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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

|           |  |                                                                   
|---------- |  | ------------------------------------------------------------------
|(Mark One)
|[ X]       |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|           |  | EXCHANGE ACT OF 1934                                              

For the quarterly period ended September 30, 2003

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

TradeStation Group, Inc.

(Exact name of registrant as specified in its charter)


|                                                                       |  |                                                
|---------------------------------------------------------------------- |  | -----------------------------------------------
|Florida
(State or other jurisdiction of
incorporation or organization) |  | 65-0977576
(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)

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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X] No [   ]

As of October 27, 2003, there were 41,241,774 shares of the Registrants
Common Stock outstanding.





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TABLE OF CONTENTS



|                                                |                                                                                               |                                            |  |  |  |  |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                 
|                                                | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                                |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                                                |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                                |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                                |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                                | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                                | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II  OTHER INFORMATION                    
|                                                | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                                | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                                                | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                                                | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURE                                      
|Certification of Co-Chief Executive Officer-302
|Certification of Co-Chief Executive Officer-302
|Certification of Chief Financial Officer-302   
|Certification of Co-Chief Executive Officers   
|Certification of Chief Financial Officer       



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##### Table of Contents



TRADESTATION GROUP, INC. AND SUBSIDIARIES

INDEX

|          |  |                                                                                                           |  |  |    |      |    | 
|--------- |  | --------------------------------------------------------------------------------------------------------- |  |  | -- | ---- | -- | 
|          |  |                                                                                                           |  |  |    | Page
|          |  |                                                                                                           |  |  |    |     
|PART I.   |  | FINANCIAL INFORMATION                                                                                     |  |  |    |     
|Item 1.   |  | Financial Statements:                                                                                     |  |  |    |     
|          |  | Consolidated Balance Sheets September 30, 2003 (unaudited) and December 31, 2002                          |  |  | 3  |     
|          |  | Consolidated Statements of Operations Three and Nine Months Ended September 30, 2003 and 2002 (unaudited) |  |  | 4  |     
|          |  | Consolidated Statements of Cash Flows Nine Months Ended September 30, 2003 and 2002 (unaudited)           |  |  | 5  |     
|          |  | Notes to Consolidated Financial Statements                                                                |  |  | 6  |     
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  |  | 13 |     
|Item 3.   |  | Quantitative and Qualitative Disclosures about Market Risk                                                |  |  | 31 |     
|Item 4.   |  | Controls and Procedures                                                                                   |  |  | 31 |     
|PART II.  |  | OTHER INFORMATION                                                                                         |  |  |    |     
|Item 1.   |  | Legal Proceedings                                                                                         |  |  | 32 |     
|Item 2.   |  | Changes in Securities and Use of Proceeds                                                                 |  |  | 33 |     
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                       |  |  | 33 |     
|Item 6.   |  | Exhibits and Reports on Form 8-K                                                                          |  |  | 34 |     
|Signature |  |                                                                                                           |  |  |    |      | 35 | 

2



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PART I  FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                      |                                                                                                                                                                         |                                            |   |               |            |              |   |             |            | 
|------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------------- | ---------- | ------------ | - | ----------- | ---------- | 
|                                      |                                                                                                                                                                         |                                            |   | September 30, |            | December 31,
|                                      |                                                                                                                                                                         |                                            |   | 2003          |            | 2002        
|                                      |                                                                                                                                                                         |                                            |   |               |            |             
|                                      |                                                                                                                                                                         |                                            |   | (Unaudited)   |            |              |   |            
|ASSETS:                               |                                                                                                                                                                         |                                            |   |               |            |              |   |            
|                                      | Cash and cash equivalents, including restricted cash
of $2,738,827 and $3,427,290 at September 30, 2003
and December 31, 2002, respectively                             |                                            | $ | 28,639,483    |            |              | $ | 16,410,146  |           
|                                      | Receivables from clearing firms                                                                                                                                         |                                            |   | 869,477       |            |              |   | 751,220     |           
|                                      | Accounts receivable                                                                                                                                                     |                                            |   | 150,248       |            |              |   | 181,826     |           
|                                      | Income tax receivable                                                                                                                                                   |                                            |   | 873,949       |            |              |   |            |           
|                                      | Property and equipment, net                                                                                                                                             |                                            |   | 3,855,997     |            |              |   | 4,348,752   |           
|                                      | Intangible assets, net                                                                                                                                                  |                                            |   | 101,901       |            |              |   | 244,337     |           
|                                      | Other assets                                                                                                                                                            |                                            |   | 647,658       |            |              |   | 681,513     |           
|                                      |                                                                                                                                                                         |                                            |   |               |            |              |   |            
|                                      |                                                                                                                                                                         | Total assets                               |   | $             | 35,138,713 |              |   | $           | 22,617,794 | 
|                                      |                                                                                                                                                                         |                                            |   |               |            |              |   |            
|LIABILITIES AND SHAREHOLDERS EQUITY: |                                                                                                                                                                         |                                            |   |               |            |              |   |            
|LIABILITIES:                          |                                                                                                                                                                         |                                            |   |               |            |              |   |            
|                                      | Accounts payable                                                                                                                                                        |                                            | $ | 2,503,253     |            |              | $ | 1,947,602   |           
|                                      | Accrued expenses                                                                                                                                                        |                                            |   | 6,475,361     |            |              |   | 6,894,616   |           
|                                      | Capital lease obligations                                                                                                                                               |                                            |   | 351,800       |            |              |   | 1,382,264   |           
|                                      |                                                                                                                                                                         |                                            |   |               |            |              |   |            
|                                      |                                                                                                                                                                         | Total liabilities                          |   |               | 9,330,414  |              |   |             | 10,224,482 | 
|                                      |                                                                                                                                                                         |                                            |   |               |            |              |   |            
|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, 41,147,423 and 39,588,881
issued and outstanding at September 30, 2003 and
December 31, 2002, respectively |                                            |   | 411,474       |            |              |   | 395,889     |           
|                                      | Additional paid-in capital                                                                                                                                              |                                            |   | 49,652,631    |            |              |   | 44,866,130  |           
|                                      | Accumulated deficit                                                                                                                                                     |                                            |   | (24,255,806   | )          |              |   | (32,833,307 | )         
|                                      | Accumulated other comprehensive loss                                                                                                                                    |                                            |   |              |            |              |   | (35,400     | )         
|                                      |                                                                                                                                                                         |                                            |   |               |            |              |   |            
|                                      |                                                                                                                                                                         | Total shareholders equity                 |   |               | 25,808,299 |              |   |             | 12,393,312 | 
|                                      |                                                                                                                                                                         |                                            |   |               |            |              |   |            
|                                      |                                                                                                                                                                         | Total liabilities and shareholders equity |   | $             | 35,138,713 |              |   | $           | 22,617,794 | 
|                                      |                                                                                                                                                                         |                                            |   |               |            |              |   |            

The accompanying notes are an integral part of these consolidated financial statements.

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TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                     |                                   |                                   |         |                    |            |                   |        |            |            |      |          |            |            |  |         |            |            |  
|------------------------------------ | --------------------------------- | --------------------------------- | ------- | ------------------ | ---------- | ----------------- | ------ | ---------- | ---------- | ---- | -------- | ---------- | ---------- |  | ------- | ---------- | ---------- | -
|                                     |                                   |                                   |         | Three Months Ended |            | Nine Months Ended
|                                     |                                   |                                   |         | September 30,      |            | September 30,    
|                                     |                                   |                                   |         |                    |            |                  
|                                     |                                   |                                   |         | 2003               |            | 2002              |        | 2003       |            | 2002
|                                     |                                   |                                   |         |                    |            |                   |        |            |            |     
|REVENUES:                            |                                   |                                   |         |                    |            |                   |        |            |            |      |          |            |            |  |         |           
|                                     | Brokerage revenues                |                                   | $       | 13,797,692         |            |                   | $      | 10,801,693 |            |      | $        | 37,480,564 |            |  | $       | 27,447,539 |           
|                                     | Subscription fees                 |                                   |         | 1,776,931          |            |                   |        | 1,722,113  |            |      |          | 5,182,390  |            |  |         | 4,915,384  |           
|                                     | Other                             |                                   |         | 511,416            |            |                   |        | 577,706    |            |      |          | 1,705,104  |            |  |         | 2,640,567  |           
|                                     |                                   |                                   |         |                    |            |                   |        |            |            |      |          |            |            |  |         |           
|                                     |                                   | Total revenues                    |         |                    | 16,086,039 |                   |        |            | 13,101,512 |      |          |            | 44,368,058 |  |         |            | 35,003,490 |  
|                                     |                                   |                                   |         |                    |            |                   |        |            |            |      |          |            |            |  |         |           
|OPERATING EXPENSES:                  |                                   |                                   |         |                    |            |                   |        |            |            |      |          |            |            |  |         |           
|                                     | Clearing and execution costs      |                                   |         | 4,825,451          |            |                   |        | 3,426,669  |            |      |          | 13,129,683 |            |  |         | 7,796,104  |           
|                                     | Data center costs                 |                                   |         | 1,099,579          |            |                   |        | 1,303,731  |            |      |          | 3,119,280  |            |  |         | 3,726,927  |           
|                                     | Technology development            |                                   |         | 1,773,915          |            |                   |        | 2,368,758  |            |      |          | 5,491,769  |            |  |         | 7,056,519  |           
|                                     | Sales and marketing               |                                   |         | 2,425,380          |            |                   |        | 3,027,172  |            |      |          | 7,716,847  |            |  |         | 9,772,882  |           
|                                     | General and administrative        |                                   |         | 2,482,472          |            |                   |        | 2,227,404  |            |      |          | 7,000,507  |            |  |         | 7,647,455  |           
|                                     | Amortization of intangible assets |                                   |         | 52,479             |            |                   |        | 258,548    |            |      |          | 157,436    |            |  |         | 772,868    |           
|                                     | Recovery of insurance claim       |                                   |         |                   |            |                   |        | (1,250,000 | )          |      |          |           |            |  |         | (1,250,000 | )         
|                                     |                                   |                                   |         |                    |            |                   |        |            |            |      |          |            |            |  |         |           
|                                     |                                   | Total operating expenses          |         |                    | 12,659,276 |                   |        |            | 11,362,282 |      |          |            | 36,615,522 |  |         |            | 35,522,755 |  
|                                     |                                   |                                   |         |                    |            |                   |        |            |            |      |          |            |            |  |         |           
|                                     |                                   | Income (loss) from operations     |         |                    | 3,426,763  |                   |        |            | 1,739,230  |      |          |            | 7,752,536  |  |         |            | (519,265   | )
|OTHER INCOME, net                    |                                   |                                   | 113,722 |                    |            |                   | 62,144 |            |            |      | 95,136   |            |            |  | 410,441 |           
|                                     |                                   |                                   |         |                    |            |                   |        |            |            |      |          |            |            |  |         |           
|                                     |                                   | Income (loss) before income taxes |         |                    | 3,540,485  |                   |        |            | 1,801,374  |      |          |            | 7,847,672  |  |         |            | (108,824   | )
|INCOME TAX PROVISION (BENEFIT)       |                                   |                                   | 71,000  |                    |            |                   | 6,848  |            |            |      | (729,829 | )          |            |  | 7,174   |           
|                                     |                                   |                                   |         |                    |            |                   |        |            |            |      |          |            |            |  |         |           
|                                     |                                   | Net income (loss)                 |         | $                  | 3,469,485  |                   |        | $          | 1,794,526  |      |          | $          | 8,577,501  |  |         | $          | (115,998   | )
|                                     |                                   |                                   |         |                    |            |                   |        |            |            |      |          |            |            |  |         |           
|EARNINGS (LOSS) PER SHARE:           |                                   |                                   |         |                    |            |                   |        |            |            |      |          |            |            |  |         |           
|                                     | Basic                             |                                   | $       | 0.08               |            |                   | $      | 0.04       |            |      | $        | 0.21       |            |  | $       | (0.00      | )         
|                                     |                                   |                                   |         |                    |            |                   |        |            |            |      |          |            |            |  |         |           
|                                     | Diluted                           |                                   | $       | 0.08               |            |                   | $      | 0.04       |            |      | $        | 0.20       |            |  | $       | (0.00      | )         
|                                     |                                   |                                   |         |                    |            |                   |        |            |            |      |          |            |            |  |         |           
|WEIGHTED AVERAGE SHARES
OUTSTANDING: |                                   |                                   |         |                    |            |                   |        |            |            |      |          |            |            |  |         |           
|                                     | Basic                             |                                   |         | 40,863,350         |            |                   |        | 43,698,342 |            |      |          | 40,183,181 |            |  |         | 44,261,471 |           
|                                     |                                   |                                   |         |                    |            |                   |        |            |            |      |          |            |            |  |         |           
|                                     | Diluted                           |                                   |         | 44,746,892         |            |                   |        | 43,791,189 |            |      |          | 42,977,658 |            |  |         | 44,261,471 |           
|                                     |                                   |                                   |         |                    |            |                   |        |            |            |      |          |            |            |  |         |           

The accompanying notes are an integral part of these consolidated financial statements.

