PENSON WORLDWIDE INC, S-1/A, 2000-10-23

PENSON WORLDWIDE INC
S-1/A, 2000-10-23
SECURITY BROKERS, DEALERS & FLOTATION COMPANIES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 2000

REGISTRATION NO. 333-45844
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------

AMENDMENT NO. 2

TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------

PENSON WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 6211 75-2896356
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

1700 PACIFIC AVENUE, SUITE 1400
DALLAS, TEXAS 75201
(214) 765-1100
(Address, including zip code, and telephone number, including area code,
of the registrant's principal executive offices)

ROGER J. ENGEMOEN, JR.
CHAIRMAN OF THE BOARD
PENSON WORLDWIDE, INC.
1700 PACIFIC AVENUE, SUITE 1400
DALLAS, TEXAS 75201
(214) 765-1100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:

<TABLE>
<S> <C>
THOMAS P. MASON PAUL TOBIAS
MICHELLE KWAN MONTOYA WILSON SONSINI GOODRICH & ROSATI,
BROBECK, PHLEGER & HARRISON LLP PROFESSIONAL CORPORATION
4801 PLAZA ON THE LAKE 8911 CAPITAL OF TEXAS HIGHWAY NORTH
AUSTIN, TEXAS 78746 WESTECH 360, SUITE 3350
(512) 330-4000 AUSTIN, TEXAS 78759
(512) 338-5400
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
---------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 AS AMENDED OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION
8(a), MAY DETERMINE.
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<PAGE> 2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION
IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES,
AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES, IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION, DATED OCTOBER 23, 2000

PROSPECTUS

8,000,000 SHARES

[PENSON WORLDWIDE LOGO]
COMMON STOCK

This is an initial public offering of common stock by Penson Worldwide,
Inc. We are selling 8,000,000 shares of common stock. The estimated initial
public offering price will be between $12.50 and $14.50 per share.

--------------------------------------------------------------------------------

Prior to this offering, there has been no public market for the common
stock. We have applied to have the common stock approved for quotation on the
Nasdaq National Market under the symbol PNSN.

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Estimated initial public offering price................... $ $
Underwriting discounts and commissions.................... $ $
Proceeds to Penson Worldwide, before expenses............. $ $
</TABLE>

We have granted the underwriters an option for a period of 30 days to
purchase up to 1,200,000 additional shares of common stock.

--------------------------------------------------------------------------------

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
--------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

CHASE H&Q ROBERTSON STEPHENS
--------------------------------------------------------------------------------
U.S. BANCORP PIPER JAFFRAY
, 2000
<PAGE> 3

Artwork on the left-hand side of the inside front cover depicts graphic
representations of stock traders connected to and interacting with their
correspondent broker-dealer which in turn is connected to and interacting with
Penson. The traders are represented by small caricatures of men working at
computer terminals. The correspondent is represented by a building structure.
Penson is depicted as a circular disk platform upon which sits items
representing computer servers and stock certificates.

To the right-hand side of these graphics appears the following descriptive
information:

- "Direct Access and Online Customers

Direct access trading accounts for an estimated 15% of the Nasdaq
National Market's trading volume.

- Correspondents

Our client base consists primarily of broker-dealers that target direct
access and online customers.

- Penson Worldwide

We provide our correspondent broker-dealers and their customers with an
array of services:

- Integrated trade execution

- Clearing and custody services

- Web-based account information

- Customized data processing

- Margin lending services

- Penson solutions enable our correspondent broker-dealers to:

- Focus on their core competencies

- Reduce transaction processing costs

- Avoid complexity of developing, installing, operating and
maintaining transaction processing hardware and software

- Avoid capital requirements established by regulatory
authorities associated with margin lending activities."
<PAGE> 4

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Forward-Looking Statements.................................. 19
Use of Proceeds............................................. 20
Dividend Policy............................................. 20
Prior S Corporation Status.................................. 21
Capitalization.............................................. 22
Dilution.................................................... 23
Selected Consolidated Financial Data........................ 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Business.................................................... 38
Management.................................................. 53
Certain Transactions........................................ 62
Principal Stockholders...................................... 64
Description of Capital Stock................................ 66
Shares Eligible for Future Sale............................. 70
United States Tax Consequences to Non-U.S. Holders.......... 72
Underwriting................................................ 75
Legal Matters............................................... 78
Experts..................................................... 78
Where You Can Find More Information......................... 78
Index to Consolidated Financial Statements.................. F-1
</TABLE>

Unless otherwise indicated, all references in this prospectus to "Penson
Worldwide," "Penson," "we," "us" and "our" refer to Penson Worldwide, Inc., a
Delaware corporation, and our subsidiaries.
i
<PAGE> 5

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including the information under "Risk Factors" beginning
on page 6 and the financial statements beginning on page F-1, before making an
investment decision.

PENSON WORLDWIDE

We are a technology-focused provider of a broad range of securities
clearing, margin lending and other related services to the brokerage industry,
primarily to direct access and online broker-dealers. We provide our clients,
which we refer to as our correspondents, with securities clearing services that
facilitate the settlement of purchases and sales of securities, primarily
stocks, bonds and options, in the public trading markets. Our securities
clearing services consist primarily of clearing and custody services, customer
account maintenance and customized data processing services. We have made
substantial investments in the development of customized data processing systems
that we use to provide these "back-office" services to our correspondents on an
integrated, efficient and cost-effective basis, reducing the need for our
correspondents to make significant capital investments in a clearing
infrastructure and allowing them to focus on the core competencies of their
businesses. These systems also enable us to provide customized, timely
transaction and account information to our correspondents and their customers.

As a result of our clearing relationships with our correspondents, we have
developed a significant margin lending business with our correspondents'
customers. Under these margin lending arrangements, we extend credit to these
customers so that they may purchase securities on margin. We extend credit for a
portion of the purchase price of the securities, which is collateralized by
existing securities and cash in the customers' accounts. We also engage in
securities lending activities as a means of financing our business and
generating additional net interest income.

According to International Data Corporation, or IDC, the number of online
brokerage accounts in the United States increased to 12.7 million at the end of
1999, representing $875.3 billion in assets, from 3.5 million accounts at the
end of 1997, representing $317.9 billion in assets, and is estimated to reach
28.3 million accounts at the end of 2004, representing $2,469.3 billion in
assets. The average daily volume of securities traded on the Nasdaq National
Market increased to 1.1 billion shares in 1999 from 401.6 million shares in
1995, representing an increase of 173.9%. The average daily volume of securities
traded on the NYSE increased to 809.7 million shares in 1999 from 346.4 million
shares in 1995, representing an increase of 133.7%. In addition, the dollar
amount of margin loans made by all NYSE- and NASD-designated clearing firms has
increased to $242.0 billion at December 31, 1999 from $76.7 billion at December
31, 1995, representing an increase of 215.5%.

We believe that the growth in the direct access and online brokerage
business, the increase in equity trading volumes and the increase in margin loan
activity have resulted, and will continue to result, in an increased demand for
our services. For instance, our quarterly clearing volume increased to
approximately 9.6 million confirmed transactions for the quarter ended September
30, 2000 from approximately 4.2 million confirmed transactions for the quarter
ended September 30, 1999, representing an increase of 128.6%. In addition, our
margin loans outstanding increased to approximately $550.3 million at September
30, 2000 from approximately $246.6 million at September 30, 1999, representing
an increase of 123.2%.

1
<PAGE> 6

Our goal is to be the leading provider of securities clearing and margin
lending services to the direct access and online brokerage industry. To
accomplish this goal, we are pursuing the following key strategies:

- Focus on high-volume direct access and online broker-dealers;

- Continue to be highly selective in the correspondents we serve;

- Continue to invest in highly scalable, sophisticated clearing
solutions;

- Continue to provide timely, updated information to enhance and
differentiate our service offerings;

- Expand our operations internationally;

- Develop multi-currency clearing capabilities for international
applications; and

- Invest in and develop our employees and our culture.

Previously, we operated as Service Asset Holdings, Inc. In September 2000,
Service Asset Holdings, Inc. effected a restructuring for the purpose of
distributing its non-core operations to its shareholders in a tax-free
distribution. The financial information in this prospectus with respect to our
company and its consolidated subsidiaries excludes the results of operations and
balance sheet information for the businesses and operations distributed to the
shareholders of Service Asset Holdings, Inc.

In September 2000, we changed our name and state of domicile by
effectuating a merger between Service Asset Holdings, Inc. and Penson Worldwide,
Inc., a newly formed Delaware corporation. In connection with the merger, each
outstanding share of common stock of Service Asset Holdings, Inc. was converted
into 675 shares of common stock of Penson Worldwide, Inc. All information
contained in this prospectus takes into account the 675-for-1 exchange. Our
principal offices are located at 1700 Pacific Avenue, Suite 1400, Dallas, Texas
75201, and our telephone number is (214) 765-1100. We maintain a Web site at
www.penson.com. Information contained on this Web site does not constitute part
of this prospectus and is not incorporated by reference in this prospectus.

2
<PAGE> 7

THE OFFERING

Common stock offered by Penson Worldwide.......... 8,000,000 shares

Common stock to be outstanding after this
offering.......................................... 36,657,800 shares

Use of proceeds................................... We intend to use the net
proceeds for working
capital, repayment of
existing indebtedness and
general corporate purposes.
See "Use of Proceeds."

Proposed Nasdaq National Market symbol............ PNSN

---------------------

This table is based on the number of shares outstanding as of September 30,
2000, and excludes:

- 714,150 shares subject to options outstanding, exercisable at 125%
of the net book value per share on the date of exercise; and

- 5,872,500 shares of common stock authorized for issuance under our
2000 Stock Incentive Plan, of which 188,000 shares have been granted
and 5,684,500 shares remain available for future grant.

---------------------

Unless otherwise indicated, all information in this prospectus assumes that
the underwriters do not elect to exercise their over-allotment option.

