been paid as of June 30, 2006. These purchases related primarily to hardware and software for our data server farms, telephone and recording systems and, to a lesser extent, fixed assets and leasehold improvements related to
our Chicago office. These expenditures are expected to be funded through operating cash flows, capital leases, or a combination of the two.

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.

Net cash provided by operating activities totaled approximately $5.1 million and $4.2 million during the six months ended June 30, 2006 and 2005,
respectively. Net cash provided by operating activities during the six months ended June 30, 2006 of $5.1 million was due primarily to net income and adjustments for non-cash items, partially offset by timing differences related to a decrease
in net brokerage customer assets and liabilities, including timing differences related to funding cash segregated in compliance with federal regulations, and, to a lesser extent, increases in deposits with clearing organizations and clearing agents
and increases in other assets. Net cash provided by operating activities of $4.2 million during the six months ended June 30, 2005 was due primarily to net income, adjustments for non-cash items and reduced deposits with clearing organizations,
partially offset by pre-payments for income taxes, decreases in other assets, increases in accounts payable and accrued expenses, and timing differences related to cash segregated in compliance with federal regulations (including approximately $5.1
million transferred from cash segregated in compliance with federal regulations to cash and cash equivalents on July 5, 2005).

Investing activities used cash of $2.8 million and $1.3 million during the six months ended June 30, 2006 and 2005, respectively. Investing activities in both years were primarily for capital expenditures (mostly computer hardware to
support the growth of our data server farms).

Financing activities provided cash of $3.8 million and $2.2 million during the six months
ended June 30, 2006 and 2005, respectively. Proceeds from the issuance of common stock related to the exercise of stock options from our incentive stock plans provided cash of approximately $1.9 million and $2.2 million during the six months
ended June 30, 2006 and 2005, respectively. Excess tax benefits from the exercise of stock options were approximately $1.9 million during the six months ended June 30, 2006.

Recently Issued Accounting Standards

In July 2006, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the
minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also prescribes guidance on derecognition, measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently in the process of determining the impact, if any, that the adoption of FIN 48 will have on our financial position and
results of operations



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We adopted SFAS No. 123 (revised 2004), Share-Based Payment(SFAS 123R),
effective January 1, 2006. SFAS 123R, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95,
Statement of Cash Flows. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of income based on their fair values. Pro forma disclosure is no longer an
alternative. We have adopted the fair value provisions of SFAS 123R using the modified-prospective-transition method. Under the modified-prospective-transition method of adoption, compensation cost is recognized for all stock-based awards issued
after the effective date, and for the portion of outstanding awards for which the requisite service has not yet been rendered (i.e., stock-based awards granted prior to the effective date, but not yet vested as of the effective date). Under this
method of transition, results for prior periods are not restated. As a result of adopting SFAS 123R, the charge to income before income taxes for the three and six months ended June 30, 2006 was $365,000 and $765,000, respectively, of
stock-based compensation included in employee compensation and benefits in our consolidated statement of income. The impact of adopting SFAS 123R is a reduction to net income for the three and six months ended June 30, 2006 of $307,000 and
$686,000, respectively. The impact of adopting SFAS 123R on basic and diluted earnings per share for the three months ended June 30, 2006 is $0.01 per share and $0.00 per share, respectively, lower. The impact of adopting SFAS 123R on both
basic and diluted earnings per share for the six months ended June 30, 2006 is $0.01 per share.

Prior to the adoption of SFAS 123R,
we presented all benefits of tax deductions resulting from the exercise of stock options as operating cash flows in the statement of cash flows. SFAS No. 123R requires the benefits of tax deductions in excess of recognized compensation costs to
be reported as a financing cash flow, rather than as an operating cash flow as required under the previous literature. This requirement reduced net operating cash flows and increased net financing cash flows by approximately $1.9 million during the
six months ended June 30, 2006. See Note 2  STOCK-BASED COMPENSATION for further information regarding our stock-based compensation assumptions and expenses, including pro forma disclosures for prior periods as if we had recorded
stock-based compensation expenses.

