10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

Commission file number 1-9700

THE CHARLES SCHWAB CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	94-3025021
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

120 Kearny Street, San Francisco, CA 94108

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (415) 636-7000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock - $.01 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes  ¨    No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x Accelerated filer  ¨ Non-accelerated filer  ¨

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

As of June 30, 2006, the aggregate market value of the voting stock held by nonaffiliates of the registrant was $16.7 billion. For purposes of this information, the outstanding shares of Common Stock owned by directors and executive officers of the registrant, and certain investment companies managed by Charles Schwab Investment Management, Inc. were deemed to be shares of the voting stock held by affiliates.

The number of shares of Common Stock outstanding as of January 31, 2007 was 1,267,988,965.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates certain information contained in the registrant’s definitive proxy statement for its annual meeting of stockholders, to be held May 17, 2007, by reference to that document.

THE CHARLES SCHWAB CORPORATION

Annual Report On Form 10-K

For Fiscal Year Ended December 31, 2006

TABLE OF CONTENTS

Part I
Item 1.	Business	1
	General Corporate Overview	1
	Business Strategy and Competitive Environment	1
	Products and Services	2
	Regulation	5
	Sources of Net Revenues	5
	Available Information	6
Item 1A.	Risk Factors	6
Item 1B.	Unresolved Securities and Exchange Commission Staff Comments	10
Item 2.	Properties	10
Item 3.	Legal Proceedings	10
Item 4.	Submission of Matters to a Vote of Security Holders	11
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	12
Item 6.	Selected Financial Data	14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	Overview	15
	Results of Operations	17
	Liquidity and Capital Resources	24
	Risk Management	29
	Critical Accounting Estimates	33
	Forward-Looking Statements	35
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 8.	Financial Statements and Supplementary Data	39
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	80
Item 9A.	Controls and Procedures	80
Item 9B.	Other Information	80
Part III
Item 10.	Directors, Executive Officers, and Corporate Governance	80
Item 11.	Executive Compensation	83
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	83
Item 13.	Certain Relationships and Related Transactions, and Director Independence	83
Item 14.	Principal Accountant Fees and Services	83
Part IV
Item 15.	Exhibits and Financial Statement Schedule	84
	Exhibit Index	84
	Signatures	89
	Index to Financial Statement Schedule	F-1

THE CHARLES SCHWAB CORPORATION

PART I

Item 1. Business

General Corporate Overview

The Charles Schwab Corporation (CSC), headquartered in San Francisco, California, was incorporated in 1986 and engages, through its subsidiaries (collectively referred to as the Company, and primarily located in San Francisco except as indicated), in securities brokerage, banking, and related financial services. At December 31, 2006, the Company had $1.239 trillion in client assets, 6.7 million active brokerage accounts^(a), 542,000 corporate retirement plan participants, and 147,000 banking accounts. Certain subsidiaries of CSC include: Charles Schwab & Co., Inc. (Schwab), which was incorporated in 1971, is a securities broker-dealer with 303 domestic branch offices in 45 states, a branch in each of the Commonwealth of Puerto Rico and London, U.K., and serves clients in Hong Kong through one of CSC’s subsidiaries; Charles Schwab Bank, N.A. (Schwab Bank), which commenced operations in 2003, is a retail bank located in Reno, Nevada; Charles Schwab Investment Management, Inc. (CSIM) is the investment advisor for Schwab’s proprietary mutual funds, which are referred to as the Schwab Funds^®; CyberTrader, Inc. (CyberTrader), which was acquired in 2000 and is located in Austin, Texas, is an electronic trading technology and brokerage firm providing services to highly active, online traders; and The Charles Schwab Trust Company (CSTC), which serves as trustee for employee benefit plans, primarily 401(k) plans.

On November 19, 2006, the Company entered into a definitive agreement with Bank of America Corporation (Bank of America) pursuant to which Bank of America will acquire all of the outstanding stock of U.S. Trust Corporation (USTC, and with its subsidiaries collectively referred to as U.S. Trust), a subsidiary which provides wealth management services and is located in New York. The transaction is expected to close early in the third quarter of 2007; accordingly, U.S. Trust is presented on a discontinued operations basis for financial statement purposes. All other information contained in this Annual Report on Form 10-K is presented on a continuing operations basis unless otherwise noted.

In 2004, the Company sold its capital markets business, consisting of the partnership interests of Schwab Capital Markets L.P. and all of the outstanding capital stock of SoundView Technology Group, Inc. (collectively referred to as Schwab Soundview Capital Markets, or SSCM). In 2003, the Company substantially exited from its international operations with the sales of its U.K. brokerage subsidiary, Charles Schwab Europe, and its investment in Aitken Campbell, a market-making joint venture in the U.K.

As of December 31, 2006, the Company had full-time, part-time and temporary employees, and persons employed on a contract basis that represented the equivalent of about 12,400 full-time employees.

The Company provides financial services to individuals and institutional clients through two segments – Schwab Investor Services and Schwab Institutional^®. The Schwab Investor Services segment includes the Company’s retail brokerage and banking operations, as well as the Schwab Retirement Plan Services division. The Schwab Institutional segment provides custodial, trading and support services to independent investment advisors (IAs). For financial information by segment for the three years ended December 31, 2006, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 21. Segment Information.”

Business Strategy and Competitive Environment

The Company’s primary strategy is to meet the financial services needs of individual investors and the independent IAs who serve them. In pursuit of this strategy, the Company endeavors to provide clients with a compelling combination of personalized relationships, superior service, and competitive pricing. The Company also strives to combine people and technology in ways that facilitate the delivery of a full range of investment services at great value. People provide the

^(a) Accounts with balances or activity within the preceding eight months.

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THE CHARLES SCHWAB CORPORATION

client focus and personal touch that are essential in serving investors, while technology helps create services that are scalable and consistent. This combination helps the Company address a wide range of client needs – from tools and information for self-directed investing or active trading, to advice services or wealth management, to retirement plans, to support services for independent IAs – while enabling each client to easily utilize some or all of these capabilities according to each client’s unique circumstances. In 2006 the Company sharpened its strategic focus with the pending sale of U.S. Trust and the announcement of an agreement to purchase The 401(k) Company, a provider of retirement plan services.

The Company’s competition in serving individual investors includes a wide range of brokerage, wealth management, and asset management firms. In serving these investors and competing for a growing percentage of the trillions of dollars of investable wealth in the U.S., the Company offers a multi-channel service delivery model which includes branch, telephonic, and online capabilities. Under this model, the Company can offer personalized service at competitive prices while giving clients the choice of where, when, and how they do business with the firm. Schwab’s network of branches and regional telephone service centers is staffed with trained and experienced financial consultants (FCs) focused on building and sustaining client relationships. The Company offers the ability to meet client investing needs through a single ongoing point of contact, even as those needs change over time. In particular, management believes that the Company’s ability to provide those clients seeking help, guidance, or advice with an integrated, individually tailored solution – ranging from occasional consultations to an ongoing relationship with a Schwab FC or IA – is a competitive strength versus the more fragmented offerings of other firms.

The Company’s online and telephonic channels provide quick and efficient access to an extensive array of information, research, tools, trade execution, and administrative services, which clients can access according to their needs. For example, as clients trade more actively, they can use these channels to access highly competitive pricing, expert tools, and extensive service capabilities – including experienced, knowledgeable teams of trading specialists and integrated product offerings. Individuals investing for retirement through 401(k) plans can take advantage of the Company’s bundled offering of multiple investment choices, education, and third-party advice. Management also believes the Company is able to compete with the wide variety of financial services firms striving to attract individual client relationships, by complementing these capabilities with the extensive array of investment, banking, and lending products and services described in the following section.

In the IA arena, the Company competes with institutional custodians, traditional and discount brokers, banks, and trust companies. Management believes that its Schwab Institutional segment can maintain its market leadership position primarily through the efforts of its expanded sales and support teams, which are dedicated to helping IAs grow, compete, and succeed. In addition to focusing on superior service, Schwab Institutional competes by utilizing technology to provide IAs with a highly-developed, scalable platform for administering their clients’ assets easily and efficiently. Schwab Institutional also sponsors a variety of national, regional, and local events designed to help IAs identify and implement better ways to grow and manage their practices efficiently.

Another important aspect of the Company’s ability to compete is its ongoing focus on efficiency and productivity, as lower costs give the Company greater flexibility in its approach to pricing and investing for growth. Management believes that this flexibility remains important in light of the current competitive environment, in which a number of competitors have reduced online trading commission rates and account fees. Additionally, the Company’s nationwide marketing effort is an important competitive tool because it reinforces the attributes of the Schwab^® brand.

Products and Services

The Company offers a broad range of products to address its clients’ varying investment and financial needs. Examples of these product offerings include:

• Brokerage – various asset management accounts including some with check-writing features, debit card, and billpay; individual retirement accounts; retirement plans for small to large businesses; 529 college savings accounts; and margin loans, as well as access to fixed income securities and equity and debt offerings;

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THE CHARLES SCHWAB CORPORATION

• Banking – first mortgages, home equity lines of credit, pledged-asset mortgages, checking accounts linked to brokerage accounts, certificates of deposit, demand deposit accounts, and credit cards; and

• Mutual funds – third-party mutual funds through Mutual Fund Marketplace^®, including no-load mutual funds through the Mutual Fund OneSource^® service, proprietary mutual funds from two fund families – Schwab Funds and Laudus Funds^TM – and mutual fund trading and clearing services to broker-dealers.

These products, and the Company’s full array of investing services, are made available through its two segments – Schwab Investor Services and Schwab Institutional.

Schwab Investor Services

Through the Schwab Investor Services segment, the Company provides retail brokerage and banking services to individual investors, as well as 401(k) record keeping and other retirement plan services to corporations and professional organizations. Clients of the Company, through the Schwab Investor Services segment, have access to the services described below.

The Company offers research, analytic tools, performance reports, market analysis, and educational material to all clients. Clients looking for more guidance have access to online portfolio planning tools, as well as professional advice from Schwab’s portfolio consultants who can help develop an investment strategy and carry out investment and portfolio management decisions. Many clients have a relationship with a specific FC, who serves as their primary point of contact for utilizing Schwab’s services.

Schwab strives to demystify investing by educating and assisting clients in the development of investment plans. Educational tools include workshops, interactive courses, and online information about investing. Additionally, Schwab provides various Internet-based research and analysis tools which are designed to help clients achieve better investment outcomes. As an example of such tools, Schwab Equity Ratings^® is a quantitative model-based stock rating system which provides all clients with ratings on approximately 3,000 stocks, assigning each equity a single grade: A, B, C, D, or F. Stocks are rated based on specific factors relating to fundamentals, valuation, momentum, and risk and ranked so that the number of ‘buy consideration’ ratings – As and Bs – equals the number of ‘sell consideration’ ratings – Ds and Fs.

Clients may need specific investment recommendations either from time to time or on an ongoing basis. The Company seeks to provide clients seeking advice with customized solutions. The Company’s approach to advice is based on long-term investment strategies and guidance on portfolio diversification and asset allocation. This approach is designed to be offered consistently across all of Schwab’s delivery channels.

Schwab Private Client^TM features a personal advice relationship with a designated FC, supported by a team of investment professionals who provide individualized service, a customized investment strategy developed in collaboration with the client, and ongoing guidance and execution.

For clients seeking a relationship in which investment decisions are fully delegated to a financial professional, the Company offers several alternatives. The Company provides investors access to professional investment management in a diversified account that is invested exclusively in mutual funds through the Schwab Managed Portfolio^TM program. The Company also refers investors who want to utilize a specific third-party money manager to direct a portion of their investment assets to the Schwab Managed Account program. In addition, clients who want the assistance of an independent professional in managing their financial affairs may be referred to IAs in the Schwab Advisor Network^®. These IAs provide personalized portfolio management, financial planning, and wealth management solutions.

The Company strives to deliver information, education, technology, service, and pricing which meet the specific needs of clients who trade actively. Schwab offers integrated Web- and software-based trading platforms, which incorporate intelligent order routing technology, real-time market data, options trading, and premium stock research, as well as multi-channel access. CyberTrader^® also offers extensive Web- and software-based trading platforms with more

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THE CHARLES SCHWAB CORPORATION

sophisticated account and trade management features, risk management tools, decision support tools, and dedicated personal support.

The Company serves both foreign investors and non-English-speaking U.S. clients who wish to trade or invest in U.S. dollar-based securities. The Company has a physical presence in the United Kingdom and Hong Kong. In the U.S., the Company serves Chinese-, Korean-, Spanish-, and Vietnamese-speaking clients through a combination of designated branch offices and Web-based and telephonic services.

The Company provides 401(k) recordkeeping and other retirement plan services to corporations and professional organizations through its Schwab Retirement Plan Services division. A dedicated sales force markets these services directly to such organizations, and the Company also serves plan sponsors indirectly through alliances with third-party administrators. The Company’s bundled

401(k) retirement plan product offers plan sponsors a wide array of investment options, participant education and servicing, trustee services, and participant-level recordkeeping. Participants in these plans have access to customized advice provided by a third party.

On December 22, 2006, the Company announced an agreement to acquire The 401(k) Company, which offers defined contribution plan services. The 401(k) Company will complement Schwab’s retirement business strategy and increase Schwab’s ability to meet the needs of retirement plans of all sizes. The transaction is expected to close in March 2007.

Schwab Institutional

Through the Schwab Institutional segment, Schwab provides custodial, trading, technology, practice management, and other support services to IAs. To attract and serve IAs, Schwab Institutional has a dedicated sales force and service teams assigned to meet their needs.

IAs who custody client accounts at Schwab may use proprietary software that provides them with up-to-date client account information, as well as trading capabilities. In addition, IAs may utilize the Schwab Institutional website, the core platform for IAs to conduct daily business activities online with Schwab, including submitting client account information and retrieving news and market information. This platform provides IAs with a comprehensive suite of electronic and paper-based reporting capabilities. Schwab Institutional also offers online cashiering services, as well as internet-based eDocuments sites for both IAs and their clients that provide multi-year archiving of online statements, trade confirms and tax reports, along with document search capabilities.

To help IAs grow and manage their practices, Schwab Institutional offers a variety of services, including marketing and business development, business strategy and planning, and transition support. Regulatory compliance consulting and support services are also available, as well as website design and development capabilities. In addition, Schwab Institutional maintains a website that provides interactive tools, educational content, and research reports to assist advisors thinking about establishing their own independent practices.

The Company also offers a variety of educational materials and events to IAs seeking to expand their knowledge of industry issues and trends, as well as sharpen their individual expertise and practice management skills. Schwab Institutional updates and shares market research on an ongoing basis, and it holds a series of events and conferences every year to discuss topics of interest to IAs, including business strategies and best practices. The Company also sponsors the annual IMPACT^® conference, which provides a national forum for the Company, IAs, and other industry participants to gather and share information and insights.

IAs and their clients also have access to a broad range of the Company’s products and services, including managed accounts, cash products, and annuities.

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THE CHARLES SCHWAB CORPORATION

Regulation

CSC is a financial holding company, which is a type of bank holding company subject to supervision and regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the Act). CSC’s depository institution subsidiaries, including Schwab Bank and affiliates of U.S. Trust (currently reflected as a discontinued operation for financial statement purposes), are subject to regulation and supervision and to various requirements and restrictions under federal and state laws, including regulatory capital guidelines. Among other things, these requirements govern transactions with CSC and its non-depository institution subsidiaries, including loans and other extensions of credit, investments or asset purchases, dividends, and investments. The federal banking agencies have broad powers to enforce these regulations, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver.

To maintain its status as a financial holding company, each of CSC’s depository institution subsidiaries must be kept “well capitalized” and “well managed.” In addition, each of CSC’s insured depository institution subsidiaries must be rated “satisfactory” or better in meeting the requirements of the Community Reinvestment Act of 1977 in order for CSC to engage in new financial activities or enter into certain acquisitions of companies engaged in financial activities.

The securities industry in the United States is subject to extensive regulation under both federal and state laws. Schwab and CyberTrader are registered as broker-dealers with the Securities and Exchange Commission (SEC), the fifty states, and the District of Columbia and Puerto Rico. Schwab and CSIM are registered as investment advisors with the SEC. Additionally, Schwab is regulated by the Commodities Futures Trading Commission (CFTC) with respect to the futures and commodities trading activities it conducts as an introducing broker.

Much of the regulation of broker-dealers has been delegated to self-regulatory organizations (SROs), namely the national securities exchanges, the National Association of Securities Dealers (NASD), and the Municipal Securities Rulemaking Board (MSRB). Schwab is a member of several national securities exchanges and is consequently subject to their rules and regulations. The primary regulators of Schwab and CyberTrader are the NASD and, for municipal securities, the MSRB. The CFTC has designated the National Futures Association (NFA) as Schwab’s primary regulator for futures and commodities trading activities. The Company’s business is also subject to oversight by regulatory bodies in other countries in which the Company operates.

The principal purpose of regulating broker-dealers and investment advisors is the protection of clients and the securities markets. The regulations to which broker-dealers and investment advisors are subject cover all aspects of the securities business, including, among other things, sales and trading practices, publication of research, margin lending, uses and safekeeping of clients’ funds and securities, capital adequacy, recordkeeping and reporting, fee arrangements, disclosure to clients, fiduciary duties owed to advisory clients, and the conduct of directors, officers and employees.

As registered broker-dealers, certain subsidiaries of CSC, including Schwab are subject to SEC Rule 15c3-1 (the Net Capital Rule) and related SRO requirements. The CFTC and NFA also impose net capital requirements. The Net Capital Rule specifies minimum capital requirements that are intended to ensure the general financial soundness and liquidity of broker-dealers. Because CSC itself is not a registered broker-dealer, it is not subject to the Net Capital Rule. However, if Schwab failed to maintain specified levels of net capital, such failure would constitute a default by CSC under certain debt covenants.

The Net Capital Rule limits broker-dealers’ ability to transfer capital to parent companies and other affiliates. Compliance with the Net Capital Rule could limit Schwab’s operations and its ability to repay subordinated debt to CSC, which in turn could limit CSC’s ability to repay debt, pay cash dividends, and purchase shares of its outstanding stock.

Sources of Net Revenues

For revenue information by source for the three years ended December 31, 2006, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Net Revenues.”

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THE CHARLES SCHWAB CORPORATION

Available Information

The Company files annual, quarterly, and current reports, proxy statements, and other information with the SEC. You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an Internet website that contains annual, quarterly, and current reports, proxy and information statements, and other information that issuers (including the Company) file electronically with the SEC. The SEC’s Internet website is www.sec.gov.

On the Company’s Internet website, www.aboutschwab.com, the Company posts the following recent filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: the Company’s annual reports on Form 10-K, the Company’s quarterly reports on Form 10-Q, the Company’s current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All such filings are available free of charge either on the Company’s website or by request via email (investor.relations@schwab.com), telephone (415-636-2787), or mail (Charles Schwab Investor Relations at 101 Montgomery Street, San Francisco, CA 94104).

Item 1A. Risk Factors

The Company faces a variety of risks that may affect its operations or financial results, and many of those risks are driven by factors that the Company cannot control or predict. The following discussion addresses those risks that management believes are the most significant, although there may be other risks that could arise, or may prove to be more significant than expected, that may affect the Company’s operations or financial results.

For a discussion of the Company’s risk management, including technology and operating risk and legal and regulatory risk, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management.”

There has been aggressive price competition in the Company’s industry, which may continue in the future.

The Company continually monitors its pricing in relation to competitors and periodically adjusts commission rates, interest rates, and other fee structures to enhance its competitive position. Increased competition, including pricing pressure, could harm the Company’s results of operations and financial condition.

The industry in which the Company competes has undergone a period of consolidation and the Company now faces stronger competitors.

The Company faces intense competition for the clients that it serves and the products and services it offers. There has been significant consolidation as financial institutions with which the Company competes have been acquired by or merged into or acquired other firms. This consolidation may continue. Competition is based on many factors, including the range of products and services offered, pricing, customer service, brand recognition, reputation, and perceived financial strength. Consolidations may enable other firms to offer a broader range of products and services than the Company does, or offer such products at more competitive prices.

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THE CHARLES SCHWAB CORPORATION

The Company faces intense competition in hiring and retaining qualified employees, especially for employees who are key to the Company’s ability to build and enhance client relationships.

The market for quality professionals and other personnel in the Company’s business is highly competitive. Competition is particularly strong for financial consultants who build and sustain the Company’s client relationships. The Company’s ability to continue to compete effectively will depend upon its ability to attract new employees and retain existing employees while managing compensation costs.

Extensive regulation of the Company’s businesses limits the Company’s activities and may subject it to significant penalties.

As a participant in the securities and financial services industries, the Company is subject to extensive regulation under both federal and state laws by governmental agencies, supervisory authorities, and SROs. Such regulation continues to become more extensive and complex. The requirements imposed by the Company’s regulators are designed to ensure the integrity of the financial markets and to protect clients. These regulations often serve to limit the Company’s activities by way of net capital, customer protection and market conduct requirements, and restrictions on the businesses in which the Company may operate. Despite the Company’s efforts to comply with applicable regulations, there are a number of risks, particularly in areas where applicable regulations may be unclear or where regulators revise their previous guidance. Any enforcement actions or other proceedings brought by the Company’s regulators against the Company or its affiliates, officers or employees could result in fines, penalties, cease and desist orders, enforcement actions, or suspension or expulsion, any of which could harm the Company’s reputation and adversely affect the Company’s results of operations and financial condition.

In the ordinary course of business, the Company is subject to litigation and may not always be successful in defending itself against such claims.

The Company is subject to claims and lawsuits in the ordinary course of its business, which can result in settlements, awards, and injunctions. It is inherently difficult to predict the ultimate outcome of these matters, particularly in cases in which claimants seek substantial or unspecified damages, and a substantial judgment, settlement, fine, or penalty could be material to the Company’s operating results or cash flows for a particular future period, depending on the Company’s results for that period.

From time to time, the Company is subject to litigation claims from third parties alleging infringement of their intellectual property rights (e.g., patents). Such litigation can require the expenditure of significant Company resources. If the Company was found to have infringed a third-party patent, or other intellectual property rights, it could incur substantial liability, and in some circumstances could be enjoined from using certain technology, or providing certain products or services.

Legislation or changes in rules and regulations could negatively impact the Company’s business and financial results.

New legislation, rule changes, or changes in the interpretation or enforcement of existing federal, state and SRO rules and regulations may directly affect the operation and profitability of the Company or its specific business lines. The profitability of the Company could also be affected by rules and regulations which impact the business and financial communities generally, including changes to the laws governing taxation, electronic commerce, client privacy and security of client data.

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THE CHARLES SCHWAB CORPORATION

A significant decrease in the Company’s liquidity could negatively affect the Company’s business as well as reduce client confidence in the Company.

Maintaining adequate liquidity is crucial to the business operations of the Company, including margin lending, mortgage lending, and transaction settlement, among other liquidity needs. A reduction in the Company’s liquidity position could also reduce client confidence in the Company, which could result in the loss of client accounts. In addition, if the Company’s broker-dealer or depository institution subsidiaries fail to meet regulatory capital guidelines, regulators could limit the Company’s operations and its ability to repay debt, pay cash dividends, and repurchase shares of its stock. In particular, any such limitations could have an adverse effect on CSC, which depends primarily on cash generated by its subsidiaries in order to fulfill its debt service obligations and otherwise meet its liquidity needs. The Company attempts to manage liquidity risk by maintaining sufficient liquid financial resources to fund its balance sheet and meet its obligations. The Company meets its liquidity needs primarily through cash generated by operations, as well as cash provided by external financing. Fluctuations in client cash or deposit balances, as well as changes in market conditions, may affect the Company’s ability to meet its liquidity needs.

Specific risk factors which may adversely affect the Company’s liquidity position include:

• a reduction in cash held in banking or brokerage client accounts which may affect the amount of the Company’s liquid assets;

• a significant downgrade in the Company’s credit ratings which could increase its borrowing costs and limit its access to the capital markets; and

• a dramatic increase in the Company’s client lending activities (including margin, mortgage, and personal lending) which may reduce the Company’s liquid resources and excess capital position.

Technology and operational failures could subject the Company to losses, litigation, and regulatory actions.

The Company faces technology and operating risk which is the potential for loss due to deficiencies in control processes or technology systems of the Company or its vendors that constrain the Company’s ability to gather, process, and communicate information and process client transactions efficiently and securely, without interruptions. This risk also includes the risk of human error, employee misconduct, external fraud, computer viruses, terrorist attacks, and natural disaster. The Company’s business and operations could be negatively impacted by any significant technology and operational failures. Moreover, instances of fraud or other misconduct, including improper use or disclosure of confidential client or employee information, might also negatively impact the Company’s reputation and client confidence in the Company, in addition to any direct losses that might result from such instances. Despite the Company’s efforts to identify areas of risk, oversee operational areas involving risk, and implement policies and procedures designed to manage risk, there can be no assurance that the Company will not suffer unexpected losses due to technology or other operational failures, including those of its vendors.

The Company also faces risk related to its security guarantee which covers client losses from unauthorized account activity, such as those caused by external fraud involving the compromise of clients’ login and password information. Losses reimbursed under the guarantee could have a negative impact on the Company’s results of operations.

The Company relies on outsourced service providers to perform key functions.

The Company relies on service providers to perform certain key technology, processing, and support functions. These service providers also face technology and operating risk and any significant failures by them, including the improper use or disclosure of the Company’s confidential client or employee information, could cause the Company to incur losses and could harm the Company’s reputation. The Company also faces the risk that a service provider could, without adequate notice, cease to provide services, which could disrupt the Company’s operations. Switching to an alternative service provider may also require a transition period and result in less efficient operations.

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THE CHARLES SCHWAB CORPORATION

The Company may suffer significant losses from its credit exposures.

The Company’s businesses are subject to the risk that a client or counterparty will fail to perform its contractual obligations, or that the value of collateral held to secure obligations will prove to be inadequate. The Company’s exposure mainly results from margin lending activities, securities lending activities, its role as a counterparty in financial contracts, investing activities, banking loan portfolios, and indirectly from the investing activities of certain of the Company’s proprietary funds.

Significant interest rate changes could affect the Company’s profitability and financial condition.

The Company is exposed to interest rate risk primarily from changes in the interest rates on its interest-earning assets (such as margin loans and customer mortgages) and its funding sources, such as customer deposits and Company borrowings. Changes in interest rates could affect the interest earned on interest-earning assets differently than the interest the Company pays on its interest-bearing liabilities. In general, the Company is positioned to benefit from a rising interest rate environment, and could be adversely affected by a general decline in interest rates, although any potential reduction in net interest income may be offset by growth in the Company’s loan portfolio and inflows of client cash. In addition, in the event prevailing short-term interest rates declined to the point where yields available on money market mutual funds approached the level of management fees on those funds, the Company could find itself in the position of having to reduce its management fees so that it could continue to pay clients a competitive return on their assets.

Potential strategic transactions could have a negative impact on the Company’s financial position.

The Company evaluates potential strategic transactions, including business combinations, acquisitions, and dispositions. Any such transaction could have a material impact on the Company’s financial position, results of operations, or cash flows. The process of evaluating, negotiating, and effecting any such strategic transaction may divert management’s attention from other business concerns, and might cause the loss of key clients, employees, and business partners. Moreover, integrating businesses and systems may result in unforeseen expenditures as well as numerous risks and uncertainties, including the need to integrate operational, financial, and management information systems and management controls, integrate relationships with clients and business partners, and manage facilities and employees in different geographic areas. In addition, an acquisition may cause the Company to assume liabilities or become subject to litigation. Further, the Company may not realize the anticipated benefits from an acquisition, including the acquisition of The 401(k) Company, and any future acquisition could be dilutive to the Company’s current stockholders’ percentage ownership or to earnings per share (EPS).

The Company’s acquisitions and dispositions are typically subject to closing conditions, including regulatory approvals and the absence of material adverse changes in the business, operations or financial condition of the entity being acquired or sold. To the extent the Company enters into an agreement to buy or sell an entity, including the existing agreement to sell U.S. Trust, there can be no guarantee that the transaction will close when expected, or at all. If a material transaction does not close, the Company’s stock price could decline.

The Company’s stock price has fluctuated historically, and may continue to fluctuate.

The Company’s stock price can be volatile. Among the factors that may affect the Company’s stock price are the following:

• speculation in the investment community or the press about, or actual changes in, the Company’s competitive position, organizational structure, executive team, operations, financial condition, financial reporting and results, effectiveness of cost reduction initiatives, or strategic transactions;

• the announcement of new products, services, acquisitions, or dispositions by the Company or its competitors;

• increases or decreases in revenue or earnings, changes in earnings estimates by the investment community, and variations between estimated financial results and actual financial results.

Changes in the stock market generally or as it concerns the Company’s industry, as well as geopolitical, economic, and business factors unrelated to the Company, may also affect the Company’s stock price.

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THE CHARLES SCHWAB CORPORATION

Developments in the business, economic, and geopolitical environment could negatively impact the Company’s business.

The Company’s business can be significantly affected by the general environment – economic, corporate, securities market, regulatory, and geopolitical developments all play a role in client asset valuations, trading activity, interest rates and overall investor engagement. These factors are outside of the control of the Company and could have a negative impact on the Company’s results of operations and financial condition.

Item 1B. Unresolved Securities and Exchange Commission Staff Comments

None.

Item 2. Properties

A summary of the Company’s significant locations at December 31, 2006 is presented in the following table. Locations are leased or owned as noted below. The square footage amounts are presented net of space that has been subleased to third parties.

(amounts in thousands)	Square Footage
	Leased	Owned
Location
Corporate office space:
San Francisco, CA (1)	1,427	—
Service centers:
Phoenix, AZ (2,3)	154	709
Denver, CO (2)	274	—
Richfield, OH (4)	123	—
Indianapolis, IN (2)	—	113
Orlando, FL (2)	106	—

⁽¹⁾ Includes Schwab headquarters.

⁽²⁾ Includes a regional telephone service center.

⁽³⁾ Includes two data centers and an administrative support center.

⁽⁴⁾ Includes the Corporate and Retirement Services division headquarters.

Substantially all of the Company’s branch offices are located in leased premises. The corporate headquarters, data centers, offices, and service centers generally support all of the Company’s segments.

Item 3. Legal Proceedings

The Company is subject to claims and lawsuits in the ordinary course of its business, including arbitrations, class actions, and other litigation, some of which include claims for substantial or unspecified damages. The Company is also the subject of inquiries, investigations, and proceedings by regulatory and other governmental agencies. In addition, the Company is responding to certain litigation claims brought against former subsidiaries pursuant to indemnities it has provided to purchasers of those entities.

The Company believes it has strong defenses in all significant matters currently pending and is vigorously contesting liability and the damages claimed. Nevertheless, some of these matters may result in adverse judgments or awards,

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THE CHARLES SCHWAB CORPORATION

including penalties, injunctions, or other relief, and the Company may also determine to settle a matter because of the uncertainty and risks of litigation. Predicting the outcome of a matter is inherently difficult, particularly where claimants seek substantial or unspecified damages, or when investigations or legal proceedings are at an early stage. In many cases, including most class action lawsuits, it is not possible to determine whether a loss will be incurred or to estimate the range of that loss until the matter is close to resolution. However, based on current information and consultation with counsel, management believes that the resolution of matters currently pending, including those described below, will not have a material adverse impact on the financial condition or cash flows of the Company, but could be material to the Company’s operating results for a particular future period, depending on results for that period.

SoundView Litigation: As part of the sale of SoundView to UBS Securities LLC and UBS Americas Inc. (collectively referred to as UBS), the Company agreed to indemnify UBS for certain litigation, including the claims described below.

SoundView and certain of its subsidiaries are among the numerous financial institutions named as defendants in multiple purported securities class actions filed in the United States District Court for the Southern District of New York (the IPO Allocation Litigation) between June and December 2001. The IPO Allocation Litigation was brought on behalf of persons who either directly or in the aftermarket purchased IPO securities between March 1997 and December 2000. The plaintiffs allege that SoundView entities and the other underwriters named as defendants required customers receiving allocations of IPO shares to pay excessive and undisclosed commissions on unrelated trades and to purchase shares in the aftermarket at prices higher than the IPO price, in violation of the federal securities laws. SoundView entities have been named in 31 of the actions, each involving a different company’s IPO, and had underwriting commitments in approximately 90 other IPOs that are the subject of lawsuits. SoundView entities have not been named as defendants in these cases, although the lead underwriters in those IPOs have asserted that depending on the outcome of the cases, SoundView entities may have indemnification or contribution obligations based on underwriting commitments in the IPOs. The parties, with the assent of the District Court, selected 17 cases as focus cases for the purpose of case-specific discovery, and in October 2004, the District Court allowed 6 of the focus cases to proceed as class actions. Defendants appealed that decision to the United States Court of Appeals for the Second Circuit, which issued an order on December 5, 2006 reversing the District Court and rejecting the consideration of these cases as class actions. Plaintiffs are now appealing that decision. The Company will continue to vigorously contest these claims on behalf of SoundView pursuant to the indemnity with UBS.

Item 4. Submission of Matters to a Vote of Security Holders

During the fourth quarter of 2006, no matters were submitted to a vote of CSC’s security holders.

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THE CHARLES SCHWAB CORPORATION

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

CSC’s common stock is listed on The Nasdaq Stock Market under the ticker symbol SCHW. The number of common stockholders of record as of January 31, 2007 was 10,344. The closing market price per share on that date was $18.92.

The other information required to be furnished pursuant to this item is included in “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 13. Employee Incentive, Deferred Compensation, and Retirement Plans and 24. Quarterly Financial Information (Unaudited).”

The following graph shows a five-year comparison of cumulative total returns for CSC’s common stock, the Dow Jones U.S. Investment Services Index, and the Standard & Poor’s 500 Index, each of which assumes an initial investment of $100 and reinvestment of dividends.

December 31,	2001		2002		2003		2004		2005		2006
The Charles Schwab Corporation	$	100	$	70	$	77	$	79	$	97	$	129
Dow Jones U.S. Investment Services Index	$	100	$	74	$	104	$	113	$	138	$	186
Standard & Poor’s 500 Index	$	100	$	78	$	100	$	111	$	117	$	135

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THE CHARLES SCHWAB CORPORATION

(c) Issuer Purchases of Equity Securities

The following table summarizes purchases made by or on behalf of CSC of its common stock for each calendar month in the fourth quarter of 2006.

Month	Total Number Of Shares Purchased (in thousands)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program (1) (in thousands)	Approximate Dollar Value of Shares that May Yet be Purchased under the Program (in millions)
October:
Share Repurchase Program (1)	—		—	—	$	200
November:
Share Repurchase Program (1)	2,261	$	18.47	2,261	$	158
December:
Share Repurchase Program (1)	3,788	$	18.71	3,788	$	87
Employee Transactions (2)	285	$	19.31	N/A		N/A
Total:
Share Repurchase Program (1)	6,049	$	18.62	6,049	$	87
Employee Transactions (2)	285	$	19.31	N/A		N/A

N/A Not applicable.

⁽¹⁾ All shares were repurchased under an authorization by CSC’s Board of Directors covering up to $500 million of common stock publicly announced by the Company on July 25, 2006. The remaining authorization does not have an expiration date.

⁽²⁾ Includes restricted shares withheld (under the terms of grants under employee stock incentive plans) to offset tax withholding obligations that occur upon vesting and release of restricted shares. The Company may receive shares to pay the exercise price and/or to satisfy tax withholding obligations by employees who exercise stock options (granted under employee stock incentive plans), which are commonly referred to as stock swap exercises.

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THE CHARLES SCHWAB CORPORATION

Item 6. Selected Financial Data

Selected Financial and Operating Data

(In Millions, Except Per Share Amounts, Ratios, Number of Domestic Branch Offices, and as Noted)

	Growth Rates
	Compounded		Annual
	4-Year 2002-2006		1-Year 2005-2006		2006			2005			2004			2003			2002
Results of Operations
Net revenues	7	%	19	%	$	4,309		$	3,619		$	3,416		$	3,267		$	3,293
Expenses excluding interest	(2	%)	9	%	$	2,833		$	2,592		$	2,869		$	2,640		$	3,098
Income from continuing operations before extraordinary gain	66	%	41	%	$	891		$	634		$	350		$	402		$	117
Net income	83	%	69	%	$	1,227		$	725		$	286		$	472		$	109
Income from continuing operations per share — basic	67	%	43	%	$	.70		$	.49		$	.26		$	.30		$	.09
Income from continuing operations per share — diluted	66	%	44	%	$	.69		$	.48		$	.26		$	.29		$	.09
Basic earnings per share (1)	87	%	73	%	$	.97		$	.56		$	.21		$	.35		$	.08
Diluted earnings per share (1)	86	%	73	%	$	.95		$	.55		$	.21		$	.35		$	.08
Dividends declared per common share	32	%	52	%	$	.135		$	.089		$	.074		$	.050		$	.044
Weighted-average common shares outstanding — diluted	(2	%)	(2	%)		1,286			1,308			1,365			1,364			1,375
Asset-based and other revenues as a percentage of net revenues (2)						82	%		79	%		70	%		64	%		63	%
Trading revenues as a percentage of net revenues (2)						18	%		21	%		30	%		36	%		37	%
Effective income tax rate on income from continuing operations						39.6	%		38.3	%		36.0	%		35.9	%		40.0	%
Capital expenditures — cash purchases of equipment, office facilities, property, and internal-use software development costs, net (3)	(19	%)	(24	%)	$	59		$	78		$	177		$	132		$	137
Capital expenditures, net, as a percentage of net revenues						1	%		2	%		5	%		4	%		4	%
Performance Measures
Net revenue growth (decline)						19	%		6	%		5	%		(1	%)		(4	%)
Pre-tax profit margin from continuing operations						34.3	%		28.4	%		16.0	%		19.2	%		5.9	%
Return on stockholders’ equity						26	%		16	%		6	%		11	%		3	%
Financial Condition (at year end)
Total assets	5	%	3	%	$	48,992		$	47,351		$	47,133		$	45,866		$	39,705
Long-term debt	(10	%)	(16	%)	$	388		$	462		$	533		$	721		$	592
Stockholders’ equity	6	%	13	%	$	5,008		$	4,450		$	4,386		$	4,461		$	4,011
Assets to stockholders’ equity ratio						10			11			11			10			10
Long-term debt to total financial capital (long-term debt plus stockholders’ equity)						7	%		9	%		11	%		14	%		13	%
Employee Information
Full-time equivalent employees (at year end, in thousands)	(3	%)	7	%		12.4			11.6			11.8			13.4			14.1
Net revenues per average full-time equivalent employee (in thousands)	15	%	13	%	$	362		$	319		$	260		$	242		$	207

Note: All information contained in this Annual Report on Form 10-K is presented on a continuing basis unless otherwise noted.

⁽¹⁾ Both basic and diluted earnings per share include discontinued operations and an extraordinary gain in 2002.

⁽²⁾ Asset-based and other revenues include asset management and administration fees, net interest revenue, and other revenues. Trading revenues include commission and principal transaction revenues.

⁽³⁾ Capital expenditures in 2006 are presented net of proceeds of $63 million primarily from the sale of a data center and in 2005 are presented net of proceeds of $20 million from the sale of equipment.

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THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Management of the Company focuses on several key financial and non-financial metrics in evaluating the Company’s financial position and operating performance. All information contained in this Annual Report on Form 10-K is presented on a continuing operations basis unless otherwise noted. Results for the years ended December 31, 2006, 2005, and 2004 are shown in the following table:

	Growth Rate 1-year 2005-2006		2006			2005			2004
Client Activity Metrics:
Net new client assets (in billions)	4	%	$	72.2		$	69.5		$	48.8
Client assets (in billions, at year end)	18	%	$	1,239.2		$	1,053.5		$	942.0
Daily average revenue trades (in thousands)	18	%		234.4			197.9			156.4
Company Financial Metrics:
Net revenue growth from prior year				19	%		6	%		5	%
Pre-tax profit margin from continuing operations				34.3	%		28.4	%		16.0	%
Return on stockholders’ equity				26	%		16	%		6	%
Net revenue per average full-time equivalent employee     (in thousands)	13	%	$	362		$	319		$	260

• Net new client assets is defined as the total inflows of client cash and securities to the firm less client outflows. Management believes that this metric depicts how well the Company’s products and services appeal to new and existing clients.

• Client assets is the market value of all client assets housed at the Company. Management considers client assets to be indicative of the Company’s appeal in the marketplace. Additionally, growth in certain components of client assets (e.g., Mutual Fund OneSource funds) directly impacts asset management and administration fee revenues.

• Daily average revenue trades (DART) is an important indicator of client engagement with securities markets and the most prominent driver of trading revenues.

• Management believes that net revenue growth, pre-tax profit margin from continuing operations, and return on stockholders’ equity provide broad indicators of the Company’s overall financial health, operating efficiency, and ability to generate acceptable returns.

• Net revenue per average full-time equivalent employee is considered by management to be the Company’s broadest measure of productivity.

The Company’s net revenues are classified into asset-based and other (i.e., asset management and administration fees, net interest revenue, and other revenue) and trading categories. The Company generates asset-based and other revenues primarily through asset management and administration fees earned through its proprietary and third-party mutual fund offerings, as well as fee-based investment management and advisory services, and interest revenue earned on margin loans, loans to banking clients, and investments. Asset-based and other revenues are impacted by securities valuations, interest rates, the Company’s ability to attract new clients, and client activity levels. The Company generates trading revenues through commissions earned for executing trades for clients and principal transaction revenues from trading activity in fixed income securities. Trading revenues are impacted by trading volumes, the volatility of equity prices in the securities markets and commission rates.

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THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

During 2006, interest rates stabilized and the S&P 500 Index and Nasdaq Composite Index marked their fourth consecutive year of gains. Overall market returns for the year showed double-digit gains for the three major indices – the Dow Jones Industrial Average increased 16%, the Standard and Poor’s 500 Index increased 14%, and the Nasdaq Composite Index increased 10%. Coupled with the strong market returns in 2006, the Company experienced a general improvement in client asset flows and trading volume as the year progressed.

The Company strengthened its operating and financial performance in 2006 by focusing on significantly improving the client experience in each of its two segments. Additionally, reflecting a commitment to deliver a value proposition that includes high quality products and services at competitive prices, the Company reduced its commission pricing for a wide range of clients and eliminated certain fees in 2006. Assets in client accounts were $1.239 trillion at December 31, 2006, up 18% from 2005. Net new client assets in the Schwab Investor Services and Schwab Institutional segments totaled $87.3 billion for the year, up 33% from a year ago.

Overall, the Company’s success in attracting client assets and building stronger client relationships, as well as the interest rate environment and improved market performance, led to a 24% increase in asset-based and other revenues and total net revenue growth of 19%. Expenses increased by 9% over 2005 levels, primarily due to higher compensation and benefits expense, professional services expense, and advertising and market development expense. The Company achieved an increase in its pre-tax profit margin from continuing operations due to revenue growth outpacing expense growth in 2006. Return on stockholders’ equity grew in 2006 due to both a 69% increase in net income to $1.2 billion (the highest level in the Company’s history) and its capital management activities, including the repurchase of $859 million of common stock.

Discontinued Operations

On November 19, 2006, CSC entered into a definitive agreement with Bank of America pursuant to which Bank of America will acquire all of the outstanding common stock of U.S. Trust for $3.3 billion in cash. The transaction is expected to close early in the third quarter of 2007. However, the closing is subject to (i) approval of new investment advisor agreements for each of the Excelsior^® mutual funds by the applicable public fund board and the stockholders of each fund, (ii) regulatory approvals, and (iii) other customary closing conditions. The Company estimates it will record a pre-tax gain on the sale of approximately $1.9 billion. After-tax proceeds will be used for general corporate purposes, including share repurchases and continued investment in Schwab Investor Services, Schwab Institutional, and Schwab Bank. U.S. Trust comprised all of the previously-reported U.S. Trust segment.

In 2006, the Company recorded an income tax benefit of $205 million related to the estimated difference between the tax and book bases of the Company’s U.S. Trust stock. This amount is included in income from discontinued operations, net of tax on the Company’s consolidated statements of income. When calculating the Company’s gain on the sale of U.S. Trust for income tax purposes, the tax basis will be the basis of U.S. Trust’s prior stockholders in their shares as of the date U.S. Trust was acquired by the Company, since the transaction qualified as a tax-free exchange. This tax benefit is management’s current estimate and is based on publicly available information, including information on the composition of U.S. Trust’s stockholders at the acquisition date and the market price of U.S. Trust stock during relevant periods. The final amount of the basis difference, which could differ from management’s estimate, will be determined following a survey of former U.S. Trust stockholders that the Company expects to complete in mid-2007.

The results of operations, net of income taxes, and cash flows of U.S. Trust have been presented as discontinued operations on the Company’s consolidated statements of income and of cash flows, respectively, and the assets and liabilities of U.S. Trust have been combined and presented as assets and liabilities of discontinued operations on the Company’s consolidated balance sheets. The Company’s consolidated prior period revenues, expenses, taxes on income, assets, liabilities, and cash flows also reflect this presentation.

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THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

On October 29, 2004, the Company sold its capital markets business to UBS and thereby eliminated the revenues and expenses unique to the capital markets business. The results of operations, net of income taxes, and cash flows of the capital markets business have been presented as discontinued operations on the Company’s consolidated statements of income and of cash flows for all periods.

	2006		2005			2004
Income (loss) from discontinued operations, net of tax:
Pending sale of U.S. Trust	$	333	$	96		$	64
Sale of capital markets business		3		(5	)		(128	)
Total	$	336	$	91		$	(64	)

Subsequent Events

On January 24, 2007, Christopher V. Dodds, Executive Vice President and Chief Financial Officer of CSC, announced his decision to retire as the Chief Financial Officer of CSC on May 18, 2007. The Board of Directors named Joseph R. Martinetto, Senior Vice President and Treasurer of CSC and Schwab, to replace Mr. Dodds as Chief Financial Officer of CSC effective upon Mr. Dodds’ retirement on May 18, 2007.

On February 20, 2007, the Board of Directors appointed Walter W. Bettinger II as President and Chief Operating Officer of CSC. Mr. Bettinger had been serving as Executive Vice President and President-Schwab Investor Services.

RESULTS OF OPERATIONS

	Growth Rate 1-year 2005-2006		2006			2005			2004
Asset-based and other revenues	24	%	$	3,524		$	2,841		$	2,393
Trading revenue	1	%		785			778			1,023
Total net revenues	19	%		4,309			3,619			3,416
Expenses excluding interest	9	%		2,833			2,592			2,869
Income from continuing operations before taxes on income	44	%		1,476			1,027			547
Taxes on income	49	%		(585	)		(393	)		(197	)
Income from continuing operations	41	%		891			634			350
Income (loss) from discontinued operations, net of tax	n/m			336			91			(64	)
Net income	69	%	$	1,227		$	725		$	286
Earnings per share – diluted	73	%	$	.95		$	.55		$	.21
Pre-tax profit margin from continuing operations				34.3	%		28.4	%		16.0	%
Effective income tax rate on income from continuing operations				39.6	%		38.3	%		36.0	%

n/m Not meaningful.

The increase in asset-based and other revenues from 2005 was primarily due to an increase in asset management and administration fees resulting from higher levels of client assets and an increase in net interest revenue resulting from yields on assets increasing faster than those on liabilities. The increase in trading revenues from 2005 was primarily due to higher client trading activity, partially offset by lower average revenue earned per revenue trade resulting from reductions in the Company’s commission pricing, which were effective in the third quarter of 2006.

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THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

The increase in expenses excluding interest from 2005 was primarily due to higher compensation and benefits expense, professional services expense, and advertising and market development expense. The increases in the effective income tax rates from 2004 to 2006 were primarily due to higher state taxes.

The increase in income from continuing operations before taxes on income from 2005 was primarily due to higher asset-based and other revenues. The higher income from continuing operations, combined with the income from discontinued operations, resulted in a 69% increase in net income.

Certain reclassifications have been made to prior year amounts to conform to the current presentation. All references to EPS information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflect diluted earnings per share unless otherwise noted.

Segment Information

The Company evaluates the performance of its segments on a pre-tax basis excluding items such as restructuring charges, impairment charges, discontinued operations, and extraordinary items.

As detailed in “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 21. Segment Information,” income from continuing operations before taxes on income was $1.5 billion for 2006, up $449 million, or 44%, from 2005 primarily due to increases of $278 million, or 37%, in the Schwab Investor Services segment; $87 million, or 27%, in the Schwab Institutional segment; and an $84 million increase in unallocated and other income from continuing operations. The increases in the Schwab Investor Services and Schwab Institutional segments were primarily due to growth in net interest revenue and higher asset management and administrative fees combined with expense growth that was lower than revenue growth. The increase in unallocated and other income from continuing operations was primarily due to the receipt of $25 million related to the confidential resolution of a legal matter in 2006 and restructuring charges recorded in 2005.

Net Revenues

The Company categorizes its revenues as either asset-based and other revenues or trading revenue. As shown in the following table, asset-based and other revenues, trading revenue, and total net revenues increased from 2005.

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THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

Sources of Net Revenues

Year Ended December 31,

			2006				2005				2004
	Growth Rate 2005-2006		Amount		% of Total Net Revenues		Amount		% of Total Net Revenues		Amount		% of Total Net Revenues
Asset-based and other revenues
Asset management and administration fees
Mutual fund service fees:
Proprietary funds (Schwab Funds® and Laudus FundsTM)	15	%	$	930	22	%	$	807	22	%	$	794	23	%
Mutual Fund OneSource®	17	%		523	12	%		447	12	%		380	11	%
Other	13	%		63	2	%		56	2	%		54	2	%
Investment management and trust fees	34	%		296	7	%		221	6	%		149	4	%
Other	(7	%)		133	3	%		143	4	%		172	5	%
Asset management and administration fees	16	%		1,945	46	%		1,674	46	%		1,549	45	%
Net interest revenue
Interest revenue:
Margin loans to clients	28	%		837	19	%		654	18	%		454	13	%
Investments, client-related	17	%		609	14	%		522	14	%		293	9	%
Securities available for sale	149	%		319	8	%		128	4	%		62	2	%
Loans to banking clients	64	%		128	3	%		78	2	%		25	1	%
Other	56	%		220	5	%		141	4	%		43	1	%
Interest revenue	39	%		2,113	49	%		1,523	42	%		877	26	%
Interest expense:
Brokerage client cash balances	13	%		426	10	%		378	10	%		113	3	%
Deposits from banking clients	170	%		200	5	%		74	2	%		21	1	%
Long-term debt	(3	%)		29	1	%		30	1	%		28	1	%
Other	26	%		24	—			19	1	%		10	—
Interest expense	36	%		679	16	%		501	14	%		172	5	%
Net interest revenue	40	%		1,434	33	%		1,022	28	%		705	21	%
Other	—			145	3	%		145	5	%		139	4	%
Total asset-based and other revenues	24	%		3,524	82	%		2,841	79	%		2,393	70	%
Trading revenue
Commissions	1	%		703	16	%		693	19	%		934	27	%
Principal transactions	(4	%)		82	2	%		85	2	%		89	3	%
Total trading revenue	1	%		785	18	%		778	21	%		1,023	30	%
Total net revenues	19	%	$	4,309	100	%	$	3,619	100	%	$	3,416	100	%

- 19 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

Schwab Investor Services and Schwab Institutional segments generate both asset-based and other revenues and trading revenues. Net revenues by segment are as shown in the following table:

	Growth Rate 2005-2006		2006		2005		2004
Schwab Investor Services	18	%	$	3,239	$	2,742	$	2,615
Schwab Institutional	20	%		966		803		725
Unallocated and other	41	%		104		74		76
Total net revenues	19	%	$	4,309	$	3,619	$	3,416

The increase in net revenues in both the Schwab Investor Services and Schwab Institutional segments was primarily due to higher levels of client assets and higher interest rate spreads. The increase in unallocated and other income from continuing operations was primarily due to the receipt of $25 million related to the confidential resolution of a legal matter in 2006.