3
<PAGE> 8

SUMMARY CONSOLIDATED FINANCIAL DATA

The following table sets forth summary consolidated financial data for our
company. The data has been derived from our audited consolidated financial
statements for the three years ended December 31, 1999 included elsewhere in
this prospectus. The data for the period ended December 31, 1995 and for the
year ended 1996 and the nine months ended September 30, 1999 and 2000 have been
derived from the unaudited financial statements for such periods, which
financial statements, in the opinion of management, include all adjustments
necessary to state fairly the data included therein in accordance with generally
accepted accounting principles. Interim results are not necessarily indicative
of financial results expected for the full fiscal year. You should read this
information together with the financial statements and the notes to those
statements appearing elsewhere in this prospectus and the information under
"Selected Consolidated Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
PERIOD FROM
JULY 3, 1995
(INCEPTION) NINE MONTHS ENDED
TO YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------------------ ------------------
1995 1996 1997 1998 1999 1999 2000
-------------- ------ ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND CORRESPONDENTS DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Total revenues........................ $1,093 $7,834 $14,753 $17,256 $36,596 $23,946 $ 52,808
Total expenses(1)..................... 993 5,521 11,149 14,786 28,159 18,591 59,105
------ ------ ------- ------- ------- ------- --------
Operating income (loss)............... 100 2,313 3,604 2,470 8,437 5,355 (6,297)
Interest expense on notes payable..... (152) (434) (822) (947) (1,490) (1,108) (2,346)
------ ------ ------- ------- ------- ------- --------
Income (loss) from continuing
operations before income taxes...... (52) 1,879 2,782 1,523 6,947 4,247 (8,643)
Provision for income taxes............ (5) 618 995 -- -- -- 6,225
------ ------ ------- ------- ------- ------- --------
Income (loss) from continuing
operations.......................... (47) 1,261 1,787 1,523 6,947 4,247 (14,868)
Income from discontinued operations,
net of tax(2)....................... -- -- -- 211 1,991 803 3,372
------ ------ ------- ------- ------- ------- --------
Net income (loss)..................... $ (47) $1,261 $ 1,787 $ 1,734 $ 8,938 $ 5,050 $(11,496)
====== ====== ======= ======= ======= ======= ========
Pro forma information:
Income (loss) from continuing
operations........................ $ (47) $1,261 $ 1,787 $ 1,523 $ 6,947 $ 4,247 $(14,868)
Pro forma adjustment for income
taxes............................. -- -- -- (533) (2,431) (1,487) --
------ ------ ------- ------- ------- ------- --------
Pro forma income (loss) from
continuing operations(3).......... $ (47) $1,261 $ 1,787 $ 990 $ 4,516 $ 2,760 $(14,868)
====== ====== ======= ======= ======= ======= ========
Earnings (loss) per share -- basic and
diluted:
Earnings (loss) per share from
continuing operations............. $(0.00) $ 0.05 $ 0.06 $ 0.05 $ 0.27 $ 0.17 $ (0.53)
Earnings (loss) per share from
discontinued operations........... -- -- -- 0.01 0.08 0.03 0.12
------ ------ ------- ------- ------- ------- --------
Earnings (loss) per share........... $(0.00) $ 0.05 $ 0.06 $ 0.06 $ 0.35 $ 0.20 $ (0.41)
====== ====== ======= ======= ======= ======= ========
Pro forma earnings (loss) per share
from continuing operations(3)..... $(0.00) $ 0.05 $ 0.06 $ 0.03 $ 0.18 $ 0.11 $ (0.53)
====== ====== ======= ======= ======= ======= ========
Weighted average shares
outstanding -- basic and diluted.... 26,729 26,806 27,720 28,629 25,728 25,270 28,193
</TABLE>

4
<PAGE> 9

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
-------------------------
AS
ACTUAL ADJUSTED(4)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 11,515 $ 68,508
Total assets................................................ 995,859 1,052,851
Notes payable............................................... 41,892 0
Total stockholders' equity.................................. 13,874 112,759
</TABLE>

---------------

(1) Total expenses for the nine months ended September 30, 2000 includes $24.0
million of non-cash compensation expense related to the grant of options to
key management personnel.

(2) Immediately prior to the effectiveness of this offering, we will discontinue
our market making operations. Our decision to discontinue our market making
operations was based on our belief that the volatility associated with
earnings of the market making business would be detrimental to the
performance of our stock in the public trading market.

(3) For the years ended December 31, 1998 and 1999, we elected to be treated as
an S corporation for federal and state income tax purposes and, accordingly,
our income was taxable directly to our shareholders. For all other periods
presented, we elected to be treated as a C corporation. Pro forma income
(loss) from continuing operations and pro forma earnings (loss) per share
from continuing operations give effect to pro forma adjustments that reflect
the estimated federal and state income taxes that would have been recorded
if we had been a C corporation for the years ended December 31, 1998 and
1999. In addition, the information related to pro forma income (loss) from
continuing operations and pro forma earnings (loss) per share from
continuing operations excludes income from our discontinued market making
operations.

(4) The as adjusted column in the balance sheet data reflects our sale of
8,000,000 shares of common stock at an assumed initial public offering price
of $13.50 per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses that we will pay, and the
application of net proceeds from this offering to repay outstanding notes
payable.

5
<PAGE> 10

RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. If any of the circumstances described in these risk factors
actually occur, our business, financial condition or results of operations could
be materially adversely affected. In that event, the trading price of our shares
could decline, and you may lose part or all of your investment.

RISKS RELATED TO OUR BUSINESS AND OUR INDUSTRY

OUR REVENUES MAY DECREASE DUE TO DECLINES IN TRADING VOLUME, MARKET PRICES OR
LIQUIDITY OF SECURITIES MARKETS, WHICH COULD RESULT IN DECREASED PROFITABILITY.

We have recently experienced unprecedented stock value fluctuations,
transaction volume and volatility in U.S. and foreign securities markets. Sudden
sharp declines in market values of securities can result in:

- reduced trading activity;

- illiquid markets;

- declines in the market values of securities held in our inventory;

- the failure of buyers and sellers of securities to fulfill their
settlement obligations;

- reduced margin loan balances of customers; and

- increases in claims and litigation.

The occurrence of any of these events would likely result in reduced
revenues and decreased profitability from our clearing operations and margin
lending activities.

GENERAL ECONOMIC AND POLITICAL CONDITIONS AND BROAD TRENDS IN BUSINESS AND
FINANCE THAT ARE BEYOND OUR CONTROL MAY CONTRIBUTE TO REDUCED TRADING VOLUME,
MARKET PRICES AND LIQUIDITY IN THE SECURITIES MARKETS, WHICH COULD RESULT IN
LOWER REVENUES FROM OUR CLEARING OPERATIONS AND OUR MARGIN LENDING ACTIVITIES.

Trading volume, market prices and liquidity are affected by general
national and international economic and political conditions and broad trends in
business and finance that result in changes in volume and price levels of
securities transactions. These factors include:

- economic, political and market conditions;

- the availability of short-term and long-term funding and capital;

- the level and volatility of interest rates;

- legislative and regulatory changes;

- currency values and inflation; and

- national, state and local taxation levels affecting securities
transactions.

These factors are beyond our control and may contribute to reduced levels
of activity in the securities markets. Any reduction in activity in the
securities markets could result in lower revenues from our clearing operations
and margin lending activities.

6
<PAGE> 11

OUR QUARTERLY REVENUE AND OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT
FLUCTUATIONS. ACCORDINGLY, YOU SHOULD NOT RELY ON OUR HISTORICAL REVENUES AND
OPERATING RESULTS AS INDICATORS OF OUR FUTURE PERFORMANCE.

Our quarterly revenue and operating results may fluctuate significantly in
the future due to a number of factors, including:

- changes in the proportion of clearing operations revenues and
interest income;

- our lengthy sales and integration cycle with new correspondents;

- the gain or loss of business from a correspondent;

- reductions in per-transaction clearing fees;

- changes in bad debt expense from margin lending as compared to
historical levels;

- changes in the rates we charge for margin loans and changes in the
rates we pay for cash deposits we hold on behalf of our
correspondents and their customers;

- changes in the market price of securities and our ability to manage
related risks;

- our ability to manage personnel, overhead and other expenses; and

- the amount and timing of capital expenditures.

Our expense structure is based on historical expense levels and the
expected levels of demand for our clearing and margin lending services. If
demand for our services declines, we may be unable to adjust our cost structure
on a timely basis in order to sustain our profitability.

Due to the foregoing factors, period-to-period comparisons of our
historical revenues and operating results are not necessarily meaningful, and
you should not rely upon such comparisons as indicators of future performance.
We also cannot assure you that we will be able to sustain the rates of revenue
growth we have experienced in the past, improve our operating results or sustain
our profitability on a quarterly basis.

ALL ASPECTS OF OUR BUSINESS ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION. IF
WE FAIL TO COMPLY WITH THESE REGULATIONS, WE MAY BE SUBJECT TO DISCIPLINARY OR
OTHER ACTION BY REGULATORY ORGANIZATIONS.

The securities industry in the U.S. is subject to extensive regulation
under both federal and state laws. In addition to these laws, we must comply
with rules and regulations of the Securities and Exchange Commission, known as
the SEC, the National Association of Securities Dealers, known as the NASD,
various stock exchanges, state securities commissions and other regulatory
bodies charged with safeguarding the integrity of the securities markets and
other financial markets and protecting the interests of investors participating
in these markets. Broker-dealers are subject to regulations covering all aspects
of the securities business, including:

- sales methods;

- trade practices among broker-dealers;

- use and safekeeping of customers' funds and securities;

- capital structure;

- margin lending;

- record keeping;

- conduct of directors, officers and employees; and

- supervision of customer accounts.
7
<PAGE> 12

Our ability to comply with these regulations depends largely on the
establishment and maintenance of an effective compliance system as well as our
ability to attract and retain qualified compliance personnel. We could be
subject to disciplinary or other actions due to claimed noncompliance with these
regulations in the future. If a claim of noncompliance is made by a regulatory
authority, the efforts of our management could be diverted to responding to such
claim and we could be subject to a range of possible consequences, including the
payment of fines and the suspension of one or more portions of our business. In
addition, our mode of operation and profitability may be directly affected by:

- additional legislation;

- changes in rules promulgated by the SEC, the NASD, the Board of
Governors of the Federal Reserve System, the various stock exchanges
or other self-regulatory organizations; or

- changes in the interpretation or enforcement of existing laws and
rules.

