eTrade 2007 Annual Report Download - page 41

Other
Other expenses increased 127% to $136.0 million for 2006 compared to 2005. These increases were due
primarily to a 212% increase in fraud related losses to $31.2 million for 2006 and the favorable settlement of the
Nomura Securities, Inc. (“Nomura”) litigation, which reduced other expense by $35.0 million in 2005. The fraud
related losses were primarily identity theft situations which arose from computer viruses that attacked the
personal computers of our customers. We did not suffer from a breach of the security of our systems. We
reimbursed customers for their losses through our E*TRADE Complete Protection Guarantee. These fraud
schemes have impacted our industry as a whole. While we believe our systems remain safe and secure, we have
implemented technological and operational changes to deter unauthorized activity in our customer accounts.
Other Income (Expense)
Other income (expense) decreased to an expense of $72.0 million for 2006 compared to income of
$26.3 million for 2005. Other expense for 2006 primarily consisted of corporate interest expense resulting from
the funding of the Harrisdirect and BrownCo acquisitions beginning in late 2005. Offsetting corporate interest
expense was $70.8 million in gain on sales and impairment of investments. During 2006, we sold shares of our
investments in SBI and International Securities Exchange Holdings, Inc. (“ISE”) resulting in gains of
$71.7 million.
Income Tax Expense
Income tax expense from continuing operations increased 31% to $302.0 million for 2006 compared to
2005. The increase in income tax expense was principally related to the increase in pre-tax income over the
comparable periods. Our effective tax rate for 2006 was 32.5% compared to 34.0% for 2005. The decrease in the
2006 tax rate compared to the 2005 tax rate is primarily due to benefits recognized on state tax refunds filed in
one of our jurisdictions as a result of recent favorable court decisions, a reversal of valuation allowance recorded
in prior years related to international operations and a continued decrease in our overall effective state tax rate
due to our changing geographic footprint.
Discontinued Operations
Our net gain (loss) from discontinued operations was $2.0 million for 2006. During 2006 and 2005, our
discontinued operations included operating results from our professional agency business E*TRADE
Professional Trading, LLC and we recognized a gain of approximately $2.6 million, net of tax, in 2006. In 2005,
discontinued operations also included operating losses from our consumer loan origination business and our
proprietary trading business E*TRADE Professional Securities, LLC, both of which were sold or discontinued
during 2005.
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