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TRADESTATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                            |                                                                                          |                                             |                                 |                                                     |           |                   |            |            |           |           |            |  
|----------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------------- | --------------------------------------------------- | --------- | ----------------- | ---------- | ---------- | --------- | --------- | ---------- | -
|                                                            |                                                                                          |                                             |                                 |                                                     |           | Nine Months Ended
|                                                            |                                                                                          |                                             |                                 |                                                     |           | September 30,    
|                                                            |                                                                                          |                                             |                                 |                                                     |           |                  
|                                                            |                                                                                          |                                             |                                 |                                                     |           | 2003              |            | 2002      
|                                                            |                                                                                          |                                             |                                 |                                                     |           |                   |            |           
|CASH FLOWS FROM OPERATING ACTIVITIES:                       |                                                                                          |                                             |                                 |                                                     |           |                   |            |           
|                                                            | Net income (loss)                                                                        |                                             | $                               | 8,577,501                                           |           |                   | $          | (115,998   | )        
|                                                            | Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |                                             |                                 |                                                     |           |                   |            |            |          
|                                                            |                                                                                          | Depreciation and amortization               |                                 |                                                     | 1,699,558 |                   |            |            | 2,252,171 |          
|                                                            |                                                                                          | Loss on sale of investments                 |                                 |                                                     | 54,823    |                   |            |            |          |          
|                                                            |                                                                                          | Gain on sale of intangible assets           |                                 |                                                     |          |                   |            |            | (287,500  | )        
|                                                            |                                                                                          | Compensation expense on stock option grants |                                 |                                                     |          |                   |            |            | 37,692    |          
|                                                            |                                                                                          | (Increase) decrease in:                     |                                 |                                                     |           |                   |            |            |           |          
|                                                            |                                                                                          |                                             | Receivables from clearing firms |                                                     |           | (118,257          | )          |            |           | (646,567  | )         
|                                                            |                                                                                          |                                             | Accounts receivable             |                                                     |           | 31,578            |            |            |           | 129,033   |           
|                                                            |                                                                                          |                                             | Income tax receivable           |                                                     |           | (873,949          | )          |            |           |          |           
|                                                            |                                                                                          |                                             | Other assets                    |                                                     |           | (32,145           | )          |            |           | 170,077   |           
|                                                            |                                                                                          | Increase (decrease) in:                     |                                 |                                                     |           |                   |            |            |           |          
|                                                            |                                                                                          |                                             | Accounts payable                |                                                     |           | 555,651           |            |            |           | 209,305   |           
|                                                            |                                                                                          |                                             | Accrued expenses                |                                                     |           | (419,255          | )          |            |           | 1,302,232 |           
|                                                            |                                                                                          |                                             |                                 |                                                     |           |                   |            |           
|                                                            |                                                                                          |                                             |                                 | Net cash provided by operating activities           |           |                   | 9,475,505  |            |           |           | 3,050,445  |  
|                                                            |                                                                                          |                                             |                                 |                                                     |           |                   |            |           
|CASH FLOWS FROM INVESTING ACTIVITIES:                       |                                                                                          |                                             |                                 |                                                     |           |                   |            |           
|                                                            | Capital expenditures                                                                     |                                             |                                 | (1,049,367                                          | )         |                   |            | (1,154,356 | )        
|                                                            | Decrease in restricted cash                                                              |                                             |                                 | 688,463                                             |           |                   |            | 265,878    |          
|                                                            | Proceeds from sale/maturity of investments                                               |                                             |                                 | 46,577                                              |           |                   |            | 314,528    |          
|                                                            | Acquisition of intangible assets                                                         |                                             |                                 | (15,000                                             | )         |                   |            | (100,000   | )        
|                                                            | Proceeds from sale of intangible assets                                                  |                                             |                                 |                                                    |           |                   |            | 1,000,000  |          
|                                                            |                                                                                          |                                             |                                 |                                                     |           |                   |            |           
|                                                            |                                                                                          |                                             |                                 | Net cash (used in) provided by investing activities |           |                   | (329,327   | )          |           |           | 326,050    |  
|                                                            |                                                                                          |                                             |                                 |                                                     |           |                   |            |           
|CASH FLOWS FROM FINANCING ACTIVITIES:                       |                                                                                          |                                             |                                 |                                                     |           |                   |            |           
|                                                            | Proceeds from issuance of common stock                                                   |                                             |                                 | 4,802,086                                           |           |                   |            | 21,860     |          
|                                                            | Repurchase and retirement of common stock                                                |                                             |                                 |                                                    |           |                   |            | (2,139,181 | )        
|                                                            | Repayment of capital lease obligations                                                   |                                             |                                 | (1,030,464                                          | )         |                   |            | (959,177   | )        
|                                                            |                                                                                          |                                             |                                 |                                                     |           |                   |            |           
|                                                            |                                                                                          |                                             |                                 | Net cash provided by (used in) financing activities |           |                   | 3,771,622  |            |           |           | (3,076,498 | )
|                                                            |                                                                                          |                                             |                                 |                                                     |           |                   |            |           
|NET INCREASE IN UNRESTRICTED CASH AND
CASH EQUIVALENTS      |                                                                                          |                                             | 12,917,800                      |                                                     |           |                   | 299,997    |           
|UNRESTRICTED CASH AND CASH EQUIVALENTS,
beginning of period |                                                                                          |                                             | 12,982,856                      |                                                     |           |                   | 16,364,309 |           
|                                                            |                                                                                          |                                             |                                 |                                                     |           |                   |            |           
|UNRESTRICTED CASH AND CASH EQUIVALENTS,
end of period       |                                                                                          | $                                           | 25,900,656                      |                                                     |           | $                 | 16,664,306 |           
|                                                            |                                                                                          |                                             |                                 |                                                     |           |                   |            |           
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:           |                                                                                          |                                             |                                 |                                                     |           |                   |            |           
|                                                            | Cash paid for interest                                                                   |                                             | $                               | 65,901                                              |           |                   | $          | 171,472    |          
|                                                            |                                                                                          |                                             |                                 |                                                     |           |                   |            |           
|                                                            | Cash paid (received) for income taxes, net                                               |                                             | $                               | 142,217                                             |           |                   | $          | (18,730    | )        
|                                                            |                                                                                          |                                             |                                 |                                                     |           |                   |            |           
|SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:   |                                                                                          |                                             |                                 |                                                     |           |                   |            |           
|                                                            | Equipment acquired under capital lease obligations                                       |                                             | $                               |                                                    |           |                   | $          | 1,351,579  |          
|                                                            |                                                                                          |                                             |                                 |                                                     |           |                   |            |           

The accompanying notes are an integral part of these consolidated financial
statements.

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TRADESTATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All notes and related disclosures applicable to
the three and nine months ended September 30, 2003 and 2002 are unaudited)

TradeStation Group, Inc. (the Company), a Florida corporation formed in
2000, is the successor company to Omega Research, Inc., a Florida corporation
that was formed in 1982. TradeStation Group is listed on The Nasdaq National
Market under the symbol TRAD. TradeStation Securities, Inc. and TradeStation
Technologies, Inc. are TradeStation Groups two operating subsidiaries. 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, 2002. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the consolidated financial position as of September 30, 2003,
the consolidated results of operations for the three and nine months ended
September 30, 2003 and 2002 and the consolidated cash flows for the nine months
ended September 30, 2003 and 2002 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. Certain prior period amounts have been reclassified
to conform to the current period presentation.

(1) EARNINGS (LOSS) PER SHARE

Weighted average shares outstanding for the three and nine months ended
September 30, 2003 and 2002 are calculated as follows:

|                                                                                       |  |                      |            |                     |  |      |            |      |  |  |            |  |  |  |            | 
|-------------------------------------------------------------------------------------- |  | -------------------- | ---------- | ------------------- |  | ---- | ---------- | ---- |  |  | ---------- |  |  |  | ---------- | 
|                                                                                       |  | For the Three Months |            | For the Nine Months
|                                                                                       |  | Ended September 30,  |            | Ended September 30,
|                                                                                       |  |                      |            |                    
|                                                                                       |  | 2003                 |            | 2002                |  | 2003 |            | 2002
|                                                                                       |  |                      |            |                     |  |      |            |     
|Weighted average shares
outstanding (basic)                                            |  |                      | 40,863,350 |                     |  |      | 43,698,342 |      |  |  | 40,183,181 |  |  |  | 44,261,471 | 
|Impact of dilutive stock
options and warrants after
applying the treasury stock
method |  |                      | 3,883,542  |                     |  |      | 92,847     |      |  |  | 2,794,477  |  |  |  |           | 
|                                                                                       |  |                      |            |                     |  |      |            |      |  |  |            |  |  |  |            | 
|Weighted average shares
outstanding (diluted)                                          |  |                      | 44,746,892 |                     |  |      | 43,791,189 |      |  |  | 42,977,658 |  |  |  | 44,261,471 | 
|                                                                                       |  |                      |            |                     |  |      |            |      |  |  |            |  |  |  |            | 

Stock options and warrants outstanding for the three and nine months ended
September 30, 2003 and 2002, which are not included in the calculation of
diluted earnings (loss) per share because their impact is antidilutive, are as
follows:

|                              |  |                      |        |                     |  |      |           |      |  |  |        |  |  |  |           | 
|----------------------------- |  | -------------------- | ------ | ------------------- |  | ---- | --------- | ---- |  |  | ------ |  |  |  | --------- | 
|                              |  | For the Three Months |        | For the Nine Months
|                              |  | Ended September 30,  |        | Ended September 30,
|                              |  |                      |        |                    
|                              |  | 2003                 |        | 2002                |  | 2003 |           | 2002
|                              |  |                      |        |                     |  |      |           |     
|Stock options                 |  |                      | 27,375 |                     |  |      | 5,706,593 |      |  |  | 27,375 |  |  |  | 6,322,283 | 
|                              |  |                      |        |                     |  |      |           |      |  |  |        |  |  |  |           | 
|Warrants (expiring June 2004) |  |                      |       |                     |  |      | 386,369   |      |  |  |       |  |  |  | 386,369   | 
|                              |  |                      |        |                     |  |      |           |      |  |  |        |  |  |  |           | 

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(2) STOCK-BASED COMPENSATION  PRO FORMA NET INCOME (LOSS)

In accordance with Statement of Financial Accounting Standards (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 operations when such equity instruments are issued. No such
compensation expense was recorded for the three and nine months ended September
30, 2003. Such compensation expense for the three and nine months ended
September 30, 2002 was $0 and $38,000, respectively.

As permitted by SFAS No. 123, the Company accounts for its stock-based
compensation paid to employees using the intrinsic value method in accordance
with the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees,and related
interpretations. Generally, no stock-based employee compensation cost is
reflected in net income (loss), as all options granted under the Companys
plans have an exercise price equal to the fair value of the underlying common
stock on the date of grant.

The following table illustrates the effect on net income (loss) and
earnings (loss) per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation.

|                                                                                                                                       |                      |   |                      |      |                     |   |           |      |      |   |            |      |  |   |            |       |  
|-------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | - | -------------------- | ---- | ------------------- | - | --------- | ---- | ---- | - | ---------- | ---- |  | - | ---------- | ----- | -
|                                                                                                                                       |                      |   | For the Three Months |      | For the Nine Months
|                                                                                                                                       |                      |   | Ended September 30,  |      | Ended September 30,
|                                                                                                                                       |                      |   |                      |      |                    
|                                                                                                                                       |                      |   | 2003                 |      | 2002                |   | 2003      |      | 2002
|                                                                                                                                       |                      |   |                      |      |                     |   |           |      |     
|Net income (loss), as reported                                                                                                         |                      | $ | 3,469,485            |      |                     | $ | 1,794,526 |      |      | $ | 8,577,501  |      |  | $ | (115,998   | )    
|Deduct: Total stock-based
employee compensation
expense determined under the
fair value based method for
all awards, net of tax impact |                      |   | (376,802             | )    |                     |   | (600,469  | )    |      |   | (1,353,284 | )    |  |   | (1,846,189 | )    
|                                                                                                                                       |                      |   |                      |      |                     |   |           |      |      |   |            |      |  |   |            |      
|Pro forma net income (loss)                                                                                                            |                      | $ | 3,092,683            |      |                     | $ | 1,194,057 |      |      | $ | 7,224,217  |      |  | $ | (1,962,187 | )    
|                                                                                                                                       |                      |   |                      |      |                     |   |           |      |      |   |            |      |  |   |            |      
|Earnings (loss) per share:                                                                                                             |                      |   |                      |      |                     |   |           |      |      |   |            |      |  |   |            |      
|                                                                                                                                       | Basic, as reported   |   | $                    | 0.08 |                     |   | $         | 0.04 |      |   | $          | 0.21 |  |   | $          | (0.00 | )
|                                                                                                                                       |                      |   |                      |      |                     |   |           |      |      |   |            |      |  |   |            |      
|                                                                                                                                       | Diluted, as reported |   | $                    | 0.08 |                     |   | $         | 0.04 |      |   | $          | 0.20 |  |   | $          | (0.00 | )
|                                                                                                                                       |                      |   |                      |      |                     |   |           |      |      |   |            |      |  |   |            |      
|                                                                                                                                       | Basic, pro forma     |   | $                    | 0.08 |                     |   | $         | 0.03 |      |   | $          | 0.18 |  |   | $          | (0.04 | )
|                                                                                                                                       |                      |   |                      |      |                     |   |           |      |      |   |            |      |  |   |            |      
|                                                                                                                                       | Diluted, pro forma   |   | $                    | 0.07 |                     |   | $         | 0.03 |      |   | $          | 0.17 |  |   | $          | (0.04 | )
|                                                                                                                                       |                      |   |                      |      |                     |   |           |      |      |   |            |      |  |   |            |      

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes model with the following assumptions:

|                              |  |                      |    |                     |  |      |    |      |  |  |    |   |  |  |    |  
|----------------------------- |  | -------------------- | -- | ------------------- |  | ---- | -- | ---- |  |  | -- | - |  |  | -- | -
|                              |  | For the Three Months |    | For the Nine Months
|                              |  | Ended September 30,  |    | Ended September 30,
|                              |  |                      |    |                    
|                              |  | 2003                 |    | 2002                |  | 2003 |    | 2002
|                              |  |                      |    |                     |  |      |    |     
|Risk free interest rate       |  |                      | 2  | %                   |  |      | 4  | %    |  |  | 2  | % |  |  | 4  | %
|Dividend yield                |  |                      |   |                     |  |      |   |      |  |  |   |   |  |  |   |  
|Volatility factor             |  |                      | 68 | %                   |  |      | 66 | %    |  |  | 68 | % |  |  | 66 | %
|Weighted average life (years) |  |                      | 4  |                     |  |      | 4  |      |  |  | 4  |   |  |  | 4  |  

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(3) COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is defined as the change in a business
enterprises equity during a period arising from transactions, events or
circumstances relating to non-owner sources, such as unrealized gains or losses
on available-for-sale securities and foreign currency translation adjustments.
It includes all changes in equity during a period except those resulting from
investments by, or distributions to, owners. In June 2003, the Company
recorded a loss of approximately $55,000 when it sold an investment in
corporate stock, classified as an available-for-sale security, at market value.
Prior to the sale of such investment, temporary unrealized holding gains and
losses were excluded from earnings and reported in comprehensive income (loss).

A reconciliation of net income (loss) to comprehensive income (loss) is as
follows:

|                                                                                                         |  |                      |           |                     |  |      |           |      |  |   |           |   |  |   |          |  
|-------------------------------------------------------------------------------------------------------- |  | -------------------- | --------- | ------------------- |  | ---- | --------- | ---- |  | - | --------- | - |  | - | -------- | -
|                                                                                                         |  | For the Three Months |           | For the Nine Months
|                                                                                                         |  | Ended September 30,  |           | Ended September 30,
|                                                                                                         |  |                      |           |                    
|                                                                                                         |  | 2003                 |           | 2002                |  | 2003 |           | 2002
|                                                                                                         |  |                      |           |                     |  |      |           |     
|Net income (loss)                                                                                        |  | $                    | 3,469,485 |                     |  | $    | 1,794,526 |      |  | $ | 8,577,501 |   |  | $ | (115,998 | )
|Unrealized holding gains (losses)
on available-for-sale securities
arising during period,
net of tax     |  |                      |          |                     |  |      | (39,690   | )    |  |   | (19,423   | ) |  |   | (39,690  | )
|Reclassification adjustment for
loss on available-for-sale
securities included in net
income, net of tax |  |                      |          |                     |  |      |          |      |  |   | 54,823    |   |  |   |         |  
|                                                                                                         |  |                      |           |                     |  |      |           |      |  |   |           |   |  |   |          |  
|Comprehensive income (loss)                                                                              |  | $                    | 3,469,485 |                     |  | $    | 1,754,836 |      |  | $ | 8,612,901 |   |  | $ | (155,688 | )
|                                                                                                         |  |                      |           |                     |  |      |           |      |  |   |           |   |  |   |          |  

(4) ACCRUED EXPENSES

Accrued expenses consist of the following as of September 30, 2003 and
December 31, 2002:

|                                         |  |               |           |              |  |   |           | 
|---------------------------------------- |  | ------------- | --------- | ------------ |  | - | --------- | 
|                                         |  | September 30, |           | December 31,
|                                         |  | 2003          |           | 2002        
|                                         |  |               |           |             
|Payroll and related accruals             |  | $             | 1,049,662 |              |  | $ | 923,896   | 
|Deferred rent and related concessions    |  |               | 849,387   |              |  |   | 770,205   | 
|Data and exchange fees                   |  |               | 816,418   |              |  |   | 768,000   | 
|Uninsured loss reserves                  |  |               | 625,000   |              |  |   | 750,000   | 
|Clearing deposits                        |  |               | 533,052   |              |  |   | 416,731   | 
|Consulting and professional fees         |  |               | 531,090   |              |  |   | 607,740   | 
|Estimated loss on sublease of facilities |  |               | 508,049   |              |  |   | 732,839   | 
|Other                                    |  |               | 1,562,703 |              |  |   | 1,925,205 | 
|                                         |  |               |           |              |  |   |           | 
|                                         |  | $             | 6,475,361 |              |  | $ | 6,894,616 | 
|                                         |  |               |           |              |  |   |           | 

Other includes customer credits, commissions to third parties, technical
support costs, returns, advertising (at December 31, 2002), event termination
fees (at December 31, 2002), and other accrued expenses and reserves, none of
which individually exceeds 5% of total liabilities.