OUR EXPANSION INTO INTERNATIONAL MARKETS WILL SUBJECT US TO REGULATORY
REQUIREMENTS WITH WHICH WE HAVE LIMITED EXPERIENCE AND TO ADDITIONAL RISKS
INHERENT IN CONDUCTING BUSINESS IN INTERNATIONAL MARKETS.

We have recently acquired Worldwide Settlements Limited, a company located
in London, England, and ECE Electronic Clearing Inc., a company located in
Montreal, Canada, in order to expand our operations into western Europe and
Canada. The brokerage and clearing industries in these and other foreign
countries into which we may expand our business are heavily regulated. The
varying compliance requirements of these different regulatory jurisdictions and
other factors may limit our ability to expand internationally. Since we have
limited experience in operating our business internationally, we cannot assure
you that we will be successful in obtaining the necessary regulatory approvals
for any such expansion or, if such approvals are obtained, that we will be able
to continue to comply with such regulations.

In addition, there are other risks inherent in doing business in
international markets, including:

- unexpected changes in regulatory requirements, tariffs, export
restrictions and other trade barriers;

- less developed technological infrastructures, resulting in lower
client acceptance of, or access to, electronic channels;

- less developed automation in exchanges, depositories and national
clearing systems;

- difficulties in staffing and supervising foreign operations;

- political instability;

- fluctuations in currency exchange rates; and

- seasonal reductions in business activity during the summer months in
Europe.

Any of the above could affect the profitability of our international operations
or hinder our ability to expand internationally.

The growth of the Internet as a means of conducting international business
has raised many international legal issues regarding, among other things, the
circumstances in which countries or other jurisdictions have the right to
regulate Internet services that may be available to their citizens from service
providers located elsewhere. In many cases, there are no laws, regulations,
judicial decisions or governmental interpretations that clearly resolve these
issues. This uncertainty may adversely affect our ability to use the Internet to
expand our international

8
<PAGE> 13

operations and creates the risk that we could be subject to disciplinary
sanctions or other penalties for failure to comply with applicable laws or
regulations.

IF WE FAIL TO ABIDE BY NET CAPITAL REQUIREMENTS IMPOSED ON BROKER-DEALERS, WE
MAY BE SUBJECT TO SUSPENSION, REVOCATION OF REGISTRATION OR EXPULSION BY THE
SEC, THE NASD OR NON-U.S. REGULATORY AUTHORITIES.

The SEC, the NASD and various other regulatory agencies impose stringent
rules with respect to the maintenance of specific levels of net capital by
broker-dealers. Net capital is the net worth of a broker-dealer, less deductions
for other types of assets including assets not readily convertible into cash and
specified percentages of a broker-dealer's securities positions. If we fail to
maintain the required net capital, we may be subject to suspension or revocation
of registration by the SEC and suspension or expulsion by the NASD, which, if
not cured, could ultimately lead to our liquidation. If the net capital rules
are changed or expanded, or if there is an unusually large charge against our
net capital, we might be required to limit or discontinue our clearing and
margin lending operations that require the intensive use of capital. Also, our
ability to withdraw capital from our subsidiaries could be restricted, which in
turn could limit our ability to pay dividends, repay debt at the parent company
level and redeem or purchase shares of our outstanding stock, if necessary. A
large operating loss or charge against net capital could impede our ability to
expand or even maintain our present volume of business.

Historically, we have relied upon borrowings at the parent company level
and by one of our subsidiaries that is not a registered broker-dealer to make
contributions to our subsidiaries that are registered broker-dealers in order to
allow these subsidiaries to meet the net capital rules. We intend to repay these
loans with net proceeds from this offering; however, our future growth may be
limited by our ability to satisfy the net capital rules through the incurrence
of debt following the offering, particularly to the extent that any future
lender requires the pledge of assets to secure these loans.

Our U.K. subsidiary is subject to capital adequacy rules that require our
subsidiary to maintain stockholders' equity and qualifying subordinated loans at
specified minimum levels. If we fail to maintain the required capital, we may be
subject to fine, suspension or revocation of our license with the SFA. If our
license is suspended or revoked or if the capital adequacy requirements are
changed or expanded, we may be required to discontinue our U.K. operations,
which could result in diminished revenues.

As a member of the Investment Dealers Association of Canada, or IDA, and a
holder of permits with the Montreal Exchange, our Canadian subsidiary is subject
to the IDA and Montreal Exchange rules relating to the maintenance of capital.
Specifically, to ensure that IDA members will be able to meet liabilities as
they become due, the IDA requires its member broker-dealers, such as our
Canadian subsidiary, to periodically calculate their risk adjusted capital in
accordance with a prescribed formula. If our Canadian subsidiary fails to
maintain the required risk adjusted capital, it may be subject to monetary
sanctions, suspensions or other sanctions, including expulsion as a member. If
our Canadian subsidiary is sanctioned or expelled or if the risk adjusted
capital requirements are changed or expanded, we may be required to discontinue
operations in Canada, which could result in diminished revenues.

AS THE OPERATIONS OF OUR CORRESPONDENTS GROW, OUR EXISTING CORRESPONDENTS MAY
CHOOSE TO PERFORM THEIR OWN CLEARING SERVICES, AND THE LOSS OF THOSE
CORRESPONDENTS WHO DECIDE TO SELF-CLEAR MAY REDUCE OUR REVENUES AND
PROFITABILITY.

We market our clearing services to our existing correspondents on the
strength of our ability to process transactions and perform related back-office
functions at a lower cost than the correspondents could perform these functions
themselves. As our correspondents' operations grow, they often consider the
option of performing clearing functions themselves, in a process

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referred to in the securities industry as "self-clearing." As the transaction
volume of a broker-dealer grows, the cost of implementing the necessary
infrastructure for self-clearing may be eventually offset by the elimination of
per-transaction processing fees that would otherwise be paid to a clearing firm.
Additionally, performing their own clearing services allows self-clearing
correspondents to retain their customers' free credit balances and securities
for use in margin lending activities. As an example, CyBerCorp, Inc., our
largest correspondent, was acquired by The Charles Schwab Company in March 2000.
While our contract with CyBerCorp does not expire until 2002, CyBerCorp may
terminate its contract with us in order to begin self-clearing upon 45 days
notice. Other major correspondents have similar provisions in their agreements
with us. Accordingly, we cannot assure you that we will be able to retain our
correspondents who consider the implementation of self-clearing operations or
that the loss of those correspondents will not substantially reduce our revenues
and profitability.

IF WE CONTINUE TO EXPERIENCE A DECLINE IN OUR NET CLEARING REVENUE PER
TRANSACTION, THE PROFITABILITY OF OUR OPERATIONS MAY BE REDUCED.

Net clearing revenue per transaction has declined each year of our
operations. For example, our net clearing revenue per transaction decreased from
$2.22 for the year ended December 31, 1998 to $1.63 for the year ended December
31, 1999, and from $1.68 for the nine months ended September 30, 1999 to $1.36
for the nine months ended September 30, 2000. These decreases are primarily
attributable to volume discounts to our existing correspondents or new
correspondents' high transaction volumes and competitive pressures in the
industry. If these declines continue, we may be unable to reduce our expenses at
a comparable rate. Our failure to reduce expenses comparably will reduce our
profit margins, and could cause us to operate at a loss.

IF WE ARE UNABLE TO RESPOND TO THE DEMANDS OF OUR EXISTING AND NEW
CORRESPONDENTS, OUR ABILITY TO REACH OUR REVENUE GOALS OR MAINTAIN OUR
PROFITABILITY COULD BE DIMINISHED.

Our correspondents' demand for our services is influenced by:

- rapid technological change;

- changing demands of their customers; and

- evolving industry standards.

Our future success will depend, in part, on our ability to respond to our
correspondents' demands for new services, products and technologies on a timely
and cost-effective basis, to adapt to technological advancements and changing
standards and to address the increasingly sophisticated requirements of our
correspondents.

We depend on a limited number of correspondents for a significant portion
of our clearing revenues. Consequently, the loss of even a small number of these
correspondents at any one time could cause our revenues to decline
substantially. Three correspondents, CyBerCorp, A.B. Watley and Mt. Pleasant
Brokerage Services, LLP, each accounted for more than 10% of our total revenues
for the year ended December 31, 1999. CyBerCorp also accounted for more than 10%
of our total revenues for the nine months ended September 30, 2000. In addition,
for the year ended December 31, 1999 and the nine months ended September 30,
2000, our five largest correspondents accounted for 48.5% and 39.6%,
respectively, of our total revenues. Any failure on our part to anticipate or
respond adequately to technological advancements, correspondent requirements or
changing industry standards, or any significant delays in the development,
introduction or availability of new services, products or enhancements could
hinder our ability to market our services to new correspondents or respond to
the changing requirements of our current correspondents.

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WE RELY, IN PART, ON OTHERS TO PROVIDE AND SUPPORT THE SOFTWARE AND SYSTEMS WE
USE TO PROVIDE OUR SERVICES. IF WE ARE UNABLE TO OBTAIN THIRD-PARTY SOFTWARE AND
SYSTEMS ON A TIMELY AND RELIABLE BASIS, THE RELATIONSHIPS WE HAVE WITH OUR
CORRESPONDENTS COULD BE HARMED AND OUR ABILITY TO PERFORM SECURITIES CLEARING
SERVICES COULD BE HINDERED.

We have contracted with SunGard Financial Systems to provide a major
portion of the software and systems necessary for our execution and clearing
services. Our current agreement with SunGard has an expiration date of May 1,
2002 and can be terminated by SunGard upon 10 to 30 days notice in the event
that we breach the agreement. In the past, we have experienced occasional
hardware and software outages with SunGard. Any major interruption in our
ability to process our transactions through SunGard would impact our growth. We
also license many additional generally available software packages in support of
our customer development. Failures in any of these applications would harm our
business operations.

We rely on SunGard and other third parties to enhance their current
products, develop new products on a timely and cost-effective basis, and respond
to emerging industry standards and other technological changes. If, in the
future, enhancements or upgrades of third-party software and systems cannot be
integrated with our technologies or if the technologies on which we rely fail to
respond to industry standards or technological changes, we may be required to
redesign our proprietary systems. Software products may contain defects or
errors, especially when first introduced or when new versions or enhancements
are released. The inability of third parties to supply us with software or
systems on a reliable, timely basis could harm relationships with our
correspondents and our ability to achieve our projected level of growth.