As of June 30, 2006, there was approximately $5.7 million of unrecognized compensation cost,
adjusted for estimated forfeitures, related to unvested stock-based payments granted to the companys employees and non-employee directors. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures, and
is expected to be recognized over 3.5 years.

We adopted SFAS No. 154, Accounting Changes and Error Corrections, effective
January 1, 2006. SFAS No. 154, which is a replacement of APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, provides guidance on accounting for and
reporting of accounting changes and error corrections. It requires a voluntary change in accounting principle to be applied retrospectively to all prior periods financial statements as if the principle had always been applied. Previously,
voluntary changes in accounting principles were required to be recognized by including the cumulative effect of changing to the new accounting principle in net income during the period of change. The adoption of SFAS No. 154 did not have any
impact on our consolidated financial position, results of operations or cash flows.

Off-Balance Sheet Arrangements

In the ordinary course of business, there are various contingencies which are not reflected in the consolidated financial statements. These include
customer activities involving the execution, settlement and financing of various customer securities and futures transactions. These activities may expose the company to off-balance sheet credit risk in the event the customers are unable to fulfill
their contractual obligations.



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Nearly all TradeStation Securities customer accounts are margin accounts. In margin transactions,
TradeStation Securities may be obligated for credit extended to its customers by its clearing agents that are collateralized by cash and securities in the customers accounts with those clearing agents. In connection with securities activities,
TradeStation Securities also executes customer transactions involving the sale of securities not yet purchased (short sales), all of which are transacted on a margin basis subject to federal, self-regulatory organization and individual
exchange regulations and TradeStation Securities and its clearing agents internal policies. Additionally, TradeStation Securities may be obligated for credit extended to its customers by its clearing agents for futures transactions that
are collateralized by cash and futures positions in the customers accounts with those clearing agents. In all cases, such transactions may expose TradeStation Securities to significant off-balance sheet credit risk in the event customer
collateral is not sufficient to fully cover losses that customers may incur. In the event customers fail to satisfy their obligations, TradeStation Securities may be required to purchase or sell financial instruments at prevailing market prices to
fulfill the customers obligations.

TradeStation Securities seeks to manage the risks associated with its customers activities
by requiring customers to maintain collateral in their margin accounts in compliance with various regulatory requirements, internal requirements, and the requirements of clearing agents. TradeStation Securities and its clearing agents monitor
required margin levels on an intra-day basis and, pursuant to such guidelines, require the customers to timely deposit additional collateral or to reduce positions when necessary.

TradeStation Securities provides guarantees to its clearing organization and exchanges under their standard membership agreements, which require members
to guarantee the performance of other members. Under the agreements, if another member becomes unable to satisfy its obligations to the clearing organization and exchanges, other members would be required to meet shortfalls. TradeStation
Securities liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, management believes that the possibility of the company being required to make payments under these
arrangements is remote. Accordingly, no liability has been recorded for these potential events.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk generally represents the risk of
loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest rates or market prices. We have established policies, procedures and internal processes governing our management of market
risks in the normal course of our business operations. We do not hold any market risk sensitive instruments for trading purposes.

TradeStation Securities seeks to manage the risks associated with our customers activities by requiring customers to maintain margin collateral and reduce concentrated positions in compliance with regulatory and internal guidelines.
TradeStation Securities monitors required margin levels on an intra-day basis and, pursuant to such guidelines, requires customers to deposit additional collateral, or to reduce positions, when necessary.

As a self-clearing broker-dealer, TradeStation Securities holds interest-earning assets, mainly customer funds required to be segregated in compliance
with federal regulations. These funds totaled $410.1 million at June 30, 2006. Interest-earning assets are financed primarily by short-term interest-bearing liabilities, which totaled $507.8 million at June 30, 2006, in the form of
customer cash balances. In addition to earning interest on the customer funds segregated in compliance with federal regulations, TradeStation Securities earns a net interest spread on the difference between amounts earned on customer margin loans
and amounts paid on customer cash balances. Since TradeStation Securities establishes the rate paid on customer cash balances and the rate charged on customer margin loans, a substantial portion of our interest rate risk is under our direct
management. TradeStation Securities also earns interest from interest revenue-sharing arrangements with its clearing agents. We estimate that, based upon our brokerage customer balances at June 30, 2006, for each basis point increase or
decrease in interest rates retained by the company there is an annual impact of approximately $42,000 to our net income.