Asset Management and Administration Fees

Asset management and administration fees include mutual fund service fees, as well as fees for other asset-based financial services provided to individual and institutional clients. The Company earns mutual fund service fees for transfer agent services, shareholder services, administration, and investment management provided to its proprietary funds, and recordkeeping and shareholder services provided to third-party funds. These fees are based upon the daily balances of client assets invested in third-party funds and upon the average daily net assets of the Company’s proprietary funds. The Company also earns asset management and administration fees for financial services provided to individual and institutional clients, including trust and custody services.

The increase in asset management and related service fees from 2004 to 2006 was primarily due to higher levels of client assets in the Company’s proprietary mutual funds and higher volumes of asset-based fees from certain client relationships, including increases in average assets in Schwab’s Mutual Fund OneSource service.

Net Interest Revenue

Net interest revenue is the difference between interest earned on certain assets (mainly margin loans to clients, investments of segregated client cash balances, loans to banking clients, and securities available for sale) and interest paid on supporting liabilities (mainly deposits from banking clients and brokerage client cash balances). Net interest revenue is affected by changes in the volume and mix of these assets and liabilities, as well as by fluctuations in interest rates and portfolio management strategies. The Company is positioned so that the consolidated balance sheet produces an increase in net interest revenue when interest rates rise and, conversely, a decrease in net interest revenue when interest rates fall (i.e., interest-earning assets reprice more quickly than interest-bearing liabilities). In the event of falling interest rates, the Company might attempt to mitigate some of this negative impact by extending maturities of assets in investment portfolios to lock-in asset yields as well as by lowering rates paid to clients on interest-bearing liabilities.

In clearing its clients’ trades, Schwab holds cash balances payable to clients. In most cases, Schwab pays its clients interest on cash balances awaiting investment, and may invest these funds and earn interest revenue. Margin loans arise when Schwab lends funds to clients on a secured basis to purchase securities. Pursuant to SEC regulations, client cash balances that are not used for margin lending are generally segregated into investment accounts that are maintained for the exclusive benefit of clients.

When investing segregated client cash balances, Schwab must adhere to SEC regulations that restrict investments to U.S. government securities, participation certificates, mortgage-backed securities guaranteed by the Government National Mortgage Association, certificates of deposit issued by U.S. banks and thrifts, and resale agreements

- 20 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

collateralized by qualified securities. Schwab’s policies for credit quality and maximum maturity requirements are more restrictive than these SEC regulations. Schwab Bank also maintains investment portfolios for liquidity as well as to invest funding from deposits raised in excess of loans to clients. Schwab Bank invests in securities available for sale, including commercial paper, collateralized mortgage obligations, corporate debt, and U.S. government securities. Schwab Bank lends funds to banking clients primarily in the form of mortgage loans. These loans are largely funded by interest-bearing deposits from banking clients.

The Company’s interest-earning assets are financed primarily by interest-bearing brokerage client cash balances and deposits from banking clients. Other funding sources include noninterest-bearing brokerage client cash balances, proceeds from stock-lending activities, and long-term debt, as well as stockholders’ equity. Client-related daily average balances, interest rates, and average net interest spread are summarized as follows:

	2006			2005			2004
Interest-Earning Assets (client-related and other):
Investments (client-related):
Average balance outstanding	$	12,758		$	17,007		$	20,159
Average interest rate		4.77	%		3.07	%		1.45	%
Margin loans to clients:
Average balance outstanding	$	10,252		$	9,780		$	9,074
Average interest rate		8.17	%		6.69	%		4.99	%
Securities available for sale:
Average balance outstanding (1)	$	6,090		$	3,363		$	2,487
Average interest rate		5.23	%		3.81	%		2.48	%
Loans to banking clients:
Average balance outstanding	$	2,162		$	1,613		$	733
Average interest rate		5.94	%		4.84	%		3.45	%
Average yield on interest-earning assets		6.06	%		4.35	%		2.60	%
Funding Sources (client-related and other):
Interest-bearing brokerage client cash balances:
Average balance outstanding	$	17,865		$	22,037		$	23,788
Average interest rate		2.38	%		1.72	%		.47	%
Interest-bearing banking deposits:
Average balance outstanding (1)	$	9,137		$	5,597		$	3,748
Average interest rate		2.19	%		1.32	%		.55	%
Other interest-bearing sources:
Average balance outstanding	$	1,816		$	1,585		$	2,518
Average interest rate		2.42	%		2.32	%		1.07	%
Average noninterest-bearing portion	$	2,444		$	2,544		$	2,399
Average interest rate on funding sources		2.14	%		1.54	%		.49	%
Summary:
Average yield on interest-earning assets		6.06	%		4.35	%		2.60	%
Average interest rate on funding sources		2.14	%		1.54	%		.49	%
Average net interest spread		3.92	%		2.81	%		2.11	%

⁽¹⁾ Includes assets and liabilities retained from discontinued operations as discussed below.

The increases in net interest revenue in the last two years were primarily due to changes in the composition of interest-earning assets, including increases in securities available for sale, loans to banking clients, and margin loan balances, as well as generally higher yields on earning assets, partially offset by higher interest rates on banking deposits.

- 21 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

Since the Company establishes the rates paid on brokerage client cash balances and certain banking deposits and the rates charged on margin loans, it manages a substantial portion of its net interest spread. However, the spread is influenced by external factors such as the interest rate environment and competition. The Company’s average net interest spread increased from 2004 to 2006 as the average yield on interest-earning assets, primarily client-related investments, increased more than the average interest rate on funding sources.

Certain interest-bearing assets and liabilities of U.S. Trust to be retained by the Company: The excess cash held in certain Schwab brokerage client accounts is swept into a money market deposit account at U.S. Trust. In 2007, Schwab will terminate this arrangement prior to the closing of the sale of U.S. Trust and move these balances to a similar existing arrangement with Schwab Bank. At December 31, 2006 and 2005, these balances totaled $749 million and $711 million, respectively, and are included in deposits from banking clients with a corresponding amount in assets retained from discontinued operations on the Company’s consolidated balance sheets. The interest expense related to these client deposit balances is included in interest expense from continuing operations on the Company’s consolidated statements of income of $11 million, $6 million, and $2 million for 2006, 2005, and 2004, respectively. The corresponding interest revenue on the invested cash balances related to these deposits is included in interest revenue from continuing operations on the Company’s consolidated statements of income of $38 million, $22 million, and $6 million for 2006, 2005, and 2004, respectively. The interest revenue amount is calculated using the Company’s funds transfer pricing methodology.

Other Revenue

Other revenue generally includes net gains and losses on certain investments, service fees, and software maintenance fees.

Trading Revenue

Trading revenue includes commission and principal transaction revenues. Commission revenues are affected by the number of revenue trades executed and the average revenue earned per revenue trade. Principal transaction revenues are primarily comprised of revenues from client fixed income securities trading activity. Factors that influence principal transaction revenues include the volume of client trades, market price volatility, and changes in regulations and industry practices. The increase in trading revenue from 2005 to 2006 was primarily due to higher daily average revenue trades, partially offset by lower average revenue earned per revenue trade as a result of reductions in commission pricing in 2006 and 2005. The decrease in trading revenue from 2004 to 2005 was primarily due to lower average revenue earned per revenue trade as a result of reductions in commission pricing for a wide range of clients in 2005 and 2004, partially offset by higher daily average revenue trades.

As shown in the following table, daily average revenue trades executed by the Company increased 18% in 2006. Average revenue earned per revenue trade decreased 14% from 2005 to 2006, and 41% from 2004 to 2005, primarily due to the pricing changes discussed above.

	Growth Rate 2005-2006		2006		2005		2004
Daily average revenue trades (in thousands) (1)	18	%		234.4		197.9		156.4
Number of trading days	(1	%)		250.0		251.5		251.5
Average revenue earned per revenue trade	(14	%)	$	13.39	$	15.61	$	26.34

⁽¹⁾ Includes all client trades that generate trading revenue (i.e., commission revenue or revenue from fixed income securities trading).

- 22 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

Expenses Excluding Interest

As shown in the table below, total expenses excluding interest increased in 2006 primarily due to higher compensation and benefits expense, professional services expense, and advertising and market development expense.

	Growth Rate 2005-2006		2006		2005		2004
Compensation and benefits	12%		$	1,619	$	1,449	$	1,456
Professional services	28%			285		222		210
Occupancy and equipment	(1%	)		260		262		319
Advertising and market development	15%			189		165		174
Communications	3%			180		174		202
Depreciation and amortization	(12%	)		157		179		197
Restructuring charges	(100%	)		—		16		186
Other	14%			143		125		125
Total expenses excluding interest	9%		$	2,833	$	2,592	$	2,869
Expenses as a percentage of total net revenues:
Total expenses, excluding interest				66%		72%		84%
Compensation and benefits				38%		40%		43%
Advertising and market development				4%		5%		5%

Compensation and Benefits

Compensation and benefits expense includes salaries and wages, incentive compensation, and related employee benefits and taxes. Incentive compensation is tied to the achievement of specified objectives, including revenue growth, profit margin, and EPS. Therefore, a significant portion of compensation and benefits expense will fluctuate with these measures.

The increase in compensation and benefits expense from 2005 to 2006 was primarily due to higher levels of incentive compensation. The decrease in compensation and benefits expense from 2004 to 2005 was primarily due to a reduction in full-time employees through the Company’s past restructuring initiatives, partially offset by higher levels of incentives to employees as a result of the Company’s improved financial performance. The following table shows a comparison of certain compensation and benefits components and employee data:

	Growth Rate 2005-2006		2006		2005		2004
Salaries and wages	4	%	$	872	$	842	$	958
Incentive compensation (1)	30	%		504		389		258
Employee benefits and other	11	%		243		218		240
Total compensation and benefits expense	12	%	$	1,619	$	1,449	$	1,456
Full-time equivalent employees (in thousands) (2)
At year end	7	%		12.4		11.6		11.8
Average	5	%		11.9		11.3		13.1

⁽¹⁾ Includes incentives, discretionary bonus costs, long-term incentive plan compensation, and stock-based compensation.

⁽²⁾ Includes full-time, part-time and temporary employees, and persons employed on a contract basis, but excludes professional services related to outsourced service providers. Amounts have been adjusted to exclude U.S. Trust in light of its pending sale.

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THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

The increases in incentive compensation expense from 2004 to 2006 were primarily due to higher levels of discretionary bonuses to employees and long-term incentive plan compensation in 2005, and increases in incentives and long-term incentive plan compensation in 2006.

Expenses Excluding Compensation and Benefits

The increase in professional services expense from 2005 to 2006 was primarily due to higher levels of fees paid to outsourced service providers and consultants. The decrease in occupancy and equipment expense from 2004 to 2005 was primarily due to the Company’s past restructuring initiatives and other expense reduction measures. The increase in advertising and market development expense from 2005 to 2006 was primarily due to the Company’s media spending related to its “Talk to Chuck™” national advertising campaign during 2006. The decrease in communications from 2004 to 2005 was primarily due to decreases in telecommunication services, news and quotes services, and market data fees.

Restructuring

During 2001 to 2004, the Company carried out a series of restructuring initiatives which were designed to strengthen its productivity and efficiency and increase profitability. These initiatives included workforce reductions, reductions in operating facilities, the removal of certain systems hardware, software, and equipment from service, and the withdrawal from certain international operations. The Company completed its 2004 cost reduction effort in the first half of 2005.

LIQUIDITY AND CAPITAL RESOURCES

CSC conducts substantially all of its business through its wholly-owned subsidiaries. The capital structure among CSC and its subsidiaries is designed to provide each entity with capital and liquidity to meet its operational needs and regulatory requirements.

CSC is a financial holding company, which is a type of bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System (Federal Reserve Board) under the Bank Holding Company Act of 1956, as amended. In July 2006, USTC (currently reflected as a discontinued operation for financial statement purposes) became a financial holding company. CSC and its depository institution subsidiaries, which include Schwab Bank and U.S. Trust, are subject to the Federal Reserve Board’s risk-based and leverage capital guidelines. These regulations require banks and bank holding companies to maintain minimum levels of capital. In addition, CSC’s depository institution subsidiaries are subject to limitations on the amount of dividends they can pay to CSC. Based on their respective regulatory capital ratios at December 31, 2006 and 2005, the Company’s depository institution subsidiaries are considered well capitalized.

Liquidity

CSC

CSC’s liquidity needs are generally met through cash generated by its subsidiaries, as well as cash provided by external financing. Schwab and Schwab Bank are subject to regulatory requirements that may restrict them from certain transactions with CSC. Management believes that funds generated by the operations of CSC’s subsidiaries will continue to be the primary funding source in meeting CSC’s liquidity needs, providing adequate liquidity to meet Schwab Bank’s capital guidelines, and maintaining Schwab’s net capital.

CSC has liquidity needs that arise from its Senior Medium-Term Notes, Series A (Medium-Term Notes), as well as from the funding of cash dividends, acquisitions, and other investments. The Medium-Term Notes, of which $262 million was

- 24 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

issued and outstanding at December 31, 2006, have maturities ranging from 2007 to 2010 and fixed interest rates ranging from 6.52% to 8.05% with interest payable semiannually. The Medium-Term Notes are rated A2 by Moody’s Investors Service (Moody’s), A- by Standard & Poor’s Ratings Group (S&P), and A by Fitch IBCA, Inc. (Fitch).

CSC has a prospectus supplement on file with the SEC enabling CSC to issue up to $750 million in Senior or Senior Subordinated Medium-Term Notes, Series A. At December 31, 2006, all of these notes remained unissued.

CSC has a Registration Statement under the Securities Act of 1933 on Form S-3 on file with the SEC relating to a universal shelf registration for the issuance of up to $1.0 billion aggregate amount of various securities, including common stock, preferred stock, debt securities, and warrants. At December 31, 2006, all of these securities remained unissued.

CSC has authorization from its Board of Directors to issue commercial paper up to the amount of CSC’s committed, unsecured credit facility (see below), not to exceed $1.5 billion. At December 31, 2006, no commercial paper had been issued. CSC’s ratings for these short-term borrowings are P-1 by Moody’s, A-2 by S&P, and F1 by Fitch.

CSC maintains an $800 million committed, unsecured credit facility with a group of eighteen banks which is scheduled to expire in June 2007. CSC plans to establish a similar facility to replace this one when it expires. These facilities were unused in 2006. Any issuances under CSC’s commercial paper program will reduce the amount available under this facility. The funds under this facility are available for general corporate purposes and CSC pays a commitment fee on the unused balance of this facility. The financial covenants in this facility require CSC to maintain a minimum level of stockholders’ equity, Schwab to maintain a minimum net capital ratio, as defined, and CSC’s depository institution subsidiaries to be well capitalized, as defined. Management believes that these restrictions will not have a material effect on its ability to meet foreseeable dividend or funding requirements.

CSC also has direct access to $792 million of the $842 million uncommitted, unsecured bank credit lines, provided by eight banks, that are primarily utilized by Schwab to manage short-term liquidity. The amount available to CSC under these lines is lower than the amount available to Schwab because the credit line provided by one of these banks is only available to Schwab. These lines were not used by CSC in 2006.

Schwab

Most of Schwab’s assets are readily convertible to cash, consisting primarily of short-term (i.e., less than 150 days) investment-grade, interest-earning investments (the majority of which are segregated for the exclusive benefit of clients pursuant to regulatory requirements), receivables from brokerage clients, and receivables from brokers, dealers, and clearing organizations. Client margin loans are demand loan obligations secured by readily marketable securities. Receivables from and payables to brokers, dealers, and clearing organizations primarily represent current open transactions, which usually settle, or can be closed out, within a few business days.

Liquidity needs relating to client trading and margin borrowing activities are met primarily through cash balances in brokerage client accounts, which were $19.9 billion, $24.2 billion, and $27.0 billion at December 31, 2006, 2005, and 2004, respectively. Management believes that brokerage client cash balances and operating earnings will continue to be the primary sources of liquidity for Schwab in the future.

The Company has a lease financing liability related to an office building and land under a 20-year lease. The remaining lease financing liability of $126 million at December 31, 2006 is being reduced by a portion of the lease payments over the remaining lease term.

To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank credit lines with a group of eight banks totaling $842 million at December 31, 2006. The need for short-term borrowings arises primarily from timing differences

- 25 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

between cash flow requirements and the scheduled liquidation of interest-bearing investments. Schwab used such borrowings for twelve days in 2006, with daily amounts borrowed averaging $79 million. There were no borrowings outstanding under these lines at December 31, 2006.

To satisfy the margin requirement of client option transactions with the Options Clearing Corporation (OCC), Schwab has unsecured letter of credit agreements with eleven banks in favor of the OCC aggregating $930 million at December 31, 2006. Schwab pays a fee to maintain these arrangements. In connection with its securities lending activities, Schwab is required to provide collateral to certain brokerage clients. Schwab satisfies the collateral requirements by arranging letters of credit (LOCs), in favor of these brokerage clients, which are issued by multiple banks. At December 31, 2006, the aggregate face amount of these outstanding LOCs totaled $173 million. No funds were drawn under these LOCs at December 31, 2006.

Schwab is subject to regulatory requirements that are intended to ensure the general financial soundness and liquidity of broker-dealers. These regulations prohibit Schwab from repaying subordinated borrowings to CSC, paying cash dividends, or making unsecured advances or loans to its parent or employees if such payment would result in net capital of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement of $250,000. At December 31, 2006, Schwab’s net capital was $1.1 billion (10% of aggregate debit balances), which was $850 million in excess of its minimum required net capital and $511 million in excess of 5% of aggregate debit balances. Schwab targets net capital to be at least 10% of its aggregate debit balances, which primarily consist of client margin loans.

To manage Schwab’s regulatory capital requirement, CSC provides Schwab with a $1.4 billion subordinated revolving credit facility which is scheduled to expire in March 2008. The amount outstanding under this facility at December 31, 2006 was $220 million. Borrowings under this subordinated lending arrangement qualify as regulatory capital for Schwab.

Schwab Bank

Schwab Bank’s current liquidity needs are generally met through deposits from banking clients and equity capital.

The excess cash held in certain Schwab brokerage client accounts is swept into a money market deposit account at Schwab Bank. At December 31, 2006, these balances totaled $9.9 billion.

Schwab Bank has access to traditional funding sources such as deposits, federal funds purchased, and repurchase agreements. Additionally, CSC provides Schwab Bank with a $100 million short-term credit facility maturing in December 2007. Borrowings under this facility do not qualify as regulatory capital for Schwab Bank. No funds were drawn under this facility at December 31, 2006.

Schwab Bank maintains a credit facility with the Federal Home Loan Bank System (FHLB). At December 31, 2006, $683 million was available, and no funds were drawn under this facility.

U.S. Trust (currently reflected as a discontinued operation for financial statement purposes)

The liquidity needs of U.S. Trust are generally met through deposits from banking clients, equity capital, and borrowings.

The excess cash held in certain Schwab brokerage client accounts is swept into a money market deposit account at U.S. Trust. At December 31, 2006, these balances totaled $749 million.

In addition to traditional funding sources such as deposits, federal funds purchased, and repurchase agreements, USTC’s depository institution subsidiaries have established their own external funding sources. At December 31, 2006, U.S. Trust had $52 million in Trust Preferred Capital Securities outstanding with a fixed interest rate of 8.41%. In

- 26 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

December 2006, U.S. Trust elected to and submitted notice to redeem all of the outstanding Trust Preferred Capital Securities on February 1, 2007.

Certain of USTC’s depository institution subsidiaries have established credit facilities with the FHLB totaling $2.3 billion. At December 31, 2006, $100 million was outstanding under these facilities. Additionally, at December 31, 2006, U.S. Trust had $1 million of federal funds purchased.

U.S. Trust also engages in intercompany repurchase agreements with Schwab and had $200 million outstanding with Schwab at December 31, 2006.

CSC provides U.S. Trust with a $300 million short-term credit facility maturing in December 2007. Borrowings under this facility do not qualify as regulatory capital for U.S. Trust. No funds were drawn under this facility at December 31, 2006.

U.S. Trust uses interest rate swap agreements (Swaps) with third parties to hedge the interest rate risk primarily associated with its variable rate deposits from banking clients. These Swaps are structured for U.S. Trust to receive a variable rate of interest and pay a fixed rate of interest. At December 31, 2006, the Swaps had a notional value of $660 million and a fair value of $6 million.

Prior to or as of the closing date of the sale of U.S. Trust, all of the arrangements with U.S. Trust disclosed above, except for the credit facilities with the FHLB and the Swaps, will be cancelled or terminated.

Capital Resources

The Company monitors both the relative composition and absolute level of its capital structure. Management is focused on limiting the Company’s use of capital and currently targets a long-term debt to total financial capital ratio of less than 20%. The Company’s total financial capital (long-term debt plus stockholders’ equity) at December 31, 2006 was $5.4 billion, up $484 million from December 31, 2005. At December 31, 2006, the Company had long-term debt of $388 million, or 7% of total financial capital, that bears interest at a weighted-average rate of 7.02%. At December 31, 2005, the Company had long-term debt of $462 million, or 9% of total financial capital.

The Company’s cash position (reported as cash and cash equivalents on the Company’s consolidated balance sheet) and cash flows are affected by changes in brokerage client cash balances and the associated amounts required to be segregated under federal or other regulatory guidelines. Timing differences between cash and investments actually segregated on a given date and the amount required to be segregated for that date may arise in the ordinary course of business and are addressed by the Company in accordance with applicable regulations. Other factors which affect the Company’s cash position and cash flows include investment activity in securities, levels of capital expenditures, acquisition and divestiture activity, banking client deposit activity, brokerage and banking client loan activity, financing activity in long-term debt, payments of dividends, and repurchases of CSC’s common stock. The combination of these factors can cause significant fluctuations in the levels of cash and cash equivalents during specific time periods.

In 2006, cash and cash equivalents increased $2.6 billion, or 137%, to $4.5 billion primarily due to movements of brokerage client-related funds to meet segregation requirements and an increase in deposits from banking clients. These changes were partially offset by a decrease in payables to brokerage clients and an increase in securities available for sale.

The Company repaid $68 million and $56 million of long-term debt in 2006 and 2005, respectively.

- 27 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

Capital Expenditures

In 2006, the Company’s capital expenditures were $122 million. The Company sold $63 million of fixed assets, which primarily consisted of a data center. In 2005, the Company’s capital expenditures were $98 million and the Company sold $20 million of fixed assets. Capital expenditures, net, as a percentage of net revenues totaled 1% and 2% in 2006 and 2005, respectively. In 2006 and 2005, capital expenditures were primarily for software and equipment relating to the Company’s information technology systems. Capital expenditures include capitalized costs for developing internal-use software of $42 million in 2006 and $32 million in 2005.

Management currently anticipates that 2007 capital expenditures will be approximately 40% higher than 2006 spending, primarily due to increased spending on capitalized costs for developing internal-use software and assets relating to the Company’s information technology systems. As has been the case in recent years, the Company may adjust its capital expenditures from period to period as business conditions change. Management believes that funds generated by its operations will continue to be the primary funding source of its capital expenditures.

Dividends

CSC paid common stock cash dividends of $173 million and $116 million in 2006 and 2005, respectively. Since the initial dividend in 1989, CSC has paid 71 consecutive quarterly dividends and has increased the dividend 18 times, including a 20% and 67% increase in the second and fourth quarters of 2006, respectively. Since 1989, dividends have increased by a 28% compounded annual growth rate. CSC paid common stock dividends of $.135, $.089, and $.074 per share in 2006, 2005, and 2004, respectively. While the payment and amount of dividends are at the discretion of the Board, subject to certain regulatory and other restrictions, the Company currently targets its cash dividend at approximately 20% to 30% of net income.

Share Repurchases

CSC repurchased 52 million shares of its common stock for $859 million in 2006 and 56 million shares of its common stock for $688 million in 2005. As of December 31, 2006, CSC had authority to repurchase up to $87 million of its common stock under prior authorization by the Board of Directors. On January 24, 2007, the Board of Directors authorized the repurchase of up to $500 million of CSC’s common stock in addition to this remaining authorization.

Acquisition and Divestiture

Upon completion of the pending sale of U.S. Trust in 2007, the Company will receive pre-tax proceeds of approximately $3.3 billion. The Company plans to use the net proceeds for general corporate purposes, including share repurchases and continued investment in Schwab Investor Services, Schwab Institutional, and Schwab Bank.

On December 22, 2006, the Company announced an agreement to acquire The 401(k) Company from Nationwide Financial Services, Inc. for $115 million in cash. The transaction is expected to close in March 2007, subject to customary closing conditions.

Off-Balance-Sheet Arrangements

The Company enters into various off-balance-sheet arrangements in the ordinary course of business, primarily to meet the needs of its clients. These arrangements include firm commitments to extend credit. Additionally, the Company enters into guarantees and other similar arrangements as part of transactions in the ordinary course of business. For information on each of these arrangements, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 18. Commitments and Contingent Liabilities.”

- 28 -

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

Contractual Obligations

A summary of the Company’s principal contractual obligations as of December 31, 2006 is shown in the following table. Excluded from this table are liabilities recorded on the consolidated balance sheet that are generally short-term in nature (e.g., drafts payable) or without contractual payment terms (e.g., deposits from banking clients, payables to brokerage clients, and deferred compensation). Management believes that funds generated by its continuing operations, as well as cash provided by external financing, will continue to be the primary funding sources in meeting these obligations.

	Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years		Total
Credit-related financial instruments (1)	$	277		—	$	6	$	2,462	$	2,745
Operating leases (2)		121	$	212		170		268		771
Long-term debt (3)		43		34		211		100		388
Purchase obligations (4)		279		122		12		—		413
Long-term incentive plan (5)		38		102		—		—		140
Acquisition-related commitment		115		—		—		—		115
Total	$	873	$	470	$	399	$	2,830	$	4,572

⁽¹⁾ Represents Schwab Bank’s firm commitments to extend credit primarily for loans to banking clients.

⁽²⁾ Represents minimum rental commitments, net of sublease commitments, and includes facilities under the Company’s restructuring initiatives.

⁽³⁾ Excludes maturities under a lease financing liability, interest payments, and the effect of interest swaps.

⁽⁴⁾ Consists of purchase obligations for services such as advertising and marketing, telecommunications, professional services, and hardware- and software-related agreements. Includes purchase obligations which can be canceled by the Company without penalty.

⁽⁵⁾ Represents the liability associated with the Company’s long-term incentive plans.

RISK MANAGEMENT

Overview

The Company’s business activities expose it to a variety of risks including technology and operations risk, credit, market and liquidity risks, and legal and reputational risk. Identification and management of these risks are essential to the success and financial soundness of the Company.

Senior management takes an active role in the Company’s risk management process and has developed policies and procedures under which specific business and control units are responsible for identifying, measuring, and controlling various risks. Oversight of risk management has been delegated to the Global Risk Committee, which is comprised of senior managers of major business and control functions. The Global Risk Committee is responsible for reviewing and monitoring the Company’s risk exposures, and leading the continued development of the Company’s risk management policies and practices.

Functional risk sub-committees focusing on specific areas of risk report into the Global Risk Committee. These sub-committees include:

• Corporate Asset-Liability Management and Pricing Committee, which focuses on the Company’s liquidity, capital resources, and interest rate risk;

• Credit and Market Risk Oversight Committee, which focuses on the credit exposures resulting from client activity (e.g., margin lending activities and loans to banking clients), the investing activities of certain of the Company’s

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THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

proprietary funds, corporate credit activities (e.g., counterparty and corporate investing activities), and market risk resulting from the Company taking positions in certain securities to facilitate client trading activity;

• Technology and Operations Risk Committee, which focuses on the integrity of controls and operating capacity of the Company’s systems and operations processes;

• Fiduciary Risk Committee, which oversees activities of the Company with a fiduciary component;

• New Products Committee, which addresses risks associated with new products and services; and

• Information Security and Privacy Steering Committee, which oversees information security and privacy programs and policies.

The Global Risk Committee reports regularly to the Audit Committee of the Board of Directors (Audit Committee), which reviews major risk exposures and the steps management has taken to monitor and control such exposures.

The Company’s Disclosure Committee is responsible for the monitoring and evaluation of the effectiveness of the Company’s (a) disclosure controls and procedures and (b) internal control over financial reporting as of the end of each fiscal quarter. The Disclosure Committee reports on this evaluation to the CEO and CFO prior to their certification required by Sections 302 and 906 of the Sarbanes Oxley Act of 2002.

Additionally, the Company’s compliance, finance, internal audit, legal, and risk and credit management departments assist management and the various risk committees in evaluating, testing, and monitoring the Company’s risk management.

Risk is inherent in the Company’s business. Consequently, despite the Company’s efforts to identify areas of risk, oversee operational areas involving risk, and implement policies and procedures designed to manage risk, there can be no assurance that the Company will not suffer unexpected losses due to operating or other risks. The following discussion highlights the Company’s policies and procedures for identification, assessment, and management of the principal areas of risk in its operations.

Technology and Operating Risk

Technology and operating risk is the potential for loss due to deficiencies in control processes or technology systems that constrain the Company’s ability to gather, process and communicate information and process client transactions efficiently and securely, without interruptions. The Company’s operations are highly dependent on the integrity of its technology systems and the Company’s success depends, in part, on its ability to make timely enhancements and additions to its technology in anticipation of evolving client needs. To the extent the Company experiences system interruptions, errors or downtime (which could result from a variety of causes, including changes in client use patterns, technological failure, changes to its systems, linkages with third-party systems, and power failures), the Company’s business and operations could be significantly negatively impacted. Additionally, rapid increases in client demand may strain the Company’s ability to enhance its technology and expand its operating capacity. To minimize business interruptions, Schwab has two data centers intended, in part, to further improve the recovery of business processing in the event of an emergency. The Company is committed to an ongoing process of upgrading, enhancing, and testing its technology systems. This effort is focused on meeting client needs, meeting market and regulatory changes, and deploying standardized technology platforms.

Technology and operating risk also includes the risk of human error, employee misconduct, external fraud, computer viruses, terrorist attack, and natural disaster. Employee misconduct could include fraud and misappropriation of client or Company assets, improper use or disclosure of confidential client or Company information, and unauthorized activities, such as transactions exceeding acceptable risks or authorized limits. External fraud includes misappropriation of client or Company assets by third parties, including through unauthorized access to Company systems and data and client accounts. The frequency and sophistication of such fraud attempts continue to increase.

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THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

The Company has specific policies and procedures to identify and manage operational risk, and uses periodic risk self-assessments and internal audit reviews to evaluate the effectiveness of these internal controls. The Company maintains backup and recovery functions, including facilities for backup and communications, and conducts periodic testing of disaster recovery plans. The Company also maintains policies and procedures and technology to protect against fraud and unauthorized access to systems and data.

Despite the Company’s risk management efforts, it is not always possible to deter or prevent technological or operational failure, or fraud or other misconduct, and the precautions taken by the Company may not be effective in all cases. The Company may be subject to litigation, losses, and regulatory actions in such cases, and may be required to expend significant additional resources to remediate vulnerabilities or other exposures.

The Company also faces technology and operating risk when it employs the services of various external vendors, including domestic and international outsourcing of certain technology, processing, and support functions. The Company manages its exposure to such outsourcing risks through contractual agreements, enhanced controls, and ongoing monitoring of vendor performance. The Company maintains policies and procedures regarding the standard of care expected with Company data, whether the data is internal company information, employee information, or non-public client information. The Company clearly defines for employees, contractors, and vendors the Company’s expected standards of care for confidential data. Regular training is provided by the Company in regard to data security.

The Company is actively engaged in the research and development of new technologies, services, and products. The Company endeavors to protect its research and development efforts, and its brands, through the use of copyrights, patents, trade secrets, and contracts.

Credit Risk

Credit risk is the potential for loss due to a client or counterparty failing to perform its contractual obligations, or the value of collateral held to secure obligations proving to be inadequate. The Company’s direct exposure to credit risk mainly results from margin lending activities, securities lending activities, its role as a counterparty in financial contracts and investing activities, and indirectly from the investing activities of certain of the Company’s proprietary funds. To manage the risks of such losses, the Company has established policies and procedures which include: establishing and reviewing credit limits, monitoring of credit limits and quality of counterparties, and adjusting margin requirements for certain securities. In addition, most of the Company’s credit extensions, such as margin loans to clients, securities lending agreements, and resale agreements, are supported by collateral arrangements. These arrangements are subject to requirements to provide additional collateral in the event that market fluctuations result in declines in the value of collateral received.

Additionally, the Company has exposure to credit risk associated with the Company’s banking loan portfolios held at Schwab Bank and U.S. Trust (currently reflected as a discontinued operation for financial statement purposes). This client credit exposure is actively managed through individual and portfolio reviews performed by account officers and senior line management. Periodic assessment of the validity of credit ratings, credit quality and the credit management process is conducted by a credit review department which is separate from the loan origination and monitoring department. Management regularly reviews asset quality including concentrations, delinquencies, non-performing loans to banking clients, losses, and recoveries. All are factors in the determination of an appropriate allowance for credit losses, which is reviewed quarterly by senior management.

Schwab performs clearing services for all securities transactions in its client accounts. Schwab has exposure to credit risk due to its obligation to settle transactions with clearing corporations, mutual funds, and other financial institutions even if Schwab’s client or a counterparty fails to meet its obligations to Schwab.

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THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

Fiduciary Risk

Fiduciary risk is the potential for financial or reputational loss through breach of fiduciary duties to a client. Fiduciary activities include, but are not limited to, individual and institutional trust, investment management, custody, and cash and securities processing. The Company attempts to manage this risk by establishing procedures to ensure that obligations to clients are discharged faithfully and in compliance with applicable legal and regulatory requirements. Business units have the primary responsibility for adherence to the procedures applicable to their business. Guidance and control are provided through the creation, approval, and ongoing review of applicable policies by business units and various fiduciary risk committees.

Legal and Regulatory Risk

The Company faces significant legal and compliance risk in its business, and the volume of litigation and regulatory proceedings against financial services firms and the amount of damages claimed have been increasing. Among other things, these risks relate to the suitability of client investments, conflicts of interest, disclosure obligations and performance expectations for Company products and services, supervision of employees, and the adequacy of the Company’s controls. Claims against the Company may increase due to a variety of factors, such as if clients suffer losses during a period of deteriorating equity market conditions, as the Company increases the level of advice it provides to clients, and as the Company enhances the services it provides to IAs. In addition, the Company and its affiliates are subject to extensive regulation by federal, state and foreign regulatory authorities, and SROs, and such regulation is becoming increasingly extensive and complex.

The Company attempts to manage legal and compliance risk through policies and procedures reasonably designed to avoid litigation claims and prevent or detect violations of applicable legal and regulatory requirements. These procedures address issues such as business conduct and ethics, sales and trading practices, marketing and communications, extension of credit, client funds and securities, books and records, anti-money laundering, client privacy, employment policies, and contracts management. Despite the Company’s efforts to maintain an effective compliance program and internal controls, legal breaches and rule violations could result in reputational harm, significant losses and disciplinary sanctions, including limitations on the Company’s business activities.

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THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

CRITICAL ACCOUNTING ESTIMATES

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the U.S. While the majority of the Company’s revenues, expenses, assets and liabilities are not based on estimates, there are certain accounting principles that require management to make estimates regarding matters that are uncertain and susceptible to change where such change may result in a material adverse impact on the Company’s financial position and reported financial results. These critical accounting estimates are described below. Management regularly reviews the estimates and assumptions used in the preparation of the Company’s financial statements for reasonableness and adequacy.

Income Tax Benefit Related to the Pending Sale of U.S. Trust: In 2006, the Company recorded a $205 million income tax benefit related to the estimated difference between the tax and book bases of the Company’s U.S. Trust stock. This amount is included in income from discontinued operations, net of tax on the Company’s consolidated statements of income. When calculating the Company’s gain on the sale of U.S. Trust for income tax purposes, the tax basis will be the basis of U.S. Trust’s prior stockholders in their shares as of the date U.S. Trust was acquired by the Company, since the transaction qualified as a tax-free exchange. This tax benefit is management’s current estimate and is based on publicly available information, including information on the composition of U.S. Trust’s stockholders at the acquisition date and the market price of U.S. Trust stock during relevant periods. The final amount of the basis difference, which could differ from management’s estimate, will be determined following a survey of former U.S. Trust stockholders that the Company expects to complete in mid-2007.

Valuation of Goodwill: Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 142 – Goodwill and Other Intangible Assets, goodwill is required to be tested for impairment at least annually, or whenever indications of impairment exist. An impairment exists when the carrying amount of goodwill exceeds its implied fair value, resulting in an impairment charge for this excess.

The Company has elected April 1 as its annual goodwill impairment testing date. In testing for a potential impairment of goodwill on April 1, 2006, management estimated the fair value of each of the Company’s reporting units (generally defined as the Company’s businesses for which financial information is available and reviewed regularly by management) and compared this value to the carrying value of the reporting unit. The estimated fair value of each reporting unit was greater than its carrying value, and therefore management concluded that no amount of goodwill was impaired. The estimated fair value of the reporting units was established using a discounted cash flow model that includes significant assumptions about the future operating results and cash flows of each reporting unit. Adverse changes in the Company’s planned business operations such as unanticipated competition, a loss of key personnel, the sale of a reporting unit or a significant portion of a reporting unit, or other unforeseen developments could result in an impairment of the Company’s recorded goodwill. The Company’s goodwill balance, net of accumulated amortization, was $419 million at both December 31, 2006 and 2005.

Derivative Instruments and Hedging Activities: As part of its asset and liability management process, the Company has entered into Swaps that effectively convert the interest rate characteristics of a portion of the Company’s Medium-Term Notes from fixed to variable. The Company has designated such Swaps as fair value hedges, as allowed by SFAS No. 133 – Accounting for Derivative Instruments and Hedging Activities. Since the notional amount, fixed interest rate, and maturity of these Swaps exactly match the terms of the corresponding Medium-Term Notes, the Company has concluded that these Swaps are completely effective in achieving the desired hedging results, as permitted under SFAS No. 133. Consequently, changes in the fair value of these Swaps, totaling an aggregate of approximately $500,000 and $2 million asset at December 31, 2006 and 2005, respectively, are completely offset by changes in the fair value of the hedged Medium-Term Notes. Accordingly, there has not been any impact on earnings as a result of this hedging program except for the conversion from a fixed to a floating rate of interest on a portion of the Medium-Term Notes.

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THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

Schwab Bank’s loans held for sale portfolio consists of fixed- and adjustable-rate mortgages, which are subject to a loss in value when market interest rates rise. Schwab Bank uses forward sale commitments to manage this risk. These forward sale commitments have been designated as cash flow hedging instruments of the loans held for sale. Accordingly, the fair values of these forward sale commitments are recorded on the Company’s consolidated balance sheet, with gains or losses recorded in other comprehensive income (loss).

Additionally, Schwab Bank uses forward sale commitments to hedge interest rate lock commitments issued on mortgage loans that will be held for sale. Schwab Bank considers the fair value of these commitments to be zero at the commitment date, with subsequent changes in fair value determined solely based on changes in market interest rates. Any changes in fair value of the interest rate lock commitments are completely offset by changes in fair value of the related forward sale commitments.

At both December 31, 2006 and 2005, the derivative assets and liabilities recorded by Schwab Bank for these forward sale and interest rate lock commitments were immaterial.

Allowance for Credit Losses: The Company regularly evaluates its portfolio of loans to banking clients and provides allowances for the portion management believes may be uncollectible. Several factors are taken into consideration in this evaluation including current economic conditions, the composition of the loan portfolio, past loss experience, and risks inherent in the loan portfolio. For Schwab Bank’s portfolio, which primarily consists of mortgage loans, a risk-based methodology is used to determine the allowance for credit losses. Mortgage loans are categorized into portfolios by loan type and risk characteristics. A probable loss rate, based on company and industry experience, is used to determine the credit allowance. At December 31, 2006 and 2005, the Company’s allowance for credit losses was $4 million and $3 million on loan portfolios of $2.3 billion and $1.9 billion, respectively.

Legal Reserve: Reserves for legal and regulatory claims and proceedings reflect an estimate of probable losses for each matter, after considering, among other factors, the progress of the case, prior experience and the experience of others in similar cases, available defenses, insurance coverage and indemnification, and the opinions and views of legal counsel. In many cases, including most class action lawsuits, it is not possible to determine whether a loss will be incurred, or to estimate the range of that loss, until the matter is close to resolution, in which case no accrual is made until that time. Reserves are adjusted as more information becomes available or when an event occurs requiring a change. Significant judgment is required in making these estimates, and the actual cost of resolving a matter may ultimately differ materially from the amount reserved.

Stock-based compensation: The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123R – Share-Based Payment. Under the fair value recognition provisions of SFAS No. 123R, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term of stock options, the expected volatility of the Company’s common stock, and expected dividends. Significant changes in these assumptions for future awards could materially impact stock-based compensation expense and the Company’s results of operations. In addition, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be impacted.

Long-term incentive compensation: Eligible officers may receive cash long-term incentive plan units under a long-term incentive plan (LTIP). These awards are restricted from transfer or sale and generally vest over a three- to four-year period. Each award provides for a one-time cash payment for an amount that varies based upon the Company’s cumulative EPS over the respective performance period of each grant. The Company accrues the estimated total cost for each grant on a straight-line basis over each LTIP’s vesting period, with periodic cumulative adjustments to expense as estimates of the total grant cost are revised. The estimated total cost of each grant will vary based upon changes in

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THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

estimated and actual cumulative EPS amounts over each LTIP’s performance period. Grants were issued under this LTIP in 2003, 2004, and 2005 with performance periods ending December 31, 2006, 2007, and 2008, respectively. The LTIP liability including discontinued operations was $140 million and $61 million at December 31, 2006 and 2005, respectively. The LTIP expense including discontinued operations was $78 million, $37 million, and $15 million for the years 2006, 2005, and 2004, respectively.

The Company’s management has discussed the development and selection of these critical accounting estimates with the Audit Committee. Additionally, management has reviewed with the Audit Committee the Company’s significant estimates discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “estimate,” “aim,” “target,” and other similar expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements.

These forward-looking statements, which reflect management’s beliefs, objectives, and expectations as of the date hereof, are necessarily estimates based on the best judgment of the Company’s senior management. These statements relate to, among other things, the impact on the Company’s financial position and results of operations related to the pending sale of U.S. Trust (see “Item 1- Business - General Corporate Overview”, Overview - Discontinued Operations, Results of Operations - Net Interest Revenue, and Liquidity and Capital Resources, and “Item 8 - Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - 1. Introduction and Basis of Presentation and 3. Discontinued Operations”); the Company’s ability to pursue its business strategy (see “Item 1 – Business – Business Strategy and Competitive Environment”); the impact on the Company’s financial position and results of operations related to the pending acquisition of The 401(k) Company (see “Item 1 – Business – Products and Services”, Liquidity and Capital Resources – Capital Resources, and “Item 8- Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements-1. Introduction and Basis of Presentation”); the impact of legal proceedings and regulatory matters (see “Item 3 – Legal Proceedings” and “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 18. Commitments and Contingent Liabilities – Legal Contingencies”); the impact of changes in the income tax benefit related to the pending sale of U.S. Trust (see Overview – Discontinued Operations, Critical Accounting Estimates, and “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 3. Discontinued Operations”); sources of liquidity, capital, and level of dividends (see Liquidity and Capital Resources – Liquidity and – Contractual Obligations); target capital ratios (see Liquidity and Capital Resources); capital expenditures (see Liquidity and Capital Resources – Capital Resources); the impact of changes in management’s estimates on the Company’s results of operations (see Critical Accounting Estimates); the impact on the Company’s results of operations of recording compensation expense related to the Company’s sabbatical program (see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 2. Significant Accounting Policies”); the impact on the Company’s results of operations of recording stock option expense (see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 13. Employee Incentive, Deferred Compensation, and Retirement Plans”); the impact of changes in estimated costs related to past restructuring initiatives on the Company’s results of operations (see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 3. Discontinued Operations and 16. Restructuring Charges and Reserves”); and the impact of changes in the likelihood of indemnification payment obligations on the Company’s results of operations (see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 18. Commitments and Contingent Liabilities”).

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THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Tabular Amounts in Millions, Except Ratios, and as Noted)

Achievement of the expressed beliefs, objectives and expectations described in these statements is subject to certain risks and uncertainties that could cause actual results to differ materially from the expressed beliefs, objectives, and expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K or, in the case of documents incorporated by reference, as of the date of those documents.

Important factors that may cause actual results to differ include, but are not limited to: unanticipated adverse developments in litigation or regulatory matters; the Company’s ability to sublease certain properties; the amount of loans to the Company’s banking and brokerage clients; the level of the Company’s stock repurchase activity; the timing and impact of changes in the Company’s level of investments in technology; changes in the Company’s level of personnel; potential breaches of contractual terms for which the Company has indemnification obligations; changes in the income tax benefit based on the results of a tax survey related to the pending sale of U.S. Trust; and the timing and impact of pending strategic transactions. Certain of these factors, as well as general risk factors affecting the Company, are discussed in greater detail in this Annual Report on Form 10-K, including “Item 1A – Risk Factors.”

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THE CHARLES SCHWAB CORPORATION

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the potential for loss due to a change in the value of a financial instrument held by the Company as a result of fluctuations in interest rates, equity prices, or currency exchange rates.

The Company is exposed to interest rate risk primarily from changes in the interest rates on its interest-earning assets (mainly margin loans to clients, investments, loans to banking clients, mortgage-backed securities, and other fixed-rate investments) and its funding sources (including brokerage client cash balances, banking deposits, proceeds from stock-lending activities, and long-term debt) which finance these assets. To mitigate the risk of loss, the Company has established policies and procedures which include setting guidelines on the amount of net interest revenue at risk, and by monitoring the net interest margin and average maturity of its interest-earning assets and funding sources. The Company also has the ability to adjust the rates paid on certain brokerage client cash balances and certain banking deposits and the rates charged on margin loans. The Company’s exposure to equity price and currency exchange risks is not material.

Financial Instruments Held For Trading Purposes

The Company holds fixed income securities, which include municipal and government securities, and corporate bonds, in inventory to meet clients’ trading needs. The fair value of such inventory was approximately $76 million and $74 million at December 31, 2006 and 2005, respectively. These securities, and the associated interest rate risk, are not material to the Company’s financial position, results of operations, or cash flows.

Financial Instruments Held For Purposes Other Than Trading

Debt Issuances

At December 31, 2006, CSC had $262 million aggregate principal amount of Medium-Term Notes outstanding, with fixed interest rates ranging from 6.52% to 8.05%. At December 31, 2005, CSC had $330 million aggregate principal amount of Medium-Term Notes outstanding, with fixed interest rates ranging from 6.21% to 8.05%.

The Company has fixed cash flow requirements regarding these long-term debt obligations due to the fixed rate of interest. The fair value of these obligations at December 31, 2006 and 2005, based on estimates of market rates for debt with similar terms and remaining maturities, was $277 million and $352 million, respectively, compared to their carrying amounts of $262 million and $332 million, respectively.

Interest Rate Swaps

As part of its consolidated asset and liability management process, the Company utilizes Swaps to effectively convert the interest rate characteristics of a portion of its Medium Term Notes from fixed to variable. For a discussion of such Swaps, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 19. Financial Instruments Subject to Off-Balance Sheet Risk, Credit Risk, or Market Risk.”

Forward Sale and Interest Rate Lock Commitments

For a discussion of Schwab Bank’s forward sale and interest rate lock commitments related to its loans held for sale portfolio, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 19. Financial Instruments Subject to Off-Balance Sheet Risk, Credit Risk, or Market Risk.”

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THE CHARLES SCHWAB CORPORATION

Net Interest Revenue Simulation

The Company uses net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates. The simulation model (the model) includes all interest-sensitive assets and liabilities, as well as Swaps utilized by the Company to hedge its interest rate risk. Key variables in the model include assumed balance growth or decline for client loans, deposits, brokerage client cash, changes in the level and term structure of interest rates, the repricing of financial instruments, prepayment and reinvestment assumptions, and product pricing assumptions. The simulations involve assumptions that are inherently uncertain and, as a result, cannot precisely estimate net interest revenue or precisely predict the impact of changes in interest rates on net interest revenue. Actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies, including changes in asset and liability mix.

As demonstrated by the simulations presented below, the Company is positioned so that the consolidated balance sheet produces an increase in net interest revenue when interest rates rise and, conversely, a decrease in net interest revenue when interest rates fall (i.e., interest-earning assets are repricing more quickly than interest-bearing liabilities).

The forward-looking simulations in the following table exclude all of U.S. Trust’s net interest revenue in 2006 and assume that the sale will close early in the third quarter of 2007. In addition, the simulations assume that the asset and liability structure of the consolidated balance sheet would not be changed as a result of the simulated changes in interest rates. As the Company actively manages its consolidated balance sheet and interest rate exposure, in all likelihood the Company would take steps to manage any additional interest rate exposure that could result from changes in the interest rate environment. The following table shows the results of a gradual 200 basis point increase or decrease in interest rates relative to the Company’s current base rate forecast on simulated net interest revenue over the next twelve months at December 31, 2006 and 2005.

December 31,	2006		2005
Increase of 200 basis points	5.4	%	5.2	%
Decrease of 200 basis points	(8.5	%)	(5.7	%)

The simulations show an increase in exposure to rate changes at December 31, 2006 from December 31, 2005, and the Company remains positioned to experience increases in net interest revenue as rates rise and decreases as rates fall. If U.S. Trust’s net interest revenue is excluded from the 2005 simulations, the simulations would have shown net interest revenue increasing 7.5% for an increase of 200 basis points and decreasing 7.5% for a decline of 200 basis points.