OUR CLEARING OPERATIONS COULD EXPOSE US TO LEGAL LIABILITY FOR ERRORS IN
PERFORMING CLEARING FUNCTIONS AND IMPROPER ACTIVITIES OF OUR CORRESPONDENTS.

Any intentional failure or negligence in properly performing our clearing
functions or any mishandling of funds and securities held by us on behalf of our
correspondents and their customers could lead to civil penalties imposed by
applicable authorities as well as actions in tort brought by parties who are
financially harmed by those failures or mishandlings. Any litigation that arises
as a result of our clearing operations could harm our reputation and cause us to
incur substantial expenses associated with litigation and damage awards that
could exceed our liability insurance by unknown but significant amounts.

In the past, clearing firms in the U.S. have been held liable for aiding
and abetting, and even causing, the improper activities of their correspondents.
We cannot assure you that our procedures will be sufficient to protect us from
liability for the acts of our correspondents under current laws and regulations
or that securities industry regulators will not enact more restrictive laws or
regulations or change their interpretations of current laws and regulations. If
we fail to implement proper procedures or fail to adapt our existing procedures
to new or more restrictive regulations, we may be subject to liability that
could result in substantial costs to us and distract our management from our
business.

OUR MARGIN LENDING BUSINESS IS SUBJECT TO THE RISK THAT THE VALUE OF THE
COLLATERAL WE HOLD COULD FALL BELOW THE AMOUNT OF A CUSTOMER'S INDEBTEDNESS,
WHICH COULD HARM THE PROFITABILITY OF OUR BUSINESS.

We provide margin loans to investors; therefore, we are subject to risks
inherent in extending credit, including the risk that the value of the
collateral we hold could fall below the amount of a customer's indebtedness.
This risk is especially great when the market is rapidly declining. Agreements
with our margin account customers permit us to liquidate the customers'
securities with or without prior notice in the event that the amount of margin
collateral becomes insufficient.

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Despite those agreements, we may be unable to liquidate the customers'
securities for various reasons including the fact that:

- the pledged securities may not be actively traded;

- there may be an undue concentration of securities pledged; or

- a stop order may be issued with regard to pledged securities.

If we are unable to liquidate a customer's securities when the margin collateral
becomes insufficient, the profitability of our business will suffer.

CHANGES IN INTEREST RATES COULD NEGATIVELY IMPACT THE PROFITABILITY OF OUR
MARGIN LENDING BUSINESS.

The profitability of our margin lending activities depends to a great
extent on the differences between interest income earned on loans and
investments and the interest expense paid on deposits and other borrowings.
These rates are highly sensitive to factors that are beyond our control,
including general economic conditions and the policies of various governmental
and regulatory authorities. For example, increases in the federal funds rate by
the Board of Governors of the Federal Reserve System usually lead to rising
interest rates, which affect our profitability. Interest rates in Canada and
Europe are also subject to fluctuations based on governmental and economic
factors and these fluctuations could affect our profitability. The nature,
timing and effect of any future changes in federal monetary and fiscal policies
on our company and our operating results are not predictable. From time to time,
maturities of assets and liabilities are not balanced, and a rapid increase or
decrease in interest rates could harm the profitability of our margin lending
activities.

IF OUR OPERATIONAL SYSTEMS AND INFRASTRUCTURE FAIL TO KEEP PACE WITH OUR
ANTICIPATED GROWTH, WE MAY EXPERIENCE OPERATING INEFFICIENCIES, CLIENT
DISSATISFACTION AND LOST REVENUE OPPORTUNITIES.

We have experienced significant growth in our client base, business
activities and the number of our employees. The growth of our business and
expansion of our client base have placed, and will continue to place, a
significant strain on our management and operations. We believe that our current
and anticipated future growth will require the implementation of new and
enhanced communications and information systems, the training of personnel to
operate these systems and the expansion and upgrade of core technologies. We may
need to make significant investments in additional hardware and software to
accommodate growth in the future. In addition, we cannot assure you that we will
be able to accurately predict the timing or rate of this growth or expand and
upgrade our systems and infrastructure on a timely basis.

In addition, the scope of procedures for assuring compliance with
applicable rules and regulations has changed as the size and complexity of our
business has increased. We have implemented and continue to implement formal
compliance procedures to respond to these changes and the impact of our growth.
Our future operating results will depend on our ability:

- to improve our systems for operations, financial controls, and
communication and information management;

- to refine our compliance procedures and enhance our compliance
oversight; and

- to recruit, train, manage and retain our employees.

Our growth has required and will continue to require increased investments
in management personnel and systems, financial systems and controls and office
facilities. In the absence of continued revenue growth, the costs associated
with these investments would cause our operating margins to decline from current
levels. We cannot assure you that we will be able to

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<PAGE> 17

manage or continue to manage our recent or future growth successfully. If we
fail to manage our growth, we may experience operating inefficiencies,
dissatisfaction among our correspondent base and lost revenue opportunities.

WE FACE SUBSTANTIAL COMPETITION FROM OTHER SECURITIES CLEARING FIRMS, MANY OF
WHOM HAVE SIGNIFICANTLY GREATER FINANCIAL, TECHNICAL AND MARKETING RESOURCES
THAN WE POSSESS.

The market for securities clearing and margin lending services is rapidly
evolving and highly competitive. We compete with many firms that provide
clearing services to the securities industry. A number of our competitors have
significantly greater financial, technical, marketing and other resources than
we possess. Some of our competitors also offer a wider range of services and
financial products than we do and have greater name recognition and more
extensive client bases than ours. These competitors may be able to respond more
quickly to new or changing opportunities, technologies and client requirements
and may be able to undertake more extensive promotional activities, offer more
attractive terms to clients and adopt more aggressive pricing policies than
ours.

Moreover, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties or
may consolidate to enhance their services and products. We expect that new
competitors or alliances among competitors will emerge and may acquire
significant market share. Increased competition could result in price
reductions, decreased profitability or loss of market share. The introduction of
competing services or products incorporating new technologies could render some
of our services obsolete or unmarketable. There can be no assurances that we
will be able to compete effectively with current or future competitors.

ANY SLOWDOWN OR FAILURE OF OUR COMPUTER SYSTEMS COULD SUBJECT US TO LIABILITY
FOR LOSSES SUFFERED BY OUR CORRESPONDENTS OR THEIR CUSTOMERS.

Our services depend on our ability to store, retrieve, process and manage
significant databases, and to receive and process trade orders through a variety
of electronic media. Our principal computer equipment and software systems are
maintained at our corporate headquarters in Dallas, Texas. Our systems or any
other systems in the trading process could slow down significantly or fail for a
variety of reasons, including:

- undetected errors in our internal software programs or computer
systems;

- our inability to effectively resolve any errors in our internal
software programs or computer systems once they are detected;

- heavy stress placed on our systems during peak trading times; or

- power or telecommunications failure, fire, tornado or any other
natural disaster.

We cannot assure you that we will be able to accurately predict future
volume increases or volatility or that our systems will be able to accommodate
these volume increases or volatility without failure or degradation. Any
significant degradation or failure of our computer systems or any other systems
in the clearing or trading processes could cause the customers of our
correspondents to suffer delays in the execution of their trades. These delays
could cause substantial losses for our correspondents or their customers and
could subject us to claims from our correspondents or their customers for
losses, including litigation claiming fraud or negligence, damage our
reputation, increase our service costs, cause us to lose revenues or divert our
technical resources. In addition, we cannot assure you that our redundant
systems or proposed backup computer facility will protect us in the event of
significant system failures.

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PROBLEMS WITH THE PERFORMANCE AND RELIABILITY OF THE INTERNET INFRASTRUCTURE
COULD DISRUPT OUR OPERATIONS AS WELL AS THE OPERATIONS OF OUR CORRESPONDENTS.

We depend on the Internet infrastructure in the conduct of our clearing
operations. Continued development of the Internet infrastructure will require a
reliable network backbone with necessary speed, data capacity and security. The
success of the Internet will depend on government regulation and the ability of
Internet users to develop and adopt new standards and protocols to handle
increased levels of activity. Currently, there are regular failures of the
Internet infrastructure, including outages and delays. The frequency of these
failures may increase in the future. These failures could cause interruptions in
our operations. If Internet usage grows, the Internet infrastructure may be
unable to support the demands placed on it by this growth, and its performance
and reliability may decline, which could adversely affect our ability to sustain
revenue growth.

Additionally, we depend on the business we receive from a number of other
broker-dealers who increasingly rely on the Internet to conduct transactions
with their customers. The need for our services and products depends on whether
the customers of these broker-dealers are willing to adopt the Internet as a
medium for commerce and communication. There has been a significant growth in
the use of the Internet as a means of trading securities. However, customer
concerns, including security, reliability, cost, ease of use, accessibility and
quality of service, may negatively affect the growth of Internet use for
securities trading activities. If the number of transactions generated over the
Internet does not continue to increase, the growth in the number of securities
transactions that we process may be reduced and, as a result, our growth in
revenues may slow or even decline.

IF WE ARE UNABLE TO SELECT CORRESPONDENTS WITH ADEQUATE GROWTH POTENTIAL,
EFFECTIVE MANAGEMENT OR PROFITABLE OPERATIONS, WE MAY NOT ACHIEVE OUR DESIRED
PROFITABILITY.

Many broker-dealers operating as online trading or direct access trading
firms fail to realize their anticipated growth potential due to inadequate
management or the inability to attract an adequate client base. Additionally,
some broker-dealers fail to implement or maintain operating procedures that
ensure regulatory compliance and minimize the risk of costly litigation. Our
success depends on our ability to acquire and maintain long-term business
relationships with stable, profitable correspondents. As a result, we must be
selective in choosing the correspondents with which we enter into business
relationships. Failure to select profitable, well managed correspondents could
diminish our ability to achieve our desired profitability.

WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE THE OPERATIONS OF OUR RECENT
ACQUISITIONS OF WORLDWIDE SETTLEMENTS LIMITED AND ECE ELECTRONIC CLEARING INC.
OR ACHIEVE THE BENEFITS EXPECTED FROM THESE ACQUISITIONS.