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Changes in interest rates also affect the interest earned on our cash and cash equivalents and security
deposits. To reduce this interest rate risk, we are currently invested in investments with short maturities. As of June 30, 2006, our cash and cash equivalents consisted primarily of interest-bearing cash deposits and money market funds and our
security deposits consisted primarily of interest-bearing cash deposits and treasury bills. Any increase or decrease in interest rates will not have a material impact on our interest earned on our corporate cash balances or security deposits.

TradeStation Securities seeks to manage risks associated with its securities borrowing activities by requiring credit approvals for
counterparties, by monitoring the collateral values for securities borrowed on a daily basis and by obtaining additional collateral as needed. See Note 10 of Notes to Consolidated Financial Statements  COMMITMENTS AND CONTINGENCIES 
General Contingencies and Guarantees.

Our revenues and financial instruments are denominated primarily in U.S. dollars, and we do
not invest in derivative financial instruments.

ITEM 4. 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 were effective at the
reasonable assurance level as of the end of the period covered by this report. 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 control over financial reporting that occurred during the second quarter of 2006 that have materially affected, or are reasonably likely to materially affect, the companys
internal control over financial reporting.



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PART II - OTHER INFORMATION

ITEM 1A. RISK FACTORS

There have been no material changes in risk factors during the first half of 2006 from
those previously discussed in ITEM 1A, RISK FACTORS, of PART I of the Annual Report on Form 10-K of TradeStation Group for the year ended December 31, 2005. In reading and evaluating the information set forth in this report, in addition to
considering and evaluating issues, uncertainties and risk factors discussed in Part I of this report, we refer you to the issues, uncertainties and risk factors disclosed in our Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Sales of Unregistered Securities

During the three months ended June 30, 2006, we issued to one employee options to purchase 10,000 shares of common stock. Such options vest
ratably in annual increments over a five-year period and are exercisable at a price of $16.05 per share, which was the fair market value (as defined in the Incentive Stock Plan) of the Companys common stock on the date the options were
granted. All of the options were granted under the Incentive Stock Plan in the ordinary course and expire, if they remain unexercised, on the tenth anniversary of the date on which they were granted. During the three months ended June 30, 2006,
we also issued to four nonemployee directors options to purchase an aggregate of 28,000 shares of common stock. Such options vest ratably in annual increments over a three-year period and are exercisable at a price of $13.53 per share, which was the
fair market value (as defined in our Nonemployee Director Stock Option Plan) of our common stock on the date on which the options were granted. All of the options were granted under our Nonemployee Director Stock Option Plan, and expire, if they
remain unexercised, on the fifth 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 third quarter of 2005.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) Meeting

On June 6, 2006, TradeStation Group held its 2006 Annual Meeting of Shareholders (the Annual Meeting).

(b) Election of Board of Directors

At the Annual
Meeting, an election was held for the Board of Directors of TradeStation Group. All seven nominees to the Board of Directors were elected (all of whom were re-elected), receiving the number and percentage of votes for election and abstentions as set
forth next to their respective names below:



|                     |  |              |  |            |             |  |         |  |            |  
|-------------------- |  | ------------ |  | ---------- | ----------- |  | ------- |  | ---------- | -
|                     |  | For Election |  |            | Abstentions | 
|Nominee for Director |  | Number       |  | Percentage |             |  | Number  |  | Percentage |  
|Ralph L. Cruz        |  | 40,555,145   |  | 99.2       | %           |  | 329,194 |  | 0.8        | %
|William R. Cruz      |  | 40,555,120   |  | 99.2       | %           |  | 329,219 |  | 0.8        | %
|Denise Dickens       |  | 40,771,176   |  | 99.7       | %           |  | 113,163 |  | 0.3        | %
|Michael W. Fipps     |  | 40,615,873   |  | 99.3       | %           |  | 268,466 |  | 0.7        | %
|Stephen C. Richards  |  | 40,731,868   |  | 99.6       | %           |  | 152,471 |  | 0.4        | %
|Salomon Sredni       |  | 40,379,249   |  | 98.8       | %           |  | 505,090 |  | 1.2        | %
|Charles F. Wright    |  | 40,731,168   |  | 99.6       | %           |  | 153,171 |  | 0.4        | %