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THE CHARLES SCHWAB CORPORATION

Item 8. Financial Statements and Supplementary Data

TABLE OF CONTENTS

Consolidated Statements of Income			40
Consolidated Balance Sheets			41
Consolidated Statements of Cash Flows			42
Consolidated Statements of Stockholders’ Equity			43
Notes to Consolidated Financial Statements			44
	Note 1.	Introduction and Basis of Presentation	44
	Note 2.	Significant Accounting Policies	44
	Note 3.	Discontinued Operations	48
	Note 4.	Securities Owned	51
	Note 5.	Receivables from Brokerage Clients	52
	Note 6.	Loans to Banking Clients and Related Allowance for Credit Losses	53
	Note 7.	Equipment, Office Facilities, and Property	53
	Note 8.	Deposits from Banking Clients	53
	Note 9.	Payables to Brokers, Dealers, and Clearing Organizations	54
	Note 10.	Payables to Brokerage Clients	54
	Note 11.	Borrowings	54
	Note 12.	Taxes on Income	55
	Note 13.	Employee Incentive, Deferred Compensation, and Retirement Plans	57
	Note 14.	Accumulated Other Comprehensive Loss	60
	Note 15.	Earnings Per Share	61
	Note 16.	Restructuring Charges and Reserves	61
	Note 17.	Regulatory Requirements	62
	Note 18.	Commitments and Contingent Liabilities	65
	Note 19.	Financial Instruments Subject to Off-Balance Sheet Risk, Credit Risk, or Market Risk	67
	Note 20.	Fair Value of Financial Instruments	70
	Note 21.	Segment Information	71
	Note 22.	Supplemental Cash Flow Information	73
	Note 23.	The Charles Schwab Corporation – Parent Company Only Financial Statements (Unconsolidated)	74
.	Note 24	Quarterly Financial Information (Unaudited)	77
Management’s Report on Internal Control Over Financial Reporting			78
Report of Independent Registered Public Accounting Firm			79

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THE CHARLES SCHWAB CORPORATION

C onsolidated Statements of Income

(In Millions, Except Per Share Amounts)

Year Ended December 31,	2006			2005			2004
Net Revenues
Asset management and administration fees	$	1,945		$	1,674		$	1,549
Interest revenue		2,113			1,523			877
Interest expense		(679	)		(501	)		(172	)
Net interest revenue		1,434			1,022			705
Trading revenue		785			778			1,023
Other		145			145			139
Total net revenues		4,309			3,619			3,416
Expenses Excluding Interest
Compensation and benefits		1,619			1,449			1,456
Professional services		285			222			210
Occupancy and equipment		260			262			319
Advertising and market development		189			165			174
Communications		180			174			202
Depreciation and amortization		157			179			197
Restructuring charges		—			16			186
Other		143			125			125
Total expenses excluding interest		2,833			2,592			2,869
Income from continuing operations before taxes on income		1,476			1,027			547
Taxes on income		(585	)		(393	)		(197	)
Income from continuing operations		891			634			350
Income (loss) from discontinued operations, net of tax		336			91			(64	)
Net Income	$	1,227		$	725		$	286
Weighted-Average Common Shares Outstanding — Diluted		1,286			1,308			1,365
Earnings Per Share — Basic
Income from continuing operations	$	.70		$	.49		$	.26
Income (loss) from discontinued operations, net of tax	$	.27		$	.07		$	(.05	)
Net income	$	.97		$	.56		$	.21
Earnings Per Share — Diluted
Income from continuing operations	$	.69		$	.48		$	.26
Income (loss) from discontinued operations, net of tax	$	.26		$	.07		$	(.05	)
Net income	$	.95		$	.55		$	.21
Dividends Declared Per Common Share	$	.135		$	.089		$	.074

See Notes to Consolidated Financial Statements.

- 40 -

THE CHARLES SCHWAB CORPORATION

C onsolidated Balance Sheets

(In Millions, Except Share and Per Share Amounts)

December 31,	2006			2005
Assets
Cash and cash equivalents	$	4,507		$	1,905
Cash and investments segregated and on deposit for federal or other regulatory purposes (1) (including resale agreements of $4,740 in 2006 and $8,073 in 2005)		10,862			15,192
Securities owned — at market value (including securities pledged of $5 in 2006 and 2005)		6,386			4,195
Receivables from brokers, dealers and clearing organizations		650			820
Receivables from brokerage clients — net		10,927			10,780
Loans to banking clients — net		2,334			1,946
Loans held for sale		30			17
Equipment, office facilities, and property — net		602			699
Goodwill		419			419
Deferred tax assets		406			171
Other assets		524			401
Assets retained from discontinued operations		749			711
Assets of discontinued operations		10,596			10,095
Total	$	48,992		$	47,351
Liabilities and Stockholders’ Equity
Deposits from banking clients	$	11,020		$	6,969
Drafts payable		324			225
Payables to brokers, dealers and clearing organizations		1,498			1,294
Payables to brokerage clients		20,621			24,700
Accrued expenses and other liabilities		1,069			1,018
Long-term debt		388			462
Liabilities of discontinued operations		9,064			8,233
Total liabilities		43,984			42,901
Stockholders’ equity:
Preferred stock — 9,940,000 shares authorized; $.01 par value per share; none issued		—			—
Common stock — 3 billion shares authorized; $.01 par value per share; 1,392,091,544 shares issued		14			14
Additional paid-in capital		1,868			1,827
Retained earnings		4,901			3,847
Treasury stock — 126,904,699 and 101,377,515 shares in 2006 and 2005, respectively, at cost		(1,739	)		(1,124	)
Unamortized stock-based compensation		—			(81	)
Accumulated other comprehensive loss		(36	)		(33	)
Total stockholders’ equity		5,008			4,450
Total	$	48,992		$	47,351

⁽¹⁾ Amounts included represent actual balances on deposit, whereas cash and investments required to be segregated for federal or other regulatory purposes at December 31, 2006 and 2005, excluding $201 million of intercompany repurchase agreements and associated interest, were $11,063 million and $14,914 million, respectively. On January 3, 2007 and January 4, 2006, the Company deposited a net amount of $554 million and $92 million, respectively, into its segregated reserve bank accounts.

See Notes to Consolidated Financial Statements.

- 41 -

THE CHARLES SCHWAB CORPORATION

C onsolidated Statements of Cash Flows

(In Millions)

Year Ended December 31,	2006			2005			2004
Cash Flows from Operating Activities
Net income	$	1,227		$	725		$	286
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss from discontinued operations, net of tax		(336	)		(91	)		64
Depreciation and amortization		157			179			197
Stock-based compensation expense		39			17			26
Excess tax benefits from stock-based compensation		(64	)		30			16
Deferred income taxes		(31	)		(4	)		(14	)
Non-cash restructuring charges		—			5			(15	)
Other		(2	)		6			1
Originations of loans held for sale		(638	)		(823	)		(856	)
Proceeds from sales of loans held for sale		626			830			870
Net change in:
Cash and investments segregated and on deposit for federal or other regulatory purposes		4,331			3,697			2,241
Securities owned (excluding securities available for sale)		73			(5	)		32
Receivables from brokers, dealers, and clearing organizations		170			(338	)		(7	)
Receivables from brokerage clients		(151	)		(946	)		(1,261	)
Other assets		(6	)		(6	)		(26	)
Drafts payable		98			(138	)		210
Payables to brokers, dealers, and clearing organizations		204			(174	)		(1,165	)
Payables to brokerage clients		(4,079	)		(2,454	)		(31	)
Accrued expenses and other liabilities		66			(44	)		96
Net cash provided by (used for) discontinued operations		76			311			(71	)
Net cash provided by operating activities		1,760			777			593
Cash Flows from Investing Activities
Purchases of securities available for sale		(3,224	)		(2,161	)		(1,798	)
Proceeds from sales of securities available for sale		81			16			312
Proceeds from maturities, calls, and mandatory redemptions of securities available for sale		854			670			647
Net increase in loans to banking clients		(442	)		(755	)		(837	)
Purchase of equipment, office facilities, and property		(122	)		(98	)		(180	)
Proceeds from sales of equipment, office facilities, and property		63			20			3
Cash payments for business combinations and investments, net of cash received		6			(2	)		(1	)
Proceeds from sales of subsidiaries and investments		—			4			271
Net cash used for discontinued operations		(456	)		(1,062	)		(1,208	)
Net cash used for investing activities		(3,240	)		(3,368	)		(2,791	)
Cash Flows from Financing Activities
Net change in deposits from banking clients		4,051			2,362			2,153
Proceeds from long-term debt		—			—			136
Repayment of long-term debt		(68	)		(56	)		(315	)
Excess tax benefits from stock-based compensation		64			—			—
Dividends paid		(173	)		(116	)		(101	)
Purchase of treasury stock		(868	)		(697	)		(365	)
Proceeds from stock options exercised and other		253			115			51
Other financing activities		1			—			—
Net cash provided by discontinued operations		822			637			324
Net cash provided by financing activities		4,082			2,245			1,883
Increase (Decrease) in Cash and Cash Equivalents		2,602			(346	)		(315	)
Cash and Cash Equivalents at Beginning of Year		1,905			2,251			2,566
Cash and Cash Equivalents at End of Year	$	4,507		$	1,905		$	2,251

See Notes to Consolidated Financial Statements.

- 42 -

THE CHARLES SCHWAB CORPORATION

C onsolidated Statements of Stockholders’ Equity

(In Millions)

	Common Stock			Additional Paid-In Capital			Retained Earnings			Treasury Stock, at cost			Unamortized Stock-based Compensation			Accumulated Other Comprehensive Loss			Total
	Shares	Amount
Balance at December 31, 2003	1,392	$	14	$	1,749		$	3,125		$	(319	)	$	(95	)	$	(13	)	$	4,461
Comprehensive income:
Net income	—		—		—			286			—			—			—			286
Net unrealized gain on cash flow hedging instruments, net of reclassification adjustment and tax	—		—		—			—			—			—			15			15
Net unrealized loss on securities available for sale, net of reclassification adjustment and tax	—		—		—			—			—			—			(8	)		(8	)
Foreign currency translation adjustment	—		—		—			—			—			—			1			1
Total comprehensive income																				294
Dividends declared on common stock	—		—		—			(101	)		—			—			—			(101	)
Purchase of treasury stock	—		—		—			—			(383	)		—			—			(383	)
Stock options exercised and shares issued under stock-based compensation plans	—		—		17			(52	)		111			(47	)		—			29
Non-cash stock-based compensation expense related to restructuring	—		—		3			—			—			3			—			6
Amortization of stock-based compensation awards	—		—		—			—			—			80			—			80
Balance at December 31, 2004	1,392		14		1,769			3,258			(591	)		(59	)		(5	)		4,386
Comprehensive income:
Net income	—		—		—			725			—			—			—			725
Net unrealized gain on cash flow hedging instruments, net of tax	—		—		—			—			—			—			12			12
Net unrealized loss on securities available for sale, net of tax	—		—		—			—			—			—			(39	)		(39	)
Foreign currency translation adjustment	—		—		—			—			—			—			(1	)		(1	)
Total comprehensive income																				697
Dividends declared on common stock	—		—		—			(116	)		—			—			—			(116	)
Purchase of treasury stock	—		—		—			—			(688	)		—			—			(688	)
Stock options exercised and shares issued under stock-based compensation plans	—		—		57			(20	)		155			(60	)		—			132
Non-cash stock-based compensation expense related to restructuring	—		—		1			—			—			3			—			4
Amortization of stock-based compensation awards	—		—		—			—			—			35			—			35
Balance at December 31, 2005	1,392		14		1,827			3,847			(1,124	)		(81	)		(33	)		4,450
Comprehensive income:
Net income	—		—		—			1,227			—			—			—			1,227
Net unrealized loss on cash flow hedging instruments, net of reclassification adjustment and tax	—		—		—			—			—			—			(6	)		(6	)
Net unrealized gain on securities available for sale, net of tax	—		—		—			—			—			—			7			7
Foreign currency translation adjustment	—		—		—			—			—			—			1			1
Total comprehensive income																				1,229
Adjustment to initially apply SFAS No. 158, net of tax	—		—		—			—			—			—			(5	)		(5	)
Dividends declared on common stock	—		—		—			(173	)		—			—			—			(173	)
Purchase of treasury stock	—		—		—			—			(859	)		—			—			(859	)
Stock option exercises and other	—		—		6			—			249			—			—			255
Stock-based compensation expense	—		—		52			—			—			—			—			52
Excess tax benefits from stock-based compensation	—		—		64			—			—			—			—			64
Restricted shares withheld for tax	—		—		—			—			(5	)		—			—			(5	)
Adoption of SFAS No. 123R	—		—		(81	)		—			—			81			—			—
Balance at December 31, 2006	1,392	$	14	$	1,868		$	4,901		$	(1,739	)		—		$	(36	)	$	5,008

See Notes to Consolidated Financial Statements.

- 43 -

T HE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

1. Introduction and Basis of Presentation

The Charles Schwab Corporation (CSC) is a financial holding company engaged, through its subsidiaries, in securities brokerage, banking, and related financial services. Charles Schwab & Co., Inc. (Schwab) is a securities broker-dealer with 303 domestic branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and London, U.K. In addition, Schwab serves clients in Hong Kong through one of CSC’s subsidiaries. Other subsidiaries include Charles Schwab Bank, N.A. (Schwab Bank), a retail bank; Charles Schwab Investment Management, Inc., the investment advisor for Schwab’s proprietary mutual funds; CyberTrader, Inc., an electronic trading technology and brokerage firm providing services to highly active, online traders; and The Charles Schwab Trust Company, a trustee for employee benefit plans, primarily 401(k) plans.

The consolidated financial statements include CSC and its majority-owned subsidiaries (collectively referred to as the Company). These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S., which require management to make certain estimates and assumptions that affect the reported amounts in the accompanying financial statements. Such estimates relate to capitalized development costs for internal-use software; useful lives of intangible assets, equipment, office facilities, and property; valuation of goodwill, intangible assets, and equity investments; valuation of employee stock options; future value of long-term incentive plan units; fair value of financial instruments and investments; allowance for credit losses on banking loans; allowance for doubtful accounts of brokerage clients; retirement and postretirement benefits; future tax benefits; restructuring reserves; and legal reserves. Actual results could differ from such estimates. Certain prior-year amounts have been reclassified to conform to the 2006 presentation. All material intercompany balances and transactions have been eliminated.

On November 19, 2006, the Company entered into a definitive agreement with Bank of America Corporation (Bank of America) pursuant to which Bank of America will acquire all of the outstanding common stock of U.S. Trust Corporation (USTC, and with its subsidiaries collectively referred to as U.S. Trust), a subsidiary which provides wealth management services. The transaction is expected to close early in the third quarter of 2007. The Company sold its capital markets business in 2004. These financial statements reflect these businesses as discontinued operations for all periods.

On December 22, 2006, the Company announced an agreement to acquire The 401(k) Company from Nationwide Financial Services, Inc. for $115 million in cash. The transaction is expected to close in March 2007, subject to customary closing conditions. The 401(k) Company offers defined contribution plan services.

2. Significant Accounting Policies

Securities transactions: Clients’ securities transactions are recorded on the date that they settle, while the related commission revenues and expenses are recorded on the date that the trade occurs. Principal transactions are recorded on a trade date basis. Commission revenues and principal transactions are included in trading revenue.

Cash and cash equivalents: The Company considers all highly liquid investments, including money market funds, interest-bearing deposits with banks, federal funds sold, commercial paper and treasury securities, with original maturities of three months or less that are not segregated and on deposit for federal or other regulatory purposes to be cash equivalents.

Cash and investments segregated and on deposit for federal or other regulatory purposes consist primarily of securities purchased under agreements to resell (resale agreements), which are collateralized by U.S. government securities, and certificates of deposit. Resale agreements are collateralized investing transactions that are recorded at their contractual amounts plus accrued interest. The Company obtains possession of collateral (U.S. government securities) with a market value equal to or in excess of the principal amount loaned and accrued interest under resale agreements. Collateral is valued daily by the Company, with additional collateral obtained when necessary. Certificates of deposit are recorded at market value.

- 44 -

THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

Securities borrowed, securities loaned, and securities sold under agreements to repurchase (repurchase agreements): Securities borrowed require the Company to deliver cash to the lender in exchange for securities and are included in receivables from brokers, dealers, and clearing organizations. For securities loaned, the Company receives collateral in the form of cash in an amount generally equal to the market value of securities loaned. Securities loaned are included in payables to brokers, dealers, and clearing organizations. The Company monitors the market value of securities borrowed and loaned, with additional collateral obtained or refunded when necessary. Fees received or paid are recorded in interest revenue or interest expense. Repurchase agreements are recorded at their contractual amounts plus accrued interest and are included in short-term borrowings.

Securities owned include securities available for sale that are recorded at estimated fair value using quoted market prices, where available, or third-party pricing services. Unrealized gains and losses are reported, net of taxes, in accumulated other comprehensive income (loss) included in stockholders’ equity. Realized gains and losses from sales of securities available for sale are determined on a specific identification basis and are included in other revenue.

Securities owned also include Schwab Funds^® money market funds, fixed income, equity, and other securities, and equity and bond mutual funds and are recorded at estimated fair value. Unrealized gains and losses are included in trading revenue.

Receivables from brokerage clients are stated net of allowance for doubtful accounts of $2 million at December 31, 2006 and 2005. Cash receivables from brokerage clients that remain unsecured or partially secured for more than 30 days are fully reserved.

Nonperforming assets included in the loan portfolio consist of financial instruments where the Company has stopped accruing interest (non-accrual financial instruments). Interest accruals are discontinued when principal or interest is contractually past due 90 days or more unless collectibility of the loan is reasonably assured. Non-accrual financial instruments are generally returned to accrual status only when all delinquent principal and interest payments become current and the collectibility of future principal and interest on a timely basis is reasonably assured.

Loans to banking clients are stated net of allowance for credit losses of $4 million and $3 million at December 31, 2006 and 2005, respectively. The allowance is established through charges to income based on management’s evaluation of the adequacy of the allowance for credit losses in the existing portfolio. The adequacy of the allowance is reviewed regularly by management, taking into consideration current economic conditions, the existing loan portfolio composition, past loss experience and risks inherent in the portfolio, including the value of impaired loans.

Loans held for sale consist of fixed-rate and adjustable-rate mortgage loans intended for sale. Loans held for sale are stated at lower of cost or market value. Market value is determined using quoted market prices.

Equipment, office facilities, and property: Equipment and office facilities are depreciated on a straight-line basis over the estimated useful life of the asset of three to ten years. Buildings are depreciated on a straight-line basis over twenty years. Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful life of the asset or the term of the lease. Software and certain costs incurred for purchasing or developing software for internal use are amortized on a straight-line basis over an estimated useful life of three or five years. Equipment, office facilities, and property are stated at cost net of accumulated depreciation and amortization, except for land, which is stated at cost. Equipment, office facilities, and property are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

Derivative financial instruments are recorded on the balance sheet at fair value based upon dealer quotes and third-party pricing services. As part of its consolidated asset and liability management process, the Company utilizes interest rate swap agreements (Swaps) to effectively convert the interest rate characteristics of a portion of its Medium-Term Notes from fixed to variable. These Swaps have been designated as fair value hedges. There is no impact on net income as changes in fair value of the Swaps are offset by changes in the fair value of the hedged Medium-Term Notes.

- 45 -

THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

Schwab Bank’s loans held for sale portfolio consists of fixed- and adjustable-rate mortgages, which are subject to a loss in value when market interest rates rise. Schwab Bank uses forward sale commitments to manage this risk. These forward sale commitments have been designated as cash flow hedging instruments of the loans held for sale. Accordingly, the fair values of these forward sale commitments are recorded on the Company’s consolidated balance sheet, with gains or losses recorded in other comprehensive income (loss).

Additionally, Schwab Bank uses forward sale commitments to hedge interest rate lock commitments issued on mortgage loans that will be held for sale. Schwab Bank considers the fair value of these commitments to be zero at the commitment date, with subsequent changes in fair value determined solely based on changes in market interest rates. Any changes in fair value of the interest rate lock commitments are completely offset by changes in fair value of the related forward sale commitments.

Income taxes: The Company files a consolidated U.S. federal income tax return and uses the asset and liability method in recording income tax expense. Under this method, deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their recorded amounts for financial reporting purposes, using currently enacted tax law.

Stock-based compensation: On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) – Share-Based Payment (SFAS No. 123R) which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment arrangements including employee and director stock option and restricted stock awards. In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB No. 107) relating to certain issues surrounding the implementation of SFAS No. 123R. In November 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FAS 123R-3 – Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.

The Company adopted SFAS No. 123R using a modified prospective transition method, under which this accounting standard applies to new awards and to awards modified, repurchased, or cancelled after January 1, 2006 and prior periods are not restated. Additionally, compensation cost is recognized for the unvested portion of awards outstanding on January 1, 2006 over their remaining vesting period. As a result of the adoption of SFAS No. 123R, the Company’s income from continuing operations before income taxes, income from continuing operations, and net income for the year ended December 31, 2006, were $13 million, $8 million, and $11 million lower, respectively, than under the Company’s previous accounting method for share-based compensation. When calculated under the Company’s previous accounting method, basic and diluted earnings per share (EPS) for the year ended December 31, 2006 were unchanged and $.01 higher, respectively.

Stock-based compensation expense for 2006 is based on awards ultimately expected to vest, and therefore has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant based on the Company’s historical forfeiture experience and revised in subsequent periods if actual forfeitures differ from those estimates. For periods prior to 2006, the Company recognized forfeitures as they occurred. Upon adoption of SFAS No. 123R, the Company recorded an immaterial cumulative adjustment to estimate forfeitures for unvested stock awards outstanding at January 1, 2006. The Company has elected to adopt the alternative transition method provided in the FASB Staff Position No. FAS 123R-3 for calculating the tax effects of stock-based compensation.

Long-term incentive compensation: Eligible officers may receive cash long-term incentive plan units under a long-term incentive plan (LTIP). These awards are restricted from transfer or sale and generally vest annually over a three- to four-year period. Each award provides for a one-time cash payment for an amount that varies based upon the Company’s cumulative EPS over the respective performance period of each grant. The Company accrues the estimated total cost for each grant on a straight-line basis over each LTIP’s vesting period, with periodic cumulative adjustments to expense as estimates of the total grant cost are revised.

Goodwill: represents the cost of acquired businesses in excess of the fair value of the related net assets acquired. Goodwill is tested for impairment at least annually or whenever indications of impairment exist. In testing for a potential impairment of goodwill, management estimates the fair value of each of the Company’s reporting units (generally

- 46 -

THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

defined as the Company’s businesses for which financial information is available and reviewed regularly by management), and compares it to their carrying value. If the estimated fair value of a reporting unit is less than its carrying value, management is required to estimate the fair value of all assets and liabilities of the reporting unit, including goodwill. If the carrying value of the reporting unit’s goodwill is greater than the estimated fair value, an impairment charge is recognized for the excess. The Company has elected April 1 as its annual impairment testing date.

The carrying amount of goodwill is included in the Schwab Investor Services segment. At December 31, 2006 and 2005, the Company’s goodwill balance was $419 million.

Intangible assets: The Company has certain intangible assets which are non-amortizing but are subject to impairment testing annually and whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. The Company’s non-amortizing intangible asset balances were $14 million at both December 31, 2006 and 2005, and are included in other assets. These balances are primarily comprised of the value of contracts acquired in 2004 to manage investments of mutual funds.

New accounting standards: SFAS No. 154 – Accounting Changes and Error Corrections was issued in May 2005 and was effective beginning January 1, 2006. SFAS No. 154 generally requires retrospective application to prior periods’ financial statements of changes in accounting principle. The adoption of SFAS No. 154 did not have a material impact on the Company’s financial position, results of operations, EPS, or cash flows.

SFAS No. 155 – Accounting for Certain Hybrid Financial Instruments was issued in February 2006 and is effective for all financial instruments acquired or issued after December 31, 2006. SFAS No. 155 allows financial instruments that contain an embedded derivative to be accounted for as a whole (eliminating the need to account for the embedded derivative separately) if an election is made to report the whole instrument on a fair value basis. The adoption of SFAS No. 155 is not expected to have a material impact on the Company’s financial position, results of operations, EPS, or cash flows.

SFAS No. 156 – Accounting for Servicing of Financial Assets was issued in March 2006 and is effective beginning January 1, 2007. This statement amends the requirements under SFAS No. 140 – Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, for accounting for mortgage servicing assets and servicing liabilities. Currently, servicing assets and servicing liabilities are amortized over the expected period of estimated net servicing income or loss and assessed for impairment or increased obligation at each reporting date. SFAS No. 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, and permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. The adoption of SFAS No. 156 is not expected to have a material impact on the Company’s financial position, results of operations, EPS, or cash flows.

SFAS No. 157 – Fair Value Measurements was issued in September 2006 and is effective beginning January 1, 2008. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. The adoption of SFAS No. 157 is not expected to have a material impact on the Company’s financial position, results of operations, EPS, or cash flows.

SFAS No. 158 – Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans was issued in September 2006. SFAS No. 158 requires recognition of an asset or liability for the overfunded or underfunded status of defined benefit postretirement plans, and recognition of changes in that funded status through other comprehensive income. The funded status of a benefit plan is generally measured as the difference between the fair value of the plan assets and the benefit obligation. SFAS No. 158 also requires the recognition of previously unrecognized actuarial gains and losses and prior service costs within accumulated other comprehensive income, net of tax. These provisions of the statement are effective December 31, 2006. All of the Company’s defined postretirement benefit plans are maintained at U.S. Trust. The adoption of SFAS No. 158 resulted in a $9 million pre-tax reduction in prepaid postretirement benefit plans and a $5 million after-tax reduction in the Company’s accumulated other comprehensive income as of

- 47 -

THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

December 31, 2006. The adoption of SFAS No. 158 did not have any impact on the Company’s results of operations, EPS, or cash flows. Effective December 31, 2008, SFAS No. 158 requires the measurement date for plan assets and liabilities to be the same date as a company’s fiscal year end.

SFAS No. 159 – The Fair Value Option for Financial Assets and Financial Liabilities was issued in February 2007 and is effective beginning January 1, 2008. SFAS No. 159 permits entities to elect to measure eligible financial instruments, commitments, and certain other arrangements at fair value at specified election dates with changes in fair value recognized in earnings at each subsequent reporting period. The Company is currently evaluating the impact of the adoption of SFAS No. 159 on its financial position, results of operations, EPS, and cash flows.

Emerging Issues Task Force Issue (EITF) No. 06-02 – Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43 – Accounting for Compensated Absences, was ratified by the FASB in June 2006 and is effective beginning January 1, 2007. This EITF requires the recognition of compensation expense associated with a sabbatical leave or other similar benefit arrangement that does not vest over the requisite service period. The Company currently records compensation expense related to its sabbatical program in the period the sabbatical is taken by an employee. As a result of this change in accounting principle, the Company will record a charge, net of estimated forfeitures, to retained earnings as of January 1, 2007 of $17 million after tax. This accounting change is not expected to have a material impact on the Company’s results of operations, EPS, or cash flows.

Financial Accounting Standards Board Interpretation (FIN) No. 48 – Accounting for Uncertainty in Income Taxes - An Interpretation of SFAS No. 109, was issued in July 2006 and is effective beginning January 1, 2007. FIN No. 48 provides new requirements for the recognition, measurement, and disclosure in the financial statements of a tax position taken or expected to be taken in a tax return when there is uncertainty about whether that tax position will ultimately be sustained. The adoption of FIN No. 48 is not expected to have a material impact on the Company’s financial position, results of operations, EPS, or cash flows.

Staff Accounting Bulletin (SAB) No. 108 – Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements was issued by the SEC in September 2006 and is effective for the year ended December 31, 2006. SAB No. 108 requires a dual approach – evaluation of an error from both a financial position perspective and results of operations perspective – when quantifying and evaluating the materiality of a misstatement. The adoption of SAB No. 108 did not have a material impact on the Company’s financial position, results of operations, EPS, or cash flows.

3. Discontinued Operations

U.S. Trust:

On November 19, 2006, CSC entered into a definitive agreement with Bank of America pursuant to which Bank of America will acquire all of the outstanding common stock of U.S. Trust for $3.3 billion in cash. The transaction is expected to close early in the third quarter of 2007. However, the closing is subject to (i) approval of new investment advisor agreements for each of the Excelsior mutual funds by the applicable public fund board and the stockholders of each fund, (ii) regulatory approvals, and (iii) other customary closing conditions. The Company estimates it will record a pre-tax gain on the sale of approximately $1.9 billion. After-tax proceeds will be used for general corporate purposes, including share repurchases and continued investment in Schwab Investor Services, Schwab Institutional, and Schwab Bank. U.S. Trust comprised all of the previously-reported U.S. Trust segment.

The results of operations, net of income taxes, and cash flows of U.S. Trust have been presented as discontinued operations on the Company’s consolidated statements of income and of cash flows for all periods, and the assets and liabilities of U.S. Trust have each been combined and presented as assets and liabilities of discontinued operations on the Company’s consolidated balance sheets. The Company’s consolidated prior period revenues, expenses, taxes on income, assets, liabilities, and cash flows also reflect this presentation.

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

Summarized financial information for discontinued operations related to U.S. Trust is as follows:

December 31,	2006			2005
Assets
Cash and cash equivalents	$	625		$	428
Cash and investment segregated and on deposit for federal and other regulatory purposes		11			65
Loans to banking clients – net		7,090			6,560
Securities owned		2,571			2,662
Equipment, office facilities, and property – net		97			98
Goodwill		390			390
Intangible assets – net		119			129
Other assets		442			474
Assets retained from discontinued operations		(749	)		(711	)
Total assets	$	10,596		$	10,095
Liabilities
Deposits from banking clients (net of liabilities retained)	$	8,532		$	7,138
Accrued expenses and other liabilities		379			371
Short-term borrowings		101			672
Long-term debt		52			52
Total liabilities	$	9,064		$	8,233

The components of income from discontinued operations related to U.S. Trust are as follows:

	2006		2005			2004
Net revenues	$	892	$	845		$	786
Income, before taxes (1)	$	197	$	158		$	98
Tax benefit (expense) on income (2)	$	136	$	(62	)	$	(34	)
Income, net of tax (1,2)	$	333	$	96		$	64

⁽¹⁾ Includes $6 million pre-tax, or $4 million after tax, of transaction-related costs recorded in 2006.

⁽²⁾ Includes an income tax benefit of $205 million recorded in 2006 related to the estimated excess of the tax basis of U.S. Trust stock over the book basis.

In 2006, the Company recorded a $205 million income tax benefit related to the estimated difference between the tax and book bases of the Company’s U.S. Trust stock. This amount is included in income from discontinued operations, net of tax on the Company’s consolidated statements of income. When calculating the Company’s gain on the sale of U.S. Trust for income tax purposes, the tax basis will be the basis of U.S. Trust’s prior stockholders in their shares as of the date U.S. Trust was acquired by the Company, since the transaction qualified as a tax-free exchange. This tax benefit is management’s current estimate and is based on publicly available information, including information on the composition of U.S. Trust’s stockholders at the acquisition date and the market price of U.S. Trust stock during relevant periods. The final amount of the basis difference, which could differ from management’s estimate, will be determined following a survey of former U.S. Trust stockholders that the Company expects to complete in mid-2007.

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

The assets retained from discontinued operations reflect the excess cash held in certain Schwab brokerage client accounts that is swept into a money market deposit account at U.S. Trust. In 2007, Schwab will terminate this arrangement prior to the closing of the sale of U.S. Trust and move these balances to a similar existing arrangement with Schwab Bank. At December 31, 2006 and 2005, these balances totaled $749 million and $711 million, respectively, and are included in deposits from banking clients with a corresponding amount in assets retained from discontinued operations on the Company’s consolidated balance sheets. The interest expense related to these client deposit balances is included in interest expense from continuing operations on the Company’s consolidated statements of income of $11 million, $6 million, and $2 million for 2006, 2005, and 2004, respectively. The corresponding interest revenue on the invested cash balances related to these deposits is included in interest revenue from continuing operations on the Company’s consolidated statements of income of $38 million, $22 million, and $6 million for 2006, 2005, and 2004, respectively. The interest revenue amount is calculated using the Company’s funds transfer pricing methodology, which is used by management to estimate the interest earned on the investment of these deposit balances.

Capital Markets Business:

In October 2004, the Company sold its capital markets business to UBS Securities LLC and UBS Americas Inc. (collectively referred to as UBS). Pursuant to the agreement, UBS acquired all of the partnership interests of Schwab Capital Markets L.P. and all of the outstanding capital stock of SoundView Technology Group, Inc. (collectively referred to as Schwab Soundview Capital Markets, or SSCM) for $265 million in cash. A summary of revenues and losses in 2004 for discontinued operations related to SSCM is as follows: net revenues of $226 million; loss on sale of $88 million, which includes goodwill impairment charges of $95 million; total pre-tax loss of $199 million; and after-tax loss of $128 million. Additionally, the Company recorded income of $4 million, or $3 million after tax, in 2006 and income of $5 million, or loss of $5 million after tax, in 2005.

In addition to the restructuring reserves discussed in note “16 – Restructuring Charges and Reserves,” the Company retained certain restructuring-related obligations following the sales of SSCM and Charles Schwab Europe in 2004 and 2003, respectively, and recorded reserves for severance, facilities leases and systems. A summary of the activity in these reserves is as follows:

	Workforce Reduction			Facilities Reduction			Total
Balance at December 31, 2003	$	4		$	12		$	16
Restructuring charges (1)		75			38			113
Cash payments – net		(55	)		(5	)		(60	)
Non-cash charges (2)		(1	)		(7	)		(8	)
Balance at December 31, 2004		23			38			61
Restructuring charges (1)		1			1			2
Cash payments – net		(22	)		(17	)		(39	)
Non-cash charges		(1	)		—			(1	)
Other (3)		—			2			2
Balance at December 31, 2005		1			24			25
Restructuring credit (1)		—			(3	)		(3	)
Cash payments – net		(1	)		(6	)		(7	)
Balance at December 31, 2006	$	—		$	15	(4)	$	15

⁽¹⁾ Included in income (loss) from discontinued operations.

⁽²⁾ Primarily includes charges for officers’ stock-based compensation and write-downs of fixed assets.

⁽³⁾ Includes the reclassification of deferred rent amounts and the accretion of facilities restructuring reserves, which are initially recorded at net present value.

⁽⁴⁾ The Company expects to substantially utilize the remaining facilities reduction reserve through cash payments for the net lease expense over the respective lease terms through 2015.

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

4. Securities Owned

A summary of securities owned is as follows:

December 31,	2006		2005
Securities available for sale	$	5,988	$	3,725
Schwab Funds® money market funds		182		271
Fixed income, equity, and other securities		163		166
Equity and bond mutual funds		53		33
Total securities owned	$	6,386	$	4,195

The amortized cost, estimated fair value, and gross unrealized gains and losses on securities available for sale are as follows:

December 31, 2006	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage-backed securities:
Collateralized mortgage obligations	$	3,115	$	2	$	19	$	3,098
Federal agencies		1,920		3		9		1,914
Total mortgage-backed securities		5,035		5		28		5,012
Corporate debt		677		—		—		677
U.S. Treasury and federal agencies		249		—		—		249
Certificates of deposit		50		—		—		50
Total	$	6,011	$	5	$	28	$	5,988
December 31, 2005	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage-backed securities:
Collateralized mortgage obligations	$	2,210	$	1	$	20	$	2,191
Federal agencies		1,440		5		10		1,435
Total mortgage-backed securities		3,650		6		30		3,626
U.S. Treasury and federal agencies		100		—		1		99
Total	$	3,750	$	6	$	31	$	3,725

A summary of investments with unrealized losses, aggregated by category and period of continuous unrealized loss, at December 31, 2006, is as follows:

	Less than 12 months				12 months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities:
Collateralized mortgage obligations	$	974	$	2	$	1,227	$	17	$	2,201	$	19
Federal agencies		649		2		402		7		1,051		9
Total temporarily impaired securities	$	1,623	$	4	$	1,629	$	24	$	3,252	$	28

Management views the unrealized losses noted above as temporary as the decline in market value is attributable to changes in interest rates and not credit quality. The number of investment positions with unrealized losses totals 149. The determination of whether or not other-than-temporary impairment exists is a matter of judgment. Factors considered in evaluating whether a decline in value is other than temporary include: the financial conditions and near-term

- 51 -

THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

prospects of the issuer; the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery; and the length of time and the extent to which the fair value has been less than cost.

The maturities of debt securities available for sale at December 31, 2006 are as follows:

December 31, 2006	Within 1 Year		1-5 Years		5-10 Years		After 10 Years		Total
Mortgage-backed securities(1):
Collateralized mortgage obligations		—		—		—	$	3,098	$	3,098
Federal agencies		—		—	$	7		1,907		1,914
Total mortgage-backed securities		—		—		7		5,005		5,012
Corporate debt	$	194	$	483		—		—		677
U.S. Treasury and federal agencies		209		40		—		—		249
Certificates of deposit		50		—		—		—		50
Estimated fair value	$	453	$	523	$	7	$	5,005	$	5,988
Total amortized cost	$	453	$	523	$	7	$	5,028	$	6,011
Net unrealized losses		—		—		—	$	23	$	23

⁽¹⁾ Collateralized mortgage obligations have been allocated over maturity groupings based on contractual maturities. Expected maturities may differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.

Gross proceeds and gross realized gains and losses related to sales of securities available for sale are as follows. Realized gains and losses of securities available for sale are included in other revenue on the Company’s consolidated income statements.

	2006		2005		2004
Gross proceeds	$	81	$	16	$	312
Gross realized gains		—		—	$	2
Gross realized losses		—		—	$	2

The Company’s positions in Schwab Funds^® money market funds arise from certain overnight funding of clients’ redemption, check-writing, and debit card activities. Fixed income, equity, and other securities include fixed income securities held to meet clients’ trading activities, and investments made by the Company relating to its deferred compensation plan. Equity and bond mutual funds include inventory maintained to facilitate certain Schwab Funds and third-party mutual fund clients’ transactions.

Securities sold, but not yet purchased of $20 million at December 31, 2006 consisted primarily of mutual fund shares that are distributed to clients to satisfy their dividend reinvestment requests. Securities sold, but not yet purchased of $15 million at December 31, 2005 consisted primarily of equity positions which are held as a hedge against securities owned. These securities are recorded at market value in accrued expenses and other liabilities.

5. Receivables from Brokerage Clients

Receivables from brokerage clients consist primarily of margin loans to brokerage clients of $10.4 billion at both December 31, 2006 and 2005. Securities owned by brokerage clients are held as collateral for margin loans. Such collateral is not reflected in the consolidated financial statements.

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

6. Loans to Banking Clients and Related Allowance for Credit Losses

An analysis of the composition of the loan portfolio is as follows:

December 31,	2006			2005
Home equity lines of credit	$	1,192		$	1,193
Residential real estate mortgages		1,127			746
Other		19			10
Total loans to banking clients		2,338			1,949
Less: allowance for credit losses		(4	)		(3	)
Loans to banking clients – net	$	2,334		$	1,946

Included in the loan portfolio are non-accrual loans totaling $1 million at both December 31, 2006 and 2005. Non-accrual loans are considered impaired by the Company, and represent all the Company’s nonperforming assets at both December 31, 2006 and 2005. The amount of loans accruing interest that were contractually 90 days or more past due was $1 million at both December 31, 2006 and 2005. For 2006 and 2005, the impact of interest revenue which would have been earned on non-accrual loans versus interest revenue recognized on these loans was not material to the Company’s results of operations.

Charge-offs related to the allowance for credit losses on the loan portfolio were not material for both 2006 and 2004. There were no charge-offs during 2005. There were no recoveries for each of 2006, 2005, and 2004.

7. Equipment, Office Facilities, and Property

Equipment, office facilities, and property are detailed below:

December 31,	2006			2005
Land	$	52		$	54
Buildings		382			458
Leasehold improvements		245			234
Furniture and equipment		117			126
Telecommunications equipment		96			107
Information technology equipment		366			366
Software		684			729
Software development and construction in progress		2			3
Subtotal		1,944			2,077
Accumulated depreciation and amortization		(1,342	)		(1,378	)
Total equipment, office facilities, and property - net	$	602		$	699

8. Deposits from Banking Clients

Deposits from banking clients consist of money market and other savings deposits, certificates of deposit, and noninterest-bearing deposits. Interest-bearing deposits were $11.0 billion and $7.0 billion at December 31, 2006 and 2005, respectively. During the years ended December 31, 2006 and 2005, the Company paid an average rate of 2.19% and 1.32%, respectively, on its interest-bearing deposits from banking clients. Noninterest-bearing deposits were not material at both December 31, 2006 and 2005. Demand deposit overdrafts included as other loans within loans to banking clients were not material for both December 31, 2006 and 2005.

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

9. Payables to Brokers, Dealers, and Clearing Organizations

Payables to brokers, dealers, and clearing organizations consist primarily of securities loaned of $1.4 billion and $1.2 billion at December 31, 2006 and 2005, respectively. The cash collateral received from counterparties under securities lending transactions was equal to or greater than the market value of the securities loaned.

10. Payables to Brokerage Clients

The principal source of funding for Schwab’s margin lending is cash balances in brokerage client accounts. At December 31, 2006, Schwab was paying interest at 2.5% on $15.8 billion of cash balances in brokerage client accounts, which were included in payables to brokerage clients. At December 31, 2005, Schwab was paying interest at 2.1% on $20.9 billion of such cash balances.

11. Borrowings

CSC may borrow up to $800 million under a committed, unsecured credit facility with a group of eighteen banks which is scheduled to expire in June 2007. This facility replaced a facility that expired in June 2006. The funds under this facility are available for general corporate purposes and CSC pays a commitment fee on the unused balance of this facility. The financial covenants in this facility require CSC to maintain a minimum level of stockholders’ equity, Schwab to maintain minimum net capital ratios, as defined, and CSC’s depository institution subsidiaries, which include Schwab Bank and U.S. Trust (currently reflected as a discontinued operation for financial statement purposes) to be well capitalized, as defined. These facilities were unused at December 31, 2006 and 2005.

To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank credit lines with a group of eight banks totaling $842 million at December 31, 2006. CSC has access to $792 million of these credit lines. The amount available to CSC under these lines is lower than the amount available to Schwab because the credit line provided by one of these banks is only available to Schwab. There were no borrowings outstanding under these lines at December 31, 2006 and 2005.

To satisfy the margin requirement of client option transactions with the Options Clearing Corporation (OCC), Schwab has unsecured letter of credit agreements with eleven banks in favor of the OCC aggregating $930 million at December 31, 2006. Schwab pays a fee to maintain these arrangements. In connection with its securities lending activities, Schwab is required to provide collateral to certain brokerage clients. Schwab satisfies the collateral requirements by arranging letters of credit (LOCs), in favor of these brokerage clients, which are issued by multiple banks. At December 31, 2006, the aggregate face amount of these outstanding LOCs totaled $173 million. No funds were drawn under these LOCs at December 31, 2006 and 2005.

Long-term debt consists of the following:

December 31,	2006		2005
Senior Medium-Term Notes, Series A	$	262	$	330
Lease financing liability		126		130
Fair value adjustment (1)		—		2
Total long-term debt	$	388	$	462

⁽¹⁾ Represents the fair value adjustment related to hedged Medium-Term Notes.

The aggregate principal amount of Senior Medium-Term Notes, Series A (Medium-Term Notes) outstanding at December 31, 2006 had maturities ranging from 2007 to 2010. The aggregate principal amount of Medium-Term Notes outstanding at December 31, 2006 and 2005 had fixed interest rates ranging from 6.52% to 8.05% and 6.21% to

- 54 -

THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

8.05%, respectively. At December 31, 2006 and 2005, the Medium-Term Notes carried a weighted-average interest rate of 7.77% and 7.56%, respectively.

Upon adoption of FIN No. 46 in the first quarter of 2003, the Company consolidated a Trust and recorded a note payable of $235 million. This Trust was formed in 2000 to finance the acquisition and renovation of an office building and land. In 2004, the Company exercised its option to purchase this property from the Trust and repaid $99 million of the note payable. Simultaneously, the Company completed a transaction on this property with American Financial Realty Trust, a publicly-traded real estate investment trust, resulting in proceeds of $136 million, which was used to repay the remainder of the note payable, and a 20-year lease. This transaction was accounted for as a financing lease. The remaining lease financing liability of $126 million at December 31, 2006 is being reduced by a portion of the lease payments over the 20-year term.

Annual maturities on long-term debt outstanding at December 31, 2006 are as follows:

2007	$	43
2008		20
2009		14
2010		205
2011		6
Thereafter		100
Total	$	388

12. Taxes on Income

Income tax expense on income from continuing operations is as follows:

	2006			2005			2004
Current:
Federal	$	505		$	337		$	185
State		111			60			26
Total current		616			397			211
Deferred:
Federal		(25	)		(3	)		(4	)
State		(6	)		(1	)		(10	)
Total deferred		(31	)		(4	)		(14	)
Taxes on income	$	585		$	393		$	197

The excess tax benefits from the exercise of stock options and the vesting of restricted stock awards, which for accounting purposes are recorded in additional paid-in capital, were $64 million, $30 million, and $16 million in 2006, 2005, and 2004, respectively.

- 55 -

THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

The net income tax benefit from discontinued operations was $134 million in 2006 and includes a $205 million income tax benefit related to the estimated excess of the tax basis of U.S. Trust stock over the book basis. The income tax expense related to income from discontinued operations was $71 million in 2005. The income tax benefit related to loss from discontinued operations was $37 million in 2004.

The temporary differences that created deferred tax assets and liabilities are detailed below:

December 31,	2006			2005
Deferred tax assets:
Excess tax basis of investment in subsidiary	$	205			—
Employee compensation, severance and benefits		127		$	95
Facilities lease commitments		105			121
Reserves and allowances		25			25
Net unrealized loss on securities available for sale		9			10
Deferred income		9			12
Other		14			14
Total deferred assets		494			277
Deferred tax liabilities:
Depreciation and amortization		(43	)		(57	)
Capitalized internal-use software development costs		(45	)		(49	)
Total deferred liabilities		(88	)		(106	)
Net deferred tax asset	$	406		$	171

The Company determined that no valuation allowance against deferred tax assets at December 31, 2006 and 2005 was necessary.

The effective income tax rate on income from continuing operations differs from the amount computed by applying the federal statutory income tax rate as follows:

	2006		2005		2004
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal tax benefit	4.6		3.4		2.1
Other	—		(.1	)	(1.1	)
Effective income tax rate	39.6	%	38.3	%	36.0	%

The effective income tax rate including discontinued operations was 26.9% in 2006, 39.0% in 2005, and 35.9% in 2004. In 2006, the difference between the effective income tax rate on income from continuing operations and the effective income tax rate including discontinued operations was primarily due to the $205 million income tax benefit discussed above.

- 56 -

THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

13. Employee Incentive, Deferred Compensation, and Retirement Plans

A summary of the Company’s stock-based compensation expense and related income tax benefit is as follows:

	2006			2005			2004
Stock option expense	$	16		$	2		$	3
Restricted stock expense		23			15			23
Total stock-based compensation (1,2)	$	39		$	17		$	26
Income tax benefit on stock-based compensation	$	(15	)	$	(7	)	$	(10	)

⁽¹⁾ Effective January 1, 2006, stock-based compensation is computed net of expected forfeitures.

⁽²⁾ Total stock-based compensation including discontinued operations was $52 million, $23 million, and $62 million in 2006, 2005, and 2004, respectively.

The Company issues shares for stock options and restricted stock awards from treasury stock. At December 31, 2006, the Company was authorized to grant up to 36 million common shares under its existing stock incentive plans.

As of December 31, 2006, there was $135 million of total unrecognized compensation cost, net of forfeitures, related to outstanding stock option and restricted stock awards, which is expected to be recognized through 2011 with a remaining weighted-average period of 2.0 years.

Stock Option Plans

The Company’s stock incentive plans provide for granting options to employees, officers, and directors. Options are granted for the purchase of shares of common stock at an exercise price not less than market value on the date of grant, and expire within seven or ten years from the date of grant. Options generally vest annually over a three- to four-year period from the date of grant. Certain options are granted at an exercise price above the market value of common stock on the date of grant (i.e., premium-priced options).

The Company’s stock option activity (including options held by employees of discontinued operations) is summarized below:

	Number of Options		Weighted- Average Exercise Price per Share		Weighted- Average Remaining Contractual Life (in years)	Aggregate Intrinsic Value
Outstanding at December 31, 2005	115		$	15.33
Granted	6		$	18.76
Exercised	(24	)	$	10.67
Forfeited	(2	)	$	10.29
Expired	(6	)	$	25.13
Outstanding at December 31, 2006	89		$	16.22	3.97	$	434
Vested and exercisable at December 31, 2006	79		$	16.40	3.69	$	387

The aggregate intrinsic value in the table above represents the difference between CSC’s closing stock price and the exercise price of each in-the-money option on the last trading day of the period presented.

The weighted-average fair value of options granted during each of the years 2006, 2005, and 2004 was $5.43, $2.56, and $2.75 per share, respectively. Cash received from options exercised for each of the years 2006, 2005, and 2004 was $252 million, $115 million, and $51 million, respectively. The total tax benefits recognized from the exercise of employee stock options during each of the years 2006, 2005, and 2004 was $57 million, $30 million, and $23 million,

- 57 -

THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

respectively. The total intrinsic value of options exercised during each of the years 2006, 2005, and 2004 was $149 million, $80 million and $63 million, respectively.

Management uses a binomial option pricing model for all options granted. The binomial model takes into account the contractual term of the stock option, expected volatility, dividend yield, and risk-free interest rate. Expected volatility is based on the implied volatility of publicly-traded options on CSC’s stock. Dividend yield is based on the average historical CSC dividend yield. The risk-free interest rate is based on the yield of a U.S. Treasury zero-coupon issue with a remaining term equal to the contractual term of the option. Management uses historical option exercise data, which includes employee termination data to estimate future option exercise probability. Management uses the Black-Scholes model to solve for the expected life of options valued with the binomial model. The assumptions used to value the Company’s options and their expected life were as follows:

	2006		2005		2004
Weighted-average expected dividend yield	.46	%	.48	%	.48	%
Weighted-average expected volatility	29	%	28	%	35	%
Weighted-average risk-free interest rate	4.7	%	4.1	%	3.9	%
Expected life (in years)	2.5 – 5.8		1.0 – 4.0		1.1 – 4.4

Pro Forma Information for Periods Prior to the Adoption of SFAS No. 123R

Prior to the adoption of SFAS No. 123R, the Company applied Accounting Principles Board Opinion No. 25 and related interpretations, for its stock-based employee compensation plans. Because the Company grants stock option awards at an exercise price not less than market value, there was no compensation expense recorded when the awards were granted. Had compensation expense for the Company’s stock option awards been determined based on the fair value at the grant dates for awards under those plans consistent with the fair value method of SFAS No. 123, the Company would have recorded additional compensation expense and its net income and EPS would have been reduced to the pro forma amounts presented in the following table:

	2005		2004
Expense for stock-based compensation (after tax) (1):
As reported	$	14	$	39
Pro forma (2)	$	58	$	127
Net income:
As reported	$	725	$	286
Pro forma	$	681	$	198
Basic EPS:
As reported	$	.56	$	.21
Pro forma	$	.53	$	.15
Diluted EPS:
As reported	$	.55	$	.21
Pro forma	$	.52	$	.15

⁽¹⁾ Includes discontinued operations.

⁽²⁾ Includes pro forma compensation expense related to stock options granted during the periods presented and prior periods.

Restricted Stock Plans

The Company’s stock incentive plans provide for granting restricted stock awards to employees and officers. Restricted stock awards are restricted from transfer or sale and generally vest annually over a four-year period, but some vest based upon the Company or one of its subsidiaries achieving certain financial or other measures. The fair value of restricted stock awards is based on the market price of the Company’s stock on the date of grant and is generally amortized to restricted stock expense on a straight-line basis over the requisite service period. The total fair value of the

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

restricted stock awards that vested during each of the years 2006, 2005, and 2004 was $55 million, $33 million, and $44 million, respectively.

The unrecognized compensation cost of $81 million related to outstanding restricted stock awards was recorded as unamortized stock-based compensation in stockholders’ equity at December 31, 2005. With the adoption of SFAS No. 123R, the unrecognized compensation cost related to outstanding restricted stock awards granted prior to January 1, 2006 was charged to additional paid-in capital.

The Company’s restricted stock awards activity (including awards held by employees of discontinued operations) is summarized below:

	Number of Shares		Weighted- Average Grant Date Fair Value per Share
Outstanding at December 31, 2005	8		$	11.76
Granted	5		$	17.79
Vested	(3	)	$	11.16
Forfeited	(1	)	$	12.46
Outstanding at December 31, 2006	9		$	15.06

Long-term Incentive Plans

Eligible officers may receive LTIP units under the Company’s long-term incentive program. These awards are restricted from transfer or sale and generally vest annually over a three- to four-year performance period. The cash payout of the LTIP units, which may range from $0 to $4 per unit, will be made following the end of the performance period based upon the Company achieving certain cumulative EPS levels.