Our recent acquisitions of Worldwide Settlements Limited, now known as
Penson Worldwide Settlements, which was completed in April 2000, and ECE
Electronic Clearing Inc., now known as Penson Financial Services Canada, which
was completed in September 2000, will require integrating the business and
operations of the acquired entities with our company. Integrating operations of
two ongoing businesses may be difficult, especially when they are located in two
different countries. We may be unable to successfully assimilate the personnel,
operations and clients of Penson Worldwide Settlements or Penson Financial
Services Canada into our business. Additionally, we may fail to achieve the
anticipated synergies from our acquisition of these companies. The integration
process may further strain our existing financial and managerial controls and
reporting systems and procedures, which may result in the diversion of
management and financial resources from our business strategy. We cannot assure
you that either Penson Worldwide Settlements or Penson Financial Services Canada
will achieve acceptable levels of revenue and profitability or otherwise perform
as expected, or that we will be able to retain their key employees. We have
recently filed an application with the Securities and

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<PAGE> 19

Futures Authority, referred to as the SFA, to expand the scope of business of
Penson Worldwide Settlements into Model B clearing activities. We do not have
experience in dealing with non-U.S. regulatory bodies. Failure to properly
manage this transition in the U.K. could negatively impact our operations there.
Finally, we are not experienced in managing international operations.
Difficulties we encounter in integrating the operations of these acquisitions
could disrupt our ongoing business, distract our management and employees,
increase our expenses and reduce our profitability.

WE MAY FACE RISKS ASSOCIATED WITH POTENTIAL FUTURE ACQUISITIONS, THE OCCURRENCE
OF WHICH COULD REDUCE OUR PROFITABILITY OR HINDER OUR ABILITY TO SUCCESSFULLY
EXPAND OUR OPERATIONS.

In the future, we may acquire additional corporations or technologies. We
cannot assure you that we will be able to successfully integrate future
acquisitions, which potentially involve the following risks:

- diversion of management's time and attention to the negotiation of
the acquisitions;

- difficulties in assimilating acquired businesses, technologies,
operations and personnel;

- the need to modify financial and other systems and to add management
resources;

- assumption of unknown liabilities of the acquired businesses;

- unforeseen difficulties in the acquired operations and disruption of
our ongoing business;

- dilution to our existing stockholders due to the issuance of equity
securities;

- possible adverse short-term effects on our cash flows or operating
results; and

- financial reporting effects of the amortization of goodwill and
other intangible assets.

The occurrence of one or more of these risks could reduce our profitability
or hinder our ability to successfully expand our operations.

OUR PRODUCTS AND SERVICES, AND THE PRODUCTS AND SERVICES PROVIDED TO US BY THIRD
PARTIES, MAY INFRINGE UPON INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, AND
ANY INFRINGEMENT CLAIMS COULD REQUIRE US TO INCUR SUBSTANTIAL COSTS, DISTRACT
OUR MANAGEMENT OR PREVENT US FROM CONDUCTING OUR BUSINESS.

We are subject to the risk of claims alleging infringement of third-party
proprietary rights. If we infringe upon the rights of third parties, we may be
unable to obtain licenses to use those rights on commercially reasonable terms.
Additionally, third parties that provide us with products and services that are
integral to the conduct of our business may be subject to similar allegations,
which could prevent them from providing these products and services. In either
of these events, we would need to undertake substantial reengineering to
continue offering our services and may not be successful. In addition, any claim
of infringement could cause us to incur substantial costs defending the claim,
even if the claim is invalid, and could distract our management from our
business. Furthermore, a party making such a claim could secure a judgment that
requires us to pay substantial damages. A judgment could also include an
injunction or other court order that could prevent us from conducting our
business.

OUR ABILITY TO SELL OUR SERVICES AND GROW OUR BUSINESS COULD BE SIGNIFICANTLY
IMPAIRED IF OUR MANAGEMENT TEAM IS UNABLE TO WORK TOGETHER EFFECTIVELY OR IF WE
LOSE THE SERVICES OF KEY PERSONNEL.

Our business is highly dependent on a small number of key executive
officers, principally Roger J. Engemoen, Jr., Daniel P. Son and Philip A.
Pendergraft. We have entered into
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compensation agreements with various personnel, but we do not have employment
agreements with any of our employees. The loss of the services of any of the key
personnel or the inability to identify, hire, train and retain other qualified
personnel in the future could harm our business. Competition for key personnel
and other highly qualified technical and managerial personnel in the
broker-dealer business is intense, and we cannot assure you that we would be
able to recruit management personnel to replace these individuals in a timely
manner, or at all, on acceptable terms.

IF OUR CUSTOMERS' ACCOUNT INFORMATION IS MISAPPROPRIATED, WE MAY BE HELD LIABLE
OR SUFFER HARM TO OUR REPUTATION.

We rely on encryption and authentication technology to effect secure
transmissions of confidential information over computer systems and the
Internet. If third parties were able to penetrate our network security or
otherwise misappropriate customers' personal or account information, we could be
subject to liability arising from claims related to impersonation or similar
fraud claims or other misuse of personal information, as well as suffer harm to
our reputation. We cannot assure you that advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments will
not result in a compromise or breach of the technology we use to protect
customers' transactions and account data. Internet security concerns have been a
barrier to the acceptance of online trading, and any well-publicized compromise
of security could hinder the growth of the online brokerage industry. We may
incur significant costs to protect against the threat of network or Internet
security breaches or to alleviate problems caused by such breaches.

IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS.

Some provisions of our certificate of incorporation and bylaws, as well as
some provisions of Delaware law and control by existing stockholders, may
discourage, delay or prevent third parties from acquiring us, even if doing so
would be beneficial to our stockholders. See "Description of Capital
Stock -- Anti-Takeover Effects of Certain Provisions of Delaware Law and Our
Certificate of Incorporation and Bylaws" for information regarding when and how
these provisions apply.

OUR NEGATIVE CASH FLOW FROM OPERATIONS MAY LIMIT THE GROWTH OF OUR MARGIN
LENDING ACTIVITIES.

We have had negative cash flow from operations in many historical periods,
primarily as a result of the growth in our margin lending activities. We have
financed this growth primarily through short- and long-term borrowings.
Continued growth in our margin lending activities will require continued
availability of such borrowings. If we are unable to fund such needs, our
ability to support the growth of our margin lending activities will be impeded
and could result in reduced interest income.

WE MAY NEED ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH,
AND WE MAY BE UNABLE TO OBTAIN IT ON TERMS ACCEPTABLE TO US, IF AT ALL.

We believe that our existing capital resources, including the anticipated
proceeds of this offering, will enable us to maintain our current and planned
operations for at least the next 12 months. However, we may require additional
funds during or after that 12-month period. Any required financing may not be
available or may be available only on terms that are not favorable to us.
Further, if additional funds are raised through the issuance of additional
equity securities, the percentage ownership of our stockholders would be
diluted. Any new equity securities may have rights, preferences or privileges
senior to those of our common stock.

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RISKS RELATED TO THIS OFFERING

THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK, AND WE EXPECT ITS
PRICE TO BE VOLATILE. YOU MAY BE UNABLE TO SELL YOUR STOCK AT OR ABOVE THE PRICE
YOU PAID IF AN ACTIVE PUBLIC MARKET DOES NOT DEVELOP FOR OUR COMMON STOCK.

Prior to this offering, there has been no public market for our common
stock, and we cannot assure you that an active public market for our common
stock will develop or be sustained after this offering. The initial public
offering price of our common stock will be determined by negotiation among our
management and the representatives of the several underwriters. As a result, the
initial public offering price of our common stock may not be indicative of the
market price of our common stock that will prevail in the trading market. The
market price of our common stock is likely to be highly volatile and could be
subject to wide fluctuations in response to:

- reductions in market prices or volume, which are particularly common
among securities of technology companies;

- changes in securities or other government regulations;

- quarterly variations in operating results;

- our technological capabilities to accommodate any future growth in
our operations or clients;

- announcements of technological innovations, new products, services,
significant contracts, acquisitions or joint ventures by us or our
competitors; and

- changes in financial estimates and recommendations by securities
analysts or our failure to meet or exceed analyst estimates.

As a result, you may be unable to sell your stock at or above the price you paid
for it.

OUR BUSINESS MAY BE ADVERSELY AFFECTED BY CLASS ACTION LITIGATION DUE TO STOCK
PRICE VOLATILITY.

In the past, securities class action suits have been filed following
periods of market volatility in the price of a company's securities. We may in
the future be the target of similar litigation. If a securities class action
suit was instituted, we would incur substantial costs and a diversion of
management attention and resources to defend ourselves regardless of the merit
of the underlying claim.

OUR MANAGEMENT HAS BROAD DISCRETION IN USING THE PROCEEDS FROM THIS OFFERING,
AND THE PROCEEDS MIGHT NOT BE USED IN WAYS THAT INCREASE OUR OPERATING RESULTS
OR MARKET VALUE.

We estimate the net proceeds from this offering will be approximately $98.9
million, after deducting estimated expenses of the offering. Our management will
have broad discretion in how we use the net proceeds of this offering, including
uses that do not increase our operating results or market value. We currently
expect to use these proceeds for retirement of debt, the satisfaction of
regulatory capital requirements and general corporate purposes, including
capital expenditures and working capital. We also may use a portion of the net
proceeds for the future acquisition of companies, technologies or services that
complement our business, or for strategic alliances with, or investments in,
companies that provide complementary products and services. You will not have
the opportunity, as part of your investment decision, to assess whether the
proceeds are being used appropriately. See "Use of Proceeds."

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OUR STOCKHOLDERS COULD BE HARMED IF OUR MANAGEMENT AND LARGER STOCKHOLDERS USE
THEIR INFLUENCE IN A MANNER ADVERSE TO OTHER STOCKHOLDERS' INTERESTS.

Upon completion of this offering, our executive officers, directors and 5%
stockholders will beneficially own, in the aggregate, approximately 63% of our
outstanding common stock. As a result, these stockholders will have the ability
to control all fundamental matters affecting us, including the election of the
majority of the board of directors and approval of significant corporate
transactions. This concentration of ownership may also delay or prevent a change
in our control even if beneficial to you as a stockholder. These stockholders
may use their influence to approve or take actions that are adverse to your
interests. See "Principal Stockholders."