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(5) NET CAPITAL REQUIREMENTS

TradeStation Securities is subject to the net capital requirements of the
Securities and Exchange Commissions Uniform Net Capital Rule (Rule 15c3-1) and
the Commodity Futures Trading Commissions financial requirement (Regulation
1.17). To satisfy each requirement, TradeStation Securities is required to
maintain net capital equal to the greater of $250,000 or
1/15th of aggregate
indebtedness. Also, the ratio of aggregate indebtedness to net capital cannot
exceed 15 to 1. As of September 30, 2003, TradeStation Securities had net
capital of $10.6 million, which was $10.0 million in excess of its required net
capital of $599,000, and a ratio of aggregate indebtedness to net capital of
0.85 to 1. As of December 31, 2002, TradeStation Securities had net capital of
$8.3 million, which was $8.0 million in excess of its required net capital of
$273,000, and a ratio of aggregate indebtedness to net capital of 0.49 to 1.

(6) SEGMENT AND RELATED INFORMATION

For the three and nine months ended September 30, 2003 and 2002,
TradeStation Group operated in two principal business segments: (i) brokerage
services; and (ii) software products and services. The Company evaluates the
performance of its segments based on revenue and operating income. The
brokerage services segment represents the operations of TradeStation Securities
and the software products and services segment represents the operations of
TradeStation Technologies. All intercompany transactions are eliminated in
consolidation.

|                               |                                |   |                      |            |                     |   |            |            |      |   |            |             |   |   |            |            |  
|------------------------------ | ------------------------------ | - | -------------------- | ---------- | ------------------- | - | ---------- | ---------- | ---- | - | ---------- | ----------- | - | - | ---------- | ---------- | -
|                               |                                |   | For the Three Months |            | For the Nine Months
|                               |                                |   | Ended September 30,  |            | Ended September 30,
|                               |                                |   |                      |            |                    
|                               |                                |   | 2003                 |            | 2002                |   | 2003       |            | 2002
|                               |                                |   |                      |            |                     |   |            |            |     
|Revenues:                      |                                |   |                      |            |                     |   |            |            |      |   |            |             |   |   |            |           
|                               | Brokerage services             |   | $                    | 13,854,834 |                     |   | $          | 10,803,688 |      |   | $          | 37,640,019  |   |   | $          | 27,449,534 |  
|                               | Software products and services |   |                      | 6,275,705  |                     |   |            | 5,087,824  |      |   |            | 17,607,914  |   |   |            | 13,897,156 |  
|                               | Eliminations                   |   |                      | (4,044,500 | )                   |   |            | (2,790,000 | )    |   |            | (10,879,875 | ) |   |            | (6,343,200 | )
|                               |                                |   |                      |            |                     |   |            |            |      |   |            |             |   |   |            |           
|                               |                                | $ | 16,086,039           |            |                     | $ | 13,101,512 |            |      | $ | 44,368,058 |             |   | $ | 35,003,490 |           
|                               |                                |   |                      |            |                     |   |            |            |      |   |            |             |   |   |            |           
|Income (loss) from operations: |                                |   |                      |            |                     |   |            |            |      |   |            |             |   |   |            |           
|                               | Brokerage services             |   | $                    | 1,028,315  |                     |   | $          | 484,328    |      |   | $          | 1,650,637   |   |   | $          | 146,782    |  
|                               | Software products and services |   |                      | 2,398,448  |                     |   |            | 1,254,902  |      |   |            | 6,101,899   |   |   |            | (666,047   | )
|                               |                                |   |                      |            |                     |   |            |            |      |   |            |             |   |   |            |           
|                               |                                | $ | 3,426,763            |            |                     | $ | 1,739,230  |            |      | $ | 7,752,536  |             |   | $ | (519,265   | )         
|                               |                                |   |                      |            |                     |   |            |            |      |   |            |             |   |   |            |           

|                     |                                |   |               |            |              |   |            |            | 
|-------------------- | ------------------------------ | - | ------------- | ---------- | ------------ | - | ---------- | ---------- | 
|                     |                                |   | As of         |            | As of       
|                     |                                |   | September 30, |            | December 31,
|                     |                                |   | 2003          |            | 2002        
|                     |                                |   |               |            |             
|Identifiable assets: |                                |   |               |            |              |   |            |           
|                     | Brokerage services             |   | $             | 21,567,925 |              |   | $          | 14,585,643 | 
|                     | Software products and services |   |               | 13,570,788 |              |   |            | 8,032,151  | 
|                     |                                |   |               |            |              |   |            |           
|                     |                                | $ | 35,138,713    |            |              | $ | 22,617,794 |           
|                     |                                |   |               |            |              |   |            |           

(7) INCOME TAX PROVISION (BENEFIT)

During the nine months ended September 30, 2003, the Company recorded a
net income tax benefit of $730,000 comprised of refunds related to prior year
federal income tax returns (see below), and a state income tax refund received
during the 2003 first quarter for the overpayment of a prior years income tax,
partially offset by an increase to the valuation allowance established for the
amount due under the current years alternative minimum tax calculation. Other
than the increase to the valuation allowance for the amount due under the
current years alternative minimum tax calculation, the income tax expense
associated with net operating income generated during the nine months ended
September 30, 2003 was totally offset by a reduction to the previously
established valuation allowance associated with deferred tax assets, primarily
net operating loss carryforwards.

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In February 2003, in connection with an Internal Revenue Service (IRS)
audit of a prior years federal income tax return, the Company learned that it
was entitled to a $72,000 refund related to research and development tax
credits. The Company recorded that benefit in the 2003 first quarter. Also in
conjunction with the IRS audit, in late April 2003 the Company was advised that
it was due a refund relating to its 1997 income taxes paid. Accordingly,
during the 2003 second quarter, the Company recorded a benefit of approximately
$802,000. The full amount of this federal income tax refund and related
interest thereon was received during October 2003.

(8) RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN No.
45). FIN No. 45 elaborates on the disclosures to be made by a guarantor in
its financial statements about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN No. 45 should be applied only on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantors fiscal year end. The disclosure requirements were effective
for financial statements ending after December 15, 2002. The adoption of FIN
No. 45 did not have any impact on the Companys consolidated financial
position, results of operations or cash flows.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN No. 46). FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated support from other parties. FIN No. 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entitys activities or
entitled to receive a majority of the entitys residual returns or both. FIN
No. 46 also requires disclosures about variable interest entities that the
company is not required to consolidate but in which it has a significant
variable interest. The consolidation requirements of FIN No. 46 apply
immediately to variable interest entities created after January 31, 2003 and to
variable interest entities that existed prior to February 1, 2003 in the first
interim or annual period beginning after December 15, 2003. The adoption of
FIN No. 46 is not expected to have any impact on the Companys consolidated
financial position, results of operations or cash flows as the Company does not
have any variable interest entities.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. Most of
the guidance in SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, applied prospectively. The adoption of SFAS No.
149 did not have any impact on the Companys consolidated financial position,
results of operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 improves the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. SFAS No. 150
requires that those instruments be classified as liabilities in statements of
financial position. Most of the guidance in SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 did not have any impact on
the Companys consolidated financial position, results of operations or cash
flows.

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(9) COMMITMENTS AND CONTINGENCIES

Restricted Cash

As of September 30, 2003, the Company had $2.7 million of restricted cash,
broken down as follows: (i) $2.15 million of cash supporting a ten-year lease
agreement; (ii) $511,000 of cash reserved for the benefit of certain customers;
and (iii) $77,000 of cash securing a letter of credit, which secures an
equipment lease.

Contractual Obligations

A summary of contractual obligations, including capital lease obligations,
operating lease obligations (net of subleases), and minimum purchase
obligations, as of September 30, 2003 is as follows:

|                        |                         |             |         |               |         |             |            |           |            |  |           |         |           |  |            |           |            | 
|----------------------- | ----------------------- | ----------- | ------- | ------------- | ------- | ----------- | ---------- | --------- | ---------- |  | --------- | ------- | --------- |  | ---------- | --------- | ---------- | 
|                        |                         |             |         |               |         |             |            | Operating |            |  |           |         |           |  |            |          
|                        |                         |             |         | Capital Lease |         | Lease       |            | Purchase  |            |  |           |        
|Year                    |                         | Obligations |         | Obligations   |         | Obligations |            | Total    
|                        |                         |             |         |               |         |             |            |          
|                        | Remainder of 2003       |             | $       | 169,070       |         |             | $          | 743,218   |            |  | $         |        |           |  | $          | 912,288   |           
|                        | 2004                    |             |         | 205,357       |         |             |            | 2,655,028 |            |  |           | 600,000 |           |  |            | 3,460,385 |           
|                        | 2005                    |             |         | 8,213         |         |             |            | 2,304,957 |            |  |           | 600,000 |           |  |            | 2,913,170 |           
|                        | 2006                    |             |         |              |         |             |            | 2,201,036 |            |  |           | 600,000 |           |  |            | 2,801,036 |           
|                        | 2007                    |             |         |              |         |             |            | 1,923,974 |            |  |           |        |           |  |            | 1,923,974 |           
|                        | 2008                    |             |         |              |         |             |            | 1,828,524 |            |  |           |        |           |  |            | 1,828,524 |           
|Thereafter (cumulative) |                         |             |        |               |         |             | 7,019,974  |           |            |  |          |         |           |  | 7,019,974  |          
|                        |                         |             |         |               |         |             |            |           |            |  |           |         |           |  |            |          
|                        |                         |             | 382,640 |               |         |             | 18,676,711 |           |            |  | 1,800,000 |         |           |  | 20,859,351 |          
|                        | Less interest and taxes |             |         | (30,840       | )       |             |            |          |            |  |           |        |           |  |            | (30,840   | )         
|                        |                         |             |         |               |         |             |            |           |            |  |           |         |           |  |            |          
|                        |                         | Total       |         | $             | 351,800 |             |            | $         | 18,676,711 |  |           | $       | 1,800,000 |  |            | $         | 20,828,511 | 
|                        |                         |             |         |               |         |             |            |           |            |  |           |         |           |  |            |          

Litigation and Claims

On September 5, 2003, Datamize, Inc., a Wyoming corporation, filed an
Original Complaint for Patent Infringement against nine defendants, including
TradeStation Securities, all of whom offer online securities trading services.
The other defendants are Fidelity Brokerage Services, Scottrade, Interactive
Brokers Group, Instinet, Charles Schwab, CyberTrader, E*Trade Securities and
Terra Nova Trading. The complaint was filed in the United States District
Court, Eastern District of Texas. The complaint alleges that the online
trading platforms and services the defendants offer to their customers
infringes United States Patent No. 6,460,040 issued to Datamize on October 1,
2002. The lawsuit seeks injunctive relief, actual damages and attorneys fees.
The Company believes Datamizes claim is baseless and intends to defend itself
vigorously.

Three lawsuits have recently been filed by former principal owners of
onlinetradinginc.com corp. (the predecessor of TradeStation Securities) against
the Company, certain of its directors and executive officers and certain family
partnerships owned by two of the executive officers. On July 25, 2003,
Benedict S. Gambino, from whom the Company, as of October 18, 2002, purchased
2,417,000 shares of its common stock in a private transaction, filed a lawsuit
against the Company and three of its executive officers, William R. Cruz, Ralph
L. Cruz and Marc J. Stone, in the Circuit Court of Broward County, State of
Florida. This lawsuits allegations include violation of the Florida
Securities and Investor Protection Act, common law fraud, negligent
misrepresentation, breach of fiduciary duty and breach of contract. On August
18, 2003, Andrew A. Allen Family Limited Partnership (owned and controlled by
Andrew A. Allen), from whom the Company, as of November 26, 2002, purchased
1,000,000 shares of its common stock in a private transaction, filed a lawsuit
against the same defendants in the same court. This lawsuits allegations
include violation of the Florida Securities and Investor Protection Act, common
law fraud, breach of fiduciary duty, negligent misrepresentation and fraudulent
inducement. On August 28, 2003, Farshid Tafazzoli and E. Steven zum Tobel
filed a lawsuit against the Company, the Cruzes, family

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partnerships owned and controlled by the Cruzes, Mr. Stone, Charles Wright and
David Fleischman in the Circuit Court of Miami-Dade County, State of Florida.
Mr. Tafazzolis claims relate to his family partnerships sale, as of May 1,
2002, of 3,000,000 shares of Company common stock to family partnerships owned
by William and Ralph Cruz, and Mr. zum Tobels claims relate to his family
partnerships sale, as of May 3, 2002, of 133,942 shares of Company common
stock to Charles Wright. This lawsuits allegations include violation of the
Florida Securities and Investor Protection Act, common law fraud and breach of
fiduciary duty. Each of the three lawsuits seeks rescission of the share
purchases and/or compensatory damages, plus interest, costs and attorneys
fees. The Company believes all of the allegations are baseless, intends to
defend itself and the other named parties vigorously in court, and expects to
prevail in each of the lawsuits.

On February 11, 2003, the plan administrator appointed under the
reorganization plan in the Chapter 11 bankruptcy of Bridge Information Systems,
Inc. and its affiliates filed an adversary complaint against TradeStation
Technologies and the Company in the United States Bankruptcy Court for the
Eastern District of Missouri demanding that the Company and TradeStation
Technologies return payments made to TradeStation Technologies by a Bridge
subsidiary in December 2000 and January 2001 totaling approximately $1.0
million, claiming such payments were preferences under the federal bankruptcy
code as a result of being made to TradeStation Technologies during the
ninety-day period immediately preceding the Chapter 11 bankruptcy filing. The
Company believes this claim to be without merit on various grounds and intends
to vigorously defend this claim.

In October 2002, the Company received information about alleged fraudulent
conduct by an executive of an unrelated company in no way affiliated with
TradeStation Securities (the Referral Company) that referred individual
accounts to TradeStation Securities. The executive of the Referral Company was
authorized to trade on behalf of such individuals (the Referred Account
Holders) and allegedly issued fraudulent account statements to them. The
Referred Account Holders incurred several million dollars of trading losses, in
the aggregate, during the time the executive of the Referral Company traded on
their behalves. On February 2, 2003, the Referral Company communicated to
TradeStation Securities in writing that it believes TradeStation Securities
shares responsibility for some or all of the alleged losses incurred by the
Referred Account Holders and/or the Referral Company and wishes to make an
amicable settlement. The Referral Company further stated that if an amicable
settlement is not reached it intends to initiate legal action of some kind
against TradeStation Securities in the United States. The Company believes the
Referral Companys claims are without merit and, to date, no legal action has
been commenced against the Company by any of the Referred Account Holders or
the Referral Company.

TradeStation Securities is also engaged in routine litigation or other
dispute resolution proceedings, such as arbitration, incidental to, and part of
the ordinary course of, its business (claims in pending arbitrations seek, in
the aggregate, damages in excess of $2 million, plus, in certain cases,
punitive or treble damages).

While no assurances can be given, the Company does not believe that the
ultimate outcome of any of the above legal matters or claims will result in a
material adverse effect on its consolidated financial position, results of
operations or cash flows.

The Company decided, as of June 1, 2002, to no longer carry errors or
omissions insurance that covers third-party claims made by brokerage clients or
software subscribers as a result of alleged human or system errors, failures,
acts or omissions. This decision was made based upon the Companys assessment
of the potential risks and benefits, including significant increases in premium
rates, deductibles and coinsurance amounts, reductions in available per
occurrence and aggregate coverage amounts, and the unavailability of policies
that sufficiently cover the types of risks that relate to the Companys
business.