LTIP unit information (including units held by employees of discontinued operations) is as follows:

	2006		2005		2004
LTIP units granted during the year		—		44		54
LTIP units outstanding at year end		117		124		91
LTIP unit compensation expense	$	78	$	37	$	15
LTIP liability at year end	$	140	$	61	$	24

Other Deferred Compensation Plans

The Company sponsors deferred compensation plans for eligible officers and non-employee directors. The Company’s deferred compensation plan for officers permits participants to defer the payment of certain cash compensation. The deferred compensation liability was $145 million and $129 million at December 31, 2006 and 2005, respectively. The Company’s deferred compensation plan for non-employee directors permits participants to defer receipt of all or a portion of their directors’ fees and to receive either a grant of stock options, or upon ceasing to serve as a director, the number of shares of CSC’s common stock that would have resulted from investing the deferred fee amount into CSC’s common stock.

Retirement Plan

Eligible employees of the Company who have met certain service requirements may participate in the Company’s qualified retirement plan, the SchwabPlan^® Retirement Savings and Investment Plan. The Company may match certain employee contributions or make additional contributions to this plan at its discretion. Total company contribution expense was $47 million in 2006, $41 million in 2005, and $40 million in 2004.

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THE CHARLES SCHWAB CORPORATION

14. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss represents cumulative gains and losses that are not reflected in earnings. The components of other comprehensive income (loss) are as follows:

	2006									2005									2004
	Before tax			Tax effect			Net of tax			Before tax			Tax effect			Net of tax			Before tax			Tax effect			Net of tax
Foreign currency translation adjustment	$	1			—		$	1		$	(1	)		—		$	(1	)	$	1			—		$	1
Securities available for sale:
Net unrealized gain (loss) arising during the year		9		$	(2	)		7			(64	)	$	25			(39	)		(15	)	$	6			(9	)
Reclassification adjustment for realized loss included in net income		—			—			—			—			—			—			2			(1	)		1
Net unrealized gain (loss) on securities available for sale		9			(2	)		7			(64	)		25			(39	)		(13	)		5			(8	)
Hedging instruments:
Net unrealized gain arising during the year		4			(2	)		2			20			(8	)		12			26			(10	)		16
Reclassification adjustment for realized gain included in net income		(13	)		5			(8	)		—			—			—			(1	)		—			(1	)
Net unrealized gain (loss) on cash flow hedging instruments		(9	)		3			(6	)		20			(8	)		12			25			(10	)		15
Other comprehensive income (loss)	$	1		$	1		$	2		$	(45	)	$	17		$	(28	)	$	13		$	(5	)	$	8

Accumulated other comprehensive loss balances were:

	Foreign currency translation adjustment			Net unrealized gain (loss) on securities available for sale			Net unrealized gain (loss) on cash flow hedging instruments			Total accumulated other comprehensive loss
Balance, December 31, 2003		—		$	5		$	(18	)	$	(13	)
Net change	$	1			(8	)		15			8
Balance, December 31, 2004		1			(3	)		(3	)		(5	)
Net change		(1	)		(39	)		12			(28	)
Balance, December 31, 2005		—			(42	)		9			(33	)
Net change		1			7			(6	)		2
Adjustment to initially apply SFAS No. 158, net of tax		—			—			—			(5	)
Balance, December 31, 2006	$	1		$	(35	)	$	3		$	(36	)

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

15. Earnings Per Share

Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income by the weighted-average number of common shares plus the effect of dilutive potential common shares outstanding for the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and unvested restricted stock awards. EPS under the basic and diluted computations are as follows:

	2006		2005		2004
Net income	$	1,227	$	725	$	286
Weighted-average common shares outstanding — basic		1,270		1,295		1,343
Common stock equivalent shares related to stock incentive plans		16		13		22
Weighted-average common shares outstanding — diluted (1)		1,286		1,308		1,365
Basic EPS:
Income from continuing operations	$	.70	$	.49	$	.26
Income (loss) from discontinued operations, net of tax	$	.27	$	.07	$	(.05	)
Net income	$	.97	$	.56	$	.21
Diluted EPS:
Income from continuing operations	$	.69	$	.48	$	.26
Income (loss) from discontinued operations, net of tax	$	.26	$	.07	$	(.05	)
Net income	$	.95	$	.55	$	.21

⁽¹⁾ Antidilutive stock options and restricted stock awards excluded from the calculation of diluted earnings per share were 35 million, 71 million, and 91 million shares for the years ended December 31, 2006, 2005, and 2004, respectively.

16. Restructuring Charges and Reserves

In 2005 and 2004, the Company recorded pre-tax restructuring charges of $16 million and $186 million, respectively, primarily comprised of severance costs and facilities reduction charges related to its past restructuring initiatives. These past restructuring initiatives were completed in the first half of 2005.

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

A summary of the activity in the restructuring reserve related to the Company’s past restructuring initiatives is as follows:

	Workforce Reduction			Facilities Reduction			Total
Balance at December 31, 2003	$	21		$	188		$	209
Restructuring charges		118			68			186
Cash payments – net		(83	)		(75	)		(158	)
Non-cash charges (1)		(11	)		(4	)		(15	)
Other(2)		—			7			7
Balance at December 31, 2004		45			184			229
Restructuring charges		23			(7	)		16
Cash payments – net		(60	)		(67	)		(127	)
Non-cash charges(1)		(3	)		(2	)		(5	)
Other(2)		—			19			19
Balance at December 31, 2005		5			127			132
Cash payments – net		(5	)		(35	)		(40	)
Other(2)		—			5			5
Balance at December 31, 2006	$	—		$	97	(3)	$	97

⁽¹⁾ Primarily includes charges for officers’ stock-based compensation and write-downs of fixed assets.

⁽²⁾ Includes the reclassification of deferred rent amounts in 2005 and the accretion of facilities restructuring reserves in 2006, 2005, and 2004, which are initially recorded at net present value. Accretion expense is recorded in occupancy and equipment expense on the Company’s consolidated statements of income.

⁽³⁾ The Company expects to substantially utilize the remaining facilities reduction reserve through cash payments for the net lease expense over the respective lease terms through 2017.

In addition to these restructuring reserves, see note “3 – Discontinued Operations” for a discussion of the Company’s restructuring reserves related to discontinued operations. All restructuring reserve liabilities are included in accrued expenses and other liabilities on the Company’s consolidated balance sheets.

The actual costs of the remaining restructuring reserves related to these restructuring initiatives could differ from the estimated costs, depending primarily on the Company’s ability to sublease properties.

17. Regulatory Requirements

CSC is a financial holding company, which is a type of bank holding company subject to supervision and regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the Act). In July 2006, USTC (currently reflected as a discontinued operation for financial statement purposes) became a financial holding company. The Act permits financial holding companies to engage in activities that are financial in nature, including banking, securities brokerage, underwriting, dealing in or making a market in securities, investment management services and insurance activities. The Federal Reserve Board may impose limitations, restrictions, or prohibitions on the activities or acquisitions of a financial holding company if the Federal Reserve Board believes that the company does not have the appropriate financial and managerial resources to commence or conduct an activity, make an acquisition, or retain ownership of a company. The Federal Reserve Board may also take actions as appropriate to enforce applicable federal law.

Federal Reserve Board policy provides that a bank holding company generally should not pay cash dividends unless its net income is sufficient to fully fund the dividends and the company’s prospective retained earnings appear to be sufficient to meet the capital needs, asset quality and overall financial condition of the holding company and its depository institution subsidiaries.

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

CSC’s primary depository institution subsidiaries are Schwab Bank and United States Trust Company, National Association (United States Trust NA). The operations and financial condition of CSC’s depository institution subsidiaries are subject to regulation and supervision and to various requirements and restrictions under federal and state law, including regulatory capital guidelines. Among other things, these requirements govern transactions with CSC and its non-depository institution subsidiaries, including loans and other extensions of credit, investments or asset purchases, dividends and investments. The federal banking agencies have broad powers to enforce these regulations, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver. Under the Federal Deposit Insurance Act, CSC’s insured depository institutions could be subject to restrictive actions if they were to fall within one of the lowest three of five capital categories.

Under the Act, the Federal Reserve Board has established consolidated capital requirements for bank holding companies. CSC and USTC are subject to those guidelines. The Act prohibits the Federal Reserve Board from imposing capital requirements on functionally regulated non-depository institution subsidiaries of a financial holding company, such as broker-dealers and investment advisors.

To maintain its status as a financial holding company, each of CSC’s depository institution subsidiaries must be kept “well capitalized” and “well managed.” In addition, each of CSC’s insured depository institution subsidiaries must be rated “satisfactory” or better in meeting the requirements of the Community Reinvestment Act of 1977 in order for CSC to engage in new financial activities or enter into certain acquisitions of companies engaged in financial activities. At December 31, 2006, CSC and its depository institution subsidiaries met all the above requirements.

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

The regulatory capital and ratios including discontinued operations are as follows:

		Actual				Minimum Capital Requirement				Minimum to be Well Capitalized (3)
December 31, 2006		Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 Capital:	Company	$	4,137	15.5	%	$	1,066	4.0	%		N/A
	Schwab Bank	$	705	14.1	%	$	200	4.0	%	$	300	6.0	%
	U.S. Trust	$	875	13.6	%	$	258	4.0	%		N/A
	United States Trust NA (1)	$	735	11.7	%	$	252	4.0	%	$	377	6.0	%
Total Capital:	Company	$	4,168	15.6	%	$	2,132	8.0	%		N/A
	Schwab Bank	$	709	14.2	%	$	400	8.0	%	$	500	10.0	%
	U.S. Trust	$	901	14.0	%	$	516	8.0	%		N/A
	United States Trust NA (1)	$	761	12.1	%	$	503	8.0	%	$	629	10.0	%
Leverage:	Company	$	4,137	8.9	%	$	1,857	4.0	%		N/A
	Schwab Bank	$	705	6.7	%	$	420	4.0	%	$	525	5.0	%
	U.S. Trust	$	875	7.9	%	$	443	4.0	%		N/A
	United States Trust NA (1)	$	735	6.8	%	$	434	4.0	%	$	543	5.0	%
		Actual				Minimum Capital Requirement				Minimum to be Well Capitalized (3)
December 31, 2005		Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 Capital:	Company	$	3,586	15.3	%	$	936	4.0	%		N/A
	Schwab Bank	$	553	21.4	%	$	104	4.0	%	$	155	6.0	%
	U.S. Trust	$	780	13.4	%	$	233	4.0	%		N/A
	U.S. Trust NY (1)	$	450	9.9	%	$	182	4.0	%	$	273	6.0	%
	U.S. Trust NA (1)	$	298	22.5	%	$	53	4.0	%	$	79	6.0	%
Total Capital:	Company	$	3,617	15.5	%	$	1,871	8.0	%		N/A
	Schwab Bank	$	556	21.5	%	$	207	8.0	%	$	259	10.0	%
	U.S. Trust	$	806	13.8	%	$	466	8.0	%		N/A
	U.S. Trust NY (1)	$	472	10.4	%	$	364	8.0	%	$	455	10.0	%
	U.S. Trust NA (1)	$	302	22.8	%	$	106	8.0	%	$	132	10.0	%
Leverage:	Company	$	3,586	8.0	%	$	1,794	4.0	%		N/A
	Schwab Bank (2)	$	553	8.6	%	$	257	4.0	%	$	321	5.0	%
	U.S. Trust	$	780	7.7	%	$	408	4.0	%		N/A
	U.S. Trust NY (1)	$	450	6.1	%	$	296	4.0	%	$	370	5.0	%
	U.S. Trust NA (1)	$	298	9.4	%	$	126	4.0	%	$	158	5.0	%

N/A Not applicable.

⁽¹⁾ In the first quarter of 2006, United States Trust Company of New York (U.S. Trust NY) and U.S. Trust Company National Association (U.S. Trust NA) merged into a single national bank named United States Trust Company, National Association (United States Trust NA).

⁽²⁾ Schwab Bank was subject to a minimum tier 1 leverage ratio of 8% for its first three years of operations (i.e., through April 2006).

⁽³⁾ Applicable only to depository institutions.

Based on their respective regulatory capital ratios at December 31, 2006 and 2005, Schwab Bank and United States Trust NA are considered well capitalized (the highest category) pursuant to banking regulatory guidelines. There are no conditions or events that management believes have changed Schwab Bank’s or United States Trust NA’s well-capitalized status.

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

CSC’s depository institution subsidiaries are required, under federal regulations, to maintain reserve balances at the Federal Reserve Bank based on deposit levels. These amounts are included in cash and investments segregated and on deposit for federal or other regulatory purposes. The average balances were $63 million in 2006 and $97 million in 2005.

Schwab is subject to the Uniform Net Capital Rule under the Securities Exchange Act of 1934 (the Rule). Schwab computes net capital under the alternative method permitted by this Rule. This method requires the maintenance of minimum net capital, as defined, of the greater of 2% of aggregate debit balances arising from client transactions or a minimum dollar requirement, which is based on the type of business conducted by the broker-dealer. At December 31, 2006, 2% of aggregate debits was $227 million, which exceeded the minimum dollar requirement for Schwab of $250,000. At December 31, 2006, Schwab’s net capital was $1.1 billion (10% of aggregate debit balances), which was $850 million in excess of its minimum required net capital and $511 million in excess of 5% of aggregate debit balances. Under the alternative method, a broker-dealer may not repay subordinated borrowings, pay cash dividends, or make any unsecured advances or loans to its parent or employees if such payment would result in net capital of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement.

Schwab had portions of its cash and investments segregated for the exclusive benefit of clients at December 31, 2006, in accordance with applicable regulations.

18. Commitments and Contingent Liabilities

Operating leases and other commitments: The Company has noncancelable operating leases for office space and equipment. Future minimum rental commitments under these leases, net of committed subleases, at December 31, 2006 are as follows:

	Operating Leases (1)		Subleases (1)			Net
2007	$	165	$	(44	)	$	121
2008		152		(40	)		112
2009		138		(38	)		100
2010		127		(32	)		95
2011		101		(26	)		75
Thereafter		394		(126	)		268
Total	$	1,077	$	(306	)	$	771

⁽¹⁾ Amounts include facilities under the Company’s restructuring initiatives.

Certain leases contain provisions for renewal options, purchase options, and rent escalations based on increases in certain costs incurred by the lessor. Rent expense was $166 million in 2006, $164 million in 2005, and $213 million in 2004.

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

Purchase Obligations: The Company has purchase obligations for services such as advertising and marketing, telecommunications, professional services, and hardware- and software-related agreements. At December 31, 2006, the Company has purchase obligations as follows:

2007	$	279
2008		90
2009		32
2010		6
2011		6
Thereafter		—
Total	$	413

Guarantees: The Company recognizes, at the inception of a guarantee, a liability for the estimated fair value of the obligation undertaken in issuing the guarantee. The fair values of the obligations relating to standby LOCs are estimated based on fees charged to enter into similar agreements, considering the creditworthiness of the counterparties. The fair values of the obligations relating to other guarantees are estimated based on transactions for similar guarantees or expected present value measures.

In the normal course of business, the Company provides certain indemnifications (i.e., protection against damage or loss) to counterparties in connection with the disposition of certain of its assets. Such indemnifications are generally standard contractual terms with various expiration dates and typically relate to title to the assets transferred, ownership of intellectual property rights (e.g., patents), accuracy of financial statements, compliance with laws and regulations, failure to pay, satisfy or discharge any liability, or to defend claims, as well as errors, omissions, and misrepresentations. The maximum potential future liability under these indemnifications cannot be estimated. The Company has not recorded a liability for these indemnifications and believes that the occurrence of events that would trigger payments under these agreements is remote.

Separately, the Company has guaranteed certain payments in the event of a termination of certain mutual fund sub-advisor agreements, related to the adoption of AXA Rosenberg LLC’s U.S. family of mutual funds, known as the Laudus Funds^TM. Additionally, the Company has provided indemnifications related to facility leases and technology services to a counterparty in connection with the disposition of certain of its assets. At December 31, 2006, the Company’s maximum potential future liability under these agreements was approximately $140 million. Further, as discussed below under “Legal contingencies,” the Company provided an indemnification to UBS for expenses associated with certain litigation. At December 31, 2006, the Company has a recorded liability of approximately $30 million reflecting the estimated fair value of these guarantees and indemnifications. The fair value of these guarantees and indemnifications is not necessarily indicative of amounts that would be paid in the event a payment was required.

The Company has clients that sell (i.e., write) listed option contracts that are cleared by various clearing houses. The clearing houses establish margin requirements on these transactions. The Company satisfies the margin requirements by arranging LOCs, in favor of the clearing houses, which are issued by multiple banks. At December 31, 2006, the aggregate face amount of these outstanding LOCs totaled $930 million. In connection with its securities lending activities, Schwab is required to provide collateral to certain brokerage clients. Schwab satisfies the collateral requirements by arranging LOCs, in favor of these brokerage clients, which are issued by multiple banks. At December 31, 2006, the aggregate face amount of these outstanding LOCs totaled $173 million. No funds were drawn under these LOCs at December 31, 2006.

The Company also provides guarantees to securities clearing houses and exchanges under their standard membership agreement, which requires members to guarantee the performance of other members. Under the agreement, if another member becomes unable to satisfy its obligations to the clearing houses and exchanges, other members would be required to meet shortfalls. The Company’s liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, the potential requirement for the Company to make payments under these arrangements is remote. Accordingly, no liability has been recognized for these transactions.

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

Legal contingencies: The Company is subject to claims and lawsuits in the ordinary course of business, including arbitrations, class actions, and other litigation, some of which include claims for substantial or unspecified damages. The Company is also the subject of inquiries, investigations, and proceedings by regulatory and other governmental agencies. In addition, the Company is responding to certain litigation claims brought against former subsidiaries pursuant to indemnities it has provided to purchasers of those entities.

The Company believes it has strong defenses in all significant matters currently pending and is vigorously contesting liability and the damages claimed. Nevertheless, some of these matters may result in adverse judgments or awards, including penalties, injunctions, or other relief, and the Company may also determine to settle a matter because of the uncertainty and risks of litigation. Predicting the outcome of a matter is inherently difficult, particularly where claimants seek substantial or unspecified damages, or when investigations or legal proceedings are at an early stage. In many cases, including most class action lawsuits, it is not possible to determine whether a loss will be incurred or to estimate the range of that loss until the matter is close to resolution. However, based on current information and consultation with counsel, management believes that the resolution of matters currently pending, including those described below, will not have a material adverse impact on the financial condition or cash flows of the Company, but could be material to the Company’s operating results for a particular future period, depending on results for that period.

As part of the sale of SSCM to UBS, the Company agreed to indemnify UBS for expenses associated with certain litigation, including multiple purported securities class actions against SoundView and certain of its subsidiaries filed in the United District Court for the Southern District of New York, brought on behalf of persons who either directly or in the aftermarket purchased IPO securities between March 1997 and December 2000. The Company is vigorously contesting the claims on behalf of SoundView.

19. Financial Instruments Subject to Off-Balance Sheet Risk, Credit Risk, or Market Risk

Securities lending: Through Schwab, the Company loans client securities temporarily to other brokers in connection with its securities lending activities. The Company receives cash as collateral for the securities loaned. Increases in security prices may cause the market value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities or provide additional cash collateral, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its client obligations. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the market value of securities loaned, and by requiring additional cash as collateral when necessary. The market value of Schwab’s client securities pledged in securities lending transactions to other broker-dealers was $1.3 billion and $1.2 billion at December 31, 2006 and 2005, respectively. Additionally, Schwab borrows securities from other broker-dealers to fulfill short sales of its clients. The market value of these borrowed securities was $401 million and $474 million at December 31, 2006 and 2005, respectively.

Client trade settlement: The Company is obligated to settle transactions with brokers and other financial institutions even if its clients fail to meet their obligations to the Company. Clients are required to complete their transactions on settlement date, generally three business days after trade date. If clients do not fulfill their contractual obligations, the Company may incur losses. The Company has established procedures to reduce this risk by requiring deposits from clients in excess of amounts prescribed by regulatory requirements for certain types of trades, and therefore the potential for Schwab to make payments under these client transactions is remote. Accordingly, no liability has been recognized for these transactions.

Margin lending: Schwab provides margin loans to its clients which are collateralized by securities in their brokerage accounts. Schwab may be liable for the margin requirement of its client margin securities transactions. As clients write options or sell securities short, the Company may incur losses if the clients do not fulfill their obligations and the collateral in client accounts is not sufficient to fully cover losses which clients may incur from these strategies. To mitigate this risk, the Company monitors required margin levels and clients are required to deposit additional collateral,

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

or reduce positions, when necessary. Clients with margin loans have agreed to allow Schwab to pledge collateralized securities in their brokerage accounts in accordance with federal regulations. Schwab was allowed, under such regulations, to pledge securities with a market value of $14.8 billion and $14.9 billion at December 31, 2006 and 2005, respectively. The market value of Schwab’s client securities pledged to fulfill the short sales of its clients was $1.4 billion and $925 million at December 31, 2006 and 2005, respectively. The market value of Schwab’s client securities pledged to fulfill Schwab’s proprietary short sales was $33 million and $22 million at December 31, 2006 and 2005, respectively. Schwab has also pledged a portion of its securities owned in order to fulfill the short sales of clients and in connection with securities lending transactions to other broker-dealers. The market value of these pledged securities was $5 million at both December 31, 2006 and 2005. The Company may also pledge client securities to fulfill client margin requirements for open option contracts established with the OCC. The market value of these pledged securities to the OCC was $151 million and $595 million at December 31, 2006 and 2005, respectively.

Financial instruments held for trading purposes: The Company maintains inventories in securities on a long and short basis relating to its fixed income operations. The Company could incur losses or gains as a result of changes in the market value of these securities. To mitigate the risk of losses, long and short positions are marked to market and are monitored by management to assure compliance with limits established by the Company.

Resale and repurchase agreements: Schwab enters into collateralized resale agreements principally with other broker-dealers, which could result in losses in the event the counterparty to the transaction does not purchase the securities held as collateral for the cash advanced and the market value of these securities declines. To mitigate this risk, Schwab requires that the counterparty deliver securities to a custodian, to be held as collateral, with a market value in excess of the resale price. Schwab also sets standards for the credit quality of the counterparty, monitors the market value of the underlying securities as compared to the related receivable, including accrued interest, and requires additional collateral where deemed appropriate. At December 31, 2006 and 2005, the market value of collateral received in connection with resale agreements that is available to be repledged or sold was $4.8 billion and $8.2 billion, respectively. For Schwab to repledge or sell this collateral, it would be required to deposit into its segregated reserve bank accounts cash and/or securities of an equal amount in order to meet its segregated cash and investment requirement.

Concentration risk: The Company’s most significant concentration of risk is its exposure to securities issued or collateralized by the U.S. Government and its agencies (U.S. Government securities). The Company’s direct market risk exposure, primarily from investments in securities available for sale, amounted to $2.2 billion and $1.6 billion at December 31, 2006 and 2005, respectively. The Company maintains indirect exposure to U.S. Government securities held as collateral to secure its resale agreements. The Company’s primary credit exposure on these resale transactions is with its counterparty. The Company would have exposure to the U.S. Government securities only in the event of the counterparty’s default on the resale agreements. U.S. Government securities held as collateral for resale agreements at December 31, 2006 and 2005 totaled $4.8 billion and $8.2 billion, respectively.

Commitments to extend credit: In the normal course of business, Schwab Bank enters into various transactions involving off-balance sheet financial instruments to meet the needs of their clients and to reduce their own exposure to interest rate risk. The credit risk associated with these instruments varies depending on the creditworthiness of the client and the value of any collateral held. Collateral requirements vary by type of instrument. The contractual amounts of these instruments represent the amounts at risk should the contract be fully drawn upon, the client default, and the value of any existing collateral become worthless.

Credit-related financial instruments represent firm commitments to extend credit (firm commitments). Firm commitments are legally binding agreements to lend to a client that generally have fixed expiration dates or other termination clauses, may require payment of a fee and are not secured by collateral until funds are advanced. Collateral held includes marketable securities, real estate mortgages or other assets. The majority of Schwab Bank’s firm commitments are related to mortgage lending to banking clients. Firm commitments totaled $2.7 billion and $2.2 billion at December 31, 2006 and 2005, respectively.

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

Interest rate Swaps: CSC uses Swaps to effectively convert the interest rate characteristics of a portion of its Medium-Term Notes from fixed to variable. These Swaps are structured for CSC to receive a fixed rate of interest and pay a variable rate of interest based on the three-month LIBOR rate. The variable interest rates reset every three months. Information on these Swaps is summarized in the following table:

December 31,	2006			2005
Notional principal amount	$	253		$	293
Weighted-average variable interest rate		7.91	%		6.86	%
Weighted-average fixed interest rate		7.78	%		7.57	%
Weighted-average maturity (in years)		2.7			3.3

These Swaps have been designated as fair value hedges under SFAS No. 133, and are recorded on the Company’s consolidated balance sheet. Changes in fair value of the Swaps are offset by changes in fair value of the hedged Medium-Term Notes. Therefore, there is no effect on net income. At December 31, 2006 and 2005, CSC recorded a derivative asset of approximately $500,000 and $2 million, respectively, for these Swaps. Concurrently, the carrying value of the Medium-Term Notes was increased by approximately $500,000 and $2 million at December 31, 2006 and 2005, respectively.

Forward sale and interest rate lock commitments: Schwab Bank’s loans held for sale portfolio consists of fixed- and adjustable-rate mortgages, which are subject to a loss in value when market interest rates rise. Schwab Bank uses forward sale commitments to manage this risk. These forward sale commitments have been designated as cash flow hedging instruments of the loans held for sale. Accordingly, the fair values of these forward sale commitments are recorded on the Company’s consolidated balance sheet, with gains or losses recorded in other comprehensive income (loss). Amounts included in other comprehensive income (loss) are reclassified into earnings when the related loan is sold. At both December 31, 2006 and 2005, the derivative asset and liability recorded by Schwab Bank for these forward sale commitments was immaterial.

Additionally, Schwab Bank uses forward sale commitments to hedge interest rate lock commitments issued on mortgage loans that will be held for sale. Schwab Bank considers the fair value of these commitments to be zero at the commitment date, with subsequent changes in fair value determined solely based on changes in market interest rates. Any changes in fair value of the interest rate lock commitments are completely offset by changes in fair value of the related forward sale commitments. Schwab Bank had interest rate lock commitments on mortgage loans to be held for sale with principal balances totaling approximately $122 million and $112 million at December 31, 2006 and 2005, respectively. At both December 31, 2006 and 2005, the derivative asset and liability recorded by Schwab Bank for these interest rate lock commitments and the related forward sale commitments was immaterial.

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

20. Fair Value of Financial Instruments

Substantially all of the Company’s financial instruments are recorded at estimated fair value or amounts that approximate fair value. The carrying amounts (as recorded on the Company’s consolidated balance sheet) and estimated fair values of the Company’s financial instruments are as follows:

	2006				2005
December 31,	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets:
Cash and cash equivalents	$	4,507	$	4,507	$	1,905	$	1,905
Cash and investments segregated		10,862		10,862		15,192		15,192
Securities owned		6,386		6,386		4,195		4,195
Receivables from brokers, dealers and clearing organizations		650		650		820		820
Receivables from brokerage clients – net		10,927		10,927		10,780		10,780
Loans to banking clients – net		2,334		2,312		1,946		1,930
Loans held for sale		30		30		17		17
Swaps		—		—		2		2
Total	$	35,696	$	35,674	$	34,857	$	34,841
Financial Liabilities:
Deposits from banking clients	$	11,020	$	11,020	$	6,969	$	6,969
Drafts payable		324		324		225		225
Payables to brokers, dealers and clearing organizations		1,498		1,498		1,294		1,294
Payables to brokerage clients		20,621		20,621		24,700		24,700
Accrued expenses and other liabilities		1,069		1,069		1,018		1,018
Long-term debt		388		403		462		482
Total	$	34,920	$	34,935	$	34,668	$	34,688

Cash and cash equivalents, cash and investments segregated, receivables, deposits from banking clients, payables, accrued expenses and other liabilities are short-term in nature and accordingly are recorded at fair value or amounts that approximate fair value.

Securities owned are recorded at estimated fair value. Such fair values are estimated using quoted market prices, where available, or third-party pricing services.

Loans to banking clients: The fair value of the Company’s loans are estimated using discounted contractual cash flows adjusted for current prepayment estimates. The discount rates used are based on the interest rates charged to current clients for comparable loans.

Loans held for sale: The fair value of the Company’s loans held for sale are estimated using the quoted market prices for securities backed by similar types of loans.

Swaps: The fair value of the Company’s Swaps are estimated by obtaining quotes from dealers and third-party pricing services.

Long-term debt: A portion of the Company’s long-term debt has been adjusted for changes in the fair value of Swaps. The fair value of the Company’s long-term debt is estimated using third-party pricing services and discounted cash flow analyses utilizing discount rates currently available for similar instruments.

Off-balance sheet financial instruments: In the normal course of business, the Company is a party to certain off-balance sheet financial instruments, primarily consisting of firm commitments, which represent obligations of the Company. As of December 31, 2006, 10% of these commitments mature within one year. The fair value of firm commitments is estimated based on fees charged to enter into similar agreements, considering the creditworthiness of the

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

counterparties. The Company has reviewed the unfunded portion of its firm commitments and determined that the fair values of these instruments were immaterial at December 31, 2006 and 2005.

21. Segment Information

Operating segments are defined as components of a company in which separate financial information is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company structures its operating segments according to its various types of clients and the services provided to those clients. The Company’s two reportable segments are Schwab Investor Services and Schwab Institutional. As a result of the Company’s pending sale of U.S. Trust in 2006 and exit from the capital markets business in 2004, the previously-reported U.S. Trust and Capital Markets segments have been eliminated.

The Schwab Investor Services segment includes the Company’s retail brokerage and banking operations, as well as the division that serves company 401(k) plan sponsors and third-party administrators and supports company stock option plans. The Schwab Institutional segment provides custodial, trading, and support services to independent investment advisors.

The accounting policies of the segments are the same as those described in note “2 – Significant Accounting Policies.” Financial information for the Company’s reportable segments is presented in the following table. For the computation of its segment information, the Company utilizes an activity-based costing model to allocate traditional income statement line item expenses (e.g., compensation and benefits, depreciation, and professional services) to the business activities driving segment expenses (e.g., client service, opening new accounts, or business development) and a funds transfer pricing methodology to allocate certain revenues.

The Company evaluates the performance of its segments on a pre-tax basis excluding items such as restructuring charges, impairment charges, discontinued operations, and extraordinary items. Segment assets are not disclosed because the balances are not used for evaluating segment performance and deciding how to allocate resources to segments. However, capital expenditures are used in evaluating segment performance and are therefore disclosed. Intersegment revenues, defined as revenues from transactions with other segments within the Company, are not material and are therefore not disclosed. Capital expenditures are reported gross, as opposed to net of proceeds from the sale of fixed assets.

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

	2006			2005			2004
Net revenues:
Schwab Investor Services	$	3,239		$	2,742		$	2,615
Schwab Institutional		966			803			725
Unallocated and other (1, 2)		104			74			76
Total net revenues	$	4,309		$	3,619		$	3,416
Net interest revenue:
Schwab Investor Services	$	1,238		$	903		$	630
Schwab Institutional		204			134			92
Unallocated and other		(8	)		(15	)		(17	)
Total net interest revenue	$	1,434		$	1,022		$	705
Income from continuing operations before taxes on income:
Schwab Investor Services	$	1,036		$	758		$	476
Schwab Institutional		404			317			279
Unallocated and other (2, 3)		36			(48	)		(208	)
Income from continuing operations before taxes on income		1,476			1,027			547
Taxes on income		(585	)		(393	)		(197	)
Income (loss) from discontinued operations, net of tax		336			91			(64	)
Net Income	$	1,227		$	725		$	286
Capital expenditures:
Schwab Investor Services	$	94		$	75		$	150
Schwab Institutional		25			18			24
Unallocated and other		3			5			6
Total capital expenditures	$	122		$	98		$	180
Depreciation and amortization:
Schwab Investor Services	$	126		$	145		$	156
Schwab Institutional		26			29			27
Unallocated and other		5			5			14
Total depreciation and amortization	$	157		$	179		$	197

⁽¹⁾ Includes mutual fund clearing services revenues, and gains (losses) on investments.

⁽²⁾ Includes $25 million related to the confidential resolution of a legal matter in 2006.

⁽³⁾ Includes pre-tax restructuring charges of $16 million and $186 million in 2005 and 2004, respectively, and a pre-tax gain on an investment of $14 million in 2004.

Fees received from Schwab’s proprietary mutual funds represented approximately 22% of the Company’s consolidated net revenues in 2006, 22% in 2005, and 23% in 2004. Except for Schwab’s proprietary mutual funds, which are considered a single client for purposes of this computation, no single client accounted for more than 10% of the Company’s consolidated net revenues in 2006, 2005, or 2004. Substantially all of the Company’s revenues and assets are generated or located in the U.S. The percentage of Schwab’s total client accounts located in California was approximately 25%, 25%, and 26% at December 31, 2006, 2005, and 2004, respectively.

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

Net revenues categorized by similar products and services are shown in the following table:

	2006			2005			2004
Mutual fund service fees	$	1,516		$	1,310		$	1,228
Investment management and trust fees		296			221			149
Other asset management and administration fees		133			143			172
Interest revenue:
Margin loans to clients		837			654			454
Investments, client-related		609			522			293
Securities available for sale		319			128			62
Loans to banking clients		128			78			25
Other		220			141			43
Interest expense		(679	)		(501	)		(172	)
Commissions		703			693			934
Principal transactions		82			85			89
Other		145			145			139
Total	$	4,309		$	3,619		$	3,416

22. Supplemental Cash Flow Information

	2006		2005		2004
Income taxes paid (1)	$	618	$	390	$	153
Interest paid:
Brokerage client cash balances	$	425	$	376	$	112
Deposits from banking clients		194		65		18
Long-term debt		23		23		25
Other		24		17		9
Total interest paid	$	666	$	481	$	164
Non-cash investing and financing activities:
Common stock and options issued for purchases of businesses		—		—	$	3
Treasury stock (2)		—	$	9	$	18

⁽¹⁾ Includes discontinued operations.

⁽²⁾ Amount purchased during the period, but settled after period end.

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

23. The Charles Schwab Corporation – Parent Company Only Financial Statements (Unconsolidated)

Condensed Statements of Income

	2006			2005			2004
Interest revenue	$	44		$	37		$	26
Interest expense		(31	)		(27	)		(18	)
Net interest revenue		13			10			8
Other revenues (losses)		21			3			(8	)
Restructuring credit		—			—			2
Other expenses		(16	)		(12	)		(16	)
Income (loss) before income tax (expense) benefit and equity in earnings of subsidiaries		18			1			(14	)
Income tax (expense) benefit		(8	)		5			5
Income (loss) from continuing operations before equity in earnings of subsidiaries		10			6			(9	)
Equity in earnings of subsidiaries:
Equity in undistributed earnings/(distributions in excess of earnings) of subsidiaries		48			(190	)		26
Dividends paid by non-banking subsidiaries		833			818			333
Income from continuing operations		891			634			350
Equity in undistributed earnings/(distributions in excess of earnings) of subsidiaries – discontinued operations		107			96			(18	)
Dividends paid by discontinued operation		25			—			10
Tax benefit (expense) on discontinued operations		206			(9	)		107
Income (loss) on discontinued operations		(2	)		4			(163	)
Net Income	$	1,227		$	725		$	286

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

Condensed Balance Sheets

December 31,	2006		2005
Assets
Cash and cash equivalents	$	696	$	553
Securities owned – at market value		86		75
Receivables from subsidiaries		9		7
Loans to non-banking subsidiaries		220		220
Loans to banking subsidiaries		—		30
Investments in non-banking subsidiaries, at equity		2,163		2,299
Investments in banking subsidiaries, at equity		689		538
Investments in subsidiaries – discontinued operations, at equity		1,330		1,233
Deferred tax assets		256		63
Other assets		71		53
Total	$	5,520	$	5,071
Liabilities and Stockholders’ Equity
Accrued expenses and other liabilities	$	235	$	228
Payables to subsidiaries		15		61
Long-term debt		262		332
Total liabilities		512		621
Stockholders’ equity		5,008		4,450
Total	$	5,520	$	5,071

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

Condensed Statements of Cash Flows

	2006			2005			2004
Cash Flows from Operating Activities
Net income	$	1,227		$	725		$	286
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations, net of tax		1			5			65
Distributions in excess of earnings/ (equity in undistributed earnings) of subsidiaries		(51	)		190			(25	)
Distributions in excess of earnings/ (equity in undistributed earnings) of subsidiaries- discontinued operations		(107	)		(96	)		8
Excess tax benefits from stock-based compensation		(64	)		—			—
Deferred income taxes		(192	)		(4	)		(36	)
Other		(17	)		7			(7	)
Net change in:
Other assets		(10	)		7			42
Accrued expenses and other liabilities		80			(51	)		26
Net cash provided by operating activities		867			783			359
Cash Flows from Investing Activities
Advances to subsidiaries		(60	)		(120	)		(230	)
Repayments from subsidiaries		90			120			295
Change in net receivables from subsidiaries		24			(139	)		7
Decrease (Increase) in investments in subsidiaries		22			(33	)		(20	)
Cash payments for business combinations and investments, net of cash received		(8	)		3			(1	)
Proceeds from sale of subsidiary		—			—			271
Net cash used for discontinued operations		—			—			(233	)
Net cash provided by (used for) investing activities		68			(169	)		89
Cash Flows from Financing Activities
Repayment of loans from subsidiaries		—			—			(24	)
Repayment of long-term debt		(68	)		(56	)		(80	)
Excess tax benefits from stock-based compensation		64			—			—
Dividends paid		(173	)		(116	)		(101	)
Purchase of treasury stock		(868	)		(697	)		(365	)
Proceeds from stock options exercised and other		253			115			51
Net cash used for financing activities		(792	)		(754	)		(519	)
Increase (Decrease) in Cash and Cash Equivalents		143			(140	)		(71	)
Cash and Cash Equivalents at Beginning of Year		553			693			764
Cash and Cash Equivalents at End of Year	$	696		$	553		$	693

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THE CHARLES SCHWAB CORPORATION

Notes to Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, and as Noted)

24. Quarterly Financial Information (Unaudited)

	Fourth Quarter		Third Quarter		Second Quarter		First Quarter
Year Ended December 31, 2006:
Net revenues (1)	$	1,096	$	1,066	$	1,093	$	1,054
Expenses, Excluding Interest (1)	$	724	$	684	$	724	$	701
Net Income	$	467	$	266	$	251	$	243
Weighted Average Common Shares – Diluted		1,274		1,277		1,294		1,296
Basic Earnings Per Share (2)	$	.37	$	.21	$	.20	$	.19
Diluted Earnings Per Share (2)	$	.37	$	.21	$	.19	$	.19
Dividends Declared Per Common Share	$	.050	$	.030	$	.030	$	.025
Range of Common Stock Price Per Share:
High	$	19.36	$	17.91	$	18.45	$	18.13
Low	$	16.64	$	14.26	$	14.55	$	14.43
Range of Price/Earnings Ratio (3):
High		20		25		27		29
Low		17		20		21		23
Year Ended December 31, 2005:
Net revenues (1)	$	964	$	926	$	881	$	848
Expenses, Excluding Interest (1)	$	682	$	647	$	614	$	649
Net Income	$	187	$	207	$	186	$	145
Weighted Average Common Shares – Diluted		1,298		1,308		1,314		1,326
Basic Earnings Per Share (2)	$	.15	$	.16	$	.14	$	.11
Diluted Earnings Per Share (2)	$	.14	$	.16	$	.14	$	.11
Dividends Declared Per Common Share	$	.025	$	.022	$	.022	$	.020
Range of Common Stock Price Per Share:
High	$	16.00	$	14.50	$	11.83	$	11.66
Low	$	13.04	$	11.33	$	9.87	$	10.01
Range of Price/Earnings Ratio (3):
High		29		32		46		58
Low		24		25		38		50

⁽¹⁾ Amounts have been adjusted to summarize the impact of the pending sale of U.S. Trust in income from discontinued operations.

⁽²⁾ Both basic and diluted earnings per share include income from discontinued operations.

⁽³⁾ Price/earnings ratio is computed by dividing the high and low market prices by diluted earnings per share for the 12-month period ended on the last day of the quarter presented.

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THE CHARLES SCHWAB CORPORATION

Management’s Report on Internal Control Over Financial Reporting

Management of The Charles Schwab Corporation, together with its subsidiaries (the Company), is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of and effected by the Company’s chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements in accordance with accounting principles generally accepted in the United States of America.

As of December 31, 2006, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company’s internal control over financial reporting was effective as of December 31, 2006.

The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing on the following page.

/s/ Charles R. Schwab

Charles R. Schwab

Chairman and Chief Executive Officer

February 22, 2007

/s/ Christopher V. Dodds

Christopher V. Dodds

Executive Vice President and Chief Financial Officer

February 22, 2007

- 78 -

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of The Charles Schwab Corporation:

We have audited the accompanying consolidated balance sheets of The Charles Schwab Corporation and subsidiaries (the Company) as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule of the Company on page F-2. We also have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule, an opinion on management’s assessment, and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123R – Share-Based Payment effective January 1, 2006.

/s/    Deloitte & Touche LLP

San Francisco, California

February 22, 2007

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THE CHARLES SCHWAB CORPORATION

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

Evaluation of disclosure controls and procedures: The management of the Company, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2006. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2006.

Changes in internal control over financial reporting: No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) was identified during the quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm are included in “Item 8 – Financial Statements and Supplementary Data.”

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers, and Corporate Governance

The information relating to directors of CSC required to be furnished pursuant to this item is incorporated by reference from portions of the Company’s definitive proxy statement for its annual meeting of stockholders to be filed with the SEC pursuant to Regulation 14A by April 30, 2007 (the Proxy Statement) under “The Board of Directors – Members of the Board of Directors,” “The Board of Directors – Board and Committee Meetings,” “The Board of Directors – Director Nominations,” and “Section 16(a) Beneficial Ownership Reporting Compliance.” The Company’s Code of Conduct and Business Ethics, applicable to directors and all employees, including senior financial officers, is available on the Company’s website at www.aboutschwab.com/corpgov. If the Company makes any amendments to or grants any waivers from its Code of Conduct and Business Ethics which are required to be disclosed pursuant to the Securities Exchange Act of 1934, the Company will make such disclosures on this website.

Executive Officers of the Registrant

The following table provides certain information about the executive officers who are currently members of CSC’s Management Committee.

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THE CHARLES SCHWAB CORPORATION

Executive Officers of the Registrant and Members of CSC’s Management Committee
Name	Age	Title
Charles R. Schwab	69	Chairman, Chief Executive Officer, and Director
Walter W. Bettinger II	46	President and Chief Operating Officer
John S. Clendening	44	Executive Vice President – Client Experience, Schwab Investor Services
Christopher V. Dodds	47	Executive Vice President and Chief Financial Officer
Carrie E. Dwyer	56	Executive Vice President, General Counsel and Corporate Secretary
Charles G. Goldman	45	Executive Vice President and Chief Operating Officer, Schwab Institutional
Jan Hier-King	52	Executive Vice President – Human Resources
James D. McCool	48	Executive Vice President – Schwab Corporate and Retirement Services
Deborah D. McWhinney	51	Executive Vice President and President – Schwab Institutional
Randall W. Merk	52	Executive Vice President and President – Schwab Financial Products
Rebecca Saeger	51	Executive Vice President and Chief Marketing Officer
Gideon Sasson	51	Executive Vice President and Chief Information Officer
Peter K. Scaturro	46	Executive Vice President of CSC and Chief Executive Officer –USTC

Mr. Schwab has been Chairman and a director of CSC since its incorporation in 1986. In 2004, CSC’s Board of Directors appointed Mr. Schwab as Chief Executive Officer of CSC. Mr. Schwab was Co-Chief Executive Officer of CSC from 1998 to 2003, and Chief Executive Officer of CSC from 1986 to 1997. Mr. Schwab was a founder of Schwab in 1971, its Chairman since 1978, and its Chief Executive Officer since 2004. Mr. Schwab is a trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, and Schwab Annuity Portfolios, all registered investment companies.

Mr. Bettinger was appointed President and Chief Operating Officer of CSC by the Board of Directors on February 20, 2007. He served as Executive Vice President and President – Schwab Investor Services (formerly the Individual Investor Enterprise) of CSC and Schwab from 2005 to February 2007. He served as Executive Vice President and Chief Operating Officer – Individual Investor Enterprise of CSC and Schwab from 2004 until 2005, Executive Vice President and

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THE CHARLES SCHWAB CORPORATION

President – Corporate Services of Schwab from 2002 until 2004, and Executive Vice President and President – Retirement Plan Services of Schwab from 2000 to 2002. Mr. Bettinger joined Schwab in 1995.

Mr. Clendening has been Executive Vice President – Client Experience, Schwab Investor Services of CSC since February 2007 and of Schwab since November 2006. Mr. Clendening joined Schwab in 2004 as Senior Vice President – Individual Investor Enterprise Marketing. Before joining Schwab in 2004, Mr. Clendening was President of the business services division of Savista Corporation, a provider of business process outsourcing and technology services to the food services industry.

Mr. Dodds has been Chief Financial Officer of CSC and Schwab since 1999 and Executive Vice President of CSC and Schwab since 1998. Mr. Dodds was Corporate Controller of Schwab from 1997 to 1999 and Corporate Treasurer of Schwab from 1993 to 1997. Mr. Dodds joined Schwab in 1986. On January 24, 2007, Mr. Dodds announced his decision to retire on May 18, 2007. Mr. Dodds is also currently a director and member of the audit committee of Cost Plus, Inc., a specialty retailer of casual home furnishings and entertaining products headquartered in Oakland, California.

Ms. Dwyer has been Executive Vice President, General Counsel and Corporate Secretary of CSC and Executive Vice President – Corporate Oversight of Schwab since 1996. Ms. Dwyer joined Schwab in 1996.

Mr. Goldman has been Executive Vice President and Chief Operating Officer – Schwab Institutional of CSC since February 2007 and of Schwab since 2005. He served as Executive Vice President – Strategy and Corporate Development of Schwab from 2004 until 2005 and as Senior Vice President of Corporate Development of Schwab from 2002 until 2004. Mr. Goldman joined Schwab in 2001 as Senior Vice President of Venture Capital Investing.

Ms. Hier-King has been Executive Vice President – Human Resources of CSC and Schwab since 2004. She served as Senior Vice President of Human Resources of Schwab from 2002 until 2004. Ms. Hier-King joined Schwab in 1994 as Senior Vice President – Technology and served in that role until 2002.

Mr. McCool has been Executive Vice President – Schwab Corporate and Retirement Services of CSC since February 2007 and of Schwab since August 2006. Mr. McCool served as Senior Vice President – Corporate Services of Schwab from 2004 until 2006. Mr. McCool also has served as President and Chief Executive Officer of The Charles Schwab Trust Company since 2005. Mr. McCool served as Senior Vice President – Plan Administrative Services of the Trust Company from 2004 until 2005, Chief Operating Officer of the Trust Company from 2003 until 2004, and Vice President – Development and Business Technology of the Trust Company from 2002 until 2003. Mr. McCool joined Schwab in 1995.

Ms. McWhinney has been Executive Vice President and President – Schwab Institutional of CSC and Schwab since 2001. Ms. McWhinney joined Schwab in 2001.

Mr. Merk has been Executive Vice President and President – Schwab Financial Products of CSC and Schwab since January 2006. He served as Executive Vice President and President – Asset Management Products and Services of CSC from 2004 until 2005, and as Executive Vice President and President – Asset Management Products and Services of Schwab from 2004 until January 2006. Mr. Merk Joined Schwab in 2002 as Executive Vice President and President – Investment Management of Schwab and served in that role until 2004.

Ms. Saeger has been Executive Vice President and Chief Marketing Officer of Schwab since March 2006. She has served as Executive Vice President – Brand Management and Marketing Communications of CSC since December 2004, and as Executive Vice President – Brand Management and Marketing Communications of Schwab since joining the Company in March 2004. Prior to joining Schwab, Ms. Saeger was Executive Vice President of Brand Marketing for Visa USA from 1997 to 2004.

Mr. Sasson has been Executive Vice President and Chief Information Officer of CSC and Schwab since 2004. He served as Executive Vice President and President – Active Trader of Schwab from 2001 until 2004, and Executive Vice President and President – Electronic Brokerage of Schwab from 1997 to 2001. Mr. Sasson joined Schwab in 1995.

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THE CHARLES SCHWAB CORPORATION

Mr. Scaturro has been Executive Vice President of CSC and Chief Executive Officer of USTC since 2005. Prior to joining USTC, Mr. Scaturro was the Chief Executive Officer of The Citigroup Private Bank from 1999 to 2004, and a member of Citigroup’s Management Committee from 2002 to 2004.

Item 11. Executive Compensation

The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement under “Compensation Information – Compensation Discussion and Analysis,” “Compensation Information – Summary Compensation Table,” “Compensation Information – Grants of Plan-Based Awards,” “Compensation Information – Narrative to Summary Compensation Table and Grants of Plan-Based Awards,” “Compensation Information – Termination and Change in Control Benefits,” “Compensation Information – Outstanding Equity Awards at Fiscal Year-End,” “Compensation Information – Option Exercises and Stock Vested,” “Compensation Information – Pension Benefits,” “Compensation Information – Nonqualified Deferred Compensation,” “Compensation Information – Directors Compensation,” and “The Board of Directors – Compensation Committee Interlocks and Insider Participation.” In addition, the information from a portion of the Proxy Statement under “Compensation Information – Compensation Committee Report,” is incorporated by reference from the Proxy Statement and furnished on this Form 10-K, and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement under “Security Ownership of Certain Beneficial Owners and Management,” and “Compensation Information – Securities Authorized for Issuance Under Equity Compensation Plans.”

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement under “Transactions with Related Persons” and “The Board of Directors – Director Independence.”

Item 14. Principal Accountant Fees and Services

The information required to be furnished pursuant to this item is incorporated by reference from a portion of the Proxy Statement under “Audit Information – Auditor Selection and Fees.”

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THE CHARLES SCHWAB CORPORATION

PART IV

Item 15. Exhibits and Financial Statement Schedule

(a) Documents filed as part of this Report

1. Financial Statements

The financial statements and independent auditors’ report are included in “Item 8 – Financial Statements and Supplementary Data” and are listed below:

2. Financial Statement Schedule

The financial statement schedule required to be furnished pursuant to this item is listed in the accompanying index appearing on page F-1.

(b) Exhibits

The exhibits listed below are filed as part of this annual report on Form 10-K.