NEW INVESTORS WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION IN THE TANGIBLE NET
BOOK VALUE OF THEIR SHARES.

We expect that the initial public offering price of our common stock will
significantly exceed the net tangible book value of our common stock. The net
tangible book value of one share of our common stock purchased at the assumed
initial public offering price of $13.50 per share was only $3.06 based on
weighted average shares outstanding as of September 30, 2000. As a result,
investors purchasing common stock in this offering will incur dilution of $10.44
per share. In addition, we have issued options to acquire common stock at prices
significantly below the assumed initial public offering price, the exercise of
which will likely result in additional dilution when and if they are exercised.

SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET AFTER THIS
OFFERING COULD ADVERSELY AFFECT OUR STOCK PRICE.

Sales of a substantial number of shares of common stock in the public
market, or the perception that such sales could occur, could adversely affect
the market price for our common stock. Upon completion of this offering, our
existing stockholders will hold 28,657,800 shares, representing 78% of the total
outstanding shares of our common stock. A decision by these stockholders to sell
shares of common stock could adversely affect the market price for our common
stock. After this offering, we will have an aggregate of 27,435,675 shares of
common stock authorized but unissued and not reserved for specific purposes. All
of these shares may be issued without any action or approval by our
stockholders. Upon completion of this offering we will have 36,657,800 shares of
common stock outstanding, and all shares sold in this offering will be freely
tradeable. All remaining shares of our outstanding common stock are subject to
lock-up agreements with our underwriters. These lock-up agreements restrict
transfers of such shares without the written consent of the underwriters until
180 days after the date of this prospectus. After this 180-day period expires,
28,657,800 shares of our common stock will be eligible for sale pursuant to Rule
144 under the Securities Act of 1933. Such shares are subject to the lock-up
agreements described above. In addition, 5,872,500 shares of our common stock
have been reserved for issuance under our 2000 Stock Incentive Plan, of which
188,000 shares are issuable upon exercise of options outstanding at the date of
this prospectus, including options to purchase 188,000 shares exercisable as of
the date of this prospectus or that will become exercisable within 60 days after
the date of this prospectus. An additional 776,250 shares will be available for
future purchase by our employees pursuant to our 2000 Employee Stock Purchase
Plan. We intend to register on Form S-8 under the Securities Act of 1933 a total
of approximately 6,460,750 shares of common stock reserved for issuance under
the stock option and employee stock purchase plans.

18
<PAGE> 23

FORWARD-LOOKING STATEMENTS

Some of the statements under "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology, including "may," "will," "should," "could," "expect,"
"plan," "anticipate," "believe," "estimate," "intend," "project," "seek,"
"predict," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform these statements to actual results.

19
<PAGE> 24

USE OF PROCEEDS

We estimate that the net proceeds from the sale of the 8,000,000 shares of
common stock offered by us will be approximately $98.9 million, based on an
assumed initial public offering price of $13.50 per share and after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by us. If the underwriters exercise the over-allotment option in full,
we estimate that our net proceeds will be approximately $114.0 million, after
deducting the estimated discounts, commissions and expenses.

We intend to use the net proceeds from this offering to:

- repay $41.9 million worth of indebtedness under various bank and
promissory notes whose terms range from 6 months to 7 years with a
weighted average interest rate of 9.7% as of September 30, 2000. Of
this amount, $25.0 million was incurred in March 2000 for working
capital and the repayment of outstanding promissory notes and an
additional $10.0 million was incurred in July 2000 for working
capital; and

- fund our working capital needs and for other general corporate
purposes, including the satisfaction of net capital requirements as
we increase our loans to customers.

We may also use a portion of the net proceeds for acquisitions of
businesses, products and technologies or the establishment of joint ventures
that are complementary to our business. Although we have not identified any
specific businesses, products or technologies that we may acquire, and there are
no current agreements or understandings with respect to any such transactions,
we do from time to time evaluate such opportunities. The amounts actually used
for working capital purposes may vary significantly and will depend on a number
of factors, including the amount of our future revenues and the other factors
described under "Risk Factors." Accordingly, we will retain broad discretion in
the allocation of the net proceeds of this offering. Pending these uses, we will
invest the net proceeds of this offering in interest-bearing, investment-grade
securities.

DIVIDEND POLICY

As an S corporation, we made cash distributions to our stockholders from
time to time. For the years ended December 31, 1999 and 1998, we elected to be
treated as an S corporation for federal and state income tax purposes and,
accordingly, we were not subject to taxation for federal income taxes and,
instead, our shareholders were subject to federal income taxation based on our
income. We have made distributions of cash to our shareholders in an aggregate
amount of $4.9 million in large part to enable our shareholders to pay their
income tax liability relating to our taxable income for 1999 and 1998. We also
made a cash distribution to our shareholders of approximately $1.7 million in
August 2000. In addition, we have had two transactions that were deemed to be
distributions for accounting purposes, although no cash distributions to our
shareholders were made in either case. One of these transactions occurred in
1998 and resulted in a deemed distribution of approximately $0.5 million. The
other transaction occurred in 2000 in connection with our conversion from an S
corporation to a C corporation and resulted in a deemed net distribution of
approximately $8.2 million. We currently intend to retain any earnings to
develop and expand our business and do not anticipate paying cash dividends in
the foreseeable future. Any future determination with respect to the payment of
dividends will be at the discretion of our board of directors and will depend
upon, among other things, our operating results, financial condition and capital
requirements, the terms of then-existing indebtedness, general business
conditions and other factors our board of directors deems relevant.

20
<PAGE> 25

PRIOR S CORPORATION STATUS

For the period January 1, 1998 through December 31, 1999, we elected to be
treated as an S corporation under Subchapter S of the Internal Revenue Code of
1986 and comparable state laws. Accordingly, no provision was made for federal
or state income taxes during 1998 or 1999. Our S corporation status was
terminated effective January 1, 2000, after which time we have been required to
pay federal and certain state income taxes as a C corporation. While we believe
that we were a valid S corporation, we cannot assure you that the Internal
Revenue Service or any other taxing authority will not challenge such status. If
any taxing authority were to do so and prevail, we could be liable for
substantial additional income taxes, interest and penalties.

21
<PAGE> 26

CAPITALIZATION

The following table summarizes our capitalization as of September 30, 2000
on an actual basis and on a pro forma as adjusted basis to reflect our sale of
8,000,000 shares of common stock at an assumed initial public offering price of
$13.50 per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses that we will pay.

You should read this table together with our financial statements and
related notes appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
----------------------
PRO FORMA
AS
ACTUAL ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 11,515 $ 68,508
-------- --------
Short-term debt............................................. 65,660 65,660
-------- --------
Notes payable............................................... 41,892 --
Stockholders' equity:
Common stock, $.01 par value; 65,000,000 shares
authorized, 29,564,325 issued and 28,657,800 shares
outstanding at September 30, 2000; 36,657,800 shares
outstanding pro forma as adjusted...................... 296 376
Preferred stock, $.01 par value; 10,000,000 shares
authorized, none issued or outstanding................. -- --
Additional paid-in capital................................ 17,829 116,634
Options outstanding....................................... 7,486 7,486
Treasury stock............................................ (241) (241)
Accumulated deficit....................................... (11,496) (11,496)
-------- --------
Total stockholders' equity...................... 13,874 112,759
-------- --------
Total capitalization......................... $121,426 $178,419
======== ========
</TABLE>

22
<PAGE> 27

DILUTION

Our net tangible book value as of September 30, 2000 was approximately
$13.3 million, or $0.46 per share of common stock. Net tangible book value per
share is determined by dividing the amount of our total tangible assets less our
total liabilities by the weighted average number of shares of common stock
outstanding. After giving effect to our sale of 8,000,000 shares of common stock
at an assumed initial public offering price of $13.50 per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses that we will pay, our net tangible book value as adjusted as
of September 30, 2000 would have been $112.2 million, or $3.06 per share. This
amount represents an immediate increase in net tangible book value to our
existing stockholders of $2.60 per share and an immediate dilution to new
investors of $10.44 per share. The following table illustrates this per share
dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....... $ 13.50
Net tangible book value per share as of
September 30, 2000............................ $0.46
Increase per share attributable to new
investors..................................... 2.60
-----
Net tangible book value as adjusted per share after
this offering........................................ 3.06
-------
Dilution per share to new investors................... $ 10.44
=======
</TABLE>

If the underwriters exercise their option to purchase additional shares in
this offering in full, our net tangible book value as adjusted at September 30,
2000 would have been $127.3 million, or $3.36 per share, representing an
immediate increase in net tangible book value to our existing stockholders of
$2.90 per share and an immediate dilution to new investors of $10.14 per share.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 28,657,800 78.2% $ 18,124,687 14.4% $ 0.63
New investors................. 8,000,000 21.8% 108,000,000 85.6% 13.50
---------- ----- ------------ -----
Totals............ 36,657,800 100.0% $126,124,687 100.0%
========== ===== ============ =====
</TABLE>

23
<PAGE> 28

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with our financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this prospectus. We derived the statement of operations
data for the years ended December 31, 1997, 1998 and 1999 and the balance sheet
data as of December 31, 1998 and 1999 from our financial statements audited by
Ernst & Young LLP, which appear elsewhere in this prospectus. We have prepared
our unaudited statement of operations data for the period ended December 31,
1995, for the year ended 1996 and for the nine months ended September 30, 1999
and 2000 and the balance sheet data as of December 31, 1995, 1996 and 1997 and
as of September 30, 1999 and 2000 on the same basis as our audited financial
statements. In the opinion of our management, our unaudited financial statements
include all adjustments necessary for a fair presentation of the information in
those statements. Our historical results are not necessarily indicative of
operating results to be expected in the future.