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

This discussion should be read in conjunction with the Consolidated
Financial Statements and the Notes to Consolidated Financial Statements of
TradeStation Group and its subsidiaries contained herein. The results of
operations for an interim period are not necessarily indicative of results for
the year, or for any subsequent period.

Recent Developments

The company continues to work towards commencing self-clearing operations
for its active trader equities brokerage services, which are expected to begin
in January 2004. The company is already deeply immersed in the process of
obtaining the required self-regulatory organization and exchange approvals and
memberships, and has already been working for more than three months with
SunGard Financial to integrate SunGards Phase3 and other back-office trade
processing, clearing and settlement systems with the companys trade server and
back-office systems.

We also recently announced plans to launch forex execution services in
November 2003 and options execution services in the first half of 2004.
TradeStation trading analysis software is well-known in the forex trading
community, as it has been offered over the past seven years worldwide by Dow
Jones Telerate, Bridge Telerate and MoneyLine Network as a premium service to
institutional traders who use it to design, test and optimize their forex
trading strategies. Now, through an arrangement with a forex dealer firm, we
will be able to offer this state-of-the-art forex trading technology together
with the electronic placement of forex orders. Our planned options execution
services will offer all of the features of our premium, award-winning
OptionStation trading analysis software package plus seamless execution of
options trades.

Results of Operations

For the three and nine months ended September 30, 2003 and 2002, we
operated in two principal business segments: (i) brokerage services and (ii)
software products and services. All intercompany transactions are eliminated
in consolidation. The following table presents, for the periods indicated,
certain items in our consolidated statements of operations broken down by
segment:

|                    |                                   |                          |   |                    |        |                    |   |          |       |       |   |          |        |           |   |        |        |         |   |        |        |          |   |        |       |  |   |        |        |   |   |        |        | 
|------------------- | --------------------------------- | ------------------------ | - | ------------------ | ------ | ------------------ | - | -------- | ----- | ----- | - | -------- | ------ | --------- | - | ------ | ------ | ------- | - | ------ | ------ | -------- | - | ------ | ----- |  | - | ------ | ------ | - | - | ------ | ------ | 
|                    |                                   |                          |   | Three Months Ended |        | Three Months Ended
|                    |                                   |                          |   | September 30, 2003 |        | September 30, 2002
|                    |                                   |                          |   |                    |        |                   
|                    |                                   |                          |   |                    |        |                    |   | Software |       |       |   |          |        |           |   |        |        |         |   |        |        | Software |   |        |       |  |   |        |        |  
|                    |                                   |                          |   |                    |        |                    |   | Products |       |       |   |          |        |           |   |        |        |         |   |        |        | Products |   |        |       |  |   |        |        |  
|                    |                                   |                          |   | Brokerage          |        | And                |   | Elimin-  |       |       |   |          |        | Brokerage |   | And    |        | Elimin- |   |        |        |         
|                    |                                   |                          |   | Services           |        | Services           |   | ations   |       | Total |   | Services |        | Services  |   | ations |        | Total  
|                    |                                   |                          |   |                    |        |                    |   |          |       |       |   |          |        |           |   |        |        |        
|                    |                                   |                          |   | (In thousands)     |        | (In thousands)    
|Revenues:           |                                   |                          |   |                    |        |                    |   |          |       |       |   |          |        |           |   |        |        |         |   |        |        |          |   |        |       |  |   |        |        |   |   |       
|                    | Brokerage revenues                |                          | $ | 13,798             |        |                    | $ |         |       |       | $ |         |        |           | $ | 13,798 |        |         | $ | 10,802 |        |          | $ |       |       |  | $ |       |        |   | $ | 10,802 |       
|                    | Subscription fees                 |                          |   |                   |        |                    |   | 5,822    |       |       |   | (4,045   | )      |           |   | 1,777  |        |         |   |       |        |          |   | 4,512  |       |  |   | (2,790 | )      |   |   | 1,722  |       
|                    | Other                             |                          |   | 57                 |        |                    |   | 454      |       |       |   |         |        |           |   | 511    |        |         |   | 2      |        |          |   | 575    |       |  |   |       |        |   |   | 577    |       
|                    |                                   |                          |   |                    |        |                    |   |          |       |       |   |          |        |           |   |        |        |         |   |        |        |          |   |        |       |  |   |        |        |   |   |       
|                    |                                   | Total revenues           |   |                    | 13,855 |                    |   |          | 6,276 |       |   |          | (4,045 | )         |   |        | 16,086 |         |   |        | 10,804 |          |   |        | 5,087 |  |   |        | (2,790 | ) |   |        | 13,101 | 
|                    |                                   |                          |   |                    |        |                    |   |          |       |       |   |          |        |           |   |        |        |         |   |        |        |          |   |        |       |  |   |        |        |   |   |       
|Operating expenses: |                                   |                          |   |                    |        |                    |   |          |       |       |   |          |        |           |   |        |        |         |   |        |        |          |   |        |       |  |   |        |        |   |   |       
|                    | Clearing and execution costs      |                          |   | 4,825              |        |                    |   |         |       |       |   |         |        |           |   | 4,825  |        |         |   | 3,427  |        |          |   |       |       |  |   |       |        |   |   | 3,427  |       
|                    | Data center costs                 |                          |   | 4,090              |        |                    |   | 1,054    |       |       |   | (4,045   | )      |           |   | 1,099  |        |         |   | 2,827  |        |          |   | 1,267  |       |  |   | (2,790 | )      |   |   | 1,304  |       
|                    | Technology development            |                          |   | 361                |        |                    |   | 1,413    |       |       |   |         |        |           |   | 1,774  |        |         |   | 137    |        |          |   | 2,232  |       |  |   |       |        |   |   | 2,369  |       
|                    | Sales and marketing               |                          |   | 2,307              |        |                    |   | 118      |       |       |   |         |        |           |   | 2,425  |        |         |   | 2,667  |        |          |   | 360    |       |  |   |       |        |   |   | 3,027  |       
|                    | General and administrative        |                          |   | 1,244              |        |                    |   | 1,239    |       |       |   |         |        |           |   | 2,483  |        |         |   | 1,261  |        |          |   | 966    |       |  |   |       |        |   |   | 2,227  |       
|                    | Amortization of intangible assets |                          |   |                   |        |                    |   | 53       |       |       |   |         |        |           |   | 53     |        |         |   |       |        |          |   | 258    |       |  |   |       |        |   |   | 258    |       
|                    | Recovery of insurance claim       |                          |   |                   |        |                    |   |         |       |       |   |         |        |           |   |       |        |         |   |       |        |          |   | (1,250 | )     |  |   |       |        |   |   | (1,250 | )     
|                    |                                   |                          |   |                    |        |                    |   |          |       |       |   |          |        |           |   |        |        |         |   |        |        |          |   |        |       |  |   |        |        |   |   |       
|                    |                                   | Total operating expenses |   |                    | 12,827 |                    |   |          | 3,877 |       |   |          | (4,045 | )         |   |        | 12,659 |         |   |        | 10,319 |          |   |        | 3,833 |  |   |        | (2,790 | ) |   |        | 11,362 | 
|                    |                                   |                          |   |                    |        |                    |   |          |       |       |   |          |        |           |   |        |        |         |   |        |        |          |   |        |       |  |   |        |        |   |   |       
|                    |                                   | Income from operations   |   | $                  | 1,028  |                    |   | $        | 2,399 |       |   | $        |       |           |   | $      | 3,427  |         |   | $      | 485    |          |   | $      | 1,254 |  |   | $      |       |   |   | $      | 1,739  | 
|                    |                                   |                          |   |                    |        |                    |   |          |       |       |   |          |        |           |   |        |        |         |   |        |        |          |   |        |       |  |   |        |        |   |   |       

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|                    |                                   |                               |   |                    |        |                    |   |          |        |       |   |          |         |           |   |        |        |         |   |        |        |          |   |        |        |   |   |        |        |   |   |        |        |  
|------------------- | --------------------------------- | ----------------------------- | - | ------------------ | ------ | ------------------ | - | -------- | ------ | ----- | - | -------- | ------- | --------- | - | ------ | ------ | ------- | - | ------ | ------ | -------- | - | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ | -
|                    |                                   |                               |   | Nine Months Ended  |        | Nine Months Ended 
|                    |                                   |                               |   | September 30, 2003 |        | September 30, 2002
|                    |                                   |                               |   |                    |        |                   
|                    |                                   |                               |   |                    |        |                    |   | Software |        |       |   |          |         |           |   |        |        |         |   |        |        | Software |   |        |        |   |   |        |        |  
|                    |                                   |                               |   |                    |        |                    |   | Products |        |       |   |          |         |           |   |        |        |         |   |        |        | Products |   |        |        |   |   |        |        |  
|                    |                                   |                               |   | Brokerage          |        | And                |   | Elimin-  |        |       |   |          |         | Brokerage |   | And    |        | Elimin- |   |        |        |         
|                    |                                   |                               |   | Services           |        | Services           |   | ations   |        | Total |   | Services |         | Services  |   | ations |        | Total  
|                    |                                   |                               |   |                    |        |                    |   |          |        |       |   |          |         |           |   |        |        |        
|                    |                                   |                               |   | (In thousands)     |        | (In thousands)    
|Revenues:           |                                   |                               |   |                    |        |                    |   |          |        |       |   |          |         |           |   |        |        |         |   |        |        |          |   |        |        |   |   |        |        |   |   |       
|                    | Brokerage revenues                |                               | $ | 37,481             |        |                    | $ |         |        |       | $ |         |         |           | $ | 37,481 |        |         | $ | 27,448 |        |          | $ |       |        |   | $ |       |        |   | $ | 27,448 |       
|                    | Subscription fees                 |                               |   |                   |        |                    |   | 16,062   |        |       |   | (10,880  | )       |           |   | 5,182  |        |         |   |       |        |          |   | 11,259 |        |   |   | (6,343 | )      |   |   | 4,916  |       
|                    | Other                             |                               |   | 159                |        |                    |   | 1,546    |        |       |   |         |         |           |   | 1,705  |        |         |   | 2      |        |          |   | 2,638  |        |   |   |       |        |   |   | 2,640  |       
|                    |                                   |                               |   |                    |        |                    |   |          |        |       |   |          |         |           |   |        |        |         |   |        |        |          |   |        |        |   |   |        |        |   |   |       
|                    |                                   | Total revenues                |   |                    | 37,640 |                    |   |          | 17,608 |       |   |          | (10,880 | )         |   |        | 44,368 |         |   |        | 27,450 |          |   |        | 13,897 |   |   |        | (6,343 | ) |   |        | 35,004 |  
|                    |                                   |                               |   |                    |        |                    |   |          |        |       |   |          |         |           |   |        |        |         |   |        |        |          |   |        |        |   |   |        |        |   |   |       
|Operating expenses: |                                   |                               |   |                    |        |                    |   |          |        |       |   |          |         |           |   |        |        |         |   |        |        |          |   |        |        |   |   |        |        |   |   |       
|                    | Clearing and execution costs      |                               |   | 13,130             |        |                    |   |         |        |       |   |         |         |           |   | 13,130 |        |         |   | 7,796  |        |          |   |       |        |   |   |       |        |   |   | 7,796  |       
|                    | Data center costs                 |                               |   | 10,991             |        |                    |   | 3,008    |        |       |   | (10,880  | )       |           |   | 3,119  |        |         |   | 6,380  |        |          |   | 3,690  |        |   |   | (6,343 | )      |   |   | 3,727  |       
|                    | Technology development            |                               |   | 1,053              |        |                    |   | 4,439    |        |       |   |         |         |           |   | 5,492  |        |         |   | 368    |        |          |   | 6,689  |        |   |   |       |        |   |   | 7,057  |       
|                    | Sales and marketing               |                               |   | 7,266              |        |                    |   | 451      |        |       |   |         |         |           |   | 7,717  |        |         |   | 8,705  |        |          |   | 1,068  |        |   |   |       |        |   |   | 9,773  |       
|                    | General and administrative        |                               |   | 3,549              |        |                    |   | 3,451    |        |       |   |         |         |           |   | 7,000  |        |         |   | 4,054  |        |          |   | 3,593  |        |   |   |       |        |   |   | 7,647  |       
|                    | Amortization of intangible assets |                               |   |                   |        |                    |   | 157      |        |       |   |         |         |           |   | 157    |        |         |   |       |        |          |   | 773    |        |   |   |       |        |   |   | 773    |       
|                    | Recovery of insurance claim       |                               |   |                   |        |                    |   |         |        |       |   |         |         |           |   |       |        |         |   |       |        |          |   | (1,250 | )      |   |   |       |        |   |   | (1,250 | )     
|                    |                                   |                               |   |                    |        |                    |   |          |        |       |   |          |         |           |   |        |        |         |   |        |        |          |   |        |        |   |   |        |        |   |   |       
|                    |                                   | Total operating expenses      |   |                    | 35,989 |                    |   |          | 11,506 |       |   |          | (10,880 | )         |   |        | 36,615 |         |   |        | 27,303 |          |   |        | 14,563 |   |   |        | (6,343 | ) |   |        | 35,523 |  
|                    |                                   |                               |   |                    |        |                    |   |          |        |       |   |          |         |           |   |        |        |         |   |        |        |          |   |        |        |   |   |        |        |   |   |       
|                    |                                   | Income (loss) from operations |   | $                  | 1,651  |                    |   | $        | 6,102  |       |   | $        |        |           |   | $      | 7,753  |         |   | $      | 147    |          |   | $      | (666   | ) |   | $      |       |   |   | $      | (519   | )
|                    |                                   |                               |   |                    |        |                    |   |          |        |       |   |          |         |           |   |        |        |         |   |        |        |          |   |        |        |   |   |        |        |   |   |       

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Note 1 of Notes to
Consolidated Financial Statements included in the Annual Report on Form 10-K of
TradeStation Group for the year ended December 31, 2002  DESCRIPTION OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those estimates.

Brokerage Revenues.Brokerage revenues are the key component of our
results of operations and are comprised primarily of brokerage commissions and
fees earned from our clients brokerage transactions and, to a lesser extent,
platform fees earned from brokerage customers using the TradeStationelectronic
trading platform and interest earned from interest revenue sharing arrangements
with the brokerages clearing firms. Brokerage commissions and fees and their
related clearing costs are recorded on a trade date basis as transactions
occur. Platform fees and interest are recorded monthly, when earned.

Income Taxes.Management determines the need for any valuation allowance
recorded against our net deferred income tax assets, which includes the benefit
from net operating loss carryforwards. For all periods presented, a valuation
allowance was adjusted to offset the tax expense or benefit of all current
period changes in deferred income taxes. As of September 30, 2003, we have
approximately $6.4 million of deferred income tax assets that have been fully
reserved, which relate primarily to net operating loss carryforwards, the
benefit of which may be recorded in future periods should realization become
more likely than not. See Income Taxes below.