Exhibit Number	Exhibit
1.3	The Charles Schwab Corporation Medium-Term Notes Distribution Agreement filed as Exhibit 1.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference.
3.11	Fifth Restated Certificate of Incorporation, effective May 7, 2001, of the Registrant (supersedes Exhibit 3.10), filed as Exhibit 3.11 to the Registrant’s Form 10-Q for the quarter ended September 30, 2006 and incorporated herein by reference.
3.12	Third Restated Bylaws, as amended on May 9, 2003, of the Registrant (supersedes Exhibit 3.9), filed as Exhibit 3.12 to the Registrant’s Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference.
4.2	Neither the Registrant nor its subsidiaries are parties to any instrument with respect to long-term debt for which securities authorized thereunder exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. Copies of instruments with respect to long-term debt of lesser amounts will be provided to the SEC upon request.
10.4	Form of Release Agreement dated as of March 31, 1987 among BAC, Registrant, Schwab Holdings, Inc., Charles Schwab & Co., Inc. and former shareholders of Schwab Holdings, Inc.	(1)

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THE CHARLES SCHWAB CORPORATION

Exhibit Number	Exhibit
10.57	Registration Rights and Stock Restriction Agreement, dated as of March 31, 1987, between the Registrant and the holders of the Common Stock, filed as Exhibit 4.23 to Registrant’s Registration Statement No. 33-16192 on Form S-1 and incorporated herein by reference.
10.72	Restatement of Assignment and License, as amended January 25, 1988, among Charles Schwab & Co., Inc., Charles R. Schwab and the Registrant, filed as Exhibit 10.72 to the Registrant’s Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.
10.87	Trust Agreement under the Charles Schwab Profit Sharing and Employee Stock Ownership Plan, effective November 1, 1990, dated October 25, 1990, filed as Exhibit 10.87 to the Registrant’s Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.	(4)
10.101	First Amendment to the Trust Agreement under the Charles Schwab Profit Sharing and Employee Stock Ownership Plan, effective January 1, 1992, dated December 20, 1991.	(4)
10.116	Second Amendment to the Trust Agreement for the Charles Schwab Profit Sharing and Employee Stock Ownership Plan effective July 1, 1992, dated June 30, 1992, filed as Exhibit 10.116 to the Registrant’s Form 10-Q for the quarter ended June 30, 2002, and incorporated herein by reference.	(4)
10.169	Third Amendment to the Trust Agreement for the Charles Schwab Profit Sharing and Employee Stock Ownership Plan effective January 1, 1996, dated May 8, 1996 filed as Exhibit 10.169 to the Registrant’s Form 10-Q for the quarter ended June 30, 2002 and incorporated herein by reference.	(4)
10.202	Fourth Amendment to the Trust Agreement for the Charles Schwab Profit Sharing and Employee Stock Ownership Plan effective January 1, 1998, filed as Exhibit 10.202 to the Registrant’s Form 10-K for the year ended December 31, 2003 and incorporated herein by reference.	(4)
10.226	The Charles Schwab Corporation Employee Stock Incentive Plan, restated and amended as of September 20, 2001 (supersedes Exhibit 10.190).	(4)
10.242	The Charles Schwab Corporation 1987 Stock Option Plan, amended and restated as of September 25, 2002, with form of Non-Qualified Stock Option Agreement attached (supersedes Exhibit 10.222), filed as Exhibit 10.242 to the Registrant’s Form 10-Q for the quarter ended September 30, 2002, and incorporated herein by reference.	(4)
10.243	The Charles Schwab Corporation 1987 Executive Officer Stock Option Plan, amended and restated as of September 25, 2002, with form of Non-Qualified Stock Option Agreement attached (supersedes Exhibit 10.223), filed as Exhibit 10.243 to the Registrant’s Form 10-Q for the quarter ended September 30, 2002, and incorporated herein by reference.	(4)
10.244	The Charles Schwab Corporation 1992 Stock Incentive Plan, amended and restated as of September 25, 2002 (supersedes Exhibit 10.224), filed as Exhibit 10.244 to the Registrant’s Form 10-Q for the quarter ended September 30, 2002, and incorporated herein by reference.	(4)
10.251	The Charles Schwab Corporation 2001 Stock Incentive Plan, restated to include amendments through May 2003 (supersedes Exhibit 10.248), filed as Exhibit 10.251 to the Registrant’s Form 10-Q for the quarter ended June 30, 2003, and incorporated herein by reference.	(4)
10.252	The Charles Schwab Corporation Long-Term Incentive Plan, filed as Exhibit 10.252 to the Registrant’s Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference.	(4)

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THE CHARLES SCHWAB CORPORATION

Exhibit Number	Exhibit
10.253	Employment Agreement dated as of March 31, 2003 between the Registrant and Charles R. Schwab (supersedes Exhibit 10.149), filed as Exhibit 10.253 to the Registrant’s Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference.	(4)
10.261	Purchase Agreement by and among The Charles Schwab Corporation, CS Capital Markets and Co., Schwab Associates and Co., UBS Securities LLC, and UBS Americas Inc., dated as of August 31, 2004, filed as Exhibit 10.261 to the Registrant’s Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference.	(3)
10.262	Equities Order Handling Agreement dated October 29, 2004 by and among UBS Securities LLC, Schwab Capital Markets L.P., Charles Schwab & Co., Inc., and The Charles Schwab Corporation, filed as Exhibit 10.262 to the Registrant’s Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference.	(3)
10.264	The Charles Schwab Corporation Deferred Compensation Plan II, effective December 9, 2004, filed as Exhibit 10.264 to the Registrant’s Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.	(4)
10.265	The Charles Schwab Corporation Directors’ Deferred Compensation Plan II, effective December 9, 2004, filed as Exhibit 10.265 to the Registrant’s Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.	(4)
10.266	Form of Notice and Restricted Stock Agreement for Non-Employee Directors Under The Charles Schwab Corporation 2004 Stock Incentive Plan, filed as Exhibit 10.266 to the Registrant’s Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.	(4)
10.267	Form of Notice and Restricted Stock Unit Agreement for Non-Employee Directors Under The Charles Schwab Corporation 2004 Stock Incentive Plan, filed as Exhibit 10.267 to the Registrant’s Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.	(4)
10.268	Form of Notice and Stock Option Agreement for Non-Employee Directors Under The Charles Schwab Corporation 2004 Stock Incentive Plan, filed as Exhibit 10.268 to the Registrant’s Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.	(4)
10.269	Form of Notice and Non-Qualified Stock Option Agreement Under The Charles Schwab Corporation 2004 Stock Incentive Plan, filed as Exhibit 10.269 to the Registrant’s Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.	(4)
10.270	Form of Notice and Restricted Stock Agreement Under The Charles Schwab Corporation 2004 Stock Incentive Plan, filed as Exhibit 10.270 to the Registrant’s Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.	(4)
10.271	The Charles Schwab Corporation Directors’ Deferred Compensation Plan, as amended through December 8, 2004 (supersedes Exhibit 10.215), filed as Exhibit 10.271 to the Registrant’s Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.	(4)
10.272	The Charles Schwab Corporation Deferred Compensation Plan, as amended through December 8, 2004 (supersedes Exhibit 10.257), filed as Exhibit 10.272 to the Registrant’s Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.	(4)

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THE CHARLES SCHWAB CORPORATION

Exhibit Number	Exhibit
10.274	Summary of Director Compensation, filed as Exhibit 10.274 to the Registrant’s Form 10-Q for the quarter ended March 31, 2005 and incorporated herein by reference.	(4)
10.275	Peter K. Scaturro Offer Letter, filed as Exhibit 10.275 to the Registrant’s Form 8-K dated May 19, 2005 and incorporated herein by reference.	(4)
10.276	Credit Agreement (364-Day Commitment) dated as of June 17, 2005 between the Registrant and the financial institutions listed therein (supersedes Exhibit 10.258), filed as Exhibit 10.276 to the Registrant’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference.
10.277	The Charles Schwab Corporation Corporate Executive Bonus Plan, restated to include amendments approved at the Annual Meeting of Stockholders on May 19, 2005 (supersedes Exhibit 10.240), filed as Exhibit 10.277 to the Registrant’s Form 10-Q for the quarter ended June 30, 2005, and incorporated herein by reference.	(4)
10.278	The Charles Schwab Corporation 2004 Stock Incentive Plan, restated to include amendments approved at the Annual Meeting of Stockholders on May 19, 2005 (supersedes Exhibit 10.259), filed as Exhibit 10.278 to the Registrant’s Form 10-Q for the quarter ended June 30, 2005, and incorporated herein by reference.	(4)
10.279	Separation Agreement by and between Alan J. Weber and The Charles Schwab Corporation and U.S. Trust Corporation, dated May 23, 2005, filed as Exhibit 10.279 to the Registrant’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference.	(4)
10.280	Form of Notice and Restricted Stock Agreement for Peter K. Scaturro under The Charles Schwab Corporation 2004 Stock Incentive Plan dated May 19, 2005, filed as Exhibit 10.280 to the Registrant’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference.	(3,4)
10.281	Form of Notice and Stock Option Grant for Peter K. Scaturro under The Charles Schwab Corporation 2004 Stock Incentive Plan, dated May 19, 2005, filed as Exhibit 10.281 to the Registrant’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference.	(4)
10.282	Form of Notice and Premium-Priced Stock Option Agreement under The Charles Schwab Corporation 2004 Stock Incentive plan, filed as Exhibit 10.282 to the Registrant’s Form 10-Q for the quarter ended September 30, 2005 and incorporated herein by reference.	(4)
10.283	Separation Agreement by and between William L. Atwell and The Charles Schwab Corporation and Charles Schwab & Co., Inc., dated November 29, 2005, filed as Exhibit 10.283 to the Registrant’s Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.	(4)
10.284	The Charles Schwab Severance Pay Plan, as Amended and Restated Effective January 1, 2006, including Amendment Numbers 1 and 2 (supersedes Exhibit 10.260), filed as Exhibit 10.284 to the Registrant’s Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.	(4)
10.285	Amendment to The Charles Schwab Corporation Long Term Incentive Plan, filed as Exhibit 10.285 to the Registrant’s Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.	(4)

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THE CHARLES SCHWAB CORPORATION

Exhibit Number	Exhibit
10.286	Credit Agreement (364-Day Commitment) dated as of June 16, 2006 between the Registrant and the financial institutions listed therein (supersedes Exhibit 10.276), filed as Exhibit 10.286 to the Registrant’s Form 10-Q for the quarter ended June 30, 2006 and incorporated herein by reference.
10.287	Retention Agreement by and between Peter K. Scaturro and the Registrant, dated as of November 17, 2006.	(4)
10.288	Stock Purchase Agreement by and between the Registrant and Bank of America Corporation, dated as of November 19, 2006.
12.1	Computation of Ratio of Earnings to Fixed Charges.
21.1	Subsidiaries of the Registrant.
23.1	Independent Registered Public Accounting Firm’s Consent.
31.1	Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
31.2	Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
32.1	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.	(2)
32.2	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.	(2)

(1) Incorporated by reference to the identically-numbered exhibit to Registrant’s Registration Statement No. 33-16192 on Form

S-1, as amended and declared effective on September 22, 1987.

(2) Furnished as an exhibit to this annual report on Form 10-K.

(3) Confidential treatment has been granted for portions of this exhibit.

(4) Management contract or compensatory plan.

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THE CHARLES SCHWAB CORPORATION

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 22, 2007.

THE CHARLES SCHWAB CORPORATION
(Registrant)
BY:	/s/ Charles R. Schwab
	Charles R. Schwab
	Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on February 22, 2007.

Signature / Title	Signature / Title
/s/ Charles R. Schwab	/s/ Christopher V. Dodds
Charles R. Schwab,	Christopher V. Dodds,
Chairman and Chief Executive Officer	Executive Vice President     and Chief Financial Officer     (principal financial and accounting officer)
/s/ William F. Aldinger III	/s/ Nancy H. Bechtle
William F. Aldinger III, Director	Nancy H. Bechtle, Director
/s/ C. Preston Butcher	/s/ Donald G. Fisher
C. Preston Butcher, Director	Donald G. Fisher, Director
/s/ Frank C. Herringer	/s/ Marjorie Magner
Frank C. Herringer, Director	Marjorie Magner, Director
/s/ Stephen T. McLin	/s/ Paula A. Sneed
Stephen T. McLin, Director	Paula A. Sneed, Director
/s/ Roger O. Walther	/s/ Robert N. Wilson
Roger O. Walther, Director	Robert N. Wilson, Director
/s/ David B. Yoffie
David B. Yoffie, Director

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THE CHARLES SCHWAB CORPORATION

I ndex to Financial Statement Schedule

	Page
Schedule II - Valuation and Qualifying Accounts	F-2
Combined Supplemental Financial Data for Charles Schwab Bank, N.A. (Unaudited)	F-3 – F-7

Schedules not listed are omitted because of the absence of the conditions under which they are required or because the information is included in the Company’s consolidated financial statements and notes in “Item 8 – Financial Statements and Supplementary Data.”

F-1

THE CHARLES SCHWAB CORPORATION

SCHEDULE II

Valuation and Qualifying Accounts

(In millions)

Description	Balance at Beginning of Year		Additions			Written off			Balance at End of Year
			Charged to Expense		Other (1)
For the year ended December 31, 2006:
Allowance for doubtful accounts of brokerage clients (2)	$	2	$	4	—	$	(4	)	$	2
For the year ended December 31, 2005:
Allowance for doubtful accounts of brokerage clients (2)	$	1	$	7	—	$	(6	)	$	2
For the year ended December 31, 2004:
Allowance for doubtful accounts of brokerage clients (2)	$	2	$	1	—	$	(2	)	$	1

⁽¹⁾ Represents collections of previously written-off accounts.

⁽²⁾ Excludes banking-related valuation and qualifying accounts. See “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 6. Loans to Banking Clients and Related Allowance for Credit Losses.”

F-2

THE CHARLES SCHWAB CORPORATION

Supplemental Financial Data for Charles Schwab Bank, N.A. (Unaudited)

(Dollars in Millions)

The following supplemental financial data is presented in accordance with the Securities Exchange Act of 1934, Industry Guide 3 – Statistical Disclosure by Bank Holding Companies. The accompanying unaudited financial information represents Charles Schwab Bank, N.A. (Schwab Bank), which is a subsidiary of The Charles Schwab Corporation. Schwab Bank is a retail bank which commenced operations in 2003. All periods have been adjusted to exclude U.S. Trust Corporation in light of its pending sale.

1. Three-year Net Interest Revenue and Average Balances

For the Year Ended December 31,	2006							2005							2004
	Average Balance		Interest			Average Rate		Average Balance		Interest			Average Rate		Average Balance			Interest			Average Rate
Assets:
Commercial paper	$	320	$	17		5.25	%	$	63	$	2		3.28	%	$	16			—		1.40	%
Certificates of deposit		365		19		5.19	%		220		7		3.15	%		56		$	1		1.43	%
Federal funds sold		412		21		5.04	%		291		10		3.27	%		348			5		1.36	%
Reverse repos		209		6		2.70	%		400		10		2.45	%		385			10		2.47	%
Money market investment		74		4		5.35	%		—		—					—			—
Securities available for sale (1)		6,090		319		5.23	%		3,363		128		3.81	%		2,487			62		2.48	%
Loans to banking clients (2)		2,162		128		5.94	%		1,613		78		4.84	%		733			25		3.45	%
Other interest-earning assets		63		2		5.33	%		59		3		5.02	%		75			3		3.60	%
Total interest-earning assets		9,695		516		5.33	%		6,009		238		3.95	%		4,100			106		2.55	%
Non-interest-earning assets		84							43							(9	)
Total Assets	$	9,779						$	6,052						$	4,091
Liabilities and Stockholder’s Equity:
Interest-bearing banking deposits	$	9,137		200		2.19	%	$	5,597		74		1.32	%	$	3,748			21		0.55	%
Total sources on which interest is paid		9,137		200		2.19	%		5,597		74		1.32	%		3,748			21		0.55	%
Non-interest-bearing liabilities		104							46							24
Stockholder’s equity		538							409							319
Total Liabilities and Stockholder’s Equity	$	9,779						$	6,052						$	4,091
Net interest revenue				316							164								85
Net free funds	$	558						$	412						$	352
Provision for credit loss				(1	)						(1	)							(1	)
			$	315						$	163							$	84
Net yield on interest earning assets						3.26	%						2.73	%							2.07	%

⁽¹⁾ The average balance and average rate for securities available for sale have been calculated using their amortized cost.

⁽²⁾ Includes average principal balances of non-accrual loans.

F-3

THE CHARLES SCHWAB CORPORATION

Supplemental Financial Data for Charles Schwab Bank, N.A. (Unaudited)

(Dollars in Millions)

2. Analysis of Change in Net Interest Revenue

An analysis of the year-to-year changes in the categories of interest revenue and interest expense resulting from changes in volume and rate is as follows:

	2006 Compared to 2005 Increase (Decrease) Due to Change in:									2005 Compared to 2004 Increase (Decrease) Due to Change in:
	Average Volume			Average Rate			Total			Average Volume			Average Rate		Total
Interest-earning assets:
Commercial paper	$	9		$	6		$	15		$	1		$	1	$	2
Certificates of deposit		5			7			12			2			4		6
Federal funds sold		4			7			11			(1	)		6		5
Reverse repos		(5	)		1			(4	)		—			—		—
Money market investment		—			4			4			—			—		—
Securities available for sale (1):
U.S. Government agencies and collateralized mortgage obligations (2)		104			87			191			22			44		66
Total securities available for sale		104			87			191			22			44		66
Loans to banking clients (3)		26			24			50			30			23		53
Other interest-earning assets		—			(1	)		(1	)		—			—		—
Total interest-earning assets		143			135			278			54			78		132
Interest-bearing sources of funds:
Interest-bearing banking deposits		47			79			126			10			43		53
Total sources on which interest is paid		47			79			126			10			43		53
Change in net interest revenue	$	96		$	56		$	152		$	44		$	35	$	79

Changes that are not due solely to volume or rate have been allocated to rate.

⁽¹⁾ The average balance and average rate for securities available for sale have been calculated using their amortized cost.

⁽²⁾ Includes collateralized mortgage obligations securities issued by agencies including FNMA and FHLMC.

⁽³⁾ Includes average principal balances of non-accrual loans.

F-4

THE CHARLES SCHWAB CORPORATION

Supplemental Financial Data for Charles Schwab Bank, N.A. (Unaudited)

(Dollars in Millions)

3. Securities Available for Sale

The amortized cost, estimated fair value, and gross unrealized gains and losses on securities available for sale are as follows:

December 31, 2006	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage-backed securities:
Collateralized mortgage obligations	$	3,115	$	2	$	19	$	3,098
Federal agencies		1,920		3		9		1,914
Total mortgage-backed securities		5,035		5		28		5,012
Corporate debt		677		—		—		677
U.S. Treasury and federal agencies		249		—		—		249
Certificates of deposit		50		—		—		50
Total	$	6,011	$	5	$	28	$	5,988
December 31, 2005	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage-backed securities:
Collateralized mortgage obligations	$	2,210	$	1	$	20	$	2,191
Federal agencies		1,440		5		10		1,435
Total mortgage-backed securities		3,650		6		30		3,626
U.S. Treasury and federal agencies		100		—		1		99
Total	$	3,750	$	6	$	31	$	3,725
December 31, 2004	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage-backed securities:
Collateralized mortgage obligations	$	922		—	$	6	$	916
Federal agencies		1,339	$	4		3		1,340
Total mortgage-backed securities		2,261		4		9		2,256
U.S. Treasury and federal agencies		16		—		—		16
Total	$	2,277	$	4	$	9	$	2,272

F-5

THE CHARLES SCHWAB CORPORATION

Supplemental Financial Data for Charles Schwab Bank, N.A. (Unaudited)

(Dollars in Millions)

The maturities and related weighted-average yields of debt securities available for sale at December 31, 2006 are as follows:

December 31, 2006	Within 1 Year			1-5 Years			5-10 Years			After 10 Years			Total
Mortgage-backed securities (1):
Collateralized mortgage obligations		—			—			—		$	3,098		$	3,098
Federal agencies		—			—		$	7			1,907			1,914
Total mortgage-backed securities		—			—			7			5,005			5,012
Corporate debt	$	194		$	483			—			—			677
U.S. Treasury and federal agencies		209			40			—			—			249
Certificates of deposit		50			—			—			—			50
Estimated fair value	$	453		$	523		$	7		$	5,005		$	5,988
Total amortized cost	$	453		$	523		$	7		$	5,028		$	6,011
Net unrealized losses		—			—			—		$	23		$	23
Weighted-average yield (2)		5.16	%		5.25	%		3.50	%		5.33	%		5.32	%

⁽¹⁾ Collateralized mortgage obligations have been allocated over maturity groupings based on contractual maturities. Expected maturities may differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.

⁽²⁾ The weighted-average yield is computed using the amortized cost of debt securities available for sale at December 31, 2006.

4. Loans to Banking Clients and Related Allowance for Credit Losses

An analysis of the composition of the loan portfolio is as follows:

December 31,	2006		2005		2004		2003
Home equity lines of credit	$	1,192	$	1,193	$	866	$	292
Residential real estate mortgages		1,127		746		323		64
Other		19		10		5		1
Total	$	2,338	$	1,949	$	1,194	$	357

An analysis of nonperforming assets is as follows:

December 31,	2006		2005		2004	2003
Non-accrual loans	$	1	$	1	—	—
Average non-accrual loans		—		—	—	—

An analysis of the allowance for credit losses on the loan portfolio is as follows:

December 31,	2006		2005		2004		2003
Balance at beginning of year	$	3	$	2	$	1		—
Provision		1		1		1	$	1
Balance at end of year	$	4	$	3	$	2	$	1

F-6

THE CHARLES SCHWAB CORPORATION

Supplemental Financial Data for Charles Schwab Bank, N.A. (Unaudited)

(Dollars in Millions)

The maturities of the loan portfolio at December 31, 2006 are as follows:

	Within 1 Year		1-5 Years		Over 5 Years		Total
Home equity lines of credit		—		—	$	1,192	$	1,192
Residential real estate mortgages (1)		—		—		1,127		1,127
Other	$	1	$	11		7		19
Total	$	1	$	11	$	2,326	$	2,338

⁽¹⁾ Maturities are based upon the contractual terms of the loans.

The interest sensitivity of loans with maturities in excess of one year at December 31, 2006 is as follows:

	1-5 Years		Over 5 Years		Total
Loans with predetermined interest rates	$	2	$	9	$	11
Loans with floating or adjustable interest rates		9		2,317		2,326
Total	$	11	$	2,326	$	2,337

5. Summary of Credit Loss on Banking Loans Experience

December 31,	2006			2005			2004			2003
Average loans	$	2,162		$	1,163		$	733		$	84
Allowance to year end loans		.17	%		.17	%		.14	%		.14	%
Allowance to nonperforming loans		n/m			n/m			n/m			n/m
Nonperforming assets to average loans and real estate owned		.031	%		.041	%		.005	%		—

n/m Not meaningful.

6. Deposits from Banking Clients

	2006				2005				2004
	Amount		Rate		Amount		Rate		Amount		Rate
Analysis of average daily deposits:
Certificates of deposits of $100,000 or more		—	—			—	—		$	226	.99	%
Money market and other savings deposits	$	9,137	2.19	%	$	5,597	1.32	%		3,522	.50	%
Total deposits	$	9,137			$	5,597			$	3,748

At December 31, 2006, the Company had one certificate of deposit of $100,000 or more, in the amount of $101,000, with a contractual maturity of three months or less.

7. Ratios

December 31,	2006		2005		2004		2003
Return on average stockholder’s equity	26.34	%	14.23	%	8.75	%	1.28	%
Return on average total assets	1.57	%	1.08	%	.74	%	.27	%
Average stockholder’s equity as a percentage of average total assets	5.96	%	7.60	%	8.45	%	21.17	%

F-7

EX-10.101

EXHIBIT 10.101

FIRST AMENDMENT TO THE

SECURITY PACIFIC NATIONAL BANK TRUST AGREEMENT

FOR THE CHARLES SCHWAB PROFIT SHARING

AND EMPLOYEE STOCK OWNERSHIP PLAN

The “Security Pacific National Bank Trust Agreement for the Charles Schwab Profit Sharing and Employee Stock Ownership Plan,” which was amended and restated in its entirety effective November 1, 1990, is hereby further amended, effective January 1, 1992, as follows:

By DELETING Section 5.05(c) and SUBSTITUTING therefor the following:

(c) Cash dividends received on any Employer Securities held as part of the Plan shall be invested as soon as possible in additional shares of Employer Securities which shall be purchased at such prices, in such amounts, in such manner, at such times and through such broker-dealer as the Trustee may determine in its absolute and uncontrolled discretion.

Executed by the Employer and Trustee on December 20, 1991.

CHARLES SCHWAB & CO., INC.
By:	/s/ Charles R. Schwab
Its:	Chairman and CEO
SECURITY PACIFIC NATIONAL BANK
By:	/s/ Mary Lau
Its:	Assistant Vice President

EX-10.226

Exhibit 10.226

THE CHARLES SCHWAB CORPORATION

EMPLOYEE STOCK INCENTIVE PLAN

as Amended September 20, 2001

Article 1. Introduction.

The Plan was adopted by the Board of Directors on October 22, 1997. The purpose of the Plan is to promote the long-term success of the Company and the creation of incremental stockholder value by (a) encouraging Employees to focus on long-range objectives, (b) encouraging the attraction and retention of Employees with exceptional qualifications and (c) linking Employees directly to stockholder interests. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares or Options. The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware.

Article 2. Administration.

2.1 The Committee. The Plan shall be administered by the Committee. The Committee shall consist of two or more non-employee Directors, who shall be appointed by the Board.

2.2 Committee Responsibilities. The Committee shall select the Employees who are to receive Awards under the Plan, determine the amount, vesting requirements and other conditions of such Awards, may interpret the Plan, and make all other decisions relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan, and may, in its discretion, delegate any of its responsibilities to such parties as it deems proper. The Committee’s determinations under the Plan shall be final and binding on all persons.

Article 3. Limitation on Awards.

The aggregate number of Restricted Shares and Options awarded under the Plan shall be determined by the Board from time to time. If any Restricted Shares or Options are forfeited, or if any Options terminate for any other reason before being exercised, then such Restricted Shares or Options shall again become available for Awards under the Plan. The limitation of this Article 3 shall be subject to adjustment pursuant to Article 10. Any Common Shares issued pursuant to the Plan may be authorized but unissued shares or treasury shares.

Article 4. Eligibility.

General Rule. The Committee shall make all determinations concerning the Employees who shall be eligible to participate in the Plan, and the awards to each Participant.

1

Article 5. Options.

5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan, and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. In the case of an Employee who is subject to the tax laws of a foreign jurisdiction, the Committee may designate all or any part of an Option as an option qualifying for favorable tax treatment under the laws of such foreign jurisdiction.

5.2 Options Nontransferability. No Option granted under the Plan shall be transferable by the Optionee other than by will or the laws of descent and distribution. An Option may be exercised during the lifetime of the Optionee only by him or her. No Option or interest therein may be transferred, assigned, pledged or hypothecated by the Optionee during his or her lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process.

5.3 Number of Shares. Each Stock Option Agreement shall specify the number of Common Shares subject to the Option and shall provide for the adjustment of such number in accordance with Article 10.

5.4 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price. The Exercise Price under an Option shall not be less than 100 percent of the Fair Market Value of a Common Share on the date of grant. Subject to the preceding sentence, the Exercise Price under any Option shall be determined by the Committee. The Exercise Price shall be payable in accordance with Article 6.

5.5 Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option. Subject to the preceding sentence, the Committee shall determine when all or any part of an Option is to become exercisable and when such Option is to expire; provided that, in appropriate cases, the Company shall have the discretion to extend the term of an Option or the time within which, following termination of employment, an Option may be exercised, or to accelerate the exercisability of an Option. A Stock Option Agreement may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s employment and may provide for the suspension of vesting when an employee is on a leave of absence for a period in excess of six months in appropriate cases; provided that the exercisability of Options shall be accelerated in the event of the Participant’s death or Disability and, in the case of Retirement, the exercisability of all outstanding Options shall be accelerated, other than any Options that had been granted within two years of the date of the Optionee’s Retirement. Options may also be awarded in combination with Restricted Shares, and such an Award may provide that the Options will not be exercisable unless the related Restricted Shares are forfeited. In addition, Options granted under this Section

2

5 may be granted subject to forfeiture provisions which provide for forfeiture of the Option upon the exercise of tandem awards, the terms of which are established in other programs of the Company.

5.6 Effect of Change in Control. The Committee (in its sole discretion) may determine, at the time of granting an Option, that such Option shall become fully exercisable as to all Common Shares subject to such Option immediately preceding any Change in Control with respect to the Company.

5.7 Restrictions on Transfer of Common Shares. Any Common Shares issued upon exercise of an Option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Option Agreement and shall apply in addition to any general restrictions that may apply to all holders of Common Shares.

5.8 Authorization of Replacement Options. Concurrently with the grant of any Option to a Participant, the Committee may authorize the grant of Replacement Options. If Replacement Options have been authorized by the Committee with respect to a particular award of Options (the “Underlying Options”), the Option Agreement with respect to the Underlying Options shall so state, and the terms and conditions of the Replacement Options shall be provided therein. The grant of any Replacement Options shall be effective only upon the exercise of the Underlying Options through the use of Common Shares pursuant to Section 6.2 or Section 6.3. The number of Replacement Options shall equal the number of Common Shares used to exercise the Underlying Options, and, if the Option Agreement so provides, the number of Common Shares used to satisfy any tax withholding requirements incident to the exercise of the Underlying Options in accordance with Section 13.2. Upon the exercise of the Underlying Options, the Replacement Options shall be evidenced by an amendment to the Underlying Option Agreement. The Exercise Price of a Replacement Option shall be no less than the Fair Market Value of a Common Share on the date the grant of the Replacement Option becomes effective. The term of each Replacement Option shall be equal to the remaining term of the Underlying Option. No Replacement Options shall be granted to Optionees when Underlying Options are exercised pursuant to the terms of the Plan and the Underlying Option Agreement following termination of the Optionee’s employment. The Committee, in its sole discretion, may establish such other terms and conditions for Replacement Options as it deems appropriate.

5.9 Options Granted to Non-United States Employees. In the case of Employees who are subject to the tax laws of a foreign jurisdiction, the Company may issue Options to such Employees that contain terms required to conform with any requirements for favorable tax treatment imposed by the laws of such foreign jurisdiction, or as otherwise may be required by the laws of such foreign jurisdiction. The terms of any such Options shall be governed by the Plan, subject to the terms of any Addendum to the Plan specifically applicable to such Options.

5.10 Effect of Job Elimination. Notwithstanding anything to the contrary contained in the Plan or in any Stock Option Agreement or Stock Award Agreement entered into with respect to an Award pursuant to the Plan, in the case of a Participant who is an Officer, and who

3

becomes entitled to receive payments with respect to a Severance Period pursuant to the Charles Schwab Severance Pay Plan (the “Severance Plan”) on account of a Job Elimination, the terms of the Plan and any Stock Option Agreement or Stock Award Agreement entered into with respect to an Award shall be applied by treating the Participant as if the Participant had terminated employment on the Participant’s Termination Date. For purposes of applying this Section, the terms Officer, Severance Period, Termination Date, and Job Elimination shall have the meanings set forth in the Severance Plan.

Article 6. Payment for Option Shares.

6.1 General Rule. The entire Exercise Price of Common Shares issued upon exercise of Options shall be payable in cash at the time when such Common Shares are purchased, except that the Committee may at any time accept payment pursuant to Section 6.2 or 6.3.

6.2 Surrender of Stock. To the extent that this Section 6.2 is applicable, payment for all or any part of the Exercise Price may be made with Common Shares which are surrendered to the Company. Such Common Shares shall be valued at their Fair Market Value on the date when the new Common Shares are purchased under the Plan. In the event that the Common Shares being surrendered are Restricted Shares that have not yet become vested, the same restrictions shall be imposed upon the new Common Shares being purchased.

6.3 Exercise/Sale. To the extent this Section 6.3 is applicable, payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to Charles Schwab & Co., Inc. to sell Common Shares (including the Common Shares to be issued upon exercise of the Options) and to deliver all or part of the sales proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes.

Article 7. Restricted Shares.

7.1 Time, Amount and Form of Awards. The Committee may grant Restricted Shares with respect to an Award Year during such Award Year or at any time thereafter. Each such Award shall be evidenced by a Stock Award Agreement between the Award recipient and the Company. The amount of each Award of Restricted Shares shall be determined by the Committee. Restricted Shares may also be awarded in combination with Options, and such an Award may provide that the Restricted Shares will be forfeited in the event that the related Options are exercised.

7.2 Payment for Restricted Share Awards. To the extent that an Award is granted in the form of Restricted Shares, the Award recipient, as a condition to the grant of such Award, shall be required to pay the Company in cash an amount equal to the par value of such Restricted Shares.

7.3 Vesting or Issuance Conditions. Each Award of Restricted Shares shall become vested, in full or in installments, upon satisfaction of the conditions specified in the Stock Award Agreement. The Committee shall select the vesting conditions in the case of Restricted Shares

4

which may be based upon the Participant’s service, the Participant’s performance, the Company’s performance or such other criteria as the Committee may adopt; provided that, in the case of an Award of Restricted Shares where vesting is based entirely on the Participant’s service, (i) vesting shall be accelerated in the event of the Participant’s death or Disability; (ii) in the case of Retirement, vesting shall be accelerated for all Restricted Shares that had been granted more than two years prior to the date of the Participant’s Retirement; and (iii) vesting shall be suspended when an employee is on a leave of absence for a period in excess of six months in appropriate cases, as determined by the Company. The Committee, in its sole discretion, may determine, at the time of making an Award of Restricted Shares, that such Award shall become fully vested in the event that a Change in Control occurs with respect to the Company.

Article 8. Claims Procedures.

Claims for benefits under the Plan shall be filed in writing with the Committee on forms supplied by the Committee. Written notice of the disposition of a claim shall be furnished to the claimant within 90 days after the claim is filed. If the claim is denied, the notice of disposition shall set forth the specific reasons for the denial, citations to the pertinent provisions of the Plan, and, where appropriate, an explanation as to how the claimant can perfect the claim. If the claimant wishes further consideration of his or her claim, the claimant may appeal a denied claim to the Committee (or to a person designated by the Committee) for further review. Such appeal shall be filed in writing with the Committee on a form supplied by the Committee, together with a written statement of the claimant’s position, no later than 90 days following receipt by the claimant of written notice of the denial of his or her claim. If the claimant so requests, the Committee shall schedule a hearing. A decision on review shall be made after a full and fair review of the claim and shall be delivered in writing to the claimant no later than 60 days after the Committee’s receipt of the notice of appeal, unless special circumstances (including the need to hold a hearing) require an extension of time for processing the appeal, in which case a written decision on review shall be delivered to the claimant as soon as possible but not later than 120 days after the Committee’s receipt of the appeal notice. The claimant shall be notified in writing of any such extension of time. The written decision on review shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and shall specifically refer to the pertinent Plan provisions on which it is based. All determinations of the Committee shall be final and binding on Participants and their beneficiaries.

Article 9. Voting Rights and Dividends.

All holders of Restricted Shares shall have the same voting, dividend, and other rights as the Company’s other stockholders.

Article 10. Protection Against Dilution; Adjustment of Awards.

10.1 General. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a

5

recapitalization, a spinoff or a similar occurrence, the Committee shall make appropriate adjustments in one or more of (a) the number of Options and Restricted Shares available for future Awards under Article 3, (b) the number of Common Shares covered by each outstanding Option or (c) the Exercise Price under each outstanding Option.

10.2 Reorganizations. In the event that the Company is a party to a merger or other reorganization, outstanding Options and Restricted Shares shall be subject to the agreement of merger or reorganization. Such agreement may provide, without limitation, for the assumption of outstanding Awards by the surviving corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for accelerated vesting or for settlement in cash.

10.3 Reservation of Rights. Except as provided in this Article 10, a Participant shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Common Shares subject to an Option. The grant of an Award pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets.

Article 11. Limitation of Rights.

11.1 Employment Rights. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain employed by the Company or any Subsidiary. The Company and its Subsidiaries reserve the right to terminate the employment of any employee at any time, with or without cause, subject only to a written employment agreement (if any).

11.2 Stockholders’ Rights. A Participant shall have no dividend rights, voting or other rights as a stockholder with respect to any Common Shares covered by his or her Award prior to the issuance of such Common Shares, whether by issuance of a certificate, book entry or other procedure. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date when such certificate is issued, except as expressly provided in Articles 7, 9 and 10.

11.3 Government Regulations. Any other provision of the Plan notwithstanding, the obligations of the Company with respect to Common Shares to be issued pursuant to the Plan shall be subject to all applicable laws, rules and regulations, and such approvals by any governmental agencies as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Award until such time as:

6

(a) Any legal requirements or regulations have been met relating to the issuance of such Common Shares or to their registration, qualification or exemption from registration or qualification under the Securities Act of 1933, as amended, or any applicable state securities laws; and

(b) Satisfactory assurances have been received that such Common Shares, when issued, will be duly listed on the New York Stock Exchange or any other securities exchange on which Common Shares are then listed.

Article 12. Withholding Taxes.

12.1 General. To the extent required by applicable federal, state, local or foreign law, the recipient of any payment or distribution under the Plan shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of such payment or distribution. The Company shall not be required to make such payment or distribution until such obligations are satisfied.

12.2 Withholding On Options or Restricted Shares. The Committee may permit an Optionee who exercises Options, or who receives Awards of Restricted Shares, to satisfy all or part of his or her withholding tax obligations by having the Company withhold a portion of the Common Shares that otherwise would be issued to him or her under such Awards. Such Common Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. The payment of withholding taxes by surrendering Common Shares to the Company, if permitted by the Committee, shall be subject to such restrictions as the Committee may impose, including any restrictions required by rules of the Securities and Exchange Commission.

Article 13. Assignment or Transfer of Award.

Any Award granted under the Plan shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor’s process, whether voluntarily, involuntarily or by operation of law. However, this Article 13 shall not preclude (i) a Participant from designating a beneficiary to succeed, after the Participant’s death, to those of the Participant’s Awards (including without limitation, the right to exercise any unexercised Options) as may be determined by the Company from time to time in its sole discretion, or (ii) a transfer of any Award hereunder by will or the laws of descent or distribution.

Article 14. Future of Plans.

14.1 Term of the Plan. The Plan, as set forth herein, shall become effective on October 22, 1997. The Plan shall remain in effect until it is terminated under Section 14.2.

14.2 Amendment or Termination. The Committee may, at any time and for any reason, amend or terminate the Plan.

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14.3 Effect of Amendment or Termination. No Award shall be made under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not adversely affect the rights of any holder of any Option or Restricted Shares previously granted under the Plan.

Article 15. Definitions.

15.1 “Award” means any award of an Option or a Restricted Share under the Plan.

15.2 “Award Year” means a fiscal year beginning January 1 and ending December 31 with respect to which an Award may be granted.

15.3 “Board” means the Company’s Board of Directors, as constituted from time to time.

15.4 “Change in Control” means the occurrence of any of the following events after the effective date of the Plan as set out in Section 14.1:

(a) A change in control required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation 14A under the Exchange Act;

(b) A change in the composition of the Board, as a result of which fewer than two-thirds of the incumbent directors are directors who either (i) had been directors of the Company 24 months prior to such change or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were still in office at the time of the election or nomination;

(c) Any “person” (as such term is used in sections 12(d) and 13(d) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the Company’s then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the “Base Capital Stock”); provided, however, that any change in the relative beneficial ownership of securities of any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person’s ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person’s beneficial ownership of any securities of the Company.

15.5 “Code” means the Internal Revenue Code of 1986, as amended.

15.6 “Committee” means the Compensation Committee of the Board, as constituted from time to time.

15.7 “Common Share” means one share of the common stock of the Company.

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15.8 “Company” means The Charles Schwab Corporation, a Delaware corporation.

15.9 “Disability” means the inability to engage in any substantial gainful activity considering the Participant’s age, education and work experience by reason of any medically determined physical or mental impairment that has continued without interruption for a period of at least six months and that can be expected to be of long, continued and indefinite duration. All determinations as to whether a Participant has incurred a Disability shall be made by the Committee, the findings of which shall be final, binding and conclusive.

15.10 “Employee” means a common-law employee, other than an officer of the Company or any Subsidiary, as determined by the Committee.

15.11 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

15.12 “Exchange Act” means the Securities Exchange Act of 1934, as amended.

15.13 “Exercise Price” means the amount for which one Common Share may be purchased upon exercise of an Option, as specified by the Committee in the applicable Stock Option Agreement.

15.14 “Fair Market Value” means the market price of a Common Share, determined by the committee as follows:

(a) If the Common Share was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite-transactions report for such date;

(b) If the Common Share was traded over-the-counter on the date in question and was classified as a national market issue, then the Fair Market Value shall be equal to the last transaction price quoted by the NASDAQ system for such date;

(c) If the Common Share was traded over-the-counter on the date in question but was not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the NASDAQ system for such date; and

(d) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate.

15.15 “Option” means an employee stock option, other than an option described in sections 422 through 424 of the Code, including a Replacement Option, granted under the Plan and entitling the holder to purchase one Common Share.

9

15.16 “Optionee” means an individual, or his or her estate, legatee or heirs at law that holds an Option.

15.17 “Participant” means an Employee who has received an Award.

15.18 “Plan” means this Charles Schwab Employee Stock Incentive Plan, as it may be amended from time to time.

15.19 “Replacement Option” means an Option that is granted when a Participant uses a Common Share held or to be acquired by the Participant to exercise an Option and/or to satisfy tax withholding requirements incident to the exercise of an Option.

15.20 “Restricted Share” means a Common Share awarded to a Participant under the Plan.

15.21. “Retirement” shall mean any termination of employment of an Optionee for any reason other than death at any time after the Optionee has attained fifty (50), but only if, at the time of such termination, the Participant has been credited with at least seven (7) Years of Service under the Charles Schwab Profit Sharing and Employee Stock Ownership Plan. The foregoing definition shall apply to all Stock Option Agreements entered into pursuant to the Plan, irrespective of any definition to the contrary contained in any such Stock Option Agreement.

15.22 “Stock Award Agreement” means the agreement between the Company and the recipient of a Restricted Share which contains the terms, conditions and restrictions pertaining to such Restricted Share.

15.23 “Stock Option Agreement” means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her option.

15.24 “Subsidiary” means any corporation, if the Company and/or one or more other Subsidiaries own not less than 50 percent of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date.

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ADDENDUM

THE UNITED KINGDOM 2001 EMPLOYEE SHARE OPTION SCHEME

OF THE CHARLES SCHWAB CORPORATION

This Addendum to The Charles Schwab Corporation Employee Stock Incentive Plan (the “Employee Plan”) shall constitute the rules of the United Kingdom 2001 Employee Share Option Scheme (“Scheme”) of The Charles Schwab Corporation (the “Company”), as approved by the United Kingdom’s Board of Inland Revenue (“Inland Revenue”) under Schedule 9 to the United Kingdom’s Income and Corporation Taxes Act 1988 (the “Act”).

Definitions

1 Except as specifically set forth in this Addendum, the terms and conditions of the Employee Plan shall apply to the Scheme. In addition, the following definitions will apply to this Scheme:

1.1 References to the “Act” are to the United Kingdom’s Income and Corporation Taxes Act 1998.

1.2 The expression “New Option” means an Option over shares in the Acquiring Company (as defined in rule 5.2) or some other company falling within paragraph 10(b) or 10(c) of Schedule 9 to the Act, meeting the requirements of sub-paragraphs 15(3)(a) to (d) of Schedule 9 to the Act, granted in consideration of the release of a subsisting Option within the “appropriate period” (as defined by paragraph 15(2) of Schedule 9 to the Act).

1.3 The expression “Option-holder” means the person to whom an option has been granted under this Scheme and references to “Optionee” in the Employee Plan shall be construed accordingly.

1.4 The expression “Participating Company” means the Company and any company which is under the control of the Company, within the meaning of section 840 of the Act, and to which the Committee shall have resolved that this Scheme shall for the time being extend.

1.5 References to “Qualifying Shares” in this Addendum are references to Shares which satisfy the requirements of paragraphs 10 to 14 of Schedule 9 to the Act.

1.6 References to “Shares” in this addendum are references to shares or shares of Common Stock in the Company.

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Eligibility and Grant

2.1 Options may be granted under the Scheme to a person who is an employee (other than one who is a director) or a full-time director of a Participating Company, and for this purpose a person shall be treated as a full-time director of a Participating Company if he is obliged to devote not less than 25 hours a week, excluding meal breaks, to the performance of the duties of his office or employment with that company (or with that company and any other company which is a Participating Company). References in the Employee Plan to “employee” shall be construed accordingly.

2.2 No Options under this Scheme may be granted to, or exercised by, a person who is not eligible to participate by virtue of paragraph 8 of Schedule 9 to the Act, as modified by section 187 (3) (a) of the Act.

2.3 No Option may be granted at a time when the Shares over which it is granted are not Qualifying Shares.

2.4 For the purposes of Article 5.4, the Fair Market Value, as determined by the Committee in respect of any Option under this Scheme, shall be as defined in Article 15.14(a) of the Employee Plan if the Stock Exchange referred to in that Article is the New York Stock Exchange and the closing price referred to in that Article is the closing price on the New York Stock Exchange and in any other case shall be not less than the market value of the shares as agreed in advance with the United Kingdom Inland Revenue Shares Valuation Division.

2.5 Only Options (as defined in the Employee Plan) shall be granted under this Scheme and no Replacement Options or Restricted Shares as outlined in Articles 5.8 and 7 respectively of the Employee Plan shall be granted under this Scheme. Articles 5.8, 7 and 9 of the Employee Plan shall not apply for the purposes of this Scheme.

2.6 No Option granted under this Scheme shall be exercisable more than ten years after the date the Option is granted. Article 5.5 of the Employee Plan shall be constructed accordingly.

Limitation on Awards

3. For the purposes of Article 3 of the Employee Plan, any Option granted under this Scheme to any person shall be limited and take effect so that the sterling equivalent of the amount payable on the exercise of such Option, when added to the aggregate sterling equivalent of Shares which are capable of being acquired under subsisting rights obtained by the Participant under this Scheme or any other share option scheme established by the Company or any associated company (within the meaning contained in section 416 of the Act) of the Company and approved under Schedule 9 to the Act (but excluding any rights obtained under a savings related share option scheme) shall not exceed the limit set out in paragraph 28 of Schedule 9 to the Act.

12

For the purposes of this Scheme, the sterling equivalent of any amount payable on the exercise of an option shall be the amount converted into pounds sterling at the highest buying rate shown in the day’s spread as published in the Financial Times for the date of grant of such option or at such other rate as may be agreed from time to time with the United Kingdom Inland Revenue Shares Valuation Division.

Exercise

4.1 No Option may be exercised whilst this Scheme is and is intended to remain approved by the Inland Revenue unless the Shares which would be acquired are Qualifying Shares.

4.2 Any terms and conditions imposed by the Committee under Article 5.1 of the Employee Plan for the exercise of Options granted under this Scheme shall be factual and objective, laid down at the time of grant, and shall not be amended or waived after the time of grant unless event or events have occurred such that the Committee reasonably believes that the original conditions as amended or waived will be a fairer measure and would not be less difficult to satisfy than the original condition. Any conditions imposed shall not be effective until approved by the United Kingdom Inland Revenue. Any other terms determined by the Company may only be imposed if they otherwise comply with the requirements set out in Schedule 9 to the Act.

4.3 Notwithstanding Article 5.2 of the Employee Plan, no Option may be transferred by will, and on the death of the Option-holder any subsisting Option may be exercised by his personal representatives not later than one year after the date of his death. The proviso in Article 13 of the Employee Plan shall not apply.

4.4 Article 5.5 of the Employee Plan shall not apply to this Scheme. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable (the vesting of the Option). The Stock Option Agreement shall also specify the term of the Option. Any subsisting Options may be exercised by the Participant or, if deceased, by his personal representatives in whole or in part (including any unvested part) at the time of or, subject to rule 4.5, at any time following the occurrence of the earliest of the following events:

(i) the death of the Participant; and

(ii) upon the Participant ceasing to be a director or employee of a Participating Company or the Company or any Subsidiary as defined in Article 15.24 of the Employee Plan where that cessation was by reason of Disability, injury or Retirement.

4.5 An Option shall lapse and become thereafter incapable of exercise on the earliest of the following events:

(i) the tenth anniversary of the date the Option is granted;

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(ii) where a Participant ceases to be a director or employee of a Participating Company or the Company or any Subsidiary as defined in Article 15.24 of the Employee Plan by reason of death, Disability or injury, the first anniversary following such cessation;

(iii) where a Participant ceases to be a director or employee of a Participating Company or the Company or any Subsidiary as defined in Article 15.24 of the Employee Plan by reason of Retirement, the second anniversary following such cessation; and

(iv) the end of the period of exercisability determined in accordance with rule 5.

4.6 Payment for Shares on the exercise of Options granted under this Scheme shall be in cash and not through the delivery of Shares of Common Stock or otherwise as described in Articles 6.2 and 6.3 of the Employee Plan.

4.7 Shares shall be issued and the Option-holder registered as a shareholder within 30 days of receipt of a valid exercise notice.

4.8 Notwithstanding the provisions of Article 5.7 or 6.2 of the Employee Plan, any Shares issued upon the exercise of an Option under this Scheme shall not be subject to any forfeiture conditions, rights of repurchase, rights of first refusal or any other transfer restrictions that do not apply to all holders of Shares.

4.9 Article 12.2 shall apply so that the Company shall not be obliged to issue the shares until the obligations are satisfied .

4.10 The Company shall keep available sufficient unissued Shares or Shares in the Treasury to satisfy the exercise in full of all Options granted under this Scheme and for the time being remaining capable of being exercised.

Takeover, Change of Control

5.1 If any person obtains control of the Company (within the meaning of section 840 of the Act) as a result of making:

(i) a general offer to acquire the whole of the issued share capital of the Company (other than that which is already owned by him) which is unconditional or which is made on a condition such that if it is satisfied the person making the offer will have control of the Company; or

(ii) a general offer to acquire all the shares (other than shares which are already owned by him) in the Company which are of the same class as Shares subject to a subsisting Option,

then the Committee shall notify all Participants as soon as is practicable after the change of control. Any subsisting Option may be exercised from the date of the receipt of that notification up to the expiry of a period ending six months from the time when the person making the offer has obtained control of the Company and any condition subject to which the offer is made has been satisfied.

14

5.2 If as a result of the events specified in rule 5.1 an “Acquiring Company” (as defined in paragraph 15 of Schedule 9 to the Act) has obtained control of the Company, the Participant may, if the Acquiring Company so agrees, release any subsisting Option he holds in consideration for the grant of a New Option.

5.3 Where the circumstances noted in rule 5.2 apply, New Options may be granted within the terms of paragraph 15(1) of Schedule 9 to the Act in consideration for the release of Options previously granted under this Scheme. Such New Options are deemed to be equivalent to the old Options and to have been granted within the terms of this Scheme, provided the New Options satisfy the conditions in paragraph 15(3) of Schedule 9 to the Act and the release of the Option takes place within six months of the date the Acquiring Company obtains control of the Company. A New Option issued in consideration of the release of an Option shall be evidenced by an option which shall import the relevant provisions of this Scheme.

5.4 A New Option shall, for all other purposes of this Scheme, be treated as having been acquired at the same time as the corresponding released Option.

5.5 If any person obtains control of the Company other than as a result of the events specified in rule 5.1, then the Committee shall notify all Participants as soon as practicable after the change of control. Any subsisting Option may be exercised from the date of the receipt of that notification up to the expiry of a period ending six months from the time when the person obtains control of the Company.

5.6 If, as a result of the events specified in rules 5.1 or 5.3, a company has obtained control of the Company, the Committee shall be entitled at any time to require all holders of subsisting Options to exercise those Options within 30 days by notice in writing to the Participant to this effect.