<TABLE>
<CAPTION>
PERIOD FROM
JULY 3,
1995
(INCEPTION) NINE MONTHS ENDED
TO DECEM- YEAR ENDED DECEMBER 31, SEPTEMBER 30,
BER 31, ----------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
----------- -------- -------- -------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND CORRESPONDENTS DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Net revenues from clearing operations........ $ 928 $ 6,616 $ 12,743 $ 13,817 $ 27,123 $ 18,121 $ 36,783
Interest, net................................ 165 1,218 2,010 3,439 9,473 5,825 16,025
-------- -------- -------- -------- -------- -------- ---------
Total revenues......................... 1,093 7,834 14,753 17,256 36,596 23,946 52,808
Expenses:
Employee compensation and benefits........... 362 1,519 3,817 3,550 10,127 6,158 13,234
Floor brokerage, exchange and clearance
fees....................................... 127 570 1,516 3,882 5,631 4,092 5,368
Communications and data processing........... 259 2,428 4,106 4,558 7,980 5,281 10,708
Occupancy and equipment...................... 59 268 782 1,515 2,166 1,539 2,477
Other expenses............................... 186 736 928 1,281 2,255 1,521 3,318
Non-cash employee stock option awards(1)..... -- -- -- -- -- -- 24,000
-------- -------- -------- -------- -------- -------- ---------
Total expenses......................... 993 5,521 11,149 14,786 28,159 18,591 59,105
-------- -------- -------- -------- -------- -------- ---------
Operating income (loss)........................ 100 2,313 3,604 2,470 8,437 5,355 (6,297)
Interest expense on notes payable............ (152) (434) (822) (947) (1,490) (1,108) (2,346)
-------- -------- -------- -------- -------- -------- ---------
Income (loss) from continuing operations before
income taxes................................. (52) 1,879 2,782 1,523 6,947 4,247 (8,643)
Provision for income taxes..................... (5) 618 995 -- -- -- 6,225
-------- -------- -------- -------- -------- -------- ---------
Income (loss) from continuing operations....... (47) 1,261 1,787 1,523 6,947 4,247 (14,868)
Income from discontinued operations, net of
tax(2)....................................... -- -- -- 211 1,991 803 3,372
-------- -------- -------- -------- -------- -------- ---------
Net income (loss).............................. $ (47) $ 1,261 $ 1,787 1,734 $ 8,938 $ 5,050 $ (11,496)
======== ======== ======== ======== ======== ======== =========
Pro forma information:
Income (loss) from continuing operations..... $ (47) $ 1,261 $ 1,787 $ 1,523 $ 6,947 $ 4,247 $ (14,868)
Pro forma adjustment for income taxes........ -- -- -- (533) (2,431) (1,487) --
-------- -------- -------- -------- -------- -------- ---------
Pro forma income (loss) from continuing
operations(3).............................. $ (47) $ 1,261 $ 1,787 $ 990 $ 4,516 $ 2,760 $ (14,868)
======== ======== ======== ======== ======== ======== =========
Earnings (loss) per share -- basic and diluted:
Earnings (loss) per share from continuing
operations................................. $ (0.00) $ 0.05 $ 0.06 $ 0.05 $ 0.27 $ 0.17 $ (0.53)
Earnings (loss) per share from discontinued
operations................................. -- -- -- 0.01 0.08 0.03 0.12
-------- -------- -------- -------- -------- -------- ---------
Earnings (loss) per share.................... $ (0.00) $ 0.05 $ 0.06 $ 0.06 $ 0.35 $ 0.20 $ (0.41)
======== ======== ======== ======== ======== ======== =========
Pro forma earnings (loss) per share from
continuing operations(3)................... $ (0.00) $ 0.05 $ 0.06 $ 0.03 $ 0.18 $ 0.11 $ (0.53)
======== ======== ======== ======== ======== ======== =========
Weighted average shares outstanding -- basic
and diluted.................................. 26,729 26,806 27,720 28,629 25,728 25,270 28,193
Supplemental Information:
Number of correspondents..................... 8 16 39 52 70 67 121
Total transactions........................... 199 1,559 3,934 6,234 16,607 10,785 26,959
</TABLE>

24
<PAGE> 29

<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
DECEMBER 31, ----------------------
-------------------------------------------------------- AS
1995 1996 1997 1998 1999 ACTUAL ADJUSTED(4)
------------ -------- -------- -------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 2,305 $ 1,336 $ 1,565 $ 2,844 $ 5,251 $ 11,515 $ 68,508
Total assets.................................. 103,967 184,600 202,153 143,044 543,591 995,859 1,052,851
Notes payable................................. 4,000 5,735 12,000 9,150 23,984 41,892 0
Total stockholders' equity.................... 954 2,234 4,267 5,451 11,348 13,874 112,759
</TABLE>

---------------

(1) Total expenses for the nine months ended September 30, 2000 includes $24.0
million of non-cash compensation expense related to the grant of options to
key management personnel.

25
<PAGE> 30

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our financial statements and the
related notes included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of certain factors including the risks discussed in "Risk
Factors" and elsewhere in this prospectus.

OVERVIEW

We began our securities clearing operations in July 1995 and have grown
rapidly since our inception to become a leading provider of a broad range of
securities clearing services and other related services to the brokerage
industry. Our clients are broker-dealers, primarily in the direct access and
online sector of the brokerage industry. While our clients are predominantly
located in the United States, we recently acquired subsidiaries in London and
Montreal to expand our clearing operations into Europe and Canada.

Revenues

Our revenues consist principally of net commissions we derive from our
clearing operations and net interest income from our margin lending and
securities lending activities. Our clearing revenues fluctuate based on the
number of trades we clear and the revenue earned per trade. Interest revenues
are primarily derived by our charges to customers for financing their securities
purchases on margin, and therefore fluctuate based on the volume of our total
margin loans outstanding as well as the rates of interest we can competitively
charge. We also generate interest revenues from the investment of our excess
cash balances in interest-bearing securities or through securities borrowing
activities. We incur interest expense on amounts paid to customers based on
credit balances in their accounts, stock loans, bank loans or other financing
sources.

Expenses

Our cost structure consists primarily of employee compensation and
benefits, floor brokerage, exchange and clearance fees, communications and data
processing expenses, occupancy and equipment expenses and interest. The largest
component of our overall cost structure is employee compensation and benefits
expense. Employee compensation and benefits expenses consist primarily of
employee base salaries, bonuses, benefits, recruiting expenses and temporary
employee expenses. Floor brokerage, exchange and clearance fees and
communications and data processing expenses we incur in conjunction with
clearing securities transactions also represent a substantial portion of our
total operating expenses. These costs are mostly variable in relation to our
clearing revenues. Floor brokerage, exchange and clearance fees consist
primarily of brokerage fees paid to other brokers for execution services,
clearance and custody fees paid to the Nasdaq Stock Market, the National
Securities Clearing Corporation, the Depository Trust Corporation and other
safekeeping banks as well as accruals for bad debt. Communications and data
processing expenses consist primarily of the charges we incur for a license of
SunGard Phase3, the clearing software system we use, as well as expenses
associated with third-party data processing and development services, telephone
service and data networks. Occupancy and equipment expenses, many of which are
relatively fixed, consist primarily of expenses associated with our facility
leases, the amortization of leasehold buildouts and depreciation of equipment.
Other expenses consist primarily of insurance, promotional expenses, quotation
and SEC fees, publications and office supplies. Interest expense on notes
payable consists primarily of interest expense on capital loans historically
paid to an affiliated entity and commercial banks.
26
<PAGE> 31

Our quarterly revenues and operating results are volatile and difficult to
forecast due to numerous factors. The securities business is directly affected
by national and international economic conditions, broad trends in business and
finance and fluctuations in trading volumes and price levels of securities, all
of which are beyond our control. We have recently experienced a significant
increase in demand for our services, which has led to record levels of revenues
and net profits. Our expense structure is based in part on our anticipated
future levels of demand for our services. As a result, any shortfall in revenues
relative to our expectations could cause significant fluctuations in our
operating results from quarter to quarter.

RECENT DEVELOPMENTS

Corporate reorganization and spin-off from Service Asset Holdings, Inc. We
have operated our market making operations, clearing activities and related
services through an unincorporated division of Penson Financial Services, Inc.,
which we refer to as PFSI, since 1995. PFSI, a registered broker-dealer
incorporated in North Carolina, also previously maintained two other
unincorporated divisions: SAMCO Capital Markets, which conducts underwriting and
investment advisory services, and SAMCO Financial Services, which consists of
the operations of a number of independent brokers. PFSI has operated as a
subsidiary of Service Asset Investments, Inc., a Texas corporation which we
refer to as SAII, since 1995. SAII is a wholly owned subsidiary of Service Asset
Holdings, Inc., a Texas corporation incorporated in 1995. SAII had four other
wholly owned subsidiaries: IBI, Inc.; Yee, Desmond, Schroeder & Allen, Inc.;
Penson Holdings, Inc.; and SAMCO Financial Advisors, Inc. The businesses of IBI,
Inc., Yee, Desmond, Schroeder & Allen and SAMCO Financial Advisors, Inc. consist
primarily of financial advisory services. Penson Holdings, Inc., a Delaware
corporation, was incorporated in 2000 and owns all of the capital stock of
Penson Worldwide Settlements Limited and Penson Financial Services Canada. In
September 2000, Service Asset Holdings, Inc. effected a restructuring for the
purpose of distributing its non-core operations, including its SAMCO Capital
Markets and SAMCO Financial Services divisions; IBI, Inc.; Yee, Desmond,
Schroeder & Allen, Inc. and SAMCO Financial Advisors, Inc., to its shareholders
in a tax-free distribution. In September 2000, we changed our name and state of
domicile by effectuating a merger between Service Asset Holdings, Inc. and
Penson Worldwide, Inc., a newly formed Delaware corporation. Our historical
financial statements included in this prospectus exclude the results of
operations, assets and liabilities of these non-core operations that were
distributed to our shareholders prior to this offering.

Acquisitions of Worldwide Settlements Limited and ECE Electronic Clearing
Inc. In March 2000, we acquired control of Worldwide Settlements Limited by
purchasing 51% of the company's outstanding shares. In April 2000, we exercised
our option to purchase the remaining 49% of the company's outstanding shares.
Our total purchase price for the stock was approximately $1.2 million. No
goodwill will be amortized since we purchased Worldwide Settlements for book
value. In addition, we paid approximately $0.5 million in signing bonuses to
certain employees of Worldwide Settlements in connection with our acquisition of
the company.

In September 2000, we acquired all of the outstanding stock of ECE
Electronic Clearing Inc., a clearing firm located in Montreal, Canada, for a
purchase price of approximately $0.5 million, which was allocated to acquired
goodwill and will be amortized on a straight-line basis over seven years.