Uninsured Loss Reserves.We decided, as of June 1, 2002, to no longer
carry errors or omissions insurance that covers third-party claims made by
brokerage clients or software subscribers as a result of alleged human or
system errors, failures, acts or omissions. This decision was made based upon
our assessment of the potential risks and benefits, including significant
increases in premium rates, deductibles and coinsurance amounts, reductions in
available per occurrence and aggregate coverage amounts, and the unavailability
of policies that sufficiently cover the types of risks that relate to our
business. Each quarter, we continue to evaluate our accruals for settlements
related to claims and potential claims. Estimates of settlements for such
potential claims, including related legal fees, were accrued in the
consolidated financial statements. The ultimate outcome of such potential
claims may be substantially different than our estimates. During the first
quarter of 2003, we reduced our accruals by

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$98,000 as a result of the settlement of one of those claims for an amount
lower than the amount we estimated. During the third quarter of 2003, we
reduced our accruals by $80,000 as a result of the favorable resolution of
another one of those claims. See Nine Months Ended September 30, 2003 and
2002  Brokerage Services Segment  Operating Expenses  General and
Administrative.

Sublease of Facilities. During the second quarter of 2002, we completed
the consolidation of our Florida operations to one location. Based upon advice
from our outside real estate advisors, using current market factors, we
estimated the potential losses relating to the sublease of facilities that we
will no longer occupy. During the nine months ended September 30, 2003, net
payments of $225,000 were applied against this accrual, resulting in a balance
of $508,000 as of September 30, 2003. See Nine Months Ended September 30,
2003 and 2002  Brokerage Services Segment  Operating Expenses  General and
Administrative.

Three Months Ended September 30, 2003 and 2002

Overall

Total revenues were $16.1 million for the three months ended September 30,
2003, as compared to $13.1 million for the three months ended September 30,
2002, an increase of $3.0 million, or 23%, due primarily to an increase in
brokerage revenues.

Income from operations was $3.4 million for the three months ended
September 30, 2003, as compared to $1.7 million for the three months ended
September 30, 2002, an improvement of approximately $1.7 million, or 97%. This
improvement was due primarily to higher brokerage revenues in the 2003 third
quarter, net of related clearing and execution costs, and decreases in all
other operating expense categories in the 2003 third quarter except general and
administrative, partially offset by a $1.25 million recovery of an insurance
claim in the 2002 third quarter which reduced operating expenses for that
period.

Other income, net consists primarily of interest income earned on our cash
and cash equivalents, offset by interest expense related to capital lease
obligations and bank fees, as well as other gains and losses on the sale of
assets. Other income, net was $114,000 for the three months ended September
30, 2003, as compared to $62,000 for the three months ended September 30, 2002.
The increase of $52,000 was due primarily to interest income earned on the
income tax receivable and, to a lesser extent, lower interest expense
associated with fewer capital lease obligations, partially offset by decreased
interest income as a result of lower interest rates.

Brokerage Services Segment

Revenues

Total Revenues. Total revenues were $13.9 million for the three months
ended September 30, 2003, as compared to $10.8 million for the three months
ended September 30, 2002, an increase of $3.1 million, or 28%, due primarily to
increased brokerage revenues.

Brokerage Revenues. Brokerage revenues are comprised primarily of
brokerage commissions and fees earned from our clients brokerage transactions
and, to a lesser extent, platform fees earned from brokerage customers using
the TradeStationelectronic trading platform and interest earned from interest
revenue sharing arrangements with the brokerages clearing firms. For the
three months ended September 30, 2003, brokerage revenues were $13.8 million
(which included brokerage commissions and fees of $11.0 million) as compared to
brokerage revenues of $10.8 million (which included brokerage commissions and
fees of $9.6 million) for the three months ended September 30, 2002. This
increase of $3.0 million, or 28%, was due primarily to brokerage client account
growth and higher trading volume.

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In April 2002 we offered a new brokerage commission plan  one that
charges traders fees based solely upon the share volume of client trades as
opposed to per ticket charges. This plan, as expected, significantly reduced
our commissions per trade. This reduction was partially offset by charging
brokerage clients monthly platform fees. In August 2002, we modified our price
per share plan by reducing the price per share. Effective March 31, 2003, we
reduced our commission pricing for futures and options trades and, effective
November 1, 2003, we have further reduced our commission pricing for futures
and our commission pricing per share for equities trades. These recently
announced price decreases are expected to slow our revenue growth in the
short-term. The rate and timing at which these price reductions will, if at
all, increase new accounts, client trading activity and/or market share is not
known. Continued price pressure on online brokerage commissions and fees, as
well as our ability to maintain or improve revenue growth with reduced
advertising expenditures (as compared to 2002), are challenges we expect to
face for the foreseeable future.

Other Revenues. Other revenues are comprised primarily of fees for our
training workshops that help customers take full advantage of the
state-of-the-art features of the TradeStationelectronic trading platform.
Other revenues for the three months ended September 30, 2003 were $57,000, as
compared to $2,000 for the three months ended September 30, 2002, an increase
of $55,000.

Operating Expenses

Clearing and Execution Costs.Clearing and execution costs are the costs
of executing and clearing customer trades, including commissions paid to
third-party broker-dealers. Clearing and execution costs were $4.8 million for
the three months ended September 30, 2003, as compared to $3.4 million for the
three months ended September 30, 2002, an increase of $1.4 million, or 41%, due
primarily to increased trading volume related to brokerage client account
growth. Clearing and execution costs as a percentage of brokerage revenues
increased to 35% for the three months ended September 30, 2003, from 32% for
the three months ended September 30, 2002, due to: (i) price reductions
subsequent to the second quarter of 2002, including the August 2002 reduction
of our equities per share pricing structure, and (ii) the March 31, 2003
reduction of our pricing for futures and options trades. We believe that
clearing costs as a percentage of brokerage revenues will increase during the
2003 fourth quarter due to the impact of our commission price reductions
effective November 1, 2003.

Data Center Costs. Data center costs are primarily intercompany
subscription fees, eliminated upon consolidation, paid to the software products
and services segment for providing streaming real-time, Internet-based trading
analysis software and data services to brokerage clients. See Technology
Development below. Data center costs for the three months ended September 30,
2003 were $4.1 million, as compared to $2.8 million for the three months ended
September 30, 2002, an increase of $1.3 million, or 45%, due primarily to the
increased number of brokerage accounts during 2003 as compared to 2002,
partially offset by a decrease in the per account Intercompany Subscription Fee
charged by TradeStation Technologies to TradeStation Securities during 2003.
See Software Products and Services Segment  Revenues  Subscription Fees and
 Operating Expenses  Data Center Costs.

Technology Development. Technology development expenses consist primarily
of personnel costs associated with product management of the brokerage products
and services TradeStation Securities offers to its clients and the creation of
documentation and other training and educational materials. Technology
development expenses for the three months ended September 30, 2003 were
$361,000, as compared to $137,000 for the three months ended September 30,
2002, an increase of $224,000, or 164%, due to increased personnel and related
costs as a result of an increased number of technology development employees
(including the transfer of seven positions from the Software Products and
Services Segment). Most of the technology costs required for our brokerage
firm to offer and operate a highly sophisticated electronic trading platform
are borne by its technology affiliate, which licenses that technology to the
brokerage firm pursuant to an intercompany agreement. See Software Products
and Services Segment  Operating Expenses  Technology Development.

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Sales and Marketing. Sales and marketing expenses consist primarily of
personnel costs for sales, customer support centers, marketing and order desk,
as well as brokers commissions; marketing programs, including advertising,
brochures, direct mail programs and account opening kits; data and information
tools used by sales and brokerage personnel; and web-site maintenance and
administration costs. Sales and marketing expenses were $2.3 million for the
three months ended September 30, 2003, as compared to $2.7 million for the
three months ended September 30, 2002, a decrease of $360,000, or 13%. This
decrease was due primarily to decreased advertising and promotional costs of
$256,000 and decreased personnel and related costs of $97,000 primarily
associated with lower commissions, partially offset by an increase in the
number of employees.

General and Administrative. General and administrative expenses consist
primarily of costs for administrative personnel such as executive, human
resources, finance, compliance and information technology employees;
professional fees; telecommunications; rent; insurance; and other facility
expenses. General and administrative expenses were approximately $1.2 million
for the three months ended September 30, 2003 and the three months ended
September 30, 2002.

Software Products and Services Segment

Revenues

Total Revenues. Total revenues were $6.3 million for the three months
ended September 30, 2003, as compared to $5.1 million for the three months
ended September 30, 2002, an increase of $1.2 million, or 23%, due primarily to
an increase in subscription fees, partially offset by a decrease in other
revenues (which relate primarily to our legacy software business, which is no
longer a primary focus).

Subscription Fees. Subscription fees represent monthly fees earned for
providing streaming real-time, Internet-based trading analysis software tools
and data services. Subscription fees also include intercompany revenue for
licensing to TradeStation Securities the right to provide these software tools
and data services to the brokerage customers of TradeStation Securities
(Intercompany Subscription Fees). Subscription fees were $5.8 million for
the three months ended September 30, 2003, as compared to $4.5 million for the
three months ended September 30, 2002, an increase of $1.3 million, or 29%, due
primarily to a $1.2 million increase in Intercompany Subscription Fees which
resulted from increased brokerage accounts at TradeStation Securities,
partially offset by a decrease in the per account Intercompany Subscription Fee
charged by TradeStation Technologies to TradeStation Securities during 2003.
Excluding Intercompany Subscription Fees, subscription fees were $1.8 million
for the three months ended September 30, 2003, as compared to $1.7 million for
the three months ended September 30, 2002, an increase of $55,000, or 3%, as a
result of a change in the product mix to higher-priced subscription offerings
during 2003, partially offset by a decrease in the number of subscribers.
Subscription services have not been actively marketed since December 2000.

Other Revenues. Other revenues consist primarily of royalties and
commissions received from third parties whose customers use our legacy software
products, and licensing fees that are derived from direct sales of our legacy
client software products. Other revenues were $454,000 for the three months
ended September 30, 2003, as compared to $575,000 for the three months ended
September 30, 2002, a decrease of $121,000, or 21%. This expected decrease is
the result of no longer offering these products domestically since September
2001. Other revenues are expected to continue to decrease in future quarters.

Operating Expenses

Data Center Costs. Data center costs represent expenses related to the
operation, maintenance and support of our data server farms. These expenses
consist primarily of rent and data communications costs at our co-location
facilities, rent or depreciation for servers, and data distribution and
exchange fees. Data center costs for the three months ended September 30, 2003
were $1.1 million, as compared to $1.3 million for the three months ended
September 30, 2002, a decrease of $213,000, or 17%. The decrease is due
primarily to lower server costs and lower data distribution and exchange fees.
The decrease in data

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distribution and exchange fees resulted from increased recovery of exchange
fees from client accounts, partially offset by incremental costs related to
account growth.

Technology Development. Technology development expenses include expenses
associated with the development of new products, services and technology;
enhancements to existing products, services and technology; testing of products
and services; and, in the prior year, the creation of documentation and other
training and educational materials. Technology development expenses consist
primarily of personnel costs, depreciation of computer and related equipment,
facility expenses and telecommunications costs. TradeStation Technologies owns
all intellectual property rights relating to our businesses, including, but not
limited to, all order execution technology. Technology development expenses
were $1.4 million for the three months ended September 30, 2003, as compared to
$2.2 million for the three months ended September 30, 2002, a decrease of
$819,000, or 37%, due primarily to decreased personnel and related costs of
$732,000 (due to 21, or 25%, fewer employees at September 30, 2003, as compared
to September 30, 2002) and, to a lesser extent, decreased communications costs
of $45,000 and decreased facility costs of $41,000.

Sales and Marketing. We no longer actively market software products and
services, the focus of our business being to continue to build an online
brokerage firm for active and institutional traders. Sales and marketing
expenses have consisted primarily of personnel costs for customer support
centers and facility costs. Sales and marketing expenses were $118,000 for the
three months ended September 30, 2003, as compared to $360,000 for the three
months ended September 30, 2002, a decrease of $242,000, or 67%, due primarily
to decreased personnel and related costs of $117,000 and, to a lesser extent,
decreased technical support costs.

General and Administrative. General and administrative expenses consist
primarily of costs for administrative personnel such as executive, human
resources, finance and information technology employees; professional fees;
telecommunications; rent; other facility expenses; and insurance. General and
administrative expenses were $1.2 million for the three months ended September
30, 2003, as compared to $1.0 million for the three months ended September 30,
2002, an increase of $273,000, or 28%, due primarily to increased professional
fees of $265,000, increased facility expenses of $74,000 and increased
telecommunication costs of $54,000, partially offset by decreased personnel and
related costs of $115,000.

Amortization of Intangible Assets. Amortization of intangible assets
includes amortization related to the October 1999 acquisition of Window On
WallStreet Inc., which was accounted for under the purchase method of
accounting, and amortization of data rights and other intangible assets.
Amortization of intangible assets was $53,000 for the three months ended
September 30, 2003, as compared to $258,000 for the three months ended
September 30, 2002, a decrease of $205,000, or 79%. The decrease was due
primarily to certain Window On WallStreet intangible assets becoming fully
amortized in October 2002.

Recovery of Insurance Claim. In June 2001, we made a claim of $2.7
million with our insurance carrier relating to a trading error made with
respect to a clients account. As of the 2001 year end, the insurance company
had formally denied this claim and, accordingly, the receivable that had been
recorded in our consolidated balance sheet had been fully reserved. On July
25, 2002, we entered into an agreement with the insurance company to settle
this claim for $1.25 million, payment of which was received in August 2002.
Accordingly, during the third quarter of 2002, we recorded a recovery of
insurance claim of $1.25 million.

Nine Months Ended September 30, 2003 and 2002

Overall

Total revenues were $44.4 million for the nine months ended September 30,
2003, as compared to $35.0 million for the nine months ended September 30,
2002, an increase of $9.4 million, or 27%, due

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primarily to an increase in brokerage revenues of $10.0 million, partially
offset by a decrease in other revenues (which relate primarily to our legacy
software business, which is no longer a primary focus).

Income from operations was $7.8 million for the nine months ended
September 30, 2003, as compared to a loss from operations of $519,000 for the
nine months ended September 30, 2002, an improvement of $8.3 million. This
improvement was due primarily to higher brokerage revenues, net of related
clearing and execution costs, and decreases in all other operating expense
categories. The increase in income from operations was partially offset by a
$1.25 million recovery of an insurance claim in the 2002 third quarter which
reduced operating expenses for that period, as well as a decrease in other
revenues in 2003.

Other income, net was $95,000 for the nine months ended September 30,
2003, as compared to $410,000 for the nine months ended September 30, 2002.
The decrease of $315,000 was due primarily to a gain during the second quarter
of 2002 of $287,500 recorded on the sale of legacy customer accounts, a loss of
$55,000 on the sale of investments in corporate stock during the second quarter
of 2003, and a decrease in interest income of $47,000, partially offset by a
decrease in interest expense of $106,000 related to fewer capital lease
obligations.

Income tax benefit, net of expense, of $730,000 was recorded during the
nine months ended September 30, 2003. See Income Taxes below.

Brokerage Services Segment

Revenues

Total Revenues. Total revenues were $37.6 million for the nine months
ended September 30, 2003, as compared to approximately $27.4 million for the
nine months ended September 30, 2002, an increase of $10.2 million, or 37%, due
primarily to increased brokerage revenues.

Brokerage Revenues. For the nine months ended September 30, 2003,
brokerage revenues were $37.5 million (which included brokerage commissions and
fees of $30.2 million) as compared to brokerage revenues of $27.4 million
(which included brokerage commissions and fees of $25.1 million) for the nine
months ended September 30, 2002. This $10.1 million increase, or 37%, was due
primarily to brokerage client account growth and higher trading volume.

Other Revenues. Other revenues were $159,000 for the nine months ended
September 30, 2003, as compared to other revenues of $2,000 for the nine months
ended September 30, 2002.