5.7 The periods of exercisability under this rule 5 and the date of lapse under rule 4.5 are those of whichever of the pre-conditions of rules 5.1, 5.3 or 5.4 are first achieved. The subsequent achievement of any other pre-conditions will not cause a period of exercisability to begin nor a date of lapse to arise.

5.8 For the purpose of this rule 5 other than rule 5.2, a person shall be deemed to have obtained control of the Company if he and others acting in concert with him have together obtained control of it.

5.9 The exercise of an Option pursuant to the preceding provisions of this rule 5 shall not be subject to any conditions imposed pursuant to Article 5.1 of the Employee Plan as amended by rule 4.2.

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Employment Relationship

6. With respect to Options granted pursuant to he Scheme, Article 11 of the Employee Plan shall be subject to the following: Any Participant or Employee shall waive any and all rights to compensation or damages on the termination of his office or employment with any past or present Participating Company or Subsidiary for any reason whatsoever insofar as those rights arise or may arise from his ceasing to have rights under or to be entitled to exercise any Option under this Scheme as a result of the termination. Neither the grant of an Option nor any benefit which may accrue to a Participant on the exercise of an Option shall form part of that Participant’s remuneration entitlement from his office or employment, nor shall the grant of an Option create any right or entitlement on the Participant to have any further Options granted to him under this Scheme if at all.

Protection Against Dilution: Variation of Share Capital

7. With respect to Options granted pursuant to he Scheme, Article 10.1 of the Employee Plan shall apply, but (i)_ with the omission of the following words and phrases : “a declaration of a dividend payable in Common Shares (other than a bonus issue of shares with no cash alternative)”, “a declaration of a dividend payable in a form other than Common Shares”, “a spin-off or similar occurrence;” and (ii) as if the following words were added “or any other variation of the issued Common Shares” before the words “the Committee”. Adjustments to Options, as described in Article 10 of the Employee Plan, shall be at the discretion of the Committee and shall not be effective under this Scheme until approved by the United Kingdom Inland Revenue.

Alteration of Scheme rules

8. The Committee may make such alterations to the provisions of this Scheme as may be permitted by Article 14.2 of the Employee Plan, provided that any such alteration made at a time when this Scheme is to remain approved by the United Kingdom Inland Revenue shall not have effect unless and until the alteration has the prior approval in writing of the United Kingdom Inland Revenue.

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EX-10.287

Exhibit 10.287

November 21, 2006

Peter K. Scaturro

39 Paddock Lane

Bedford, NY 10506

Re: Retention Agreement

Dear Peter:

On behalf of The Charles Schwab Corporation (“Schwab”), I am extending this retention package to you in connection with the proposed sale of U.S. Trust Corporation (“U.S. Trust”), under a Stock Purchase Agreement (the “Purchase Agreement”). Your cooperation and contribution with respect to the proposed sale of U.S. Trust is critical, and this Retention Agreement is intended to reinforce and encourage you in continuing in your present role as Chief Executive Officer of U.S. Trust and exerting maximum efforts for the successful sale of U.S. Trust. In connection with your continued employment and your efforts regarding the proposed sale, we agree with you as follows:

1. Retention Benefits.

Subject to the terms and conditions of this Retention Agreement, you will receive, within 10 business days after the Closing (as defined in the Purchase Agreement) or the Effective Date (as defined in the separation agreement described in Section 3(c)), whichever is later, the following benefits (the “Retention Benefits”):

(a) a lump sum cash payment in the amount of $6,000,000, less usual and customary taxes, withholding and authorized deductions;

(b) full vesting of the restricted share awards set forth in the first full paragraph of page 2 of your offer letter dated May 4, 2005 (the “Offer Letter”); and

(c) an additional lump sum cash payment in the amount of $2,946,196, less usual and customary taxes, withholding and authorized deductions.

2. Terms and Conditions of Retention Benefits.

Your eligibility for Retention Benefits is subject to the consummation of the sale of U.S. Trust under the Purchase Agreement and to the following terms and conditions:

(a) For the period commencing on the date of this Retention Agreement and ending on the Closing (the “Retention Period”) and subject to the terms of the Purchase Agreement, you agree (i) to perform your duties as assigned to you by me (or my designee) to the best of your

Peter K. Scaturro

February 21, 2007

Page 2

abilities, and to devote your full business time, attention and best efforts to the affairs and to the sale of U.S. Trust; (ii) to fully cooperate in the proposed sale of U.S. Trust, including assisting Schwab in providing management presentations to the Purchaser (as defined in the Purchase Agreement), making Schwab aware of all matters related to U.S. Trust that would be relevant to the Purchaser and assisting Schwab in fulfilling its obligations under the Purchase Agreement and with regard to integration planning; (iii) to conduct the business of U.S. Trust in the usual, regular and ordinary course consistent with past practice; (iv) to use your best efforts consistent with industry practice and company policies to preserve intact U.S. Trust’s present business organizations; and (v) to take all actions necessary to cease all activity relating to the sale or purchase of any U.S. Trust division or business (other than the sale of U.S. Trust in accordance with the Purchase Agreement).

(b) Without my prior written consent or the prior written consent of Schwab’s Chief Financial Officer or Executive Vice President – Human Resources, or except as required by applicable law or the Purchase Agreement, you shall use best efforts to not do, cause or permit any of the following: (i) increase any wages, salaries, compensation, pension or other fringe benefits or perquisites payable to any employee, director or contingent worker of U.S. Trust other than compensation increases in the ordinary course of business consistent with past practice; (ii) enter into, amend, adopt, or otherwise commence any compensatory plan, contract or arrangement (whether or not written), as to which any employee, director or contingent worker participates or is a party; or (iii) hire any new employee or replace any existing employee or engage any additional contingent workers.

(c) You represent and warrant that from November 2, 2006 to the date of this Retention Agreement, you (i) have acted in a manner that would have been in compliance with Section 2(a) of this Retention Agreement if such Section had been in effect during that period of time; and (ii) have operated at the direction of senior management of Schwab regarding the negotiation of the sale of U.S. Trust.

(d) If, prior to the Closing, you resign for any reason (including “Good Reason” as defined in the Offer Letter), you will not earn and will not receive the Retention Benefits. In addition, if Schwab terminates your employment for “Cause,” you will not earn and will not receive the Retention Benefits. The term “Cause” shall have the same meaning given to it under the Offer Letter except that the following additional reasons also shall constitute “Cause” under this Retention Agreement: (i) your breach of your fiduciary duties as an officer of Schwab and U.S. Trust; and (ii) your breach of any provision of this Retention Agreement, including, but not limited to, Sections 2(a) through 2(c). This provision does not alter or modify your at-will employment relationship. Your employment relationship with Schwab and its affiliates will continue to be “at will,” which means that your employment is for no definite period of time and that you and Schwab are free to terminate the employment relationship at any time, with or without advance warning, notice, investigation, or cause.

(e) If, prior to the Closing, Schwab terminates your employment for any reason other than “Cause” as defined in Section 2(d) or if your employment terminates on account of your death or “Disability,” you (or, in the event of your death, your estate) will receive the Retention Benefits in the amount and at the time described in Section 1 subject to your (or, in the event of your death, your estate’s) execution of a separation agreement in accordance with Section 3(c). The term “Disability” means that you have a disability such that you have been determined to be eligible for benefits under Schwab’s long-term disability plan.

Peter K. Scaturro

February 20, 2007

Page 3

3. Miscellaneous.

(a) In the event that the Closing does not occur on or before September 30, 2007, this Retention Agreement shall terminate on such date.

(b) You agree that your compliance with and the terms of this Retention Agreement shall not constitute “Good Reason” as defined in the Offer Letter.

(c) As a condition to the receipt of the Retention Benefits, you will be required to execute a separation agreement with Schwab in substantially the form delivered to you with this Retention Agreement.

(d) The Retention Benefits are in addition to any other compensation that you may earn, including bonuses payable under any applicable bonus plan, and this Retention Agreement in no way abrogates your rights to benefits and payments under any other agreement, including the Offer Letter. However, for purposes of clarification, you acknowledge and agree that under the terms of the Offer Letter, you are eligible to receive only one of the following severance arrangements: (i) the lump sum severance payment and vesting of awards described in the second full paragraph of page 2 of the Offer Letter; or (ii) the lump sum cash payment and the vesting of awards described in the first sentence of the first full paragraph of page 3 of the Offer Letter; or (iii) the lump sum cash payment and the vesting of awards described in the second sentence of the first full paragraph of page 3 of the Offer Letter. For purposes of further clarification, the consummation of the sale of U.S. Trust under the Purchase Agreement shall constitute “a merger or consolidation in which U.S. Trust is not the surviving entity” under the Offer Letter.

(e) If, at any time, your employment is terminated by you for any reason (including “Good Reason” as defined in the Offer Letter) or by Schwab for Cause, prior to or during the Retention Period so that you are not entitled to the Retention Benefits, then the obligation to pay the Retention Benefits under this Retention Agreement shall cease.

(f) This Retention Agreement shall constitute a nonqualified deferred compensation plan within the meaning of section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and is intended to comply with all of the applicable requirements of section 409A of the Code. To comply with section 409A of the Code, the Retention Benefits shall not be payable earlier than the effective date of a Change in Control with respect to U.S. Trust and in no event shall the date of payment be accelerated. The term “Change in Control” means: (i) Any one person, or more than one person acting as a group, acquires ownership of stock of U.S. Trust, together with stock held by such person or group, constitutes more than 50 percent of the total fair market value or total voting power of the stock of U.S. Trust; provided, however, if any one person, or more than one person acting as a group, is considered to own more than 50 percent of the total fair market value or total voting power of the stock of U.S. Trust, the acquisition of additional stock by the same person or persons is not considered to cause a Change in Control of U.S. Trust; (ii) Any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of U.S. Trust possessing 35 percent or more of the total voting power of the stock of U.S. Trust; and (iii) Any one person, or more than one person acting as a group, acquires (or has acquired during the 12- month period ending on the date of the most recent acquisition by such person or persons) assets of U.S. Trust that have a total gross fair

Peter K. Scaturro

February 20, 2007

Page 4

market value equal to or more than 40 percent of the total gross fair market value of all of the assets of U.S. Trust immediately prior to such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of U.S. Trust, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. Notwithstanding the foregoing, this definition of Change in Control is intended to comply with section 409A of the Code and Prop. Treas. Regs. § 1.409A-3 promulgated thereunder (or any successor regulation) and shall be construed in a manner to so comply.

(g) This Retention Agreement and the documents referenced herein contain the entire terms and conditions of your Retention Agreement. Your signature below acknowledges that you have not relied on any promises or representations concerning the subject matter hereof not contained in this Retention Agreement. The terms of this Retention Agreement may be changed, amended, or superseded only by an agreement in writing signed by you and me and approved by Schwab’s Board of Directors or its Compensation Committee. For purposes of clarification, the Retention Agreement does not change, amend, or supersede the Offer Letter dated May 4, 2005 or the Confidentiality, Non-Solicitation, and Assignment Agreement you signed on May 23, 2006.

(h) Except as otherwise provided in the Offer Letter and this Retention Agreement, your awards under the 2004 Stock Incentive Plan and Schwab’s Long-Term Incentive Plan shall be governed by the applicable plan documents and award agreements.

(i) This Retention Agreement is subject to approval by Schwab’s Board of Directors or its Compensation Committee and shall not become effective until such approval is obtained.

Peter, I hope that you elect to accept this retention package. Please sign your name at the end of this letter to signify your understanding and acceptance of these terms and that no one at Schwab has made any other representation to you regarding this Retention Agreement.

Sincerely,

/s/ Charles R. Schwab		11/22/06
Charles R. Schwab
Chairman and Chief Executive Officer
The Charles Schwab Corporation
Accepted:	/s/ Peter K. Scaturro	Date:	12/15/06
	Peter K. Scaturro

EX-10.288

Exhibit 10.288

STOCK PURCHASE AGREEMENT

By and Between

THE CHARLES SCHWAB CORPORATION

and

BANK OF AMERICA CORPORATION

Dated as of November 19, 2006

TABLE OF CONTENTS

		PAGE
ARTICLE I	DEFINITIONS	1
1.1	Certain Defined Terms	1
ARTICLE II	SALE AND PURCHASE OF THE COMPANY COMMON STOCK	7
2.1	Sale and Purchase of the Company Common Stock	7
2.2	Purchase Price	7
2.3	The Closing	7
ARTICLE III	REPRESENTATIONS AND WARRANTIES OF SELLER	8
3.1	Corporate Organization	8
3.2	Capitalization	9
3.3	Authority; No Violation	9
3.4	Consents and Approvals	10
3.5	Reports	10
3.6	Financial Statements	11
3.7	Undisclosed Liabilities	11
3.8	Absence of Certain Changes or Events	11
3.9	Legal Proceedings	12
3.10	Taxes and Tax Returns	12
3.11	Employee Benefit Plans	13
3.12	Employee Matters	15
3.13	Compliance with Applicable Law	16
3.14	Material Contracts	16
3.15	Agreements with Regulatory Agencies	18
3.16	Investment Securities	19
3.17	Derivative Instruments	19
3.18	Environmental Liability	19
3.19	Insurance	19
3.20	Title to Properties	20
3.21	Intellectual Property	20
3.22	Broker’s Fees	20
3.23	Eligibility	20
3.24	Funds and Clients	21
3.25	Intercompany Arrangements	23
ARTICLE IV	REPRESENTATIONS AND WARRANTIES OF PURCHASER	23
4.1	Corporate Organization	23
4.2	Authority; No Violation	23
4.3	Consents and Approvals	24
4.4	Financial Wherewithal	24
4.5	Legal Proceedings	24
4.6	Compliance with Applicable Law	25

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TABLE OF CONTENTS

(continued)

		PAGE
4.7	Agreements with Regulatory Agencies	25
4.8	Broker’s Fees	25
ARTICLE V	COVENANTS RELATING TO CONDUCT OF BUSINESS	25
5.1	Conduct of Business of Company Prior to the Closing Date	25
5.2	Certain Actions by Seller	25
5.3	Forbearances of Seller	26
5.4	No Solicitation	29
ARTICLE VI	ADDITIONAL AGREEMENTS	29
6.1	Regulatory Matters	29
6.2	Access to Information	30
6.3	No Additional Representations	31
6.4	Public Disclosure	31
6.5	Employees; Employee Benefit Matters	31
6.6	Nonsolicit of Employees and Clients	33
6.7	Indemnification; Directors’ and Officers’ Insurance	33
6.8	Additional Agreements	34
6.9	Transition Services Agreement	34
6.10	Certain Fund and Client Matters	34
6.11	Additional Agreements Regarding Tax Matters	36
6.12	Post-Closing Confidentiality	39
6.13	Cooperation	40
6.14	Certain Other Matters	40
ARTICLE VII	CONDITIONS PRECEDENT	40
7.1	Conditions to Each Party’s Obligation to Effect the Closing	40
7.2	Conditions to Obligations of Purchaser	41
7.3	Conditions to Obligations of Seller	41
ARTICLE VIII	TERMINATION AND AMENDMENT	42
8.1	Termination	42
8.2	Effect of Termination	43
8.3	Amendment	43
8.4	Extension; Waiver	43
ARTICLE IX	INDEMNIFICATION	43
9.1	Survival of Representations and Warranties and Agreements	43
9.2	Indemnification by Seller	44
9.3	Indemnification by Purchaser	44
9.4	Tax Indemnification	44
9.5	Indemnification Procedure	45

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TABLE OF CONTENTS

(continued)

		PAGE
9.6	Certain Offsets; Tax Treatment of Payments	47
9.7	Exclusive Remedy	47
ARTICLE X	GENERAL PROVISIONS	48
10.1	Expenses	48
10.2	Notices	48
10.3	Interpretation	49
10.4	Counterparts	49
10.5	Entire Agreement	49
10.6	Governing Law	49
10.7	Dispute Resolution	50
10.8	Attorneys’ Fees	51
10.9	Severability	51
10.10	Assignment; Third Party Beneficiaries	51

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STOCK PURCHASE AGREEMENT

Stock Purchase Agreement (“Agreement”), dated as of November 19, 2006, by and between The Charles Schwab Corporation, a Delaware corporation (“Seller”) and Bank of America Corporation, a Delaware corporation (“Purchaser”). Certain capitalized terms have the meanings given to such terms in Article I.

RECITALS

A. WHEREAS, Seller is the sole owner of all of the outstanding common stock of U.S. Trust Corporation, a New York corporation (“Company”), $0.01 par value per share (the “Company Common Stock”); and

B. WHEREAS, Purchaser wishes to purchase from Seller, and Seller wishes to sell to Purchaser, the Company Common Stock in accordance with the provisions set forth herein.

NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements set forth herein, and for other good and valuable consideration, and intending to be legally bound, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS

1.1 Certain Defined Terms. Unless the context otherwise requires, the following terms, when used in this Agreement, shall have the respective meanings specified below (such meanings to be equally applicable to the singular and plural forms of the terms defined):

“1940 Act” shall mean the Investment Company Act of 1940, as amended.

“Advisers Act” shall mean the Investment Advisers Act of 1940, as amended.

“Affiliate” of a Person shall mean any Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person.

“Agreed Claims” shall have the meaning stated in Section 9.5(c).

“Agreement” shall have the meaning stated in the preamble to this document.

“Balance Sheet” shall have the meaning stated in Section 3.6(a).

“BHCA” shall mean the Bank Holding Company Act of 1956, as amended.

“Business Day” shall mean any day other than a Saturday, Sunday or day on which banking institutions in New York, New York are authorized or obligated pursuant to legal requirements or executive order to be closed.

“CERCLA” shall mean the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended.

“Certificate of Incorporation” shall mean the Restated Certificate of Incorporation of Company, as filed with the New York State Department on June 1, 2000 and currently in effect.

“Claim Certificate” shall have the meaning stated in Section 9.5(a).

“Client” means any Person to which Company or any Company Subsidiary provides investment management or investment advisory services, including any sub-advisory services, pursuant to an Investment Advisory Agreement.

“Closing” shall have the meaning stated in Section 2.3(a).

“Closing Balance Sheet” shall have the meaning stated in Exhibit B.

“Closing Date” shall mean the date on which the Closing actually occurs.

“Closing Stockholders’ Equity” shall have the meaning stated in Exhibit B.

“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Company” shall have the meaning stated in the first Recital.

“Company Benefit Plans” shall have the meaning stated in Section 3.11(a).

“Company Confidential Information” shall mean information concerning the Company’s customers and prospects, products and services, employees, intellectual property (including trade secrets), technology, financial or business plans and operations, and unpublished financial information.

“Company Common Stock” shall have the meaning stated in the first Recital.

“Company Financial Statements” shall have the meaning stated in Section 3.6(a).

“Company Indemnified Party” shall have the meaning stated in Section 6.7(a).

“Company Intellectual Property” shall have the meaning stated in Section 3.21(a).

“Company Multiemployer Plan” shall have the meaning stated in Section 3.11(b).

“Company-Only Plans” shall have the meaning stated in Section 3.11(a).

“Company Regulatory Agreement” shall have the meaning stated in Section 3.15.

“Company Subsidiary” and “Company Subsidiaries” shall have the meaning stated in Section 3.1(b).

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“Confidentiality Agreement” shall mean the Confidentiality Agreement dated as of November 7, 2006 by and between Seller and Purchaser (as it may be amended from time to time).

“Controlled Group Liability” means any and all liabilities (i) under Title IV of ERISA, (ii) under Section 302 of ERISA, (iii) under Sections 412 and 4971 of the Code, (iv) as a result of a failure to comply with the continuation coverage requirements of Section 601 et seq. of ERISA and Section 4980B of the Code, and (v) under corresponding or similar provisions of foreign laws or regulations, other than such liabilities that arise solely out of, or relate solely to, the Company-Only Plans identified as such in Section 3.11(a) of the Disclosure Schedule.

“Corporate Entity” shall mean a bank, corporation, partnership, limited liability company or other organization, whether an incorporated or unincorporated organization.

“CRA” shall mean the Community Reinvestment Act of 1997.

“Damages” shall mean all costs, damages, liabilities, awards, judgments, losses or costs and expenses, interest, awards, judgments and penalties (including reasonable attorneys’ fees and consultants’ fees and expenses) actually suffered or incurred; provided, however, that Damages shall not include lost profits or opportunity costs or consequential, incidental, special, indirect, exemplary or punitive damages other than (x) such Damages (other than punitive damages) to the extent reasonably foreseeable and (y) such Damages to the extent included as part of an award, settlement, judgment or otherwise in connection with a Third Party Claim.

“Designated Purchaser Representations” shall have the meaning stated in Section 9.1.

“Designated Seller Representations” shall have the meaning stated in Section 9.1.

“Disclosure Schedule” shall mean the document dated the date of the Agreement delivered by Seller to Purchaser prior to the execution and delivery of the Agreement and referring to the representations and warranties of Seller in the Agreement.

“Dispute” shall mean any dispute regarding one or more claims for money damages based upon, arising out of or in any way connected with this Agreement or the transactions contemplated in this Agreement.

“ERISA” shall have the meaning stated in Section 3.11(a).

“Estimated Stockholders’ Equity” shall have the meaning stated in Exhibit B.

“Federal Reserve Board” shall mean the Board of Governors of the Federal Reserve System.

“Filings” shall have the meaning stated in Section 3.24(a).

“Final Determination” shall have the meaning stated in Section 10.7(c).

“Final Stockholders’ Equity” shall have the meaning stated in Exhibit B.

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“Fund” shall mean any pooled investment vehicle (including each portfolio or series thereof, if any) for which Company or any Company Subsidiary acts as investment adviser, investment sub-adviser, manager, general partner or sponsor, whether or not registered or qualified for offer and sale to members of the public generally with any Governmental Entity.

“GAAP” means United States generally accepted accounting principles.

“Governmental Entity” shall mean any court, administrative agency, arbitrator or commission or other governmental, prosecutorial or regulatory authority or instrumentality, or any SRO.

“HSR Act” shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

“Indemnified Party” shall have the meaning stated in Section 9.5(a).

“Indemnifying Party” shall have the meaning stated in Section 9.5(a).

“Intellectual Property” shall mean any or all of the following and all rights in, arising out of or associated with: all patents, trademarks, trade names, service marks, domain names, database rights, copyrights and any applications therefore, mask works, net lists, technology, web sites, know-how, trade secrets, inventory, ideas, algorithms, processes, computer software programs or applications (in both source code and object code form), and tangible or intangible proprietary information or material of a Person.

“Interim Period” shall mean any taxable year or period commencing on or prior to the Closing Date and ending after the Closing Date.

“Investment Advisory Agreement” means an agreement under which Company or a Company Subsidiary acts as an investment adviser or sub-adviser to, or manages any investment or trading account of, any Client.

“IRS” shall mean the Internal Revenue Service.

“Knowledge” with respect to Seller shall mean actual knowledge of those individuals set forth on Exhibit A, without any implication of verification or investigation concerning such knowledge.

“Lien” shall mean any lien, claim, charge, option, encumbrance, mortgage, pledge or security interest or other restriction of any kind.

“Material Adverse Effect” shall mean, with respect to Seller, any effect that (i) is, or would be reasonably likely to be, material and adverse to the business, operations, financial condition or results of operations of Company and its Subsidiaries taken as a whole or (ii) prevents, or would be reasonably likely to prevent, Seller from consummating the transactions contemplated hereby, other than (in the case of clause (i) above) (A) any effect resulting from changes after the date hereof relating to the economy in general, including market fluctuations and changes in interest rates, or to Company’s industry in general, (B) any effect

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resulting from changes after the date hereof in laws, rules or regulations, or interpretations thereof by Governmental Entities or from changes in GAAP or regulatory accounting principles that affect in general the businesses in which Company and its Subsidiaries are engaged, (C) any effect resulting from the occurrence of a natural disaster or from changes after the date hereof in global or national political conditions, including the outbreak of war or acts of terrorism, or (D) any effect resulting from the announcement or consummation of this Agreement or the transactions contemplated hereby, except, in case of clauses (A), (B) or (C), to the extent that such events, facts, circumstances, changes, disaster or conditions have a disproportionate effect on Company and its Subsidiaries, taken as a whole, relative to Persons in Company’s industry generally.

“Material Contracts” shall have the meaning stated in Section 3.14(a).

“Multiple Employer Plan” shall have the meaning stated in Section 3.11(b).

“Non-Sponsored Fund” shall have the meaning stated in Section 3.24(a).

“Notice of Arbitration” shall have the meaning stated in Section 10.7(b).

“OCC” shall mean the Office of the Comptroller of the Currency.

“Pension Plan” shall have the meaning stated in Section 3.11(e).

“Person” shall mean any individual, Corporate Entity or Governmental Entity.

“Post-Closing Period” shall mean any taxable year or period that begins after the Closing Date (but, for this purpose, expressly including any separate taxable year related to the filing of a deemed sale return in accordance with Treasury Regulation Section 1.338-10(a)(2) or (4)), and, with respect to any Interim Period, the portion of such Interim Period commencing just after the Closing Date.

“Pre-Closing Period” shall mean any taxable year or period that ends on or before the Closing Date (but, for this purpose, expressly excluding any separate taxable year related to the filing of a deemed sale return in accordance with Treasury Regulation Section 1.338-10(a)(2) or (4)), and, with respect to any Interim Period, the portion of such Interim Period ending on and including the Closing Date.

“Public Fund Board” shall have the meaning stated in Section 6.10(a).

“Purchase Price” shall have the meaning stated in Section 2.2.

“Purchaser” shall mean Bank of America Corporation, a Delaware corporation.

“Purchaser Benefit Plans” shall have the meaning stated in Section 6.5(b).

“Purchaser Indemnitees” shall have the meaning stated in Section 9.2.

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“Purchaser Material Adverse Effect” shall mean, with respect to Purchaser, any effect that prevents, or would be reasonably likely to prevent, Purchaser from consummating the transactions contemplated hereby.

“Purchaser Representatives” shall have the meaning stated in Section 6.2(a).

“Regulatory Agencies” shall have the meaning stated in Section 3.5.

“Requisite Regulatory Approvals” shall have the meaning stated in Section 3.4.

“Seller” shall mean The Charles Schwab Corporation, a Delaware corporation.

“Seller Confidential Information” shall mean information received as a result of Purchaser’s acquisition of Company concerning Seller’s customers and prospects, products and services, employees, intellectual property (including trade secrets), technology, financial or business plans and operations, and unpublished financial information, other than information pertaining to the Company.

“Seller Indemnitees” shall have the meaning stated in Section 9.3.

“SRO” shall mean any domestic or foreign securities, broker-dealer, investment adviser and insurance industry self-regulatory organization.

“Swaps” shall have the meaning stated in Section 5.2(b).

“Subsidiary” shall mean, when used with respect to any party, any Corporate Entity which is consolidated with such party for financial reporting purposes or which otherwise would be deemed to be a subsidiary of such party within the meaning of the BHCA.

“Target Stockholders’ Equity” shall have the meaning stated in Exhibit B.

“Tax” or “Taxes” shall mean all federal, state, local, and foreign income, excise, gross receipts, gross income, ad valorem, profits, gains, property, capital, sales, transfer, use, value-added, stamp, documentation, payroll, employment, severance, withholding, duties, license, intangibles, franchise, backup withholding, environmental, occupation, alternative or add-on minimum taxes, imposed by any Governmental Entity, and other taxes, charges, levies or like assessments, and including all penalties and additions to tax and interest thereon.

“Tax Data” shall have the meaning stated in Section 6.11(h).

“Tax Documentation” shall have the meaning stated in Section 6.11(h).

“Tax Return” shall mean any return, declaration, report, statement, information statement and other document filed or required to be filed with respect to Taxes, including any schedule or attachment thereto, and including any amendment thereof, supplied to a Governmental Entity.

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“Transition Services Agreement” shall mean the Transition Services Agreement by and between Company and Seller referred to in Section 6.9.

“Trust Preferred” shall have the meaning stated in Section 5.2(a).

ARTICLE II

SALE AND PURCHASE OF THE COMPANY COMMON STOCK

2.1 Sale and Purchase of the Company Common Stock. Subject to the terms and conditions of this Agreement, at the Closing, Seller agrees to sell, assign and transfer to Purchaser, and Purchaser agrees to purchase from Seller, the Company Common Stock, free and clear of any Liens or rights or claims of others.

2.2 Purchase Price. The purchase price payable by Purchaser for the Company Common Stock shall be $3,300,000,000 subject to adjustment as set forth in Exhibit B (the “Purchase Price”).

2.3 The Closing.

(a) Subject to the terms and conditions of this Agreement, the closing of the sale of the Company Common Stock to the Purchaser (the “Closing”) shall take place as soon as practicable, and in any event no later than three Business Days after the satisfaction or waiver (subject to applicable law) of the latest to occur of the conditions set forth in Article VII hereof, unless extended by mutual agreement of the parties. The Closing shall take place at the offices of Howard Rice Nemerovski Canady Falk & Rabkin, A Professional Corporation, 3 Embarcadero Center, 7th Floor, San Francisco, California 94111, or at such other location as the parties hereto may agree.

(b) At the Closing:

(i) Purchaser shall deliver the Purchase Price to Seller, by wire transfer of immediately available funds;

(ii) Seller shall deliver to Purchaser the stock certificate representing the Company Common Stock, duly endorsed (or accompanied by duly executed stock powers);

(iii) Seller and Company shall enter into the Transition Services Agreement; and

(iv) Those individuals listed on Section 2.3(b)(iv) of the Disclosure Schedule shall submit their resignations as directors and officers of Company and its Subsidiaries (and Seller to the extent relevant), effective as of immediately prior to the Closing.

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ARTICLE III

REPRESENTATIONS AND WARRANTIES OF SELLER

Except as disclosed in the Disclosure Schedule, Seller represents and warrants to Purchaser that the following is true and correct. The Disclosure Schedule shall be organized to correspond to the Sections in this Article III. Each exception set forth in the Disclosure Schedule shall be deemed to qualify (i) the corresponding representation and warranty set forth in this Agreement that is specifically identified (by cross-reference or otherwise) in the Disclosure Schedule and (ii) any other representation and warranty to the extent the relevance of such exception to such other representation and warranty is reasonably clear.

3.1 Corporate Organization.

(a) Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Company has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted, and is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified would not have a Material Adverse Effect. Company is duly registered as a bank holding company under the BHCA and is a financial holding company pursuant to Section 4(l) of the BHCA and meets the applicable requirements for qualification as such. True and complete copies of the Certificate of Incorporation and bylaws of Company, as in effect as of the date of this Agreement, have previously been furnished or made available to Purchaser. Company is not in violation of any of the provisions of its certificate of incorporation or bylaws, each as amended.

(b) Section 3.1(b) of the Disclosure Schedule sets forth a complete and correct list of all the Subsidiaries of Company (each a “Company Subsidiary” and collectively the “Company Subsidiaries”); such list identifies those Company Subsidiaries that have as their primary Federal bank regulatory agency the OCC or the Federal Reserve Board and those Company Subsidiaries that are not so regulated. Section 3.1(b) of the Disclosure Schedule also sets forth a list identifying the number (other than wholly-owned Subsidiaries) and owner of all outstanding capital stock or other equity securities of each such Subsidiary, options, warrants, stock appreciation rights, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, shares of any capital stock or other equity securities of such Subsidiary, or contracts, commitments, understandings or arrangements by which such Subsidiary may become bound to issue additional shares of its capital stock or other equity securities, or options, warrants, scrip, rights to subscribe, calls or commitments for any shares of its capital stock or other equity securities and the identity of the parties to any such agreements or arrangements. All of the outstanding shares of capital stock or other securities evidencing ownership of the Company Subsidiaries are validly issued, fully paid and nonassessable and such shares or other securities are owned by Company or another of its Subsidiaries free and clear of any Lien with respect thereto. Each Company Subsidiary (i) is a duly organized and validly existing corporation, partnership or limited liability company or other legal entity under the laws of its jurisdiction of organization, (ii) is duly qualified to do business and is in good standing in all jurisdictions (whether federal, state, local or foreign) where its

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ownership or leasing of property or the conduct of its business requires it to be so qualified (except for jurisdictions in which the failure to be so qualified would not have a Material Adverse Effect) and (iii) has all requisite corporate power and authority to own or lease its properties and assets and to carry on its business as now conducted. Except for its interests in the Company Subsidiaries, Company does not as of the date of this Agreement own, directly or indirectly, any capital stock, membership interest, partnership interest, joint venture interest or other equity interest with a fair market value as of the date of this Agreement in excess of $10 million in any Person.

3.2 Capitalization. The authorized capital stock of Company consists of 10,000 shares of Company Common Stock, 1,010 of which are issued and outstanding and have been duly authorized and validly issued, are fully paid, non-assessable and free of preemptive rights. All of the Company Common Stock is owned by Seller free and clear of any Liens. Except as set forth above, as of the date hereof, no shares of capital stock or other voting securities of Company are issued, reserved for issuance or outstanding. There are no outstanding subscriptions, options, warrants, puts, calls, rights, exchangeable or convertible securities or other commitments or agreements of any character relating to the issued or unissued capital stock or other securities of Company, or otherwise obligating Company to issue, transfer, sell, purchase, redeem or otherwise acquire any such securities.

3.3 Authority; No Violation.

(a) Seller has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of Seller. No other corporate proceedings (including any approvals of Seller’s stockholders) on the part of Seller are necessary to approve this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Seller. Assuming due authorization, execution and delivery by Purchaser, this Agreement constitutes a valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as such enforcement may be limited by (i) the effect of bankruptcy, insolvency, reorganization, receivership, conservatorship, arrangement, moratorium or other laws affecting or relating to the rights of creditors generally, or (ii) the rules governing the availability of specific performance, injunctive relief or other equitable remedies and general principles of equity, regardless of whether considered in a proceeding in equity or at law.

(b) Neither the execution and delivery of this Agreement by Seller nor the consummation by Seller of the transactions contemplated hereby, nor compliance by Seller with any of the terms or provisions hereof, will (i) violate any provision of the certificates of incorporation or bylaws of Seller or (ii) assuming that the consents and approvals referred to in Section 3.4 are duly obtained, (x) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to Seller or Company or any of their respective Subsidiaries or any of their respective properties or assets or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under or in any payment conditioned, in

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whole or in part, on a change of control of Company or approval or consummation of transactions of the type contemplated hereby, accelerate the performance required by or rights or obligations under, or result in the creation of any Lien upon any of the respective properties or assets of Seller or Company or any of their respective Subsidiaries under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement, contract, or other instrument or obligation to which Seller or Company or any of their respective Subsidiaries is a party, or by which they or any of their respective properties, assets or business activities may be bound or affected, except (in the case of clause (ii) above) for such violations, conflicts, breaches, defaults or the loss of benefits which, either individually or in the aggregate, would not result in a Material Adverse Effect.

3.4 Consents and Approvals. Except for (i) the requisite filings with, notices to and approval of the Federal Reserve Board under the BHCA, (ii) the filing of any required applications or notices with the Federal Reserve Bank of Richmond, the Federal Reserve Bank of San Francisco, the OCC, the National Association of Securities Dealers and other applicable federal, state or foreign governmental agencies or authorities as set forth in Section 3.4 of the Disclosure Schedule and approval of such applications and notices, (iii) if required, any approvals or filings required by the HSR Act, and (iv) such additional consents and approvals, the failure of which to make or obtain would not be material (such consents or approvals, the “Requisite Regulatory Approvals”), no consents or approvals of or filings or registrations with any Governmental Entity are necessary in connection with (A) the execution and delivery by Seller of this Agreement and (B) the consummation of the transactions contemplated hereby. The only material third party consents necessary in connection with (A) the execution and delivery by Seller of this Agreement and (B) the consummation of the transactions contemplated hereby are set forth in Section 3.4 of the Disclosure Schedule.

3.5 Reports. Company and each of its Subsidiaries have filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that they were required to file since January 1, 2002 with (i) any SRO, (ii) the Federal Reserve Board, (iii) the Federal Deposit Insurance Corporation, (iv) the OCC and (v) any other federal, state or foreign governmental or regulatory agency or authority (the agencies and authorities identified in clauses (i) through (v), inclusive, are, collectively, the “Regulatory Agencies”), and all other reports and statements required to be filed by them since January 1, 2002, including any report or statement required to be filed pursuant to the laws, rules or regulations of the United States, any state, or any Regulatory Agency and have paid all fees and assessments due and payable in connection therewith, except where the failure to file such report, registration or statement or to pay such fees and assessments, either individually or in the aggregate, would not result in a Material Adverse Effect. Except for normal examinations conducted by a Regulatory Agency in the regular course of the business of Company and its Subsidiaries, there is no pending proceeding before, or, to the Knowledge of Seller, investigation by, any Regulatory Agency into the business or operations of Company or any of its Subsidiaries, except where any such proceedings or investigations would not, individually or in the aggregate, have a Material Adverse Effect. There are no unresolved violations, criticisms, or exceptions by any Regulatory Agency with respect to any report or statement relating to any examinations of Company or any of its Subsidiaries, except where any such violations, criticisms or exceptions are not, individually or in the aggregate, would not have a Material Adverse Effect.

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3.6 Financial Statements.

(a) Seller has previously made available to Purchaser copies of the following financial statements (the “Company Financial Statements”), copies of which are attached as Schedule 3.6(a): (a) the audited consolidated balance sheets of Company and its Subsidiaries for fiscal years 2004 and 2005, and the related consolidated statements of income for fiscal years 2004 and 2005, and (b) the unaudited consolidated balance sheet of Company and its Subsidiaries as of September 30, 2006 (the “Balance Sheet”), and the related consolidated statement of income for the nine months ended September 30, 2006. The Company Financial Statements fairly present in all material respects the consolidated financial position and results of operations of Company and its Subsidiaries as of the respective dates or for the respective periods therein set forth and have been prepared in accordance with GAAP consistently applied during the periods involved, except in the case of the September 30, 2006 statements for the absence of footnotes and subject to recurring year end adjustments normal in nature and amount. The Company Financial Statements have been prepared from, and are in accordance with, the books and records of Company and its Subsidiaries.

(b) Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that transactions are executed in accordance with management’s general or specific authorization.

(c) Seller has implemented and maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) to ensure that material information relating to Seller, including Company and its Subsidiaries, is made known to the chief executive officer and the chief financial officer of Seller by others within those entities. Set forth in Section 3.6(c) of the Disclosure Schedule, based on Seller’s most recent evaluation prior to the date hereof of its internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act), are (i) any significant deficiencies or material weaknesses in the design or operation of internal control over financial reporting relating to Company and its Subsidiaries and (ii) any events of fraud, whether or not material, that involve management or other employees who have a significant role in Company’s internal controls over financial reporting and relate to Company or its Subsidiaries.

(d) The books and records kept by Company and any of its Subsidiaries are in all material respects complete and accurate and have been maintained in the ordinary course of business and in accordance in all material respects with applicable laws.

3.7 Undisclosed Liabilities. Except for those liabilities that are reflected or reserved against on the Balance Sheet, and except for liabilities incurred since September 30, 2006, in the ordinary course of business consistent with past practice, neither Company nor any of its Subsidiaries has any liability of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or to become due), except for liabilities which, individually or in the aggregate, have not resulted in a Material Adverse Effect.

3.8 Absence of Certain Changes or Events. Since September 30, 2006: (i) Company and its Subsidiaries have, in all material respects, carried on their respective businesses in the ordinary course consistent with their past practices; (ii) Company has not taken any of the

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actions that Seller has agreed not to permit Company to take from the date hereof through the Closing Date pursuant to Sections 5.3(a)-(m) of this Agreement, and (iii) there have been no events, circumstances, facts or occurrences which have had a Material Adverse Effect.

3.9 Legal Proceedings. Except as set forth in Section 3.9 of the Disclosure Schedule, neither Company nor any of its Subsidiaries is a party to any, and there are no pending or, to the Knowledge of Seller, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against Company or any of its Subsidiaries which would have, individually or in the aggregate, a Material Adverse Effect. There is no material injunction, order, judgment or decree imposed upon Company, any of its Subsidiaries or the assets of Company or any of its Subsidiaries.

3.10 Taxes and Tax Returns.

(a) Company and each of its Subsidiaries has duly and timely filed or caused to be filed (including all applicable extensions) all federal, state, foreign and local Tax Returns required to be filed by it or with respect to it on or prior to the date of this Agreement (all such Tax Returns being accurate and complete in all material respects) and has duly and timely paid or caused to be paid on their behalf all Taxes that are due and payable other than Taxes that are being contested in good faith, which have not been finally determined, and are adequately reserved against or provided for (in accordance with GAAP) on the most recent consolidated financial statements of the Company. Through the date hereof, Company and its Subsidiaries do not have any liability for Taxes in excess of the amount reserved or provided for on their financial statements (but excluding, for this purpose only, any liability reflected thereon for deferred Taxes to reflect timing differences between Tax and financial accounting methods).

(b) No jurisdiction where the Company and its Subsidiaries do not file a Tax Return has made a claim in writing that any of the Company and its Subsidiaries is required to file a Tax Return in such jurisdiction.

(c) No Liens for Taxes exist with respect to any of the assets of the Company and its Subsidiaries, except for statutory Liens for Taxes not yet due and payable.

(d) There are no audits, examinations, disputes or proceedings pending or threatened in writing with respect to, or claims or assessments asserted or threatened in writing for, any material amount of Taxes upon Company or any of its Subsidiaries.

(e) There is no waiver or extension of the application of any statute of limitations of any jurisdiction regarding the assessment or collection of any Tax with respect to the Company and any of its Subsidiaries, which waiver or extension is in effect.

(f) All material Taxes required to be withheld, collected or deposited by or with respect to Company and each of its Subsidiaries have been timely withheld, collected or deposited, as the case may be, and to the extent required by applicable law, have been paid to the relevant Governmental Entity.

(g) Neither the Company nor any of its Subsidiaries has participated in any reportable transaction, as defined in Treasury Regulation Section 1.6011-4(b)(1).

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(h) Neither the Company nor any of its Subsidiaries is a party to, is bound by, or has any obligation under, any Tax sharing, allocation, indemnity or similar agreements or arrangement that obligates it to make any payment computed by reference to the Taxes, taxable income or taxable losses of any other Person.

(i) Neither the Company nor any of its Subsidiaries (A) has been a member of an affiliated group filing a consolidated federal income Tax Return (other than a group the common parent of which was Seller) or (B) has any liability for the Taxes of any person (other than Seller or any of its subsidiaries) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor, by contract or otherwise;

(j) Neither the Company nor any of its Subsidiaries has been, within the past two years or otherwise as part of a “plan (or series of related transactions)” within the meaning of Section 355(e) of the Code of which the transactions contemplated in this Agreement are also a part, a “distributing corporation” or a “controlled corporation” (within the meaning of Section 355(a)(1)(A) of the Code) in a distribution of stock intending to qualify for Tax-free treatment under Section 355 of the Code.

(k) Since January 1, 2002, neither Company nor any of its Subsidiaries has been required (or has applied) to include in income any material adjustment pursuant to Section 481 of the Code by reason of a voluntary change in accounting method initiated by Company or any of its Subsidiaries, and the IRS has not initiated or proposed any such material adjustment or change in accounting method (including any method for determining reserves for bad debts maintained by Company or any Subsidiary).

3.11 Employee Benefit Plans.

(a) Section 3.11(a) of the Disclosure Schedule lists all “employee benefit plans,” as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and all other material employee benefit or executive compensation arrangements, perquisite programs or payroll practices, whether written or unwritten, including, without limitation, any such arrangements or payroll practices providing severance pay, sick leave, vacation pay, salary continuation for disability, retirement benefits, deferred compensation, bonus pay, incentive pay, stock options (including those held by directors, employees, and consultants), hospitalization insurance, medical insurance, life insurance, scholarships or tuition reimbursements, employment agreements or offer letters, that cover any current or former directors, officers, employees or consultants of Company or its Subsidiaries, or to which contributions must be made or liabilities are outstanding thereunder for current or former directors, officers, employees or consultants of Company or its Subsidiaries (the “Company Benefit Plans”). Section 3.11(a) of the Disclosure Schedules separately identifies each of the Company Benefit Plans that is sponsored by Company or its Subsidiaries (the “Company-Only Plans”). With respect to each Company-Only Plan, there are not any current participants or liabilities to persons who are not current or former directors, officers or employees of Company or its Subsidiaries (or their beneficiaries or dependents).

(b) None of the Company Benefit Plans is a “multiemployer plan,” as defined in Section 4001(a)(3) of ERISA (a “Multiemployer Plan”) or a plan that has two or more

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contributing sponsors at least two of whom are not under common control (a “Multiple Employer Plan”). None of Company or any of its Subsidiaries, Seller or their respective ERISA Affiliates has (i) contributed to or been obligated to contribute to, at any time during the past six years, a Multiemployer Plan or a Multiple Employer Plan, (ii) withdrawn in a complete or partial withdrawal from any Multiemployer Plan or Multiple Employer Plan or (iii) has any of them incurred any liability due to the termination or reorganization of a Multiemployer Plan or a Multiple Employer Plan.

(c) None of the Company Benefit Plans is a “single employer plan,” as defined in Section 4001(a)(15) of ERISA, that is subject to Title IV of ERISA. No material liability has been, or is reasonably expected to be, incurred under Section 4062 of ERISA to the Pension Benefit Guaranty Corporation or to a trustee appointed under Section 4042 of ERISA. Neither Company nor its Subsidiaries provides, or is required, either currently or in the future, to provide medical, health, life or other welfare benefits to employees, former employees or retirees after their termination of employment, other than pursuant to applicable law or regulation.

(d) Each Company Benefit Plan and its administration is in material compliance with its terms and all applicable laws, including ERISA and the Code. Each Company Benefit Plan that is intended to be “qualified” under Section 401 of the Code has received a favorable determination letter from the IRS to such effect and, to the Knowledge of Seller, no fact, circumstance or event has occurred or exists since the date of such determination letter that would reasonably be expected to adversely affect the qualified status of any such Company Benefit Plan. All contributions (including all employer contributions and employee salary reduction contributions), premiums and other payments required to have been made under any of the Company Benefit Plans to any funds or trusts established thereunder or in connection therewith have been made by the due date thereof, other than a failure to make contributions that is not material, and with respect to any such contributions, premiums or other payments required that are not yet due, to the extent required by GAAP, adequate reserves are reflected on the Balance Sheet or liability therefor was incurred in the ordinary course of business consistent with past practice since the end of such fiscal quarter.

(e) With respect to the Company’s defined benefit pension plan (the “Pension Plan”), which is a single-employer plan, (i) as of the last day of the most recent fiscal plan year ended prior to the date hereof, the actuarially determined present value of all “benefit liabilities,” within the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial assumptions contained in the Pension Plan’s most recent actuarial valuation and without regard to any action that may be taken by Purchaser following the Closing Date in respect of or negatively impacting the Pension Plan), did not exceed the then current value of the assets of such Pension Plan, and (ii) within the prior three years, there has not been a partial termination or “reportable event” within the meaning of Section 4043 of ERISA.

(f) None of Company, its Subsidiaries, the officers of Company or the Company Benefit Plans which are subject to ERISA, any trusts created thereunder or any trustee or administrator thereof, has engaged in a “prohibited transaction” (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) or any other breach of fiduciary responsibility that could subject Company, its Subsidiaries or any officer of Company to any material Tax or penalty on prohibited transactions imposed by such Section 4975 or to any material liability under Section 502(i) or (1) of ERISA.

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(g) None of Company, its Subsidiaries or Seller is a party to any contract, agreement or other arrangement, including without limitation a Company Benefit Plan, which would reasonably be expected to result in the payment of money or any other property or rights or accelerate or provide any other rights or benefits, to any current or former employee of Company or its Subsidiaries (or other current or former service providers thereto) that would not have been required but for the transaction provided for in this Agreement (either alone or in combination with any other event) or result in any limitation on the right of Company or any of its Subsidiaries to amend, merge, terminate or receive a reversion of assets from any Company Benefit Plan or related trust.

(h) True, correct and complete copies of the following documents, with respect to each of the Company Benefit Plans, have been delivered or made available to Purchaser by Seller: (i) the written document evidencing all Company Benefit Plans and the related trust documents or other funding arrangements, and amendments, modifications or supplements thereto or, with respect to any such plan that is not in writing, a written description thereof; and (ii) the most recent Forms 5500 and schedules thereto; (iii) the summary plan description and any modifications thereto; (iv) the most recent annual report, financial statement and/or actuarial report; and (v) the most recent determination letter from the IRS. Neither the Company nor any of its Subsidiaries has made an enforceable commitment to make any new amendments to, or to adopt or approve any new, Company Benefit Plan, whether or not a Company-Only Plan.

(i) There are no pending actions, claims or lawsuits which have been asserted, instituted or, to Knowledge of Seller, threatened, against the Company Benefit Plans, the assets of any of the trusts under such plans or the plan sponsor or the plan administrator, or against any fiduciary of the Company Benefit Plans with respect to the operation of such plans (other than routine benefit claims) which could result in any material liability to Company.

3.12 Employee Matters.

(a) Neither Company nor any of its Subsidiaries is, or has over the past five years been, a party to any collective bargaining agreement or other labor union contract; nor does Seller know of any activities or proceedings of any labor union to organize any such employees.

(b) To the Knowledge of Seller, no executive officer of Company or any of its Subsidiaries is in violation in any respect of any term of any employment or services contract, patent disclosure agreement, noncompetition agreement, or any restrictive covenant to a former employer which would reasonably be expected to impede the right of any such executive officer to be employed or engaged by Company or any of its Subsidiaries because of the nature of the business conducted by Company or any of its Subsidiaries or to the use of trade secrets or proprietary information of others.

(c) Company and each of its Subsidiaries has complied in all material respects with all applicable material laws relating to the employment of employees, including, without

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limitation, those relating to wages, hours, immigration, the payment of wages, and the classification of employees as exempt or not exempt from the payment of overtime under applicable law, the prohibitions against discrimination and harassment, occupational safety and health, and leaves of absence, except for such noncompliance as would not be material to Company and its Subsidiaries, taken as a whole.

3.13 Compliance with Applicable Law.

(a) Company and each of its Subsidiaries and each of their employees hold all licenses, registrations, franchises, permits and authorizations necessary for the lawful conduct of their respective businesses and are in compliance with, and are not in violation of, under any applicable law, statute, order, rule, regulation, policy and/or guideline of any Governmental Entity relating to Company or any of its Subsidiaries, except in each case where the failure to hold such license, registration, franchise, permit or authorization or such noncompliance or violation would not have, individually or in the aggregate, a Material Adverse Effect, and neither Company nor any of its Subsidiaries knows of, or has received notice of, any violations of any of the above, except for such violations which would not have, individually or in the aggregate, a Material Adverse Effect.

(b) Except as would not be material to Company and its Subsidiaries, taken as a whole, Company and each of its Subsidiaries have properly administered all accounts for which Company or any of its Subsidiaries acts as a fiduciary, including accounts for which Company or any of its Subsidiaries serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment adviser, in accordance with the terms of the governing documents, applicable state and federal law and regulation and common law in all material respects. None of Company or any of its Subsidiaries, or any director, officer or employee of Company or any of its Subsidiaries, has committed any breach of trust with respect to any such fiduciary account that would be material to Company and its Subsidiaries, taken as a whole, and the accountings for each such fiduciary account are true and correct in all material respects and accurately reflect in all material respects the assets of such fiduciary account.