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(c) Other Voting Matters

At the Annual Meeting, a proposal was submitted to the shareholders for their approval of an amendment and restatement of the TradeStation Group, Inc. Incentive Stock Plan, extending the expiration date to
June 5, 2016 and increasing the number of shares of the companys common stock, $.01 par value, reserved for issuance under such plan by 4,500,000, subject to any future antidilution adjustments. This proposal was approved, receiving the
votes of the holders of the number of shares of common stock voted in person or by proxy at the Annual Meeting and the percentage of total votes cast as indicated below:



|           |  |           |  |           
|---------- |  | --------- |  | ----------
|For        |  | Against   |  | Abstention
|25,954,700 |  | 6,233,072 |  | 23,370    
|80.6%      |  | 19.3%     |  | 0.1%      

In addition to the votes cast above, there were 8,673,197 broker non-votes with respect to this
proposal.

The final matter voted upon at the Annual Meeting was a proposal to ratify the selection of Ernst & Young LLP as
independent registered public accounting firm for TradeStation Group for the fiscal year ending December 31, 2006. This proposal was approved, receiving the votes of the holders of the number of shares of common stock voted in person or by
proxy at the Annual Meeting and the percentage of total votes cast as indicated below:



|           |  |         |  |           
|---------- |  | ------- |  | ----------
|For        |  | Against |  | Abstention
|40,742,960 |  | 110,986 |  | 30,393    
|99.6%      |  | 0.3%    |  | 0.1%      

ITEM 6. EXHIBITS

The following exhibits are filed as part of this report:



|     |  |                                                                                                                                                                                                                                
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | TradeStation Group, Inc. Amended and Restated Incentive Stock Plan (incorporated by reference to Exhibit B to Tradestation Groups 2006 Proxy Statement filed with the
Securities and Exchange Commission on April 28, 2006).
|     | 
|31.1 |  | Certifications of Co-Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.                                                                                              
|     | 
|31.2 |  | Certifications of Co-Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.                                                                                              
|     | 
|31.3 |  | Certifications of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.                                                                                                 
|     | 
|32.1 |  | Certification of Co-Chief Executive Officers under 18 U.S.C. §1350.                                                                                                                                                            
|     | 
|32.2 |  | Certification of Chief Financial Officer under 18 U.S.C. §1350.                                                                                                                                                                



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SIGNATURE

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



|               |  |                                                                                                                              
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------
|               |  | TradeStation Group, Inc.                                                                                                     
|               |  | Registrant                                                                                                                   
|               | 
|August 8, 2006 |  | /s/ David H. Fleischman                                                                                                      
|Date           |  | David H. Fleischman                                                                                                          
|               |  | Chief Financial Officer,                                                                                                     
|               |  | Vice President of Finance and Treasurer                                                                                      
|               |  | (Signing both in his capacity as duly authorized officer and as Principal Financial and Accounting Officer of the
Registrant)



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit                                                                                                                                                                                                                        
|10.1        |  | TradeStation Group, Inc. Amended and Restated Incentive Stock Plan (incorporated by reference to Exhibit B to Tradestation Groups 2006 Proxy Statement filed with the Securities
and Exchange Commission on April 28, 2006).
|            | 
|31.1        |  | Certifications of Co-Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.                                                                                              
|            | 
|31.2        |  | Certifications of Co-Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.                                                                                              
|            | 
|31.3        |  | Certifications of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.                                                                                                 
|            | 
|32.1        |  | Certification of Co-Chief Executive Officers under 18 U.S.C. §1350.                                                                                                                                                            
|            | 
|32.2        |  | Certification of Chief Financial Officer under 18 U.S.C. §1350.