Operating Expenses

Clearing and Execution Costs.Clearing and execution costs were $13.1
million for the nine months ended September 30, 2003, as compared to $7.8
million for the nine months ended September 30, 2002, an increase of $5.3
million, or 68%, due primarily to increased trading activity and brokerage
client account growth and, to a lesser extent, a temporary increase in futures
clearing costs during the 2003 second quarter prior to our May 2003 change in
futures clearing firms.

Clearing and execution costs as a percentage of brokerage revenues
increased to 35% for the nine months ended September 30, 2003, from 28% for the
nine months ended September 30, 2002, primarily due to: (i) the lower gross
margins that resulted from our equities per share pricing structure first
offered in the second quarter of 2002, (ii) price reductions subsequent to the
second quarter of 2002, including the August 2002 reduction of our equities per
share pricing structure, and the March 31, 2003 reduction of our pricing for
futures and options trades, and (iii) increased costs for futures clearing,
during the second quarter of 2003, imposed by our former futures clearing firm.

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Data Center Costs. Data center costs were $11.0 million for the nine
months ended September 30, 2003, as compared to $6.4 million for the nine
months ended September 30, 2002, an increase of $4.6 million, or 72%, due
primarily to the increased number of brokerage accounts during 2003 as compared
to 2002, partially offset by a decrease in the per account Intercompany
Subscription Fee charged by TradeStation Technologies to TradeStation
Securities during 2003. See Software Products and Services Segment  Revenues
 Subscription Fees and - Operating Expenses  Data Center Costs.

Technology Development. Technology development expenses for the nine
months ended September 30, 2003 were $1.1 million, as compared to $368,000 for
the nine months ended September 30, 2002, an increase of $685,000, or 186%, due
to increased personnel and related costs as a result of an increased number of
technology development employees (including the transfer of seven positions
from the Software Products and Services Segment).

Sales and Marketing. Sales and marketing expenses were $7.3 million for
the nine months ended September 30, 2003, as compared to $8.7 million for the
nine months ended September 30, 2002, a decrease of $1.4 million, or 17%. This
decrease was due primarily to decreased advertising and promotional costs of
$1.1 million and decreased personnel and related costs of $338,000, primarily
associated with lower sales commissions, partially offset by an increase in the
number of employees.

General and Administrative. General and administrative expenses were $3.6
million for the nine months ended September 30, 2003, as compared to $4.1
million for the nine months ended September 30, 2002, a decrease of $505,000,
or 12%. This decrease is due primarily to a decrease in facility costs of
$336,000 (mainly related to the estimated loss on the sublease of facilities
recorded during 2002 related to facilities that we no longer occupy), and two
favorable settlements which resulted in a $178,000 reduction of our accrual for
uninsured loss reserves and related legal fees. See Critical Accounting
Policies and Estimates  Sublease of Facilities and  Uninsured Loss
Reserves.

Software Products and Services Segment

Revenues

Total Revenues. Total revenues were $17.6 million for the nine months
ended September 30, 2003, as compared to $13.9 million for the nine months
ended September 30, 2002, an increase of $3.7 million, or 27%, due primarily to
an increase in subscription fees, partially offset by a decrease in other
revenues (which relate primarily to our legacy software business, which is no
longer a primary focus).

Subscription Fees. Subscription fees were $16.1 million for the nine
months ended September 30, 2003, as compared to $11.3 million for the nine
months ended September 30, 2002, an increase of $4.8 million, or 43%, due
primarily to a $4.5 million increase in Intercompany Subscription Fees which
resulted from increased brokerage accounts at TradeStation Securities,
partially offset by a decrease in the per account Intercompany Subscription Fee
charged by TradeStation Technologies to TradeStation Securities during 2003.
Excluding Intercompany Subscription Fees, subscription fees were $5.2 million
for the nine months ended September 30, 2003, as compared to $4.9 million for
the nine months ended September 30, 2002, an increase of $266,000, or 5%, as a
result of a change in the product mix to higher-priced subscription offerings
during 2003, partially offset by a decrease in the number of subscribers.
Subscription services have not been actively marketed since December 2000.

Other Revenues. Other revenues were $1.5 million for the nine months
ended September 30, 2003, as compared to $2.6 million for the nine months ended
September 30, 2002, a decrease of $1.1 million, or 41%. This expected decrease
is the result of no longer offering legacy client software products
domestically since September 2001. Other revenues are expected to continue to
decrease in future quarters.

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Operating Expenses

Data Center Costs. Data center costs for the nine months ended September
30, 2003 were $3.0 million, as compared to $3.7 million for the nine months
ended September 30, 2002, a decrease of $682,000, or 18%. The decrease is due
primarily to lower data distribution and
exchange fees of $317,000, lower server costs of $252,000, and decreased rent and data communication charges at
our co-location facilities of $113,000. The decrease in data distribution and
exchange fees resulted from approximately $208,000 of credits received from
data providers and increased recovery of exchange fees from client accounts,
partially offset by incremental costs related to account growth.

Technology Development. Technology development expenses were $4.4 million
for the nine months ended September 30, 2003, as compared to $6.7 million for
the nine months ended September 30, 2002, a decrease of approximately $2.3
million, or 34%, due primarily to decreased personnel and related costs of $1.8
million (due to 21, or 25%, fewer employees at September 30, 2003 as compared
to September 30, 2002) and, to a lesser extent, decreased facility costs of
$219,000 related to the June 2002 consolidation of our facilities and decreased
communications costs of $131,000.

Sales and Marketing. Sales and marketing expenses were $451,000 for the
nine months ended September 30, 2003, as compared to $1.1 million for the nine
months ended September 30, 2002, a decrease of $617,000, or 58%, due primarily
to a decrease in personnel and related costs of $400,000, a favorable
resolution of an event cancellation dispute which resulted in a reduction of
expenses of $112,000, and a decrease in technical support costs of $89,000.

General and Administrative. General and administrative expenses were $3.5
million for the nine months ended September 30, 2003, as compared to $3.6
million for the nine months ended September 30, 2002, a decrease of $142,000,
or 4%, due primarily to decreased personnel and related costs of $347,000,
partially offset by increased facility costs of $164,000 and, to a lesser
extent, increased property taxes.

Amortization of Intangible Assets. Amortization of intangible assets was
$157,000 for the nine months ended September 30, 2003, as compared to $773,000
for the nine months ended September 30, 2002, a decrease of $616,000, or 80%.
The decrease was due primarily to certain Window On WallStreet intangible
assets becoming fully amortized in October 2002.

Recovery of Insurance Claim. In June 2001, we made a claim of $2.7
million with our insurance carrier relating to a trading error made with
respect to a clients account. As of the 2001 year end, the insurance company
had formally denied this claim and, accordingly, the receivable that had been
recorded in our consolidated balance sheet had been fully reserved. On July
25, 2002, we entered into an agreement with the insurance company to settle
this claim for $1.25 million, payment of which was received in August 2002.
Accordingly, during the third quarter of 2002, we recorded a recovery of
insurance claim of $1.25 million.

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. See Issues, Uncertainties and Risk Factors below.

Income Taxes

During the three months ended September 30, 2003, we recorded an income
tax provision of $71,000 comprised of an increase to the valuation allowance
established for the amount due under the current years alternative minimum tax
calculation. During the nine months ended September 30, 2003, we recorded a
net income tax benefit of $730,000 comprised of refunds related to prior year
federal income

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tax returns (see below), and a state income tax refund received during the 2003
first quarter for the overpayment of a prior years income tax (see below),
partially offset by an increase to the valuation allowance established for the
amount due under the current years alternative minimum tax calculation. Other
than the increase to the valuation allowance for the amount due under the
current years alternative minimum tax calculation, the income tax expense
associated with net operating income generated during the nine months ended
September 30, 2003 was totally offset by a reduction to the previously
established valuation allowance associated with deferred tax assets, primarily
net operating loss carryforwards.

In February 2003, in connection with an Internal Revenue Service (IRS)
audit of a prior years federal income tax return, we learned that we were
entitled to a $72,000 refund related to research and development tax credits.
We recorded that benefit in the 2003 first quarter. Also in conjunction with
the IRS audit, in late April 2003 we were advised that we were due a refund
relating to our 1997 income taxes paid. Accordingly, during the 2003 second
quarter, we recorded a benefit of approximately $802,000. The full amount of
the income tax receivable and related interest thereon was received during
October 2003.

For the three and nine months ended September 30, 2002, taxes totaling
$7,000 were provided for certain state and local income taxes where our net
operating loss carryforwards could not be utilized. A valuation allowance was
recorded to offset the tax benefit of all other net operating losses generated
during the three and nine months ended September 30, 2002.

Liquidity and Capital Resources

As of September 30, 2003, we had cash and cash equivalents of $28.6
million, of which $2.7 million was restricted. Restricted cash supports a
facility lease, certain customer agreements, and a stand-by letter of credit
securing an equipment lease. In accordance with contractual agreements, during
the fourth quarter of 2003 restrictions of $77,000 will be released. See Note
9 of Notes to Consolidated Financial Statements  COMMITMENTS AND CONTINGENCIES
 Restricted Cash.

A summary of our capital lease obligations (net of interest and sales
tax), operating lease obligations (net of subleases), and minimum purchase
obligations as of September 30, 2003 is as follows:

|                            |  |                        |            |        |  |           |         |       |  |         |           |           |  |   |           |  |  |   |           | 
|--------------------------- |  | ---------------------- | ---------- | ------ |  | --------- | ------- | ----- |  | ------- | --------- | --------- |  | - | --------- |  |  | - | --------- | 
|                            |  | Payments Due by Period
|                            |  |                       
|                            |  |                        |            |        |  | Less than |         | 1-3   |  | 4-5     |           | More than
|Contractual Obligations     |  | Total                  |            | 1 Year |  | Years     |         | Years |  | 5 Years
|                            |  |                        |            |        |  |           |         |       |  |        
|Capital lease obligations   |  | $                      | 351,800    |        |  | $         | 157,796 |       |  | $       | 194,004   |           |  | $ |          |  |  | $ |          | 
|Operating lease obligations |  |                        | 18,676,711 |        |  |           | 743,218 |       |  |         | 7,161,021 |           |  |   | 3,752,498 |  |  |   | 7,019,974 | 
|Purchase obligations        |  |                        | 1,800,000  |        |  |           |        |       |  |         | 1,800,000 |           |  |   |          |  |  |   |          | 
|                            |  |                        |            |        |  |           |         |       |  |         |           |           |  |   |           |  |  |   |           | 
|Total                       |  | $                      | 20,828,511 |        |  | $         | 901,014 |       |  | $       | 9,155,025 |           |  | $ | 3,752,498 |  |  | $ | 7,019,974 | 
|                            |  |                        |            |        |  |           |         |       |  |         |           |           |  |   |           |  |  |   |           | 

We anticipate, in connection with the expected growth of our brokerage
business, capital expenditures of no more than $1.5 million for the remainder
of 2003. These expenditures are expected to be funded through operating cash
flows.

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.

Cash provided by operating activities during the nine months ended
September 30, 2003 totaled $9.5 million, compared to $3.1 million in the
comparable period of 2002. Net cash provided by operating activities during
the nine months ended September 30, 2003 was due primarily to net income and an
increase in accounts payables, partially offset by the recording of an income
tax receivable and reductions in accrued expenses. Net cash provided by
operating activities during the nine months ended September

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30, 2002 was due primarily to operating income (which included $1.25 million
from the recovery of an insurance claim), as adjusted for non-cash items, and
an increase in accrued expenses, partially offset by an increase in receivables
from clearing firms.

Investing activities used cash of $329,000 and provided cash of $326,000
during the nine months ended September 30, 2003 and 2002, respectively. For
the nine months ended September 30, 2003, cash used in investing activities
consisted primarily of capital expenditures of $1.0 million, primarily computer
hardware and software to support the growth of our business operations,
partially offset by a decrease in restricted cash of $688,000, and to a lesser
extent, proceeds from the sale of investments. For the nine months ended
September 30, 2002, cash provided by investing activities consisted primarily
of $1.0 million of cash proceeds from the sale of certain legacy customer
accounts during the second quarter of 2002, $315,000 from the maturity of
investments, and a decrease in restricted cash of $266,000, partially offset by
capital expenditures of $1.2 million.

Financing activities provided cash of $3.8 million during the nine months
ended September 30, 2003 and used cash of $3.1 million during the nine months
ended September 30, 2002. Cash provided by financing activities for the nine
months ended September 30, 2003 consisted primarily of $3.9 million of proceeds
from issuance of common stock due from exercises of stock options from our
incentive stock plans and purchases under our employee stock purchase plan, and
$914,000 of net proceeds from the exercise of warrants (see below), partially
offset by repayment of capital lease obligations of $1.0 million. Cash used in
financing activities for the nine months ended September 30, 2002 consisted
primarily of $2.1 million of cash paid for the repurchase of common stock and
$1.0 million in repayment of capital lease obligations.

In connection with the initial public offering of the predecessor to
TradeStation Securities, warrants to purchase up to 225,000 shares of that
predecessor companys common stock, at an exercise price of $11.55, were
granted to the underwriters, with an expiration date of June 9, 2004. We
assumed such warrants in connection with the merger between TradeStation
Technologies and TradeStation Securities, and, based on the 1.7172 to 1 merger
conversion ratio, the underwriters may purchase up to 386,369 shares of the
companys common stock at an exercise price of $6.73. In July 2003, we filed a
registration statement with the Securities and Exchange Commission to register
the warrants and the 386,369 shares of common stock issuable upon the exercise
of such warrants, which registration statement was declared effective by the
Securities and Exchange Commission on August 13, 2003. While we are not
entitled to receive any proceeds from the sale of the warrants or the shares of
common stock by the holders of the warrants, we receive the exercise price
payable per share by each warrant holder in connection with the purchase of the
shares of common stock by such holders from the Company. During the 2003 third
quarter, we issued 195,690 shares of common stock associated with the exercise
of warrants in exchange for net cash proceeds of $914,000 and the delivery and
cancellation of 119,855 warrants. As of September 30, 2003, warrants to
purchase up to 70,824 shares of the companys common stock at $6.73 were
outstanding.

Off-Balance-Sheet Arrangements

The brokerages clients trade on either a cash or margin basis. Nearly
all brokerage client accounts are opened as margin accounts. In margin
transactions, the brokerage may be obligated to satisfy indebtedness extended
to clients by the brokerages clearing firms. Margin transactions are subject
to various regulatory and clearing firm margin requirements, and are
collateralized by cash and securities in the clients accounts. The brokerage
routinely executes client transactions involving the sale of securities not yet
purchased, on margin, subject to applicable regulations, its internal policies
and the policies of its clearing firms. Such transactions may expose the
brokerage to significant off-balance-sheet risk in the event brokerage clients
do not fully cover their margin obligations. In the event a client and the
collateral in the clients account fail to satisfy the clients margin
obligations, the brokerage may be required to do so.

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We seek to control the risks associated with brokerage client activities
by requiring clients to maintain margin collateral in compliance with the
brokerages clearing firms requirements as well as various regulatory
requirements. The brokerage, as well as its clearing firms, monitor required
margin levels daily and require the clients to deposit additional collateral or
to reduce positions when necessary.

Brokerage client financing and securities settlement activities require
the clearing firms to pledge client securities as collateral in support of
various secured financing sources such as bank loans and securities loaned. In
the event the counterparty is unable to meet its contractual obligation to
return client securities pledged as collateral, the brokerage may be exposed to
the risk of being required to acquire the securities at prevailing market
prices in order to satisfy its clients obligations. We control this risk by
monitoring the market value of securities pledged on a daily basis and by
requiring adjustments of collateral levels in the event of excess market
exposure. In addition, we establish credit limits for such activities and
monitor compliance on a daily basis.