(c) Each insured depository institution Subsidiary of Company is “well-capitalized” (as that term is defined at 12 C.F.R. 6.4(b)(1) or the relevant regulation of the institution’s primary federal bank regulator), and “well managed” (as that term is defined at 12 C.F.R. 225.2(s)), and the institution’s CRA rating is no less than “satisfactory.” Neither Company nor any Company Subsidiary has been informed that its status as “well-capitalized,” “well managed” or “satisfactory” for CRA purposes will change within one year. All deposit liabilities of Company and its Subsidiaries are insured by the Federal Deposit Insurance Corporation to the fullest extent under the law. Company and its Subsidiaries have met all conditions of such insurance, including timely payment of its premiums.

3.14 Material Contracts.

(a) Except for the contracts set forth in Section 3.14(a) of the Disclosure Schedule (collectively, the “Material Contracts”), contracts involving less than $100,000 or contracts which can be terminated by Company or its Subsidiaries without material payment, penalty or continuing potential liability on not more than 90 days prior notice, neither Company nor any of its Subsidiaries is a party to or bound by any of the following:

(i) any contract or agreement entered into since January 1, 2002 (and any contract or agreement entered into at any time to the extent that material obligations remain as of the date hereof), other than in the ordinary course of business consistent with past practice, for the acquisition of the securities of or any material portion of the assets of any other Person or entity;

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(ii) any trust indenture, mortgage, promissory note, loan agreement or other contract, agreement or instrument for the borrowing of money, any currency exchange, commodities or other hedging arrangement or any leasing transaction of the type required to be capitalized in accordance with GAAP, in each case, where Company or any of its Subsidiaries is a lender, borrower or guarantor other than those entered into in the ordinary course of business;

(iii) any contract or agreement limiting the freedom of Company or any of its Subsidiaries to engage in any line of business to compete with any other Person or prohibiting Company from soliciting customers, clients or employees, in each case whether in any specified geographic region or business or generally;

(iv) any material contract or agreement with any Affiliate of Company or its Subsidiaries;

(v) any agreement of guarantee, support or indemnification by Company or its Subsidiaries, assumption or endorsement by Company or its Subsidiaries of, or any similar commitment by Company or its Subsidiaries with respect to, the obligations, liabilities (whether accrued, absolute, contingent or otherwise) or indebtedness of any other Person other than those entered into in the ordinary course of business;

(vi) any material agreement which would be terminable other than by Company or its Subsidiaries or any agreement under which a material payment obligation would arise or be accelerated, in each case as a result of the announcement or consummation of the transactions contemplated by this Agreement (either alone or upon the occurrence of any additional acts or events);

(vii) any alliance, cooperation, joint venture, stockholders’ partnership or similar agreement;

(viii) any employment agreement with any employee or officer of Company or any of its Subsidiaries;

(ix) any broker, distributor, dealer, agency, sales promotion, customer or client referral, underwriter, administrative services, market research, market consulting or advertising agreement providing for annual payments by Company or its Subsidiaries of more than $500,000;

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(x) any agreement, option or commitment or right with, or held by, any third party to acquire, use or have access to any assets or properties, or any interest therein, of Company or its Subsidiaries;

(xi) any contract or agreement that contains any (w) exclusive dealing obligation, (x) “clawback” or similar undertaking requiring the reimbursement or refund of any fees, (y) “most favored nation” or similar provision or (z) provision that grants any right of first refusal or right of first offer or similar right or that limits or purports to limit the ability of the Company or any of its Subsidiaries to own, operate, sell, transfer, pledge or otherwise dispose of any assets or business;

(xii) any material contract or agreement which would require any consent or approval of a counterparty as a result of the consummation of the transactions contemplated by this Agreement;

(xiii) any contract or agreement for the use or purchase of materials, supplies, goods, services, equipment or other assets providing for aggregate payments by the Company or its Subsidiaries of $1,000,000 or more if entered into on or before December 31, 2005 or $3,000,000 or more if entered into thereafter; and

(xiv) any other contract the loss of which would have a Material Adverse Effect.

(b) Company and its Subsidiaries have performed in all material respects all of the obligations required to be performed by them and are entitled to all accrued benefits under, and are not alleged (or otherwise known by Seller) to be in default in respect of, each Material Contract to which Company or its Subsidiaries are a party or by which Company or its Subsidiaries are bound, except as would not, individually or in the aggregate, be material to Company and its Subsidiaries. Each of the Material Contracts is in full force and effect, without amendment (other than as disclosed in Section 3.14(b) of the Disclosure Schedule), and there exists no default or event of default or event, occurrence, condition or act, with respect to Company or its Subsidiaries or, to Knowledge of Seller, with respect to any other contracting party, which, with the giving of notice, the lapse of the time or the happening of any other event or condition, would become a default or event of default under any Material Contract, except, as would not, individually or in the aggregate, be material to Company and its Subsidiaries. True, correct and complete copies of all Material Contracts have been furnished or made available to Purchaser.

3.15 Agreements with Regulatory Agencies. Neither Company nor any of its Subsidiaries is subject to any cease-and-desist or other order or enforcement action issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or has been ordered to pay any civil penalty by, or is a recipient of any supervisory letter from, or has adopted any board resolutions at the request or suggestion of any Regulatory Agency or other Governmental Entity that restricts the conduct of its business or that relates to its capital adequacy, its ability to pay dividends, its credit or risk management policies, its management or its business (each, whether or not set forth in the Disclosure Schedule, a

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“Company Regulatory Agreement”), nor does Seller have Knowledge of any pending or threatened regulatory investigation. Neither Company nor any of its affiliated persons, as defined in Section 2(a)(3) of the 1940 Act, has been convicted within the past 10 years of any felony or misdemeanor described in Section 9(a)(1) of the 1940 Act, or is, by reason of any misconduct, permanently or temporarily enjoined from acting in the capacities, or engaging in the activities, described in Section 9(a)(2) of the 1940 Act.

3.16 Investment Securities. Each of Company and its Subsidiaries has good and marketable title to all securities held by it (except securities sold under repurchase agreements or held in any fiduciary or agency capacity) free and clear of any Lien, except to the extent such securities are pledged in the ordinary course of business consistent with prudent business practices to secure obligations of Company or any of its Subsidiaries and except for such defects in title or Liens that would not be material to Company and its Subsidiaries. Such securities are valued on the books of Company and its Subsidiaries in accordance with GAAP.

3.17 Derivative Instruments. Any and all material swaps, caps, floors, futures, forward contracts, option agreements (other than employee stock options) and other derivative financial instruments, contracts or arrangements, whether entered into for the account of Company or one of its Subsidiaries or for the account of a customer of Company or one of its Subsidiaries, were entered into in the ordinary course of business and, to Seller’s Knowledge, in accordance with prudent business practice and applicable laws, rules, regulations and policies of all applicable Regulatory Agencies and with counterparties believed to be financially responsible at the time. Company and each of its Subsidiaries have duly performed in all material respects all of their obligations thereunder to the extent that such obligations to perform have accrued, and, to Seller’s Knowledge, there are no breaches, violations or defaults or allegations or assertions of such by any party thereunder.

3.18 Environmental Liability. There are no legal, administrative, arbitral or other proceedings, claims or actions or any private environmental investigations or remediation activities or governmental investigations of any nature that would be reasonably likely to result in the imposition, on Company or any of its Subsidiaries, of any liability or obligation arising under any local, state or federal environmental statute, regulation or ordinance, including the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”), pending or, to the Knowledge of Seller, threatened against Company or any of its Subsidiaries, which liability or obligation would result in a Material Adverse Effect. Company is not subject to any agreement, order, judgment or decree by or with any court, governmental authority, regulatory agency or third party imposing any liability or obligation with respect to the foregoing. There has been no written third party environmental site assessment conducted since January 1, 2002 assessing the presence of hazardous materials located on any property owned or leased by Company or any Company Subsidiary that is within the possession or control of Seller and its Affiliates as of the date of this Agreement that has not been delivered to Purchaser prior to the date of this Agreement.

3.19 Insurance. Company has in full force and effect the insurance coverage with respect to its business set forth in Section 3.19 of the Disclosure Schedule.

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3.20 Title to Properties.

(a) Each of Company and its Subsidiaries has good and marketable title to, or valid leasehold interests in, all its properties and assets except for such as are no longer used or useful in the conduct of its businesses or as have been disposed of in the ordinary course of business and except for defects in title, easements, restrictive covenants and similar encumbrances that individually or in the aggregate would not be material. All such assets and properties, other than assets and properties in which Company or any of its Subsidiaries has a leasehold interest, are free and clear of all Liens (other than Liens for current Taxes not yet due and payable), except for Liens that individually or in the aggregate would not be material.

(b) Each of Company and its Subsidiaries has complied in all material respects with the terms of all leases to which it is a party, and all such leases are in full force and effect. True and complete copies of all material leases have been made available to Purchaser.

3.21 Intellectual Property.

(a) Section 3.21(a) of the Disclosure Schedule lists the material Intellectual Property used or held for use by Company and its Subsidiaries as of the date hereof (collectively, the “Company Intellectual Property”). Company and its Subsidiaries own, or are licensed or otherwise possess rights to use, all Company Intellectual Property in the manner that it is currently used by Company and its Subsidiaries.

(b) Neither Company nor any of its Subsidiaries has received written notice from any third party alleging any material interference, infringement, misappropriation or violation of any Intellectual Property rights of any third party and, to the Knowledge of Seller, neither Company nor any of its Subsidiaries has interfered in any material respect with, infringed upon, misappropriated or violated any Intellectual Property rights of any third party. To the Knowledge of Seller, no third party has interfered with, infringed upon, misappropriated or violated any Company Intellectual Property. Neither Company nor any of its Subsidiaries licenses to, or has entered into any exclusive agreements relating to any Company Intellectual Property with, third parties, or permits third parties to use any Company Intellectual Property rights. Neither Company nor any of its Subsidiaries owes any material royalties or payments to any third party for using or licensing to others any Company Intellectual Property.

(c) Neither Company nor any of its Subsidiaries is a party to any agreement to indemnify any Person against a claim of infringement of or misappropriation by any Company Intellectual Property.

3.22 Broker’s Fees. Except for UBS Securities LLC, all the fees and expenses of which shall be borne entirely by Seller, neither Seller, Company nor any Company Subsidiary has employed any broker or finder or incurred any liability for any broker’s fees, commissions or finder’s fees in connection with the transactions contemplated by this Agreement.

3.23 Eligibility.

(a) With respect to Company and each Company Subsidiary that serves in a capacity described in Section 9(a) or 9(b) of the 1940 Act with respect to a Fund, (A) such

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Person is not (taking into account any applicable exemption) ineligible under such Section 9(a) or 9(b) to serve in such capacity, (B) no “affiliated person” (as defined in Section 2(a)(3) of the 1940 Act) of such Person is (taking into account any applicable exemption) ineligible under such Section 9(b) to serve as an “affiliated person” of such Person and (C) there is no proceeding or investigation pending and served on Company or any Company Subsidiary or, to the Knowledge of Seller, pending and not so served or threatened by any Governmental Entity, which would result in (1) the ineligibility of such Person to serve in such capacity under such Section 9(a) or 9(b) or (2) the ineligibility under such Section 9(b) of such “affiliated person” to serve as an “affiliated person” of such Person.

(b) With respect to Company and each Company Subsidiary that acts as an investment adviser within the meaning of the Advisers Act, (A) such Person is not (taking into account any applicable exemption) ineligible pursuant to Section 203(e) of the Advisers Act to act as an investment adviser, (B) no “person associated” (as defined in Section 202(a)(17) of the Advisers Act) with such Person is (taking into account any applicable exemption) ineligible under Section 203(f) of the Advisers Act to serve as a “person associated” with an investment adviser and (C) there is no proceeding or investigation pending and served on Company or any Company Subsidiary or, to the Knowledge of Seller, pending and not so served or threatened by any Governmental Entity, which would result in (1) the ineligibility under such Section 203(e) of such Person to act as an investment adviser or (2) the ineligibility under such Section 203(f) of such “person associated” with such Person to serve as a “person associated” with an investment adviser.

(c) With respect to Company and each Company Subsidiary that acts as a broker or dealer within the meaning of the 1934 Act, (A) such Person is not (taking into account any applicable exemption) ineligible pursuant to Section 15(b)(4) of the 1934 Act to act as a broker or dealer, (B) no “person associated” (as defined in Section 3(a)(18) of the 1934 Act) with such Person is (taking into account any applicable exemption) ineligible under Section 15(b)(6) of the 1934 Act to serve as a “person associated” with a broker or dealer and (C) there is no proceeding or investigation pending and served on Company or any Company Subsidiary or, to the Knowledge of Seller, pending and not so served or threatened by any Governmental Entity, which would result in (1) the ineligibility under such Section 15(b)(4) of such Person to act as a broker or dealer or (2) the ineligibility under such Section 15(b)(6) of such “person associated” with such Person to serve as a “person associated” with a broker or dealer.

(d) None of Company or any Company Subsidiary is (i) required to be registered, licensed or qualified as a commodity pool operator, futures commission merchant, commodity trading advisor, bank, trust company, real estate broker, insurance company, insurance broker or transfer agent under any applicable law, rule or regulation or (ii) subject to any liability or disability by reason of any failure to be so registered, licensed or qualified.

3.24 Funds and Clients.

(a) Each Fund sponsored by Company or any Subsidiary and, to the Knowledge of Seller, each other Fund (“Non-Sponsored Fund”) has filed all registrations, reports, prospectuses, proxy statements, statements of additional information, financial statements, sales literature, statements, notices and other filings required to be filed by it with

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any Governmental Entity (other than Tax Returns), including all amendments or supplements to any of the above for the past two years, in each case to the extent related to its business (the “Filings”), except as would not, individually or in the aggregate, have a Material Adverse Effect. Each Fund sponsored by Company or any Subsidiary and, to the Knowledge of Seller, each Non-Sponsored Fund, holds all legally required licenses, registrations, franchises, permits and authorizations and are in compliance with, and are not in violation of, under any applicable law, statute, order, rule, regulation, policy and/or guideline of any Governmental Entity of competent jurisdiction, except in each case where the failure to hold such license, registration, franchise, permit or authorization or such noncompliance or violation would not have, individually or in the aggregate, a Material Adverse Effect, and neither Company nor any of its Subsidiaries knows of, or has received notice of, any violations of any of the above, except for such violations which would not have, individually or in the aggregate, a Material Adverse Effect.

(b) Company and each Subsidiary has at all times since January 1, 2003 rendered investment advisory services to Clients and Funds sponsored by Company or any Subsidiary and, to the Knowledge of Seller, non-Sponsored Funds, with whom they are or were a party to an Investment Advisory Agreement, in compliance with all requirements, if any, as to investment objectives, portfolio composition and portfolio management, the terms of the applicable Investment Advisory Agreement, written instructions from such Clients and Funds, prospectuses, registration statements, offering memorandums, board of director or trustee directives, applicable law and, to the Knowledge of Seller, the organizational documents of such Clients and Funds, except where failure to do so would not, individually or in the aggregate, have a Material Adverse Effect.

(c) Each Fund sponsored by Company or its Subsidiaries that is a juridical entity is duly organized, validly existing and, with respect to jurisdictions that recognize the concept of “good standing,” in good standing under the laws of the jurisdiction of its organization and has the requisite corporate, trust, company or partnership power and authority to own its properties and to carry on its business conducted as of the date of this Agreement, and is qualified to do business in each jurisdiction where it is required to be so qualified under Applicable Law, except where failure to do so would not, individually or in the aggregate, have a Material Adverse Effect. The shares or units of each Fund sponsored by Company or its Subsidiaries (i) have been issued and sold by such Fund in compliance with applicable law, (ii) are, in the case of such public Funds only, qualified for public offering and sale by such Funds in each jurisdiction where offers are made to the extent required under applicable law and (iii) to the extent applicable, have been duly authorized and validly issued and are fully paid and non-assessable, except in each case for such failures that would not, individually or in the aggregate, have a Material Adverse Effect.

(d) For all taxable years since its inception, to the Knowledge of Seller, each of the public U.S. Funds sponsored by Company or its Subsidiaries has elected to be treated as, and has qualified to be classified as, a regulated investment company taxable under Subchapter M of Chapter 1 of the Code and under any similar provisions of state or local law in any jurisdiction in which such public Fund filed, or is required to file, a Tax Return, and each of the non-public Funds sponsored by Company or its Subsidiaries has elected to be treated as, and has qualified to be treated as, a partnership for U.S. federal income tax purposes and any similar provisions or state or local law in any jurisdiction in which such Fund filed or was required to file, a Tax Return. Each of the non-U.S. Funds is organized as a pass through entity in the foreign country or countries in which they are organized.

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3.25 Intercompany Arrangements.

(a) Section 3.25(a) of the Disclosure Schedule identifies all material agreements or arrangements between Company or any Company Subsidiary, on the one hand, and Seller or any of its Subsidiaries (other than Company and its Subsidiaries), on the other hand.

(b) Neither Seller nor any of its Subsidiaries (other than Company and its Subsidiaries) owns any material property or asset used in the conduct of the business of Company and its Subsidiaries.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

OF PURCHASER

Purchaser hereby represents and warrants to Seller as follows:

4.1 Corporate Organization. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Purchaser has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted, and is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified would not have a Purchaser Material Adverse Effect. True and complete copies of the certificate of incorporation and bylaws of Purchaser, as in effect as of the date of this Agreement, have previously been delivered by Purchaser to Seller. Purchaser is not in violation of any of the provisions of its certificate or articles of incorporation or bylaws or other charter or organizational documents, each as amended.

4.2 Authority; No Violation.

(a) Purchaser has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of Purchaser. No other corporate proceedings (including any approvals of Purchaser’s stockholders) on the part of Purchaser are necessary to approve this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Purchaser. Assuming due authorization, execution and delivery by Seller, this Agreement constitutes a valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, except as such enforcement may be limited by (i) the effect of bankruptcy, insolvency, reorganization, receivership, conservatorship, arrangement, moratorium or other laws affecting or relating to the rights of creditors generally, or (ii) the rules governing the availability of specific performance, injunctive relief or other equitable remedies and general principles of equity, regardless of whether considered in a proceeding in equity or at law.

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(b) Neither the execution and delivery of this Agreement by Purchaser, nor the consummation by Purchaser of the transactions contemplated hereby, nor compliance by Purchaser with any of the terms or provisions hereof, will (i) violate any provision of the certificate of incorporation or bylaws of Purchaser or (ii) assuming that the consents and approvals referred to in Section 4.3 are duly obtained, (x) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to Purchaser or any of its Subsidiaries or any of their respective properties or assets or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by or rights or obligations under, or result in the creation of any Lien upon any of the respective properties or assets of Purchaser or any of its Subsidiaries under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement, contract, or other instrument or obligation to which Purchaser or any of its Subsidiaries is a party, or by which they or any of their respective properties, assets or business activities may be bound or affected, except (in the case of clause (ii) above) for such violations, conflicts, breaches, defaults or the loss of benefits which, either individually or in the aggregate, would not result in a Purchaser Material Adverse Effect.

4.3 Consents and Approvals. Except for (i) the Requisite Regulatory Approvals and (ii) such additional consents and approvals, the failure of which to make or obtain would not be material, no consents or approvals of or filings or registrations with any Governmental Entity or, of or with any third party, are necessary in connection with (A) the execution and delivery by Purchaser of this Agreement and (B) the consummation by Purchaser of the transactions contemplated hereby. Purchaser has no reason to believe that any Requisite Regulatory Approvals will not be obtained.

4.4 Financial Wherewithal. Purchaser has or will have as of the Closing sufficient cash or cash equivalents available, directly or through one or more affiliates, to pay the Purchase Price to Seller on the terms and conditions contained herein, and there is no restriction on the use of such cash or cash equivalents for such purpose.

4.5 Legal Proceedings.

(a) Neither Purchaser nor any of its Subsidiaries is a party to any, and there are no pending or, to the knowledge of Purchaser, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against Purchaser or any of its Subsidiaries which would have, individually or in the aggregate, a Purchaser Material Adverse Effect.

(b) There is no injunction, order, judgment or decree imposed upon Purchaser, any of its Subsidiaries or the assets of Purchaser or any of its Subsidiaries which would have a Purchaser Material Adverse Effect.

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4.6 Compliance with Applicable Law. Purchaser and each of its Subsidiaries hold all licenses, franchises, permits and authorizations necessary for the lawful conduct of their respective businesses, and have complied with and are not in default, under any applicable law, statute, order, rule, regulation, policy and/or guideline of any Governmental Entity relating to Purchaser or any of its Subsidiaries, except in each case where the failure to hold such license, franchise, permit or authorization or such noncompliance or default would not have, individually or in the aggregate, a Purchaser Material Adverse Effect, and neither Purchaser nor any of its Subsidiaries knows of, or has received notice of, any violations of any of the above, except for such violations which would not have, individually or in the aggregate, a Purchaser Material Adverse Effect.

4.7 Agreements with Regulatory Agencies. Neither Purchaser nor any of its Subsidiaries is subject to any cease-and-desist or other order or enforcement action issued by, or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any order or directive that would, individually or in the aggregate, have a Purchaser Material Adverse Effect.

4.8 Broker’s Fees. Neither Purchaser nor any of its Subsidiaries has employed any broker or finder or incurred any liability for any broker’s fees, commissions or finder’s fees in connection with the transactions contemplated by this Agreement.

ARTICLE V

COVENANTS RELATING TO CONDUCT OF BUSINESS

5.1 Conduct of Business of Company Prior to the Closing Date. During the period from the date of this Agreement to the Closing Date, except as expressly contemplated or permitted by this Agreement (including, without limitation, pursuant to Section 5.2), Seller shall cause Company and each of its Subsidiaries to, (a) conduct its business in the usual, regular and ordinary course consistent with past practice and (b) use commercially reasonable efforts to maintain and preserve intact its business organization and its current relationships with its customers, regulators, employees and other persons with which it has significant business or other relationships.

5.2 Certain Actions by Seller. At or prior to Closing, Seller shall, or shall cause Company to, take all steps necessary:

(a) to exercise Company’s right to call the $50,000,000 of 8.41% Trust Preferred Capital Securities (“Trust Preferred”) issued by an Affiliate of Company and to pay the premium necessary to call such Trust Preferred;

(b) to cancel the interest rate swap agreements between Company and Seller (the “Swaps”) pursuant to their terms, with the amount of any payments to be made on cancellation of such Swaps pursuant to the terms thereof to be as determined by Citigroup Global Markets Inc. using the same procedures and calculations Citigroup Global Markets Inc. has historically used with respect to such Swaps;

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(c) to terminate the sweep of excess cash in Seller’s and its Affiliates’ client accounts into accounts held at Affiliates of Company, with such termination to occur following notice to such clients and with any amounts still held at Company at the Closing Date transferred into accounts held at other Affiliates of Seller at the Closing Date;

(d) to pay all amounts owed under the $300,000,000 short term credit facility between Seller and Company and to terminate such facility;

(e) to terminate the $200,000,000 of intercompany repurchase agreements between Company and an Affiliate of Seller maturing April 9, 2007 (and either Company or Seller, as the case may be, shall make applicable payments pursuant to the terms of such agreements as required to reflect any mark-to-market adjustments taken in connection with such termination), and not to renew the $200,000,000 intercompany repurchase agreement between Company and an Affiliate of Seller maturing December 19, 2006;

(f) to terminate all other intercompany agreements and relationships (including any referral agreements) between Seller or any of its Subsidiaries and Company or any of its Subsidiaries other than as set forth in the Transition Services Agreement, and settle all unpaid invoices and accounts; and

(g) subject to applicable law and regulatory requirements, to pay to Seller (i) the cash dividend previously approved by the Board of Directors of Company in the amount of $15,000,000 and (ii) an additional cash dividend as of the Closing Date (payable immediately prior to the Closing Date) equal to 50% of the consolidated earnings of Company and its Subsidiaries, calculated in the manner specified in Exhibit B, for the period from September 30, 2006 through the Closing (provided, however, that in no event shall the dividend paid pursuant to this clause (ii) exceed Forty Million U.S. Dollars ($40,000,000)).

In addition to the foregoing, Purchaser acknowledges that Seller has the right at any time to withdraw some or all of the assets of customers of Seller and its non-Company Subsidiaries.

5.3 Forbearances of Seller. During the period from the date of this Agreement to the Closing Date, except as set forth in Section 5.3 of the Disclosure Schedule or as expressly contemplated or permitted by this Agreement (including, without limitation, pursuant to Section 5.2), Seller shall not with respect to Company and Company’s Subsidiaries, and Seller shall not permit Company or any Company Subsidiary to do any of the following, without the prior written consent of Purchaser, which consent shall not be unreasonably withheld:

(a)(i) other than in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money (other than short-term indebtedness incurred to refinance existing indebtedness, and indebtedness of Company or any of its Subsidiaries to Company or any of its Subsidiaries, and indebtedness under existing lines of credit), assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other individual, corporation or other entity, or make any loan or advance (except to the extent committed to prior to the date hereof and set forth in Section 3.14 of the Disclosure Schedule) in an aggregate amount in excess of $2,000,000 (provided that any indebtedness, loans or advances involving Seller and its Affiliates shall be in the ordinary course

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consistent with past practice and shall not require the payment of any penalty or premium) or (ii) incur any capital expenditures (other than capital expenditures incurred pursuant to contracts or commitments in force on the date of this Agreement) in an aggregate amount in excess of $12,000,000;

(b)(i) adjust, split, combine or reclassify any capital stock, (ii) make, declare or pay any dividend or distribution (except for dividends paid in the ordinary course of business by any Subsidiary (whether or not wholly-owned) of Company to Company or any wholly owned Subsidiary of Company) or make any other distribution on any shares of its capital stock or redeem, purchase or otherwise acquire any securities or obligations convertible into or exchangeable for any shares of its capital stock, (iii) grant any stock appreciation rights or grant to any individual, corporation or other entity any right to acquire any shares of its capital stock, (iv) issue any additional shares of capital stock or (v) enter into any agreement, understanding or arrangement with respect to the sale or voting of its capital stock;

(c) sell, transfer, mortgage, encumber or otherwise dispose of any of its properties or assets, including capital stock in any Company Subsidiary, to any individual, corporation or other entity other than a direct or indirect wholly-owned Company Subsidiary, or cancel, release or assign any indebtedness to any such person or any claims held by any such person, except (i) in the ordinary course of business consistent with past practice to third parties who are not Affiliates of Seller, (ii) pursuant to contracts or agreements in force at the date of this Agreement that are, if involving properties or assets having a value in excess of $1,000,000 or any capital stock in any Company Subsidiary, set forth in the Disclosure Schedule or (iii) otherwise with respect to properties, assets and indebtedness with an aggregate fair market value not in excess of $2,000,000;

(d)(i) acquire any business entity, whether by stock purchase, merger, consolidation or otherwise, or (ii) make any other investment either by purchase of stock or securities, contributions to capital, property transfers, or purchase of any property or assets of any other individual, corporation, limited partnership or other entity other than a wholly-owned Company Subsidiary, other than, in the case of clause (ii), for investments in the ordinary course of business consistent with past practice for cash consideration with an aggregate value not in excess of $2,000,000;

(e)(i) except (v) as set forth on Section 5.3(e) of the Disclosure Schedule, (w) payment of fiscal 2006 bonuses in the ordinary of business consistent with past practice, (x) changes to Seller plans applicable to Seller employees generally), (y) as required under applicable law or the terms of any existing agreement to which Company is a party, and (z) for increases in annual base salary at times and in amounts in the ordinary course of business consistent with past practice, which shall not exceed 4% in the aggregate (on an annualized basis), increase in any manner the compensation or benefits of any of the current or former directors, officer or employees of Company or its Subsidiaries (collectively “Employees”), (ii) pay any pension or retirement allowance not required by any current plan or agreement to any Employee, (iii) become a party to, establish, amend, commence participation in, terminate or commit itself to any stock option plan or other stock-based compensation plan, compensation (including, without limitation, any employee co-investment fund), severance, pension, retirement, profit-sharing or welfare benefit plan or agreement or employment agreement with or

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for the benefit of any Employee (or newly hired employees), (iv) accelerate the vesting of any stock-based compensation under any Company-Only Plans, (v) hire or terminate the employment of any employee of the Company or its Subsidiaries who has (in the case of employees to be terminated) or would have (in the case of employees to be hired) target total compensation (cash and target equity) of $300,000 or more, other than terminations for cause (provided, that, in the event Company desires to hire an employee with such target or greater total compensation, Company and Purchaser shall cooperate in a reasonably prompt manner to discuss such request, and Purchaser shall not unreasonably withhold its consent to such request), or (vi) transfer any current Employee to Seller or its Subsidiaries (other than the Company or its Subsidiaries) or transfer any employee or officer of Seller or its Subsidiaries (other than an Employee) to the Company or any of its Subsidiaries;

(f) settle any claim, action or proceeding other than claims, actions or proceedings in the ordinary course of business consistent with past practice involving solely money damages not in excess of $5,000,000 individually or $10,000,000 in the aggregate, or waive or release any material rights or claims other than in the ordinary course of business consistent with past practice;

(g) change its methods of accounting (or the manner in which it accrues for liabilities) in effect at September 30, 2006, except as required by changes in GAAP as concurred in by Deloitte & Touche LLP, its independent auditors;

(h) make, change or revoke any material Tax election, change an annual Tax accounting period, adopt or change any Tax accounting method, file any material amended Tax Return, enter into any closing agreement with respect to a material amount of Taxes, settle any material Tax claim or assessment or surrender any right to claim a refund of a material amount of Taxes;

(i) adopt or implement any amendment to its Certificate of Incorporation or any changes to its bylaws or comparable organizational documents;

(j) materially restructure or materially change its investment securities portfolio, through purchases, sales or otherwise, or the manner in which the portfolio is classified or reported or materially alter the credit or risk concentrations associated with its underwriting and other investment banking businesses (it being understood and agreed that in the event that Company desires to undertake any of the foregoing, (i) the Company officers set forth on Schedule 5.3(j) may discuss such desire directly with the Purchaser officers set forth on such Schedule, (ii) such officers shall discuss the desired action(s) in good faith and with a view to determining the appropriate course of action as promptly as practicable and (iii) Purchaser shall not unreasonably withhold its consent to the requested actions under this clause (j));

(k) enter into, amend in any material respect or terminate any contract of the sort required to be disclosed pursuant to Section 3.14, other than in the ordinary course of business consistent with past practice; provided that in no event shall Company or any Company Subsidiary enter into any contract of the sort required to be disclosed pursuant to Section 3.14(a) (iii), (vi), (vii), (x) or (xi) or that calls for aggregate annual payments of $1,000,000 or more unless terminable on 90 days or less notice without payment of any penalty or premium;

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(l) take any action that is intended or would be reasonably likely to result in any of the conditions set forth in Article VII not being satisfied, except, in every case, as may be required by applicable law; or

(m) agree to, or make any commitment to, take any of the actions prohibited by this Section 5.3.

5.4 No Solicitation. Prior to the Closing Date, or until this Agreement is terminated in accordance with its terms, Seller shall not, Seller shall cause Company not to, and Seller shall use all reasonable efforts to cause Seller’s and Company’s respective officers, employees, directors, agents or representatives not to, directly or indirectly, solicit or initiate discussions or engage in negotiations with, or provide information (other than publicly available information) to, or authorize any financial advisor or other Person to solicit or initiate discussions or engage in negotiations with, or provide information to, any Person (other than Purchaser or a Purchaser Representative) concerning any potential sale of capital stock of, or merger, consolidation, combination, sale of assets, reorganization or other similar transaction involving, Company.

ARTICLE VI

ADDITIONAL AGREEMENTS

6.1 Regulatory Matters.

(a) Each of Purchaser and Seller shall, and shall cause its Subsidiaries to, (i) take, or cause to be taken, all actions necessary, proper to comply promptly with all legal requirements which may be imposed on such party or its Subsidiaries with respect to the transactions contemplated hereby, including, without limitation, obtaining any third party consent which may be required to be obtained in connection with the transactions contemplated hereby, and, subject to the conditions set forth in Article VII hereof, to consummate the transactions contemplated hereby (including, for purposes of this Section 6.1, required in order to continue any contract or agreement with Company or its Subsidiaries following Closing or to avoid any penalty or other fee under such contracts and agreements, in each case arising in connection with the transactions contemplated hereby) and (ii) obtain (and cooperate with the other party to obtain) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity which is required or advisable to be obtained by Seller or Purchaser, respectively, or any of their respective Subsidiaries in connection with the transactions contemplated by this Agreement. The parties hereto shall cooperate with each other and promptly prepare and file all necessary documentation, and to effect all applications, notices, petitions and filings (including, if required, notification under the HSR Act), to obtain as promptly as practicable all permits, consents, approvals and authorizations of all third parties and Governmental Entities which are necessary or advisable to consummate the transactions contemplated by this Agreement. Purchaser and Seller shall have the right to review in advance and, to the extent practicable, each will consult the other on, in each case subject to applicable laws relating to the exchange of information, all the information relating to Seller, Company or Purchaser, as the case may be, and any of their respective Subsidiaries, which appear in any filing made with, or written materials submitted to, any third party or any Governmental Entity in connection with the transactions contemplated by this Agreement. In exercising the foregoing

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right, each of the parties hereto shall act reasonably and as promptly as practicable. The parties hereto agree that they will consult with each other with respect to the obtaining of all permits, consents, approvals and authorizations of all third parties and Governmental Entities necessary or advisable to consummate the transactions contemplated by this Agreement and each party will keep the other apprised of the status of matters relating to completion of the transactions contemplated herein. Each of Purchaser and Seller shall resolve any objections that may be asserted by any Governmental Entity with respect to this Agreement or the transactions contemplated by this Agreement. For purposes of this Section 6.1(a), in taking each of the foregoing actions each party shall be required only to use commercially reasonable efforts; provided that with respect to obtaining the approval of the Federal Reserve Board and the approvals of all other relevant Federal and state bank and thrift regulators to the transactions contemplated by this Agreement, each party shall be required to use reasonable best efforts.

(b) Purchaser and Seller shall, upon request, furnish each other with all information concerning Purchaser, Seller, Company and their respective Subsidiaries, directors, officers and shareholders and such other matters as may be reasonably necessary in connection with any statement, filing, notice or application made by or on behalf of Purchaser, Seller, Company or any of their respective Subsidiaries to any Governmental Entity in connection with the transactions contemplated by this Agreement.

(c) Purchaser and Seller shall promptly advise each other upon receiving any communication from any Governmental Entity or third party whose consent or approval is required for consummation of the transactions contemplated by this Agreement which causes such party to believe that there is a reasonable likelihood that any Requisite Regulatory Approval or other consent or approval will not be obtained or that the receipt of any such approval will be materially delayed.

6.2 Access to Information.

(a) Subject to the Confidentiality Agreement, Seller agrees to provide Purchaser and Purchaser’s officers, directors, employees, accountants, counsel, financial advisors, agents and other representatives (collectively, the “Purchaser Representatives”), from time to time prior to the Closing Date or the termination of this Agreement, such information as Purchaser shall reasonably request with respect to Company and its Subsidiaries and their respective businesses, financial conditions and operations and such access to the properties and personnel of Company and its Subsidiaries as Purchaser shall reasonably request, which access shall occur during normal business hours and shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of Company or its Subsidiaries. Except as required by law, Purchaser will hold, and will cause its officers, employees, accountants, counsel, financial advisors and other representatives and affiliates to hold, any nonpublic information received from Seller or Company, directly or indirectly, in accordance with the Confidentiality Agreement.

(b) Seller and Company shall not be required to provide access to or to disclose information where such access or disclosure would violate or prejudice the rights of customers, jeopardize the attorney-client or other legal privilege of the institution in possession or control of such information or contravene any law, rule, regulation, order, judgment, decree,

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fiduciary duty or binding agreement entered into prior to the date of this Agreement. The parties hereto will make appropriate substitute disclosure arrangements under circumstances in which the restrictions of the preceding sentence apply.

6.3 No Additional Representations. Purchaser acknowledges that neither Seller nor any of its Affiliates is making any representation or warranty, express or implied, as to any financial or other matter with respect to Seller, Company or their respective Subsidiaries, except for the representations and warranties expressly set forth in Article III. Seller acknowledges that neither Purchaser nor any of its Affiliates is making any representation or warranty, express or implied, as to any financial or other matter with respect to Purchaser or its Subsidiaries, except for the representations and warranties expressly set forth in Article IV.

6.4 Public Disclosure. Seller and Purchaser shall consult with each other before issuing any press release or otherwise making any public statement or making any other public (or non-confidential) disclosure (whether or not in response to an inquiry) regarding the terms of this Agreement or any of the transactions contemplated hereby, and neither shall issue any such press release or make any such statement or disclosure without the prior approval of the other (which approval shall not be unreasonably withheld or delayed), except as may be required by law or the rules of any market or exchange on which the shares of Seller or Purchaser may be listed for trading, in which case the party proposing to issue such press release or make such public statement or disclosure shall consult with the other party before issuing such press release or making such public statement or disclosure.

6.5 Employees; Employee Benefit Matters.

(a) Following the Closing Date, Purchaser shall maintain or cause to be maintained compensation opportunities, employee pension and welfare plans for the benefit of employees who are actively employed by the Company and its Subsidiaries as of the Closing Date (“Covered Employees”) which, in the aggregate, are generally substantially comparable to those compensation opportunities and other employee, pension and welfare benefits that are made available to similarly situated employees of Purchaser or its Subsidiaries as applicable, provided, that in no event shall any Covered Employee be eligible to participate in any closed or frozen plan of Purchaser or its Subsidiaries; provided, further, that until such time as Purchaser shall cause Covered Employees to participate in the benefit plans that are made available to similarly situated employees of Purchaser or its Subsidiaries, the Covered Employees continued participation in the benefit plans of the Company and its Subsidiaries shall be deemed to satisfy the foregoing provisions of this sentence. Notwithstanding the foregoing, (i) each Covered Employee shall be eligible for severance benefits following the Closing Date solely under Purchaser’s severance plan and (ii) nothing herein shall obligate Purchaser or any of its Subsidiaries to continue the employment of any Covered Employee.

(b) For purposes of their participation in the employee benefit plans, arrangements and agreements of Purchaser (the “Purchaser Benefit Plans”), Purchaser shall credit each Covered Employee of Company and each of its Subsidiaries with full credit for all service credited under the Company Benefit Plans (including service with Company prior to the Closing Date and, where applicable, service with prior or predecessor employers to the extent credit is given for such service under the Company Benefit Plans) for purposes of eligibility to

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participate and receive benefits, for purposes of vesting and, except under defined benefit pension plans, for purposes of benefit accruals; provided that such recognition of service shall not operate to duplicate benefits with respect to Covered Employee and Covered Employees shall receive no credit for service under closed or frozen Purchaser Benefit Plans. With respect to Purchaser welfare benefit plans, Purchaser shall use commercially reasonable efforts to cause any such plan to waive any pre-existing condition exclusions and actively-at-work requirements thereunder with respect to the Covered Employees and their eligible dependents (to the extent waived under the applicable Company welfare benefit plan and, with respect to life insurance coverage, up to the Covered Employee’s current level of insurability) and ensure that any covered expenses incurred on or before the Closing Date (or, if later, the date on which such Covered Employee commences participation in a Purchaser Benefit Plan) shall be taken into account for purposes of satisfying applicable deductible, coinsurance and maximum out-of-pocket provisions after the Closing Date, to the extent that such expenses are taken into account for the benefit of similarly situated employees of Purchaser.

(c) Purchaser shall cause Company to honor all written contractual obligations of Company and its Subsidiaries to their respective current and former employees, directors and independent contractors, including, but not limited to, all obligations under employment, severance and consulting plans and arrangements and under all other Company-Only Plans to the extent disclosed on Section 3.11(a) of the Company Disclosure Schedule; provided that nothing herein shall limit the right of Purchaser or any of its Subsidiaries to terminate any particular plan or agreement in accordance with its terms. Notwithstanding the foregoing, for at least the one-year period following the Closing Date, Purchaser shall continue to provide to participating retirees as of the date hereof post-retirement benefits that are substantially comparable to the post-retirement benefits provided under Company-Only Plans as in effect for such retirees as of immediately prior to the Closing Date.

(d) Without limiting the generality of the final sentence of Section 10.10, nothing in this Section 6.5, express or implied, is intended to or shall confer upon any other person including without limitation any employee or former employee, any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement and no provision of this Section 6.5 shall constitute an amendment of any Company Benefit Plan.

(e) Seller shall cause the Board of Directors of the Company (or the appropriate committee thereof) to take the necessary action to amend the Company-Only Plans and any Company sponsored employee benefit trusts or other funding vehicles (the “Company Benefit Trusts”), including without limitation those listed on Schedule 6.5(e) of the Company Disclosure Schedule, or take such other appropriate action, to ensure that for purposes of the Company-Only Plans and the Company Benefit Trusts, the transactions contemplated by this Agreement (either standing alone or together with any other event) will not constitute a “change of control” (or any derivation of such term) and that in no event shall the transactions contemplated by this Agreement (either standing alone or together with any other event) result in (i) the accelerated payment or vesting of any compensation or benefits under any Company-Only Plans, (ii) the right to receive severance or similar benefits under any Company-Only Plans, (iii) the funding of any Company Benefit Trusts, (iv) any limitation on the ability of the Company to amend or terminate any Company-Only Plan or Company Benefit Trust, or (v) any limitation on the Company’s right to receive a reversion of assets. Prior to adoption, Seller shall provide

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Purchaser with copies of such amendments and/or resolutions and the opportunity to comment on them. Prior to the Closing Date, Seller shall have ratified the amendments required by this Section 6.5(e).

6.6 Nonsolicit of Employees and Clients.

(a) Seller agrees that, for a period of two years from the Closing Date, without the prior written consent of Purchaser, neither Seller nor any of its Affiliates will (or will assist or encourage others to), directly or indirectly, solicit to hire (or cause or seek to cause to leave the employ of Company or any Company Subsidiary or any of their successors) any officer or employee of Company or any Company Subsidiary as of the Closing Date; provided that Seller and its Affiliates shall not be in breach of this provision where an employee (i) has, prior to the Closing Date, been severed or been in receipt of notice to terminate his or her employment, (ii) is solicited by way of any general solicitation or advertisement not targeted at such employee, or (iii) contacts Seller or its Affiliates without any solicitation by Seller or any of its Affiliates; provided, however, that notwithstanding the foregoing, in no event during such two-year period shall Seller or any of its Affiliates hire any Key Employee unless such person has not been an employee of Company or its Affiliates for at least six months. As used herein, “Key Employee” means any executive officer of Company, any of Company’s department or function heads, or any investment management or client relationship management team member.

(b) Seller agrees that, for a period of two years from the Closing Date, without the prior written consent of Purchaser, neither Seller nor any of its Affiliates will, directly or indirectly, enter into any investment advisory, sub-advisory, management or other agreement for the provision of investment advisory or sub-advisory, wealth management, planning or similar services (other than an agreement which may provide such services as an incidental part of a brokerage account and was not undertaken with a view to avoiding the restrictions contained herein) with any Person that (i) is a customer or client of Company or any of its Subsidiaries as of the Closing Date or who was such at any time during the twelve-month period prior to the Closing Date and (ii) accounted for gross revenues during any twelve month period during the past two years (or, if such Person has been a customer or client for less than twelve months, an annualized gross revenue run-rate) of not less than $25,000, or persuade or attempt to persuade any such Persons not to purchase any of the products or services provided by Company or its Subsidiaries. For the avoidance of doubt, any and all customer and client lists, mandates and other information shall be subject to the provisions of Section 6.12.

6.7 Indemnification; Directors’ and Officers’ Insurance.

(a) Purchaser shall cause Company to indemnify, defend and hold harmless, the present and former officers and directors of Company and each of Company’s Subsidiaries in their capacities as such (each a “Company Indemnified Party”) in accordance with the Certificate of Incorporation and bylaws, or other charter documents, of Company and the respective Company Subsidiaries and any agreements or plans maintained by Company and the respective Company Subsidiary, to the fullest extent permitted thereunder and not prohibited by law after the Closing Date against all losses, expenses, claims, damages and liabilities arising out of actions or omissions occurring on or prior to the Closing Date (other than the transactions contemplated hereby, which liabilities shall be retained by Seller); provided that in no event shall

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a “Company Indemnified Party” include any Person who is or was employed or retained primarily by Seller or an Affiliate of Seller (other than Company and its Subsidiaries) and not primarily employed or retained by Company or its Subsidiaries, and Seller agrees that it shall indemnify, defend and hold harmless such individuals to the same extent that Purchaser is agreeing with respect to the Company Indemnified Parties.

(b) In the event following the Closing Purchaser or any of its successors or assigns or Company or any of its successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any person, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of Purchaser or Company, as applicable, assume the obligations set forth in this section.

(c) The provisions of this Section 6.7 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and his or her heirs and representatives.

6.8 Additional Agreements. In case at any time after the Closing Date any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement and their respective Subsidiaries shall take all such necessary action as may be reasonably requested by, and at the sole expense of, the requesting party.

6.9 Transition Services Agreement. At the Closing Date, Seller and Company will enter into the Transition Services Agreement on substantially the terms set forth in Section 6.9 of the Disclosure Schedule, providing for the continuation by Seller or its Affiliates of data center services to Company for eighteen months following the Closing.

6.10 Certain Fund and Client Matters.

(a) Seller shall use its reasonable best efforts, or cause Company and its applicable Subsidiaries to use their reasonable best efforts, with respect to each public U.S. Fund (including the Excelsior Mutual Funds) (A) to request, as promptly as practical following the date of this Agreement, the applicable board of directors or trustees (or Persons performing similar functions) of each public U.S. Fund (each, a “Public Fund Board”) to approve (and to recommend that the shareholders of such Fund approve) a new Investment Advisory Agreement with the relevant Company entity, to be effective at the Closing, containing terms that, taken as a whole, subject to applicable law, are no less favorable to such entity than the terms of the existing Investment Advisory Agreement between such public U.S. Fund and the relevant Company entity; (B) to request, as promptly as practical following receipt of the approval and recommendation described in clause (A) above, such Public Fund Board to call a special meeting of the shareholders of such public U.S. Fund to be held as promptly as reasonably practical for the purpose of voting upon a proposal to approve (in the requisite manner) such new Investment Advisory Agreement; (C) to prepare and to file (or to cause to be prepared and filed) with the SEC and all other applicable Governmental Authorities, as promptly as practical following receipt of the approval and recommendation described in clause (A) above, all registration statements and proxy solicitation materials required to be distributed to the shareholders of such

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public U.S. Fund with respect to the actions recommended for shareholder approval by such Public Fund Board and to mail (or to cause to be mailed) such proxy solicitation materials as promptly as practical after clearance thereof by the SEC (if applicable); and (D) to submit (or to request such Public Fund Board to submit), as promptly as practical following the mailing of the proxy materials to the shareholders of such public U.S. Fund for a vote at a shareholders meeting the proposal described in clause (B) above.

(b) Purchaser agrees, insofar as within the control of it or its affiliates, to use its reasonable best efforts to assure compliance with the conditions of Section 15(f) of the 1940 Act with respect to the public U.S. Funds. Without limiting the foregoing, Purchaser agrees that (i) for a period of not less than three years after the Closing Date, Purchaser shall use its reasonable best efforts to assure that no more than 25% of the members of the Board of Directors of any public U.S. Fund shall be “interested persons” (as defined in the 1940 Act) of Purchaser (or such other entity which acts as adviser or subadviser to the Funds) or of the predecessor investment adviser or any subadviser of the Funds and (ii) neither Purchaser nor any affiliate (including any parent company of Purchaser) of Purchaser (or any entity which will act as adviser or subadviser to the Funds), for a period of not less than two years after the Closing Date, shall impose or shall have any express or implied understanding, arrangement or intention to impose an “unfair burden” (as such term is used in Section 15(f) of the 1940 Act) on any of the Funds as a result of the transactions contemplated hereby.

(c) With respect to each Client not covered by the approval provisions of Section 6.10(a), including each Fund that is not a public U.S. Fund, Seller shall use its reasonable best efforts, or shall cause the Company to use its reasonable best efforts, to obtain, in accordance with applicable law and the applicable Investment Advisory Agreement, and as promptly as practical following the date of this Agreement, such approvals, consents or other actions, if any, by (x) the boards of directors or comparable governing bodies, if any, regulating or self-regulating authorities or shareholders required by applicable law or the arrangements governing any Client that is a Fund, and (y) for Clients that are not Funds, such Client, so that in all cases after the Closing Company or its applicable Subsidiary may continue its applicable management, advisory or sub-advisory relationship on terms that, taken as a whole, subject to applicable law, are no less favorable to such entity than the terms of the existing Investment Advisory Agreement between such Client and the applicable Company entity.

(d) Purchaser shall be provided a reasonable opportunity to review and comment on all consent materials to be used by the Company or its applicable Subsidiary pursuant to Section 6.10(a) and (c) prior to distribution. Seller shall promptly upon receipt by Seller, Company or its applicable Subsidiary make available to Purchaser copies of any and all substantive correspondence between it and Clients or representatives or counsel of such Clients relating to the consent solicitation provided for in this Section 6.10. Purchaser shall cooperate and provide such reasonable assistance as Seller may request in connection with seeking the consents contemplated by this Section 6.10, and shall not take any action with respect to the U.S. Public Funds that would reasonably be expected to cause fund shareholders to not approve new Investment Company Advisory Agreements.

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6.11 Additional Agreements Regarding Tax Matters.

(a) Interim Periods. In the case of any Interim Period

(i) income Taxes (including income based franchise Taxes) and other transactional based Taxes, e.g., sales Tax, of each of the Company and its Subsidiaries for the portion of any Interim Period ending on the Closing Date will be computed as if such taxable period ended as of the close of business on the Closing Date, and, in the case of any such Taxes of any of the Company and its Subsidiaries attributable to the ownership by any of the Company and its Subsidiaries of any equity interest in any partnership or other “flowthrough” entity (other than the Company and its Subsidiaries), as if a taxable period of such partnership or other “flowthrough” entity ended as of the close of business on the Closing Date; and

(ii) any other Tax of each of the Company and its Subsidiaries for the portion of any Interim Period ending on the Closing Date will be computed by multiplying the total amount of such Tax for the full taxable period that includes but does not end on the Closing Date by a fraction, the numerator of which is the number of days from the beginning of such taxable period to and including the Closing Date and the denominator of which is the total number of days in such full taxable period.

(b) Preparation and Filing of Tax Returns.

(i) Purchaser will be responsible for preparing and filing (or causing the preparation and filing of) all Tax Returns with respect to the assets and activities of Company and its Subsidiaries for all Interim Periods and Post-Closing Periods. Seller agrees to cooperate with Purchaser, in accordance with Purchaser’s reasonable requests, in the preparation and filing of such Tax Returns.

(ii) Seller will be responsible for preparing and filing (or causing the preparation and filing of) all Tax Returns with respect to the assets and activities of Company and its Subsidiaries for all Pre-Closing Periods (other than any Interim Period), including those Tax Returns that are due after the Closing Date. Purchaser agrees to cooperate with Seller, in accordance with Seller’s reasonable requests, in the preparation and filing of such Tax Returns and shall make appropriate officers of Company available to review and sign such Tax Returns.

(iii) Seller covenants and agrees that, for the taxable period ending on the Closing Date, Company will be included in the affiliated group which includes Seller for federal income Tax purposes and the results of its operations for such period will be reflected in a consolidated federal income Tax Return prepared for such affiliated group.

(iv) Purchaser covenants and agrees that, for the taxable period beginning on the day after the Closing Date, Company will be included in the affiliated group which includes Purchaser for federal income Tax purposes and the results of its subsequent operations will be reflected in a consolidated federal income Tax Return prepared for such affiliated group.

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(v) Subject to the provisions of this Agreement, all decisions relating to the preparation of Tax Returns shall be made in the sole discretion of the party responsible under this Agreement for such preparation.

(c) Payment of Taxes. From and after the Closing Date:

(i) Seller will pay or cause to be paid all Taxes with respect to Tax Returns which Seller is obligated to prepare and file or cause to be prepared and filed pursuant to Section 6.11(b) (and Company, upon request from Seller, shall reimburse Seller to the extent such Taxes are included as a liability (excluding any reserve for deferred Taxes) on the Closing Balance Sheet); provided, however, that Purchaser hereby assumes and agrees to pay directly to or at the direction of Seller, at least five days prior to the date payment (including estimated payment) thereof is due, the share of such Taxes relating to the Company and its Subsidiaries for the Post-Closing Period.

(ii) Purchaser will pay or cause to be paid all Taxes with respect to Tax Returns which Purchaser is obligated to prepare and file or cause to be prepared and filed pursuant to Section 6.11(b); provided, however, that Seller hereby assumes and agrees to pay directly to or at the direction of Purchaser, at least five days prior to the date payment (including estimated payment) thereof is due, the share of such Taxes relating to the Company and its Subsidiaries for the Pre-Closing Period.

(d) Seller’s Contest Rights Regarding Taxes. Notwithstanding any other provision of this Agreement to the contrary, Seller shall, at is own expense, have the sole right (but not the obligation) to control, defend, settle, compromise or prosecute in any manner any audit, examination, investigation, hearing or other proceeding (collectively, “Tax Proceeding”) with respect to any Tax Return of Company and its Subsidiaries involving only Pre-Closing Periods; provided, however, Seller, without the consent of Purchaser (which consent will not be unreasonably withheld or delayed), shall not settle, compromise or abandon any Tax Proceeding with respect to a Pre-Closing Period if such action would materially adversely affect the Purchaser, its Affiliates, or, following the Closing Date, the Company and its Subsidiaries. In addition, (i) Seller shall keep Purchaser duly informed of any such Tax Proceedings and (ii) Purchaser shall be entitled to receive copies of all correspondence and documents relating to such Tax Proceedings (but, for these purposes, excluding access to any financial and other confidential or proprietary information pertaining to any member of Seller’s consolidated group other than Company and its Subsidiaries).

(e) Purchaser’s Contest Rights Regarding Taxes. Except as expressly provided otherwise in Section 6.11(d) or in Article IX, Purchaser shall, at its own expense, have the sole right (but not the obligation) to control, defend, settle, compromise, or prosecute in any manner a Tax Proceeding with respect to any Tax Return of Company and its Subsidiaries; provided, however, Purchaser, without the consent of Seller (which consent will not be unreasonably withheld or delayed), shall not settle, compromise or abandon any Tax Proceeding related to an Interim Period. In addition, (i) Purchaser shall keep Seller duly informed of any Tax Proceedings in connection with Taxes for any Interim Period and (ii) Seller shall be entitled to receive copies of all correspondence and documents relating to such Tax Proceedings (but, for these purposes, excluding access to any financial and other confidential or proprietary information pertaining to any member of Purchaser’s consolidated group other than Company and its Subsidiaries).

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(f) Tax Sharing Agreements. On the Closing Date, all Tax sharing agreements and arrangements between (a) any of the Company and its Subsidiaries, on the one hand, and (b) Seller or any of its Affiliates (other than any of the Company and its Subsidiaries), on the other hand, will be terminated and have no further effect for any taxable year or period (whether a past, present or future year or period), and no additional payments will be made thereunder on or after the Closing Date in respect of a redetermination of Tax liabilities or otherwise.

(g) Notification Requirements. Purchaser shall, and shall cause Company to, promptly (but in all events within 20 Business Days of receipt thereof) forward to Seller all written notifications and other written communications from any Tax authority received by Purchaser or Company relating solely to any Pre-Closing Period of Company, and, consistent with the provisions of Section 6.11(d), Purchaser shall, and shall cause Company to take such reasonable actions as requested by Seller to enable Seller to take any action Seller deems appropriate with respect to any proceedings relating thereto.

(h) Cooperation. Purchaser, Seller and Company shall each at their own expense cooperate with each other and make available to each other such Tax data and other information as may be reasonably required in connection with (i) the preparation or filing of any Tax Return, election, consent or certification, or any claim for refund, (ii) any determinations of liability for Taxes, or (iii) any Tax Proceeding (“Tax Data”). Such cooperation shall include, without limitation, making their respective employees and independent auditors reasonably available on a mutually convenient basis for all reasonable purposes, including, without limitation, to sign Tax forms and consents, to provide explanations and background information and to permit the copying of books, records, schedules, workpapers, notices, revenue agent reports, settlement or closing agreements and other documents containing the Tax Data (“Tax Documentation”). The Tax Data and the Tax Documentation shall be retained until one year after the expiration of all applicable statutes of limitations (including extensions thereof); provided, however, that in the event an audit, examination, investigation or other proceeding has been instituted prior to the expiration of an applicable statute of limitations, the Tax Data and Tax Documentation relating thereto shall be retained until there is a final determination thereof (and the time for any appeal has expired).

(i) Carryforwards and Carrybacks. Purchaser will cause each of the Company and its Subsidiaries to elect, where permitted by law, to carry forward any net operating loss, net capital loss, charitable contribution or other item arising after the Closing Date that could, in the absence of such an election, be carried back to a taxable period of any of the Company and its Subsidiaries ending on or before the Closing Date in which any of the Company and its Subsidiaries were included in a consolidated income Tax Return. Purchaser, on its own behalf and on behalf of its Affiliates, hereby waives any right to use or apply any net operating loss, net capital loss, charitable contribution or other item of any of the Company and its Subsidiaries for any Tax year ending on any date following the Closing Date to any period of any of the Company and its Subsidiaries ending on or before the Closing Date.

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(j) Refunds. Seller will be entitled to retain, or receive prompt payment from Purchaser or any of its Affiliates (including the Company and its Subsidiaries) of any refund or credit arising with respect to any of the Company and its Subsidiaries (including, refunds and credits arising by reason of amended Tax Returns filed after the Closing Date or otherwise) relating to Taxes with respect to any Pre-Closing Period. Purchaser and the Company and its Subsidiaries will be entitled to retain, or receive prompt payment from Seller of, any refund or credit with respect to Taxes with respect to any Post-Closing Period relating to any of the Company and its Subsidiaries. Purchaser and Seller will equitably apportion any refund or credit with respect to Taxes with respect to any Interim Period consistent with the provisions of Section 6.11(a). The amount of any refund or credit which Seller is entitled to retain or receive pursuant to this Section 6.11(j) shall be limited to the amount of such refund or credit that exceeds the portion, if any, of such refund or credit that is reflected as an asset on the Closing Balance Sheet, increased by any interest actually paid with respect to such refund that accrued after the Closing Date. The amount of any refund or credit which Purchaser or Seller is entitled to retain or receive pursuant to this Section 6.11(j) shall be reduced to take account of any Taxes incurred upon the receipt of such refund or credit. All payments required to be made pursuant to this Section 6.11(j) shall be made within thirty days after receipt or entitlement to the refund or credit by Seller, Purchaser, the Company or its Subsidiaries. Notwithstanding anything to the contrary in this Section 6.11(j), Seller shall be entitled to receive and retain any Tax refund (including interest actually paid with respect to such refund) which represents a refund of Taxes that it previously paid pursuant to the indemnity provisions in Section 9.4(a).

(k) Transfer Taxes. All applicable sales and transfer Taxes and filing, recording, registration, stamp, documentary and other similar Taxes and fees payable in connection with the transactions contemplated by this Agreement or the documents giving effect to such transactions will be shared equally between Seller and Purchaser.

6.12 Post-Closing Confidentiality.

(a) Following the Closing, the confidentiality obligations of Purchaser under the Confidentiality Agreement with respect to information relating to Company and its Subsidiaries shall terminate. Following the Closing, Seller shall, and shall cause its controlled Affiliates and its and their officers, directors, employees, consultants, agents and advisors to, keep confidential and not use for its benefit or for the benefit of any other Person, any and all Company Confidential Information.

(b) Following the Closing, Purchaser shall, and shall cause its controlled Affiliates and its and their officers, directors, employees, consultants, agents and advisors to, keep confidential and not use for its benefit or for the benefit of any other Person, any and all Seller Confidential Information.

(c) Notwithstanding the foregoing, if a party hereto or its Affiliates or any of their officers, directors, employees, consultants, agents or advisors (collectively, “Disclosing Party”) is requested or required (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose any such information, the Disclosing Party will provide the other party with notice of such request or requirement as promptly as practicable (unless not permitted by applicable law) so that such

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Party may seek a protective order or other appropriate remedy and/or waive compliance with the foregoing provisions of this Agreement. The Disclosing Party will cooperate reasonably with the other party in connection with such other party’s efforts to seek such an order or remedy. If the other party does not obtain such protective order or other remedy, or the other party waives the Disclosing Party’s compliance with the provisions of this Section 6.12, the Disclosing Party will furnish only that portion of the applicable confidential information that is legally required, and will exercise reasonable efforts to obtain assurance that confidential treatment will be accorded such disclosed information. Any disclosure made as permitted hereunder shall not be a breach of this Section 6.12.

(d) Notwithstanding the foregoing, the parties’ respective Confidential Information shall not include information which (i) is or becomes generally available to the public other than as a result of a disclosure by Purchaser (in the case of Seller Confidential Information) or Seller (in the case of Company Confidential Information) or such other Persons in breach hereof, or (ii) becomes available to Purchaser or Seller after the Closing Date on a non-confidential basis from a source other than Company or a Company Subsidiary, provided that such source is not, after reasonable inquiry, known to be bound by a confidentiality agreement or other contractual, legal or fiduciary obligation with respect to such information.

(e) Each Party acknowledges and agrees that due to the unique nature of the other party’s Confidential Information there can be no adequate remedy at law for any breach of its obligations hereunder, that any such breach or threatened breach may allow a Party or third parties to unfairly compete with the other Party resulting in irreparable harm to such Party, and therefore, that upon any such breach or any threat thereof, each Party will be entitled to appropriate equitable and injunctive relief from a court of competent jurisdiction without the necessity of proving actual loss, in addition to whatever remedies either of them might have at law or equity.

6.13 Cooperation. Following the Closing, each party agrees to cooperate in good faith to provide information to the other party that is reasonably necessary in connection with regulatory, legal, accounting and similar matters of Seller and its Affiliates on the one hand and Company and its Affiliates on the other (and not relating to any dispute, litigation or arbitration between the parties hereto or their Affiliates). The parties agree that any information provided pursuant to this provision shall be kept confidential and shall not be used for any purpose except for the reason given in the request.

6.14 Certain Other Matters. The parties agree to take such other actions as may be set forth in Schedule 6.14.

ARTICLE VII

CONDITIONS PRECEDENT

7.1 Conditions to Each Party’s Obligation to Effect the Closing. The respective obligation of each party to effect the Closing shall be subject to the satisfaction at or prior to the Closing Date of the following conditions:

(a) Regulatory Approvals. All Requisite Regulatory Approvals shall have been obtained and shall remain in full force and effect or, in the case of waiting periods, shall have expired or been terminated.

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(b) No Injunctions or Restraints; Illegality. No order, injunction, decree or judgment issued by any court or governmental body or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the transactions contemplated by this Agreement shall be in effect. No statute, rule, regulation, order, injunction or decree shall have been enacted, entered, promulgated or enforced by any Governmental Entity which prohibits or makes illegal consummation of the Closing.

7.2 Conditions to Obligations of Purchaser. The obligation of Purchaser to effect the Closing is also subject to the satisfaction or waiver by Purchaser at or prior to the Closing Date of the following conditions:

(a) Representations and Warranties. The representations and warranties of Seller set forth in Article III of this Agreement shall be true and correct in all material respects (for this purpose disregarding any qualification or limitation as to materiality or a Material Adverse Effect), in each case as of the date of this Agreement and as of the Closing Date as though made on such Closing Date, except to the extent such representations and warranties are expressly made only as of an earlier date, in which case as of such earlier date; provided that, if any of such representations and warranties shall not be so true and correct, then the condition stated in this Section 7.2(a) shall be deemed satisfied if and only if the cumulative effect of all inaccuracies of such representations and warranties (for this purpose disregarding any qualification or limitation as to materiality or Material Adverse Effect) shall not be or have a Material Adverse Effect. Purchaser shall have received a certificate signed on behalf of Seller by its Chief Executive Officer or Chief Financial Officer to the foregoing effect.

(b) Performance of Obligations of Seller. Seller shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date. Purchaser shall have received a certificate signed on behalf of Seller by its Chief Executive Officer or Chief Financial Officer to the foregoing effect.

(c) Investment Advisory Agreement. A new Investment Advisory Agreement for each of the Excelsior Mutual Funds shall have been approved by the applicable Public Fund Board and by the shareholders of each such Fund in the manner contemplated by Section 6.10(a)(i)(A).

7.3 Conditions to Obligations of Seller. The obligation of Seller to effect the Closing is also subject to the satisfaction or waiver by Seller at or prior to the Closing Date of the following conditions:

(a) Representations and Warranties. The representations and warranties of Purchaser set forth in Article IV of this Agreement shall be true and correct in all material respects (for this purpose disregarding any qualification or limitation as to materiality or a Material Adverse Effect), in each case as of the date of this Agreement and as of the Closing Date as though made on such Closing Date, except to the extent such representations and

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warranties are expressly made only as of an earlier date, in which case as of such earlier date; provided that, if any of such representations and warranties shall not be so true and correct, then the condition stated in this Section 7.3(a) shall be deemed satisfied if and only if the cumulative effect of all inaccuracies of such representations and warranties (for this purpose disregarding any qualification or limitation as to materiality or Purchaser Material Adverse Effect) shall not be or have a Purchaser Material Adverse Effect. Seller shall have received a certificate signed on behalf of Purchaser by its Chief Executive Officer or Chief Financial Officer to the foregoing effect.

(b) Performance of Obligations of Purchaser. Purchaser shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date. Seller shall have received a certificate signed on behalf of Purchaser by its Chief Executive Officer or Chief Financial Officer to the foregoing effect.

ARTICLE VIII

TERMINATION AND AMENDMENT

8.1 Termination. This Agreement may be terminated at any time prior to the Closing Date:

(a) by mutual written consent of Seller and Purchaser;

(b) by either Seller or Purchaser, if the Closing shall not have occurred on or before December 1, 2007 (provided that the right to terminate this Agreement under this Section 8.1(b) shall not be available to any party whose action or failure to act has been the cause of or resulted in the failure of the Closing to occur on or before such date and such action or failure to act constitutes a breach of this Agreement);

(c) by either Seller or Purchaser, if any Requisite Regulatory Approval required to be obtained pursuant to Section 7.1(a) has been denied by the relevant Governmental Entity and such denial has become final and nonappealable or any Governmental Entity of competent jurisdiction shall have issued a final, nonappealable injunction permanently enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement;

(d) by Seller, if Purchaser has breached any representation, warranty, covenant or agreement on the part of Purchaser contained in this Agreement in any material respect (for this purpose disregarding any qualification or limitation as to materiality or a Purchaser Material Adverse Effect), which breach would, individually or together with all such other then uncured breaches by Purchaser, constitute grounds for the conditions set forth in Section 7.2(a) or 7.2(b) not to be satisfied at the Closing Date and such breach is not cured within 15 Business Days after written notice thereof to Purchaser; or

(e) by Purchaser, if Seller has breached any representation, warranty, covenant or agreement on the part of Seller contained in this Agreement in any material respect (for this purpose disregarding any qualification or limitation as to materiality or a Purchaser Material Adverse Effect), which breach would, individually or together with all such other then uncured breaches by Seller, constitute grounds for the conditions set forth in Section 7.3(a) or 7.3(b) not to be satisfied at the Closing Date and such breach is not cured within 15 Business Days after written notice thereof to Seller.

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8.2 Effect of Termination. In the event of termination of this Agreement pursuant to this Article VIII, no party to this Agreement shall have any liability or further obligation hereunder to the other party hereto, except that (i) the last sentence of Section 6.2(a) (Access to Information), and Section 6.4 (Public Disclosure), Section 8.2 (Effect of Termination), Section 10.1 (Expenses), Section 10.2 (Notices) and Section 10.6 (Governing Law) shall survive any termination of this Agreement and (ii) notwithstanding anything to the contrary in this Agreement, termination will not relieve a breaching party from liability for any willful and material breach of any provision of this Agreement.

8.3 Amendment. Subject to compliance with applicable law, this Agreement may be amended by the parties hereto. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto.

8.4 Extension; Waiver. At any time prior to the Closing Date, the parties hereto may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party, but such extension or waiver or failure to insist on strict compliance with an obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure.

ARTICLE IX

INDEMNIFICATION

9.1 Survival of Representations and Warranties and Agreements. The respective representations and warranties of Seller and Purchaser contained in this Agreement shall survive the Closing but shall expire on the eighteen month anniversary of the Closing Date, except with respect to, and to the extent of, any claim of which written notice specifying, in reasonable detail, the nature and, to the extent known, amount of the claim has been given by one party to the other prior to such expiration; provided, however, that, notwithstanding the foregoing, the representations and warranties set forth in (i) Section 3.1(b) (second and third sentences only) (Corporate Organization), Section 3.2 (Capitalization), Section 3.3(a) (Authority; No Violation) and Section 3.22 (Broker’s Fees) (the “Designated Seller Representations”) and Section 4.2(a) (Authority; No Violation) and Section 4.8 (Broker’s Fees) (the “Designated Purchaser Representations”) shall survive the Closing and continue in full force and effect indefinitely and (ii) Section 3.10 (Taxes and Tax Returns) shall survive the Closing and continue in full force and effect to the full extent of any applicable statute of limitations. The respective covenants and agreements of Seller and Purchaser contained in this Agreement (including, without limitation, the indemnification obligations set forth in this Article IX) shall survive the Closing, provided that any such covenants and agreements that by their terms are to be performed prior to the Closing Date shall survive the Closing only until the twelve month anniversary of the Closing.

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9.2 Indemnification by Seller. Subject to the remaining provisions of this Article IX, Seller shall indemnify, defend and hold Purchaser and its officers, directors, employees, agents, advisers, representatives and Affiliates (collectively, the “Purchaser Indemnitees”) harmless from and after the Closing Date for the period set forth in Section 9.1 (including any extension thereof as expressly provided for in such Section) from and against any Damages incurred or suffered by the Purchaser Indemnitees to the extent resulting or arising from: (a) any inaccuracy in any of the representations and warranties made herein by Seller (for this purpose disregarding any qualification or limitation as to materiality or a Material Adverse Effect), (b) any breach of any covenant or agreement of Seller made herein (other than Section 5.3(h) or Section 6.11, which shall be governed by Section 9.4) or (c) any of the matters listed on Schedule 9.2 (but subject to the limitations set forth thereon). Notwithstanding the foregoing, with respect to Damages arising under Section 9.2(a) (except for Damages resulting from breaches of the Designated Seller Representations) and with respect to Damages arising under Item 2 listed on Schedule 9.2, (i) Seller shall not be liable to indemnify any Purchaser Indemnitees against Damages unless and until the aggregate amount of such Damages exceeds $25,000,000 and then only to the extent of such excess, and (ii) Seller’s maximum liability to the Purchaser Indemnitees for Damages shall not exceed $330,000,000.

9.3 Indemnification by Purchaser. Subject to the remaining provisions of this Article IX, Purchaser shall indemnify, defend and hold Seller and its officers, directors, employees, agents, advisers, representatives and Affiliates (collectively, the “Seller Indemnitees”) harmless from and after the Closing Date for the period set forth in Section 9.1 (including any extension thereof as expressly provided for in such Section) from and against any Damages incurred or suffered by the Seller Indemnitees to the extent resulting or arising from (a) any inaccuracy in any of the representations and warranties made herein by Purchaser (for this purpose disregarding any qualification or limitation as to materiality or a Material Adverse Effect), and (b) any breach of any covenant or agreement of Purchaser made herein. Notwithstanding the foregoing with respect to Damages arising under Section 9.3(a) (and except for Damages resulting from breaches of the Designated Purchaser Representations), (i) Purchaser shall not be liable to indemnify any Seller Indemnitees against Damages unless and until the aggregate amount of such Damages exceeds $25,000,000 and then only to the extent of such excess, and (ii) Purchaser’s maximum liability to the Seller Indemnitees for Damages shall not exceed $330,000,000.

9.4 Tax and Benefit Liability Indemnification.

(a) Seller will indemnify, defend and hold harmless the Purchaser Indemnitees from and against (i) all Taxes of or with respect to the Company and its Subsidiaries for any Pre-Closing Period, (ii) all liability (as a result of Treasury Regulation Section 1.1502-6 or any similar provision of state, local or foreign Law, as a transferee or successor, by contract or otherwise) for Taxes of Seller or any other Person (other than any of the Company and its Subsidiaries) which is or has ever been affiliated with any of the Company and its Subsidiaries, or with whom any of the Company and its Subsidiaries otherwise joins or has ever joined (or is or has ever been required to join) in filing any consolidated, combined or unitary Tax Return, prior to the Closing, (iii) breach by Seller of any agreement or covenant contained in Section 5.3(h) or Section 6.11, (iv) all liabilities under the Company Benefit Plans other than benefit liabilities under the Company-Only Plans (except as provided in clause (vi) hereof), (v) any

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Controlled Group Liability, (vi) liabilities (A) under the Company-Only Plans that are not fully accrued for on the Closing Balance Sheet in accordance with GAAP or with respect to which there is not a corresponding and offsetting Company asset thereon (provided that Seller shall not be liable under this Section 9.4 or under Section 9.2 for any failure of the Pension Plan to be so fully accrued caused by any action that may be taken by Purchaser following the Closing Date in respect of or negatively impacting the Pension Plan) and (B) under the employment letters listed in Section 9.4(a) of the Company Disclosure Schedule, and (vii) all liability for any reasonable legal, accounting, appraisal, consulting or similar fees and expenses actually incurred relating to the foregoing provided, however, that in the case of clauses (i) and (ii) Seller shall be liable only to the extent such Taxes exceed the amount, if any, of such Taxes that is included as a liability (excluding any reserve for deferred Taxes) on the Closing Balance Sheet.

(b) Purchaser will indemnify, defend and hold Seller Indemnitees from and against (i) any and all Damages incurred by the Seller Indemnitees as a result of the breach by Purchaser of any covenant or obligation under Section 6.11, (ii) all liability for Taxes attributable to a Post-Closing Period, and (iii) all liability for any reasonable out of pocket legal, accounting, appraisal, consulting or similar fees and expenses actually incurred relating to the foregoing.

(c) The obligations of each party to indemnify, defend and hold harmless the other party and other Persons, pursuant to Sections 9.4(a) and 9.4(b), (i) are not subject to the limitations set forth in Section 9.2 and (ii) will terminate 30 days after the expiration of all applicable statutes of limitations (giving effect to any extensions thereof); provided, however, that such obligations to indemnify, defend and hold harmless will not terminate with respect to any individual item as to which an Indemnified Party shall have, before the expiration of the applicable period, previously made a claim by delivering a notice (stating in reasonable detail the basis of such claim) to the applicable Indemnifying Party.

9.5 Indemnification Procedure.

(a) Promptly after the incurrence of any Damages by the party seeking indemnification hereunder (the “Indemnified Party”), including, without limitation, any claim by a third party described in Section 9.5(d) hereof, which might give rise to indemnification hereunder or the discovery of any facts or circumstances that the Indemnified Party believes may result in an indemnification claim hereunder, the Indemnified Party shall deliver to the party from which indemnification is sought (the “Indemnifying Party”) a certificate (the “Claim Certificate”), which Claim Certificate shall:

(i) state that the Indemnified Party has paid or properly accrued Damages, or anticipates that it shall incur liability for Damages for which such Indemnified Party is entitled to indemnification pursuant to this Agreement; and

(ii) specify in reasonable detail each individual item of Damages included in the amount so stated to the extent known, the date such item was paid or properly accrued (if applicable), the basis for any anticipated liability and the nature of the misrepresentation, breach of warranty or breach of covenant or claim to which each such item is related and the computation of the amount, if reasonably capable of computation to which such Indemnified Party claims to be entitled hereunder;

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provided, however, that the failure to deliver such Claim Certificate shall not relieve the Indemnifying Party of its obligations hereunder except to the extent such failure shall have prejudiced the Indemnifying Party.

(b) In case the Indemnifying Party shall object to the indemnification of an Indemnified Party in respect of any claim or claims specified in any Claim Certificate, the Indemnifying Party shall, within 10 Business Days after receipt by the Indemnifying Party of such Claim Certificate, deliver to the Indemnified Party a written notice to such effect and the Indemnifying Party and the Indemnified Party shall, within the 10 Business Day period beginning on the date of receipt by the Indemnified Party of such written objection, attempt in good faith to agree upon the rights of the respective parties with respect to each of such claims to which the Indemnifying Party shall have so objected. If the Indemnified Party and the Indemnifying Party shall succeed in reaching agreement on their respective rights with respect to any of such claims, the Indemnified Party and the Indemnifying Party shall promptly prepare and sign a memorandum setting forth such agreement. Should the Indemnified Party and the Indemnifying Party be unable to agree as to any particular item or items or amount or amounts, then the Indemnified Party and the Indemnifying Party shall submit such dispute to arbitration pursuant to Section 10.7.

(c) Claims for Damages specified in any Claim Certificate to which an Indemnifying Party shall not object in writing within 10 Business Days of receipt of such Claim Certificate, claims for Damages covered by a memorandum of agreement of the nature described in Section 9.5(b) and claims for Damages the validity and amount of which have been the subject of a Final Determination under Section 10.7, are hereinafter referred to, collectively, as “Agreed Claims.” Within 10 Business Days of the determination of the amount of any Agreed Claims, subject to the limitations of this Article IX, the Indemnifying Party shall pay to the Indemnified Party an amount equal to the Agreed Claim by cashier’s check or wire transfer to the bank account or accounts designated in writing by the Indemnified Party not less than one Business Day prior to such payment.

(d) Promptly after the assertion by any third party of any claim against any Indemnified Party that in the reasonable judgment of such Indemnified Party may result in the incurrence by such Indemnified Party of Damages for which such Indemnified Party would be entitled to indemnification pursuant to this Agreement, such Indemnified Party shall deliver to the Indemnifying Party a written notice describing in reasonable detail such claim and such Indemnifying Party may, at its option, assume the defense of the Indemnified Party against such claim (including the employment of counsel, who shall be reasonably satisfactory to such Indemnified Party) at such Indemnifying Party’s expense. Any failure on the part of the Indemnified Party to provide prompt notice shall not limit any of the obligations of the Indemnifying Party (except to the extent such failure prejudices the defense of such claim). Any Indemnified Party shall have the right to employ separate counsel in any such action or claim and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the Indemnifying Party. Notwithstanding the foregoing, the Indemnifying Party shall not be entitled to assume such control, and shall be responsible for the fees and expenses of the Indemnified Party’s counsel, if (i) the Indemnifying Party shall have failed, within 15 Business Days after having been notified by the Indemnified Party of the existence of such claim as provided in the preceding sentence, to assume the defense of such claim or to notify the

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Indemnified Party in writing that it shall assume the defense of such claim, (ii) the employment of such counsel has been specifically authorized in writing by the Indemnifying Party, (iii) the named parties to any such action (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party and such Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to the Indemnified Party which are not available to, or the assertion of which would be adverse to the interests of, the Indemnified Party, or (iv) the Indemnified Party shall have been advised in writing by counsel that the assumption of such defense by the Indemnifying Party would be inappropriate due to an actual or potential conflict of interest (provided that the Indemnifying Party shall not be liable for the fees and expenses of more than one firm of counsel for all Indemnified Parties, other than local counsel). No Indemnifying Party shall be liable to indemnify any Indemnified Party for any settlement of any such action or claim effected without the consent of the Indemnifying Party, but if settled with the written consent of the Indemnifying Party, or if there be a final judgment for the plaintiff in any such action, the Indemnifying Party shall indemnify and hold harmless each Indemnified Party from and against any loss or liability by reason of such settlement or judgment, subject to the limitations set forth in this Article IX. If the Indemnifying Party shall assume the defense of any claim in accordance with the provisions of this Section 9.5(d), the Indemnifying Party shall obtain the prior written consent of the Indemnified Party (which shall not be unreasonably withheld) before entering into any settlement of such claim if the settlement does not release the Indemnified Party from all liabilities and obligations with respect to such claim, the settlement is in excess of the maximum liability set forth in Section 9.2 or 9.3, as applicable, or the settlement imposes injunctive or other equitable relief against the Indemnified Party. The Indemnified Party and the Indemnifying Party each agrees to fully cooperate in all matters covered by this Section 9.5(d), including, as required, the furnishing of books and records, personnel and witnesses and the execution of documents, in each case as necessary for any defense of such third party claim and at no cost to the other party (provided that any reasonable out-of-pockets expenses of the Indemnified Party incurred in connection with the foregoing shall be considered part of Damages hereunder).

9.6 Certain Offsets; Tax Treatment of Payments. For purposes of this Article IX, “Damages” shall be net of any insurance or other recoveries (net of any related deductible or expenses incurred in securing such recovery) payable to the Indemnified Party or its Affiliates in connection with the facts giving rise to the right of indemnification. In addition, any indemnification payment made pursuant to this Article IX shall be reduced by the amount of any net Tax benefit actually realized by the Indemnified Party through a reduction in Taxes otherwise due as a result of the Damages incurred or suffered by the Indemnified Party. The parties agree to treat any payment pursuant to this Article IX (other than the portion treated as interest) as an adjustment to the Purchase Price.

9.7 Exclusive Remedy. After the Closing Date, this Article IX shall provide the exclusive remedy for any of the matters addressed herein or other claims arising out of this Agreement, except in the case of common law fraud or with respect to matters for which the remedy of specific performance, injunctive relief or other non-monetary equitable remedies are available.

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ARTICLE X

GENERAL PROVISIONS

10.1 Expenses. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense.

10.2 Notices. All notices and other communications required or permitted to be given hereunder shall be sent to the party to whom it is to be given with copies to all other parties as follow (as elected by the party giving such notice) and be either personally delivered against receipt, by facsimile or other wire transmission, by registered or certified mail (postage prepaid, return receipt requested) or deposited with an express courier (with confirmation) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

(a) if to Seller, to:

The Charles Schwab Corporation

101 Montgomery Street

San Francisco, California 94104

Attention: Christopher V. Dodds

Fax: (415) 636-5877

with a copy to:

The Charles Schwab Corporation

101 Montgomery Street

Francisco, California 94104

Attention: Keith A. Wesselmann

Fax: (415) 636-3502

and

The Charles Schwab Corporation

101 Montgomery Street

Francisco, California 94104

Attention: Carrie E. Dwyer

Facsimile: (415) 667-3596

and to:

Howard Rice Nemerovski Canady Falk & Rabkin,

A Professional Corporation

Three Embarcadero Center, 7th Floor

San Francisco, California 94111

Attention: Lawrence B. Rabkin

                 Richard W. Canady

Fax: (415) 217-5910

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(b) if to Purchaser, to:

Bank of America Corporation

Bank of America Corporate Center

100 N. Tryon Street

Charlotte, North Carolina 28255

Attention: Timothy J. Mayopoulos,

                 Executive Vice President and General Counsel

Fax: (704) 370-3515

with a copy to:

Wachtell, Lipton, Rosen & Katz

51 West 52^nd Street

New York, New York 10019

Attention: Edward D. Herlihy

                 Nicholas G. Demmo

Fax: (212) 403-2000

All notices and other communications shall be deemed to have been given (i) when received if given in person, (ii) on the date of electronic confirmation of receipt if sent by facsimile or other wire transmission, (iii) three Business Days after being deposited in the U.S. mail, certified or registered mail, postage prepaid, or (iv) one Business Day after being deposited with a reputable overnight courier.

10.3 Interpretation. When a reference is made in this Agreement to Sections, Exhibits or Schedules, such reference shall be to a Section of or Exhibit or Schedule to this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation.”

10.4 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart.

10.5 Entire Agreement. This Agreement (including the Disclosure Schedules and other documents and the instruments referred to herein) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof other than the Confidentiality Agreement.

10.6 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York, without regard to any applicable conflicts of law.

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10.7 Dispute Resolution.

(a) The arbitration procedure set forth in this Section 10.7 shall be the sole and exclusive method for resolving and remedying any Dispute, except as provided in Exhibit B.

(b) If a party asserts that a Dispute exists, such party shall deliver a written notice to the other parties specifying the nature of the asserted Dispute and requesting a meeting to attempt to resolve the same. If no resolution is reached within 45 days after delivery of such notice, the party delivering the notice of Dispute may, within 75 days after delivery of the notice of Dispute, commence arbitration hereunder by delivering to the other party a notice of arbitration (a “Notice of Arbitration”) and by filing a copy of such Notice of Arbitration with the New York, New York office of the American Arbitration Association. The Notice of Arbitration shall specify the matters as to which arbitration is sought, the nature of the Dispute, the claims of the party lodging the Notice of Arbitration and the amount and nature of damages or other relief sought to be recovered and any other matters required to be included therein by the Commercial Arbitration Rules of the American Arbitration Association as in effect from time to time.

(c) The arbitration shall be conducted in New York, New York under the Commercial Arbitration Rules of the American Arbitration Association as in effect from time to time, except as otherwise set forth herein or as modified by the agreement of Seller and Purchaser. The arbitration shall be confidential. If the amount in controversy is less than $250,000, the arbitration shall be conducted by a single neutral arbitrator. If the amount in controversy is equal to or greater than $250,000, the arbitration shall be conducted by three neutral arbitrators. The arbitrator shall conduct the arbitration such that a final result, determination, finding, judgment and/or award (the “Final Determination”) is made or rendered as soon as practicable, but in no event later than 120 days after the delivery of the Notice of Arbitration nor later than 30 days following completion of the arbitration. The Final Determination shall be made in writing, shall state the basis for the determination and shall be agreed upon and signed by the arbitrator(s). The Final Determination shall be final and binding on all parties to the arbitration, and there shall be no appeal from or reexamination of the Final Determination, except for fraud, perjury, evident partiality or misconduct by an arbitrator prejudicing the rights of a party or to correct manifest clerical errors. All costs, expenses and fees of the arbitrator and the American Arbitration Association pursuant to this Section 10.7 shall be borne equally by Seller and Purchaser.

(d) A party to the arbitration may enforce the Final Determination in any state or federal court having jurisdiction over the Dispute. For the purpose of any action or proceeding instituted with respect to any Final Determination, each party hereby irrevocably submits to the jurisdiction of such court, irrevocably consents to the service of process by registered mail or personal service and hereby irrevocably waives, to the fullest extent permitted by law, any objection which it may have or hereafter have as to personal jurisdiction, the laying of the venue of any such action or proceeding brought in any such court and any claim that any such action or proceeding has been brought in an inconvenient forum.

(e) Notwithstanding the foregoing, nothing contained herein shall prevent any party (i) from applying to any state or federal court of competent jurisdiction for the remedies of specific performance, injunctive relief or other non-monetary equitable remedies or (ii) from instituting litigation to enforce any Final Determination.

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10.8 Attorneys’ Fees. In the event any party initiates any legal action (including an arbitration pursuant to Section 10.7) to enforce the provisions of this Agreement, the prevailing party shall be entitled to the recovery of reasonable attorneys’ fees and costs in such action.

10.9 Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable.

10.10 Assignment; Third Party Beneficiaries. Neither this Agreement nor any of the rights, interests or obligations shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Except for Section 6.7 (Indemnification; Directors’ and Officers’ Insurance) which is for the benefit of the persons specified in Section 6.7(c), this Agreement (including the documents and instruments referred to herein) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder.

[Signature page follows]

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IN WITNESS WHEREOF, Seller and Purchaser have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written.

THE CHARLES SCHWAB CORPORATION
By:	/s/ Christopher V. Dodds
Name:	/s/ Christopher V. Dodds
Title:	EVP and Chief Financial Officer
BANK OF AMERICA CORPORATION
By:	/s/ Gregory L. Curl
Name:
Title:

[Signature page to Stock Purchase Agreement]

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Exhibit A: Knowledge

Peter Scaturro

Frances Aldrich Sevilla-Sacasa

James L. Bailey

Miriam Esteve

Evelyn Tressitt

Richard Brinkmann

Christopher Dodds

Jan Hier-King

Geoff Huggins

Erin Leske

Exhibit B: Closing Stockholders’ Equity; Adjustment of Purchase Price

(1) No later than three Business Days prior to the date on which the Closing is scheduled to occur, Seller shall deliver to Purchaser a good faith estimate of the Closing Balance Sheet and, based on such estimated Closing Balance Sheet, a good faith estimate of Closing Stockholders’ Equity (the “Estimated Stockholders’ Equity”). Such certificate shall be in form and substance reasonably satisfactory to Purchaser and Seller. Seller shall also deliver to Purchaser copies of all workpapers and other documents used in the calculation of Estimated Stockholders’ Equity as necessary to allow Purchaser and Seller to determine the adjustments to the Purchase Price hereunder.

(2) If (i) Target Stockholders’ Equity exceeds Estimated Stockholders’ Equity, the Purchase Price shall be decreased by the amount of such excess or (ii) Estimated Stockholders’ Equity exceeds Target Stockholders’ Equity, the Purchase Price shall be increased by the amount of such excess. “Target Stockholders’ Equity” means $1,297,090,000 plus an amount equal to (x) 50% of the consolidated earnings, if any, of Company and its Subsidiaries up to Eighty Million U.S. Dollars ($80,000,000) of earnings, calculated in accordance with the Company Financial Statements, for the period from September 30, 2006 through Closing, and (y) any consolidated earnings of Company and its Subsidiaries, calculated in accordance with the Company Financial Statements, for the period from the date hereof through Closing, in excess of Eighty Million U.S. Dollars ($80,000,000). Notwithstanding the foregoing, such earnings shall be calculated to exclude (i) any gains or losses resulting from any restructuring of Company’s investment securities portfolio consented to by Purchaser in accordance with Section 5.3, (ii) any compensation expenses resulting from plans other than Company-Only Plans (other than ordinary course expenses consistent with past practice, e.g., Seller 401(k) match expenses) or otherwise arising in connection with the execution, delivery or consummation of the transactions contemplated by the Purchase Agreement (including items 3, 8 and 9 of Attachment 3.8 to the Disclosure Schedule and items 1 – 4 of Attachment 3.11(g) to the Disclosure Schedule) and (iii) any increase or decrease in the reserve for the matters addressed in clause (ii) of the last sentence in item (3) below relative to the amount of the Reserve (as defined in item (3) below).

(3) As promptly as practicable, but no later than 45 days, after the Closing Date, Purchaser will cause to be prepared and delivered to Seller the consolidated balance sheet of Company and its Subsidiaries as of the close of business on the Closing Date (and shall reflect fully the effectuation of the transactions contemplated by Section 5.2 of the Agreement and any compensation expense of Seller that is to be borne by Company or its Subsidiaries) prepared in accordance with the accounting principles, policies, practices and methodologies used in connection with the preparation of the Balance Sheet (as reflecting the Final Stockholders’ Equity, the “Closing Balance Sheet”). The Closing Balance Sheet will be accompanied by a certificate of Purchaser specifying that it was prepared in accordance with the provisions of this Section and setting forth Purchaser’s calculation of Closing Stockholders’ Equity. “Closing Stockholders’ Equity” means the consolidated stockholders’ equity of Company and its Subsidiaries as shown on the Closing Balance Sheet, determined as set forth in this Exhibit. Notwithstanding the foregoing, (i) the value of the assets available for sale by Company in its investment securities portfolio as of September 30, 2006, and as of the Closing shall be included on the Closing Balance Sheet at the values reflected on the Balance Sheet (i.e., there shall be

excluded from the Closing Balance Sheet the impact of any mark-to-market or similar adjustments to such assets subsequent to September 30, 2006), and any gains or losses resulting from any restructuring of Company’s investment securities portfolio consented to by Purchaser in accordance with Section 5.3 shall be excluded from the Closing Balance Sheet, and (ii) the Closing Balance Sheet shall include a specific reserve in the amount and for the matters orally agreed by the parties and discussed in a meeting on November 19, 2006 (the “Reserve”) regardless of whether such amount is equal to the actual amount of such reserve pursuant to GAAP reflected on the consolidated balance sheet of Company and its Subsidiaries as of the close of business on the Closing Date.

(4) If Seller disagrees with Purchaser’s calculation of Closing Stockholders’ Equity, Seller may, within 45 days after delivery of Purchaser’s delivery of the Closing Balance Sheet, deliver a notice to Purchaser disagreeing with such calculation and which specifies Seller’s calculation of such amount and, in reasonable detail, Seller’s grounds for such disagreement. Any such notice of disagreement shall specify those items or amounts as to which Seller disagrees, and Seller shall be deemed to have agreed with all other items and amounts contained in the Closing Balance Sheet and the Purchaser’s calculation of Closing Stockholders’ Equity.

(5) If a notice of disagreement shall be duly delivered pursuant to the preceding subsection, Purchaser and Seller shall, during the 15 days following such delivery, use their reasonable best efforts to reach agreement on the disputed items or amounts in order to determine, as may be required, the amount of Closing Stockholders’ Equity, which amount shall not be less than the amount thereof shown in Purchaser’s calculations delivered pursuant to clause (3) of this Exhibit nor more than the amount thereof shown in Seller’s calculation delivered pursuant to clause (4) of this Exhibit. If Purchaser and Seller are unable to reach such agreement during such period, they shall promptly thereafter cause Ernst & Young L.L.P. (or if such firm is unable or unwilling to act, independent accountants of nationally recognized standing reasonably satisfactory to Purchaser and Seller (who shall not have any material relationship with Purchaser or Seller)), promptly to review this Agreement and the disputed items or amounts for the purpose of calculating Closing Stockholders’ Equity. In making such calculation, such independent accountants shall consider only those items or amounts in the Closing Balance Sheet or Purchaser’s calculation of Closing Stockholders’ Equity as to which Seller has disagreed. Such independent accountants shall deliver to Purchaser and Seller, as promptly as practicable, a report setting forth such calculation. Such report shall be final and binding upon Purchaser and Seller. The cost of such review and report shall be borne (i) by Purchaser if the difference between Final Stockholders’ Equity and Purchaser’s calculation of Closing Stockholders’ Equity delivered pursuant to clause (3) of this Exhibit is greater than the difference between Final Stockholders’ Equity and Seller’s calculation of Closing Stockholders’ Equity delivered pursuant to clause (4) of this Exhibit, (ii) by Seller if the first such difference is less than the second such difference and (iii) otherwise equally by Purchaser and Seller.

(6) Purchaser and Seller agree that they will, and agree to cause their respective independent accountants and each of Company and its Subsidiaries to, cooperate and assist in the preparation of the Closing Balance Sheet and the calculation of Closing Stockholders’ Equity and in the conduct of the audits and reviews referred to in this Exhibit, including the making available to the extent necessary of books, records, work papers and personnel.

(7) If Estimated Stockholders’ Equity exceeds Final Stockholders’ Equity, Purchaser shall be entitled to receive a payment from Seller equal to the amount of such excess. If Final Stockholders’ Equity exceeds Estimated Stockholders’ Equity, Seller shall be entitled to receive a payment from Purchaser equal to the amount of such excess. “Final Stockholders’ Equity” means the Closing Stockholders’ Equity (i) as shown in Purchaser’s calculation delivered pursuant to clause (3) of this Exhibit, if no notice of disagreement with respect thereto is duly delivered pursuant to clause (4) of this Exhibit; or (ii) if such a notice of disagreement is delivered, (A) as agreed by Purchaser and Seller pursuant to Section 2.5(e) or (B) in the absence of such agreement, as shown in the independent accountant’s calculation delivered pursuant to clause (5) of this Exhibit; provided that in no event shall Final Stockholders’ Equity be more than Seller’s calculation of Closing Stockholders’ Equity delivered pursuant to clause (4) of this Exhibit or less than Purchaser’s calculation of Closing Stockholders’ Equity delivered pursuant to clause (3) of this Exhibit.

(8) Any payment pursuant to clause (7) of this Exhibit shall be made at a mutually convenient time and place within 10 days after the Final Stockholders’ Equity has been determined by wire transfer of immediately available funds. Any payment shall be made by wire transfer of same day funds to the account designated by the party entitled to such payment, and shall be accompanied by interest on such amount from and including the Closing Date to but excluding the date of payment at a rate per annum equal to the Prime Rate as published in the Wall Street Journal, Eastern Edition in effect from time to time during the period from the Closing Date to the date of payment.

EX-12.1

THE CHARLES SCHWAB CORPORATION

EXHIBIT 12.1

Computation of Ratio of Earnings to Fixed Charges

(Dollar amounts in millions, unaudited)

Year Ended December 31,	2006		2005		2004		2003		2002
Earnings from continuing operations before taxes on earnings and extraordinary gain	$	1,476	$	1,027	$	547	$	627	$	195
Fixed charges
Interest expense:
Brokerage client cash balances		426		378		113		76		164
Deposits from banking clients		200		74		21		5		—
Long-term debt		29		30		28		30		40
Other		24		19		10		18		6
Total		679		501		172		129		210
Interest portion of rental expense		52		56		65		72		68
Total fixed charges (A)		731		557		237		201		278
Earnings from continuing operations before taxes on earnings, extraordinary gain, and fixed charges (B)	$	2,207	$	1,584	$	784	$	828	$	473
Ratio of earnings to fixed charges (B) ÷ (A) (1)		3.0		2.8		3.3		4.1		1.7
Ratio of earnings to fixed charges excluding brokerage and banking client interest expense (2)		15.1		10.8		6.3		6.2		2.7

⁽¹⁾ The ratio of earnings to fixed charges is calculated in accordance with SEC requirements. For such purposes, “earnings” consist of earnings from continuing operations before taxes on earnings, extraordinary gain, and fixed charges. “Fixed charges” consist of interest expense as listed above, including one-third of rental expense, which is estimated to be representative of the interest factor.

⁽²⁾ Because interest expense incurred in connection with both payables to brokerage clients and deposits from banking clients is completely offset by interest revenue on related investments and margin loans, the Company considers such interest to be an operating expense. Accordingly, the ratio of earnings to fixed charges excluding brokerage and banking client interest expense reflects the elimination of such interest expense as a fixed charge.

EX-21.1

THE CHARLES SCHWAB CORPORATION

EXHIBIT 21.1

Subsidiaries of the Registrant

Pursuant to Item 601 (b)(21)(ii) of Regulation S-K, certain subsidiaries of the Registrant have been omitted which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary (as defined in Rule 1-02(w) of Regulation S-X) as of December 31, 2006.

The following is a listing of the significant subsidiaries of the Registrant:

Schwab Holdings, Inc. (holding company for Charles Schwab & Co., Inc.), a Delaware corporation

Charles Schwab & Co., Inc., a California corporation

Charles Schwab Investment Management, Inc., a Delaware corporation

U.S. Trust Corporation (holding company for United States Trust Company, National Association), a New York corporation ⁽¹⁾

United States Trust Company, National Association, a New York corporation ⁽¹⁾

Charles Schwab Bank, National Association, a Nevada corporation

UST Mortgage Company, a Florida corporation ⁽¹⁾

Other subsidiaries of the Registrant include:

The Charles Schwab Trust Company, a California corporation

⁽¹⁾ These subsidiaries are currently reflected as discontinued operations at December 31, 2006.

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements of our report dated February 22, 2007, relating to the consolidated financial statements and financial statement schedule of The Charles Schwab Corporation, and management’s report on the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of The Charles Schwab Corporation for the year ended December 31, 2006.

Filed on Form S-3:
Registration Statement No. 333-114729	(Debt Securities, Junior Subordinated Debentures, Preferred Stock, Depositary Shares, Common Stock, Warrants, Purchase Contracts, and Units Consisting of Two or More Securities)
Registration Statement No. 333-32084	(Common stock registered pursuant to the acquisition of CyBerCorp Holdings, Inc.)
Registration Statement No. 333-36410	(Debt Securities)
Registration Statement No. 333-50812	(Common stock registered pursuant to the acquisition of Chicago Investment Analytics, Inc.)
Filed on Form S-4:
Registration Statement No. 333-30886	(Common stock registered pursuant to the acquisition of U.S. Trust Corporation)
Registration Statement No. 333-48764	(Registration of common stock)
Filed on Form S-8:
Registration Statement No. 333-131502	(The Charles Schwab Corporation Deferred Compensation Plan II)
Registration Statement No. 333-101992	(The Charles Schwab Corporation 2004 Stock Incentive Plan)
Registration Statement No. 333-44793	(Charles Schwab Profit Sharing and Employee Stock Ownership Plan)
Registration Statement No. 333-48335	(The Charles Schwab Corporation Employee Stock Incentive Plan)
Registration Statement No. 333-93125	(The Charles Schwab Corporation Employee Stock Incentive Plan)
Registration Statement No. 333-32058	(CyBerCorp Holdings, Inc. 1996 Incentive Plan)
Registration Statement No. 333-59280	(The Charles Schwab Corporation Employee Stock Incentive Plan)
Registration Statement No. 333-63452	(The Charles Schwab Corporation Employee Stock Incentive Plan)
Registration Statement No. 333-63448	(The Charles Schwab Corporation 2004 Stock Incentive Plan)
Registration Statement No. 333-71322	(The SchwabPlan Retirement Savings and Investment Plan)
Registration Statement No. 333-81840	(The Charles Schwab Corporation Employee Stock Incentive Plan)
Registration Statement No. 333-47107	(The Charles Schwab Corporation 2004 Stock Incentive Plan)

/s/ Deloitte & Touche LLP

San Francisco, California

February 22, 2007

EX-31.1

THE CHARLES SCHWAB CORPORATION

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Charles R. Schwab, certify that:

1. I have reviewed this annual report on Form 10-K of The Charles Schwab Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	February 22, 2007	/s/ Charles R. Schwab
		Charles R. Schwab
		Chairman and Chief Executive Officer

EX-31.2

THE CHARLES SCHWAB CORPORATION

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Christopher V. Dodds, certify that:

1. I have reviewed this annual report on Form 10-K of The Charles Schwab Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	February 22, 2007	/s/ Christopher V. Dodds
		Christopher V. Dodds
		Executive Vice President and Chief Financial Officer

EX-32.1

THE CHARLES SCHWAB CORPORATION

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of The Charles Schwab Corporation (the Company) on Form 10-K for the year ended December 31, 2006 (the Report), I, Charles R. Schwab, Chairman and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein.

/s/ Charles R. Schwab	Date:	February 22, 2007
Charles R. Schwab
Chairman and Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to The Charles Schwab Corporation and will be retained by The Charles Schwab Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

THE CHARLES SCHWAB CORPORATION

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of The Charles Schwab Corporation (the Company) on Form 10-K for the year ended December 31, 2006 (the Report), I, Christopher V. Dodds, Executive Vice President and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein.

/s/ Christopher V. Dodds	Date:	February 22, 2007
Christopher V. Dodds
Executive Vice President and
Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to The Charles Schwab Corporation and will be retained by The Charles Schwab Corporation and furnished to the Securities and Exchange Commission or its staff upon request.