Recently Issued Accounting Standards

In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN No.
45). FIN No. 45 elaborates on the disclosures to be made by a guarantor in
its financial statements about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN No. 45 should be applied only on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantors fiscal year end. The disclosure requirements were effective
for financial statements ending after December 15, 2002. The adoption of FIN
No. 45 did not have any impact on our consolidated financial position, results
of operations or cash flows.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN No. 46). FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated support from other parties. FIN No. 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entitys activities or
entitled to receive a majority of the entitys residual returns or both. FIN
No. 46 also requires disclosures about variable interest entities that the
company is not required to consolidate but in which it has a significant
variable interest. The consolidation requirements of FIN No. 46 apply
immediately to variable interest entities created after January 31, 2003 and to
variable interest entities that existed prior to February 1, 2003 in the first
interim or annual period beginning after December 15, 2003. As we do not have
any variable interest entities, the adoption of FIN No. 46 is not expected to
have any impact on our consolidated financial position, results of operations
or cash flows.

In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. Most of the guidance in SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, applied prospectively.
The adoption of SFAS No. 149 did not have any impact on our consolidated
financial position, results of operations or cash flows.

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In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 improves the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. SFAS No. 150
requires that those instruments be classified as liabilities in statements of
financial position. Most of the guidance in SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 did not have any impact on
our consolidated financial position, results of operations or cash flows.

Issues, Uncertainties and Risk Factors

The Consolidated Financial Statements and Managements Discussion and
Analysis of Financial Condition and Results of Operations should be read and
evaluated together with the issues, uncertainties and risk factors relating to
our business described below. While we have been and continue to be confident
in our business and business prospects, we believe it is very important that
anyone who reads this report consider these issues, uncertainties and risk
factors, which include business risks relevant both to our industry and to us
in particular. These issues, uncertainties and risk factors are not intended
to be exclusive. Issues, uncertainties and risk factors are also included in
other sections of this report when specifically relevant to a statement we have
made about an aspect of our business, or our financial condition or results of
operations.

This report also contains statements that are forward-looking within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. When used in this report, the words
believes, plans, estimates, expects, intends, designed,
anticipates, may, will, should, could, become, upcoming,
potential, pending, and similar expressions, if and to the extent used, are
intended to identify the forward-looking statements. All forward-looking
statements are based on current expectations and beliefs concerning future
events that are subject to risks and uncertainties, including the risks and
uncertainties described below and elsewhere in this report. Actual results may
differ materially from the results suggested in this report. Factors that may
cause or contribute to such differences, and our business risks and
uncertainties generally, include, but are not limited to, the items described
below, as well as those described in other sections of this report, our other
public filings and our press releases.

There Are Several Factors That May Cause Fluctuations In Our Quarterly
Operating Results, Which Could Result In Significant Volatility In Our Stock
Price

Quarterly revenues and operating results of TradeStation Group and its
predecessor companies have fluctuated significantly in the past, and our
quarterly revenues and operating results are likely to fluctuate in the future.
Causes of such significant fluctuations may include, but are not limited to:



| |  |  | the effect of changes to our commission pricing structure (since
the 2002 second quarter we have continuously reduced commission
pricing), and of additional price reductions that may be implemented in
the future (our most recent reduction to our commission pricing for
equities and futures trades is effective as of November 1, 2003);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | market or competitive pressure to continue to lower commissions and
fees charged to customers;                                                                                                                                                                                                                                                
|
| |  |  | the timing, success and other effects of our anticipated
self-clearing operations;                                                                                                                                                                                                                                                            
|
| |  |  | the timing, success and other effects of our anticipated launch of
forex and online options trade execution services;                                                                                                                                                                                                                         
|
| |  |  | the appeal of our products and services to the institutional trader
market (given our limited experience selling to that market), and the
cost of product development and sales infrastructure that may be
required to improve our chance of success in the institutional market;                                                             

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| |  |  | general economic and market factors that affect active trading,
including market volume, market volatility, market direction, the level
of confidence and trust in the markets, and seasonality (summer months
and holiday seasons typically being slower periods);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | pending or potential third-party claims that turn out to be
significantly more (or less) costly, in terms of both judgment or
settlement amounts and legal expenses, than we currently estimate or
expect, including, but not necessarily limited to, the three
recently-filed claims by the co-founders of the predecessor company to
TradeStation Securities against the company, certain of its executive
officers and directors and certain family partnerships owned by two of
the executive officers (which seek, in the aggregate, tens of millions
of dollars in damages), a recently-filed patent infringement case
against the company and other online brokerage firms and other
potential patent infringement claims, pending NASD arbitrations
concerning brokerage customer and other claims seeking, in the
aggregate, more than two million dollars, and a million dollar claim by
the bankruptcy estate of Bridge Information Systems;
|
| |  |  | the quality and success of, and potential continuous changes in,
sales or marketing strategies (which continue to evolve) and the costs
allocated to marketing campaigns and the timing of those campaigns;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | variations from our expectations with respect to hiring and
retention of personnel, sales and marketing expenditures, product
development, customer account growth, customer trading activity and the
share volume of their trades, or other revenue or expense items;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | if revenues are lower than budgeted expectations, our inability to
make in a timely fashion commensurate expense reductions (as a large
amount of our expenses do not vary with revenues in the short term);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | the effect of recent enhancements to the TradeStation 7electronic
trading platform (and future versions), including less-than-anticipated
appeal to customers and unexpected technical issues or difficulties;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | changes in demand for our products and services due to the rapid
pace at which new technology is offered to customers in our industry;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | costs or adverse financial consequences that may occur with respect
to regulatory compliance or other regulatory issues, particularly
relating to laws, rules or regulations that may be enacted with a focus
on the active trader market; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | the size and frequency of any trading errors for which we may
ultimately suffer the economic burden, in whole or in part (including
losses from third party claims that may arise from time to time  as of
June 1, 2002, we have not carried errors or omissions insurance for
third party claims).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Conditions In The Securities And Financial Markets May Affect Our Rates Of
Customer Acquisition, Retention And Trading Activity

Our products and services are, and will continue to be, designed for
customers who trade actively in the securities and financial markets. There
have been for the past 3 years, and may continue to be, unfavorable conditions
in the securities and financial markets. To the extent that interest in active
trading decreases due to low trading volumes, lack of volatility, or
significant downward movement in the securities or financial markets, such as
has recently occurred, or future tax law changes, recessions, depressions,
wars, terrorism (including cyberterrorism), or otherwise, our business,
financial condition, results of operations and prospects could be materially
adversely affected. Also, unfavorable market
conditions may result in more losses for our clients, which could result in
increases in quantity and size of errors or omissions claims that may be made
against us by clients. We do not currently carry any errors or omissions
insurance that might cover, in part, some of those potential claims. See The
Nature Of Our Business Results In Potential Liability To Customersbelow.

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Our Industry Is Intensely Competitive, Which Makes It Difficult To Attract
And Retain Customers

The markets for online brokerage services, trading software tools, and
real-time market data services are intensely competitive and rapidly evolving,
and there has been substantial consolidation of those three products and
services occurring in the industry. We believe that competition from large
online and other large brokerage firms and smaller brokerage firms focused on
active traders, as well as consolidation, will substantially increase and
intensify in the future. Competition may be further intensified by the size of
the active trader market, which is generally thought to be comprised of less
than 10% of all online brokerage accounts. We believe our ability to compete
will depend upon many factors both within and outside our control. Factors
outside of our control include: price pressure; the timing and market
acceptance of new products and services and enhancements developed by our
competitors; market conditions, such as recession; the size of the active
trader market today and in the future; the extent to which institutional
traders are willing to use direct-access brokerage services from firms that
have traditionally served mostly retail clients; data availability and cost;
and clearing costs. Factors over which we have more control, but which are
subject to substantial risks and uncertainties with respect to our ability to
effectively compete, include: timing and market acceptance of new products and
services and enhancements we develop; our ability to design, improve and
support materially error-free Internet-based systems; ease-of-use of our
products and services; reliability of our products and services; pricing
decisions; and sales and other marketing decisions and efforts.

We Plan To Begin Self-Clearing Equity Trades For Active Trader Accounts

We plan to begin self-clearing equity trades for our active trader
accounts during January 2004. Currently, all of our clients equity trades are
cleared through Bear Stearns, our clearing agent. There can be no assurance
that we will obtain all of the approvals and memberships required to conduct
self-clearing operations as a broker-dealer or that we will not encounter
substantial delays in launching self-clearing operations due to the approval
and membership processes or as a result of technical issues or other
third-party acts or failures to act outside of our control. In addition, there
can be no assurance that we will be successful in seamlessly converting the
clearing of active trader stock trades from Bear Stearns to self-clearing
operations. We have no self-clearing experience and the cost savings and
efficiencies of self-clearing may be less favorable than we expect as a result
of unanticipated increased fixed, infrastructure or incremental costs, mistakes
or other factors.

Systems Failures May Result In Our Inability To Deliver Accurately, On
Time, Or At All, Important And Time-Sensitive Services To Our Customers

The online electronic trading platform we provide to our clients is based
upon the integration of our sophisticated front-end software technology with
our equally sophisticated Internet-based server farm technology. Our server
farm technology is the foundation upon which online trading clients receive
real-time market data and place buy and sell orders. However, in order for
this technology to provide a live, real-time trading platform, it requires
integration with real-time market data, which are currently provided by the
exchanges or by systems of independent third-party market data vendors (who
obtain the data directly from the exchanges), the electronic order book systems
of electronic communication networks (ECNs) and electronic systems offered by
the exchanges, and the clearing and back-office systems of the clearing firms
we use. Accordingly, our ability to offer a platform that enables the
development, testing and automation of trading strategies and the placement and
execution of buy and sell orders depends heavily on the effectiveness,
integrity, reliability and consistent performance of all of these systems and
technologies. In particular, the stress that is placed on these systems during
peak trading times could cause one or more of these systems to operate too
slowly or fail. We have experienced several delays and outages since we
launched our online trading platform, many of which related to data vendor,
exchange,
clearing firm and ECN outages or issues which are beyond our control. Also, a
hardware or software failure, software design limitations or errors that exist
in our and others technologies, power or telecommunications interruption or
natural disaster could cause a systems failure or other potentially damaging
results.

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When systems in the trading process slow down significantly or fail, even
for a short time, our brokerage customers could suffer delays in trading, or
unintended results or other problems, potentially causing losses and possibly
subjecting us to claims for such losses. Such failures or delays, depending
upon how often they occur and how serious they are, could also result in our
clients and client prospects losing or failing to gain confidence in our
trading platform. Additionally, as a general matter not applicable only to our
company, the integrity of these types of systems is increasingly being attacked
by persons sometimes referred to as hackers who intentionally introduce
viruses or other defects to cause damage, inaccuracies or complete failure.
Also, cyberterrorism, should it occur, may significantly affect peoples
willingness to use Internet-based services, particularly ones that involve
their personal or companys assets.

During a system outage, our brokerage may be able to take orders by
telephone; however, only associates with appropriate licenses can accept
telephone orders, and an adequate number of associates likely would not be
available to take customer calls in the event of a systems failure. System
delays, errors, outages and failures, depending upon how serious and how often
they occur, could have a material adverse effect on our business, financial
condition, results of operations and prospects. See The Nature Of Our
Business Results In Potential Liability To Customersbelow.

The Nature Of Our Business Results In Potential Liability To Customers

Many aspects of the securities brokerage business, including online
trading services, involve substantial risks of liability. In recent years
there has been an increasing incidence of litigation involving the securities
brokerage industry, including class action and other suits that generally seek
substantial damages, including in some cases punitive damages. Our proprietary
order routing technology is designed to automatically locate, with immediacy,
the best available price in the appropriate market in completing execution of a
trade triggered by programmed market entry and exit rules. There are risks
that the electronic communications and other systems upon which these products
and services rely, and will continue to rely, or our products and services
themselves, as a result of flaws or other imperfections or limitations in their
designs or performance, may operate too slowly, fail, cause confusion or
uncertainty to the user, or operate or produce results not understood or
intended by the user. An investor or trader using either the full electronic
trading platform or our subscription service might claim that investment or
trading losses or lost profits resulted from use of a flawed version of one of
our trading software tools or systems, or inaccurate assumptions made by the
trading software tools regarding data, or inaccurate data. Major failures of
this kind may affect all customers who are online simultaneously. Any such
litigation could have a material adverse effect on our business, financial
condition, results of operations and prospects. We do not currently carry any
errors or omissions insurance that might cover, in part, some of the
above-described risks. While our contracts with customers are, we believe,
clear that customers who do business with us must knowingly assume all of the
risks described above, there can be no assurance that a judge, arbitrator or
regulator would enforce or honor such contractual provisions. See Conditions
In The Securities And Financial Markets May Affect Our Rates Of Customer
Acquisition, Retention And Trading Activity, and Systems Failures May Result
In Our Inability To Deliver Accurately, On Time, Or At All, Important And
Time-Sensitive Services To Our Customers above.

Dependence Upon Outside Data Sources And Clearing Relationships Creates
Risks Outside Of Our Control Which May Affect Our Ability To Provide, And Our
Cost To Provide, Market Data And Clearing And Account Services

Our business is currently dependent upon our ability to maintain contracts
with private market and news data vendors and clearing firms in order to
provide market data and news and clearing and account
services, respectively, to our customers. We obtain much of the market data
and news pursuant to non-exclusive licenses from private data vendors who in
turn obtain the data from exchanges and news sources, and the clearing and
back-office account services are obtained from established brokerage clearing
firms. The data contracts typically provide for royalties based on usage or
minimums, and the

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clearing contracts provide for transactional clearing fees
and charges. There can be no assurance that we will be able to renew or
maintain contracts or acceptable price levels. In fact, we recently changed
our futures clearing firm in response to a substantial increase in our clearing
costs recently imposed by our former futures clearing firm.

If any of our relationships becomes unfavorable (like our former futures
clearing relationship did) or is terminated, or if we decide to provide data
services directly from the exchanges, which we may, in the very near future,
decide to do for Nasdaq, NYSE, AMEX and OPRA market data (we already are
providing futures data directly via interfaces with CME and CBOT), or
self-clear client trades and carry client accounts, which we currently
contemplate doing with respect to active trader equity trades and accounts
beginning in January 2004, we then face significant infrastructure expansion
costs, and would be engaging in business operations in which we have little or
no prior experience. These risks and uncertainties need to be considered when
evaluating the potential cost-benefit and operational efficiency and quality
that our direct performance of such services would provide. As a general
matter, termination of our relationship with one or more of these third parties
could have a material adverse effect on our business, financial condition,
results of operations and prospects.

We Are Subject To Intellectual Property Litigation

There has been substantial litigation in the software industry involving
intellectual property rights. Although we do not believe that we are or will
be infringing upon the intellectual property rights of others, there has been
an infringement claim asserted against us and eight other online brokerage
firms by a company named Datamize, Inc. which would have a material adverse
effect on our business, financial condition, results of operations and
prospects if it is successful. Such a case, as well as any other infringement
case that may be brought against us, could result in our being unable to use
intellectual property which is integral to one or more of our products or
services. While we believe Datamize, Inc.s claim is totally devoid of merit,
no assurances can be made about the outcome of this litigation. The risk of
infringement claims is heightened with respect to some of the more recent
TradeStationtechnology because some of that technology, as opposed to our
historical client software technology, has not stood any significant test of
time.

We May Not Be Able To Adequately Protect Or Preserve Our Rights In
Intellectual Property

Our success is and will continue to be heavily dependent on proprietary
technology, including existing trading software, Internet, Web-site and
order-execution technology, and those types of technology currently in
development. We view our technology as proprietary, and rely, and will be
relying, on a combination of copyright, trade secret and trademark laws,
nondisclosure agreements and other contractual provisions and technical
measures to protect our proprietary rights. We also have a pending patent
application covering the TradeStationelectronic platform, but we do not yet
know if the patent will be awarded. Policing unauthorized use of our products
and services is difficult, however, and we may be unable to prevent, or
unsuccessful in attempts to prevent, theft, copying or other unauthorized use
or exploitation of our product and service technologies. There can be no
assurance that the steps taken by us to protect (or defend) our proprietary
rights will be adequate or that our competitors will not independently develop
technologies that are substantially equivalent or superior to our technologies
or products and services.

We May Need Cash In The Foreseeable Future

While we anticipate having sufficient cash to meet our needs over the next
12 months, our future liquidity and capital requirements will depend upon
numerous factors, including: the rate of customer acceptance of our products
and services, including the number of new brokerage accounts acquired and
the number and volume of trades made by our brokerage customers; our recent
price reduction; price competition that may result in our continuing to charge
lower commissions and fees to customers; significant, increased infrastructure
costs as our business grows, including unanticipated costs for self-clearing
operations; the anticipated launch of forex services; the anticipated launch
next year of online

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options execution services; costs of product development
and sales efforts relating to increased and intensified pursuit of
institutional clients; substantial legal costs and/or unexpected unfavorable
outcomes in lawsuits and arbitrations currently pending against the company;
and competing technological and market developments. Funds may be raised
through debt financing and/or the issuance of equity securities, there being no
assurance that any such type of financing on terms satisfactory to us will be
available or otherwise occur. Any equity financing or debt financing which
requires issuance of equity securities or warrants to the lender would reduce
the percentage ownership of the shareholders of the company. Shareholders also
may, if issuance of equities occurs, experience additional dilution in net book
value per share, or the issued equities may have rights, preferences or
privileges senior to those of existing shareholders.

Operation In A Highly-Regulated Industry And Compliance Failures May
Result In Severe Penalties And Other Harmful Governmental Actions Against Us

The securities and commodity futures industries are subject to extensive
regulation covering all aspects of those businesses. Regulatory authorities
are currently focusing intensely on the online trading industry, particularly
the segment that seeks the accounts of active traders. The various
governmental authorities and industry self-regulatory organizations that
supervise and regulate our brokerage firm have broad enforcement powers to
censure, fine, suspend, enjoin, expel or issue cease-and-desist orders to our
brokerage firm or any of its officers or employees who violate applicable laws
or regulations. Additionally, new rules relating to active traders have
recently been enacted and more may be enacted which severely limit the
operations and potential success of our business. Our ability to comply with
all applicable laws and rules is largely dependent on our brokerages
maintenance of compliance and reporting systems, as well as its ability to
attract and retain qualified compliance and other personnel. Our brokerage
could be subject to disciplinary or other regulatory or legal actions in the
future due to noncompliance.

The Loss Of Key Employees Could Decrease The Quality Of Our Management And
Operations

Our success depends to a very significant extent on the continued
availability and performance of a number of senior management, technology and
sales and marketing personnel. The loss of one or more of these key employees
could have a material adverse effect on our company.

There Are Risks Relating To Our Ability To Maintain Customer Privacy And
Security And That Increased Government Regulation Of Internet Business May
Occur

Customers may refuse to transact business over the Internet, particularly
business, such as ours, that involves the handling of significant amounts of
customers funds, due to privacy or security concerns. This risk will grow if,
as and to the extent cyberterrorism occurs or is perceived to be a viable,
prominent threat or likelihood to occur. We currently incorporate and plan to
continue to incorporate security measures into our privacy policies. However,
a major breach of customer privacy or security could have serious consequences
for our Internet-based operations. Use of the Internet, particularly for
commercial transactions, may not continue to increase as rapidly as it has
during the past few years as a result of privacy or security concerns, or for
other reasons. If this occurs, the growth of our operations would be
materially hindered. If Internet activity becomes heavily regulated in these
respects or otherwise, that could also have significant negative consequences
for the growth of our current and planned operations.

Our Brokerage Must Meet Net Capital Requirements As A Broker-Dealer That,
If Not Complied With, Could Result In Severe Penalties, And Which At All Times
Limit Our Right To Use All Of The Brokerages Cash

The SEC, the NASD and other regulatory agencies have stringent rules with
respect to the maintenance of specific levels of net capital by securities
broker-dealers. Net capital is the net worth of a broker or dealer (assets
minus liabilities), less deductions for certain types of assets as well as
other

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charges. If a firm fails to maintain the required net capital it may be
subject to suspension or revocation of registration by the SEC and suspension
or expulsion by the NASD, and it could ultimately lead to the firms
liquidation. If such net capital rules are changed or expanded, or if there is
an unusually large charge against net capital, operations that require the use
of capital would be limited. Also, our ability to withdraw capital from our
TradeStation Securities brokerage subsidiary is subject to SEC rules, which in
turn could materially impact our available working capital and materially
impact or limit our ability to repay debt as and when due, redeem or purchase
shares of our outstanding stock, if required or desirable, and pay dividends in
the future. A large operating loss or charge against net capital could
adversely affect our ability to expand or even maintain our then present levels
of business, which could have a material adverse effect on our business,
financial condition, results of operations and prospects. See We May Need
Cash In The Foreseeable Futureabove.

Control Of TradeStation Group By The Cruzes Means That Important Decisions
Affecting The Company Are Concentrated In The Judgment Of Two Related
Individuals

As of October 27, 2003, affiliates of William R. Cruz and Ralph L. Cruz
(the Co-Chairmen and Co-Chief Executive Officers of our company) own 21,720,306
shares of our common stock, representing more than 50% of the outstanding
shares of our common stock. Therefore, the Cruzes control TradeStation Group.
Any and all decisions and votes of our shareholders (including the election of
our Board of Directors and any merger, consolidation or sale of all or
substantially all of TradeStation Groups assets) will be determined by the
Cruzes.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.




ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this Quarterly Report on Form 10-Q,
an evaluation of the effectiveness of the design and operation of the companys
disclosure controls and procedures was carried out by the company under the
supervision and with the participation of the companys management, including
the Co-Chief Executive Officers and the Chief Financial Officer. Based on that
evaluation, the companys management, including the Co-Chief Executive Officers
and the Chief Financial Officer, concluded that the companys disclosure
controls and procedures have been designed and are being operated in a manner
that provides reasonable assurance that the information required to be
disclosed by the company in reports filed under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms. A system of controls, no
matter how well designed and operated, cannot provide absolute assurance that
the objectives of the system of controls are met, and no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within a company have been detected. There have been no changes in the
companys internal controls over financial reporting that occurred during the
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the companys internal controls over financial
reporting.

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PART II - OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

On September 5, 2003, Datamize, Inc., a Wyoming corporation, filed an
Original Complaint for Patent Infringement against nine defendants, including
TradeStation Securities, all of whom offer online securities trading services.
The other defendants are Fidelity Brokerage Services, Scottrade, Interactive
Brokers Group, Instinet, Charles Schwab, CyberTrader, E*Trade Securities and
Terra Nova Trading. The complaint was filed in the United States District
Court, Eastern District of Texas. The complaint alleges that the online
trading platforms and services the defendants offer to their customers
infringes United States Patent No. 6,460,040 issued to Datamize on October 1,
2002. The lawsuit seeks injunctive relief, actual damages and attorneys fees.
The company believes Datamizes claim is baseless and intends to defend itself
vigorously.

Three lawsuits have recently been filed by former principal owners of
onlinetradinginc.com corp. (the predecessor of TradeStation Securities) against
the company, certain of its directors and executive officers and certain family
partnerships owned by two of the executive officers. On July 25, 2003,
Benedict S. Gambino, from whom the company, as of October 18, 2002, purchased
2,417,000 shares of its common stock in a private transaction, filed a lawsuit
against the company and three of its executive officers, William R. Cruz, Ralph
L. Cruz and Marc J. Stone, in the Circuit Court of Broward County, State of
Florida. This lawsuits allegations include violation of the Florida
Securities and Investor Protection Act, common law fraud, negligent
misrepresentation, breach of fiduciary duty and breach of contract. On August
18, 2003, Andrew A. Allen Family Limited Partnership (owned and controlled by
Andrew A. Allen), from whom the company, as of November 26, 2002, purchased
1,000,000 shares of its common stock in a private transaction, filed a lawsuit
against the same defendants in the same court. This lawsuits allegations
include violation of the Florida Securities and Investor Protection Act, common
law fraud, breach of fiduciary duty, negligent misrepresentation and fraudulent
inducement. On August 28, 2003, Farshid Tafazzoli and E. Steven zum Tobel
filed a lawsuit against the company, the Cruzes, family partnerships owned and
controlled by the Cruzes, Mr. Stone, Charles Wright and David Fleischman in the
Circuit Court of Miami-Dade County, State of Florida. Mr. Tafazzolis claims
relate to his family partnerships sale, as of May 1, 2002, of 3,000,000 shares
of company common stock to family partnerships owned by William and Ralph Cruz,
and Mr. zum Tobels claims relate to his family partnerships sale, as of May
3, 2002, of 133,942 shares of company common stock to Charles Wright. This
lawsuits allegations include violation of the Florida Securities and Investor
Protection Act, common law fraud and breach of fiduciary duty. Each of the
three lawsuits seeks rescission of the share purchases and/or compensatory
damages, plus interest, costs and attorneys fees. The company believes all of
the allegations are baseless, intends to defend itself and the other named
parties vigorously in court, and expects to prevail in each of the lawsuits.

On February 11, 2003, the plan administrator appointed under the
reorganization plan in the Chapter 11 bankruptcy of Bridge Information Systems,
Inc. and its affiliates filed an adversary complaint against TradeStation
Technologies and the company in the United States Bankruptcy Court for the
Eastern District of Missouri demanding that the company and TradeStation
Technologies return payments made to TradeStation Technologies by a Bridge
subsidiary in December 2000 and January 2001 totaling approximately $1.0
million, claiming such payments were preferences under the federal bankruptcy
code as a result of being made to TradeStation Technologies during the
ninety-day period immediately preceding the Chapter 11 bankruptcy filing. The
company believes this claim to be without merit on various grounds and intends
to vigorously defend this claim.

In October 2002, the company received information about alleged fraudulent
conduct by an executive of an unrelated company in no way affiliated with
TradeStation Securities (the Referral Company) that referred individual
accounts to TradeStation Securities. The executive of the Referral Company was
authorized to trade on behalf of such individuals (the Referred Account
Holders) and allegedly issued

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fraudulent account statements to them. The Referred Account Holders incurred
several million dollars of trading losses, in the aggregate, during the time
the executive of the Referral Company traded on their behalves. On February 2,
2003, the Referral Company communicated to TradeStation Securities in writing
that it believes TradeStation Securities shares responsibility for some or all
of the alleged losses incurred by the Referred Account Holders and/or the
Referral Company and wishes to make an amicable settlement. The Referral
Company further stated that if an amicable settlement is not reached it intends
to initiate legal action of some kind against TradeStation Securities in the
United States. The company believes the Referral Companys claims are without
merit and, to date, no legal action has been commenced against the company by
any of the Referred Account Holders or the Referral Company.

TradeStation Securities is also engaged in routine litigation or other
dispute resolution proceedings, such as arbitration, incidental to, and part of
the ordinary course of, its business (claims in pending arbitrations seek, in
the aggregate, damages in excess of $2 million, plus, in certain cases,
punitive or treble damages).

While no assurances can be given, the company does not believe that the
ultimate outcome of any of the above legal matters or claims will result in a
material adverse effect on its consolidated financial position, results of
operations or cash flows.

The company decided, as of June 1, 2002, to no longer carry errors or
omissions insurance that covers third-party claims made by brokerage clients or
software subscribers as a result of alleged human or system errors, failures,
acts or omissions. This decision was made based upon the companys assessment
of the potential risks and benefits, including significant increases in premium
rates, deductibles and coinsurance amounts, reductions in available per
occurrence and aggregate coverage amounts, and the unavailability of policies
that sufficiently cover the types of risks that relate to the companys
business.




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(c) Sales of Unregistered Securities

During the three months ended September 30, 2003, we issued to three
nonemployee directors options to purchase an aggregate of 21,000 shares of
common stock. Such options vest ratably in annual increments over a three-year
period and are exercisable at a price of $8.66 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 2003.




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

(a) Meeting

On September 26, 2003, TradeStation Group held its 2003 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 six nominees to the Board of Directors were elected
(all six of whom were re-elected), receiving the

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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        |  |              | 34,222,392 |             |  |        | 91.4 | %          |  |  | 3,218,477 |  |  |  | 8.6 | %
|William R. Cruz      |  |              | 34,222,392 |             |  |        | 91.4 | %          |  |  | 3,218,477 |  |  |  | 8.6 | %
|Michael W. Fipps     |  |              | 36,581,093 |             |  |        | 97.7 | %          |  |  | 859,776   |  |  |  | 2.3 | %
|Stephen C. Richards  |  |              | 36,356,954 |             |  |        | 97.1 | %          |  |  | 1,083,915 |  |  |  | 2.9 | %
|Salomon Sredni       |  |              | 34,220,992 |             |  |        | 91.4 | %          |  |  | 3,219,877 |  |  |  | 8.6 | %
|Charles F. Wright    |  |              | 36,356,954 |             |  |        | 97.1 | %          |  |  | 1,083,915 |  |  |  | 2.9 | %

(c) Other Voting Matters

The only other matter voted upon at the Annual Meeting was a proposal to
ratify the selection of Ernst & Young LLP as independent public accountants for
TradeStation Group for the fiscal year ending December 31, 2003. 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
|           |  |         |        |           
|37,416,220 |  |         | 12,778 |            |  |  | 11,871 |  
|99.93%     |  |         | 0.04   | %          |  |  | 0.03   | %




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  The following exhibits are filed as part of this report:

|     |  |                                                                                                        
|---- |  | -------------------------------------------------------------------------------------------------------
|31.1 |  | Certifications of Co-Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
|     |  |                                                                                                        
|31.2 |  | Certifications of Co-Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
|     |  |                                                                                                        
|31.3 |  | Certifications of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.   
|     |  |                                                                                                        
|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.                                        

(b) Reports on Form 8-K



| | (i)   |  | On July 15, 2003, we filed a Current Report on Form 8-K for an
event that occurred on July 15, 2003, reporting in Items 12 and 9
thereof, respectively, the companys release of its financial results
for the second quarter and six months ended June 30, 2003 and a revised
2003 business outlook.                                                                                                  
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii)  |  | On September 25, 2003, we filed a Current Report on Form 8-K for an
event that occurred on September 25, 2003, reporting in Item 5 thereof
that the company expected to report net income of $.08 per share for
the 2003 third quarter and the announcement of new lower commission
pricing for its brokerage service business and 2003 fourth quarter
earnings per share guidance as a result thereof.
|
| | (iii) |  | On October 14, 2003, we filed a Current Report on Form 8-K for an
event that occurred on October 14, 2003, reporting in Items 12 and 9
thereof, the companys release of its financial results for the third
quarter and nine months ended September 30, 2003.                                                                                                                                         

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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             
|                      |  |                                                 
|October 31, 2003
Date |  | /s/ David H. Fleischman

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                                                                                                 |  |  |  | 
|            |  |                                                                                                         |  |  |  | 
|31.1        |  | Certifications of Co-Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
|            |  |                                                                                                        
|31.2        |  | Certifications of Co-Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
|            |  |                                                                                                        
|31.3        |  | Certifications of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.   
|            |  |                                                                                                        
|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.