To date, our foreign operations have not generated any significant revenues
for us. Substantially all of our revenues are currently generated by our U.S.
operations.

Conversion from S Corporation to C Corporation Status for Income Taxes. For
the period January 1, 1998 through December 31, 1999, we elected to be treated
as an S corporation under Subchapter S of the Internal Revenue Code of 1986 and
comparable state tax laws. Accordingly, no provision was made for federal or
state income taxes during 1998 or 1999. Pro forma income

27
<PAGE> 32

from continuing operations has been computed as if we had been fully subject to
federal and state income taxes as a C corporation. Our S corporation status was
terminated effective January 1, 2000, after which time we have been required to
pay federal and certain state income taxes as a C corporation.

Closure of our market making line of business. Immediately prior to the
effectiveness of this offering, we will discontinue our market making
operations. The assets of these operations will be sold to a company controlled
by our management, IBI, Inc. The employees of this line of business will become
employees of IBI, Inc. Our decision to discontinue our market making operations
was based on our belief that the volatility associated with earnings of the
market making business would be detrimental to the performance of our stock in
the public trading market. Pro forma income (loss) from continuing operations
and pro forma earnings (loss) per share from continuing operations exclude
income from our discontinued market making operations.

Amendment of Management Compensation Arrangements. Historically, we had
compensation arrangements with certain members of executive management that
provided for bonus payments of an aggregate of 38% of our operating income,
subject to certain adjustments. In March 2000, we amended these arrangements to
reduce the percentage of operating income, subject to certain adjustments,
allocated to such bonus payments to 18%. Upon effectiveness of this offering,
these arrangements will be further amended to reduce the percentage of operating
income allocated to such bonus payments to 5% and to limit the total annual cash
compensation to all of the participating executives to $3.0 million in the
aggregate.

28
<PAGE> 33

RESULTS OF OPERATIONS

The following table summarizes our operating results as a percentage of net
revenues for each of the periods shown.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1997 1998 1999 1999 2000
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Net revenues from clearing operations...... 86.4% 80.1% 74.1% 75.7% 69.7%
Interest, net.............................. 13.6 19.9 25.9 24.3 30.3
----- ----- ----- ----- -----
Total revenues..................... 100.0 100.0 100.0 100.0 100.0
Expenses:
Employee compensation and benefits......... 25.9 20.6 27.7 25.7 25.1
Floor brokerage, exchange and clearance
fees.................................... 10.3 22.5 15.4 17.1 10.1
Communications and data processing......... 27.8 26.4 21.8 22.1 20.3
Occupancy and equipment.................... 5.3 8.8 5.9 6.4 4.7
Other expenses............................. 6.3 7.4 6.1 6.3 6.3
Non-cash employee stock option awards...... -- -- -- -- 45.4
----- ----- ----- ----- -----
Total expenses..................... 75.6 85.7 76.9 77.6 111.9
----- ----- ----- ----- -----
Operating income (loss)...................... 24.4 14.3 23.1 22.4 (11.9)
Interest expense on notes payable.......... (5.6) (5.5) (4.1) (4.7) (4.5)
----- ----- ----- ----- -----
Income (loss) from continuing operations
before income taxes........................ 18.8 8.8 19.0 17.7 (16.4)
Provision for income taxes................... 6.7 -- -- -- 11.8
----- ----- ----- ----- -----
Income (loss) from continuing operations..... 12.1 8.8 19.0 17.7 (28.2)
Income from discontinued operations, net of
tax........................................ -- 1.2 5.4 3.4 6.4
----- ----- ----- ----- -----
Net income (loss)............................ 12.1 10.0 24.4 21.1 (21.8)
===== ===== ===== ===== =====
Pro forma information:
Income (loss) from continuing operations... 12.1 8.8 19.0 17.7 (28.2)
Pro forma adjustment for income taxes...... -- (3.1) (6.7) (6.2) --
----- ----- ----- ----- -----
Pro forma income (loss) from continuing
operations.............................. 12.1% 5.7% 12.3% 11.5% (28.2)%
===== ===== ===== ===== =====
</TABLE>

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999

Net Revenues from Clearing Operations. Net revenues from clearing
operations increased to $36.8 million for the nine months ended September 30,
2000 from $18.1 million for the nine months ended September 30, 1999,
representing an increase of $18.7 million or 103.3%. This increase was
attributable to growth in the business of our correspondents and an increase in
the number of our correspondents to 121 as of September 30, 2000 from 67 as of
September 30, 1999. These factors led to an increase in the number of
transactions we processed to 27.0 million during the nine months ended September
30, 2000 from 10.8 million for the nine months ended September 30, 1999. Net
clearing revenue per transaction has been decreasing in recent years, to $1.36
for the nine months ended September 30, 2000 from $1.68 for the nine months
ended September 30, 1999. This decrease was largely attributable to volume
discounts we have granted as a result of existing correspondents' growth or new
correspondents' high transaction volumes and, to a lesser extent, pricing
pressures from competitors.

29
<PAGE> 34

Interest Income, Net of Interest Expense. Net interest income increased to
$16.0 million for the nine months ended September 30, 2000, of which $41.1
million was revenue and $25.1 million was interest expense, from $5.8 million
for the nine months ended September 30, 1999, of which $11.1 million was revenue
and $5.3 million was interest expense, representing an increase of $10.2 million
or 175.9%. This increase was attributable to a significant increase in the
amount of margin loans we financed. Average margin loans outstanding increased
$297.8 million or 153.0%, to $492.4 million for the nine months ended September
30, 2000 from $194.6 million for the nine months ended September 30, 1999.

Employee Compensation and Benefits Expense. Employee compensation and
benefits expense increased to $13.2 million for the nine months ended September
30, 2000 from $6.2 million for the nine months ended September 30, 1999,
representing an increase of $7.0 million or 112.9%. This increase was
attributable to the growth in both clearing and margin lending activities that
required additional managerial and operational personnel to support the growth
as well as management profit-based bonus compensation. Total employee headcount
associated with continuing operations was 213 as of September 30, 2000 compared
to 133 as of September 30, 1999. Employee compensation and benefits expense as a
percentage of total revenues decreased to 25.1% for the nine months ended
September 30, 2000 from 25.7% for the nine months ended September 30, 1999.

Floor Brokerage, Exchange and Clearance Fees. Floor brokerage, exchange and
clearance fees increased to $5.4 million for the nine months ended September 30,
2000 from $4.1 million for the nine months ended September 30, 1999,
representing an increase of $1.3 million or 31.7%. This increase was
attributable to the increases in our clearing operations, where the floor
brokerage, exchange and clearance fees we incur in connection with these
activities vary substantially with our revenues. Floor brokerage, exchange and
clearance fees as a percentage of total revenues decreased to 10.1% for the nine
months ended September 30, 2000 from 17.1% the nine months ended September 30,
1999. This decrease was due to a reduction in net revenues from clearing
operations as a percentage of total revenues as our margin lending activity has
grown, as well as certain efficiencies of scale achieved with the significant
growth of our clearing operations.

Communications and Data Processing Expense. Communications and data
processing expense increased to $10.7 million for the nine months ended
September 30, 2000 from $5.3 million for the nine months ended September 30,
1999, representing an increase of $5.4 million or 101.9%. This increase was
attributable to the increases in our clearing operations, where the
communications and data processing expenses we incur in connection with these
activities are variable with our revenues. Communications and data processing
expense as a percentage of total revenues decreased to 20.3% for the nine months
ended September 30, 2000 from 22.1% for the nine months ended September 30,
1999. This decrease was due to the decrease in net revenues from clearing
operations as a percentage of our total revenues, as well as the achievement of
efficiencies of scale.

Occupancy and Equipment Expense. Occupancy and equipment expense increased
to $2.5 million for the nine months ended September 30, 2000 from $1.5 million
for the nine months ended September 30, 1999, representing an increase of $1.0
million or 66.7%. The increase in occupancy and equipment expense is
attributable to the expansion of our corporate headquarters in Dallas in July
1999 as well as the expenditures for furniture and equipment we incurred in
conjunction with our significant staff increases during this period. Occupancy
and equipment expense as a percentage of total revenues decreased to 4.7% for
the nine months ended September 30, 2000 from 6.4% for the nine months ended
September 30, 1999. This decrease was due to spreading certain relatively fixed
infrastructure costs over a larger revenue base.

Other Expenses. Other operating expenses increased to $3.3 million for the
nine months ended September 30, 2000 from $1.5 million for the nine months ended
September 30, 1999,

30
<PAGE> 35

representing an increase of $1.8 million or 120.0%. The increase in other
expenses was primarily attributable to additional expenditures in promotional
and marketing expenses necessary to grow our business. Other expenses as a
percentage of total revenues decreased to 6.3% for the nine months ended
September 30, 2000 from 6.4% for the nine months ended September 30, 1999.

Non-cash Employee Stock Option Awards. We recognized non-cash compensation
expense of $24.0 million associated with stock options granted to key employees
during the nine months ended September 30, 2000.

Interest Expense on Notes Payable. Interest expense increased to $2.3
million for the nine months ended September 30, 2000 from $1.1 million for the
nine months ended September 30, 1999, representing an increase of $1.2 million
or 109.1%. These notes payable will be repaid from the proceeds of this
offering.

COMPARISON OF YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

Net Revenues from Clearing Operations. Net revenues from clearing
operations increased to $27.1 million in 1999 from $13.8 million in 1998,
representing an increase of $13.3 million or 96.3%. Net revenues from clearing
operations increased to $13.8 million in 1998 from $12.7 million in 1997,
representing an increase of $1.1 million or 8.4%. These increases were
attributable to an increase in the number of our correspondents to 70 as of
December 31, 1999 from 52 as of December 31, 1998 and 39 as of December 31,
1997, as well as growth in the business of our correspondents. These factors led
to an increase in the number of transactions processed to 16.6 million in 1999
from 6.2 million in 1998 and 3.9 million in 1997. Net clearing revenue per
transaction has been decreasing in recent years, to $1.63 in 1999 from $2.22 in
1998 and $3.24 in 1997. This decrease was primarily attributable to: volume
discounts we have granted as a result of existing correspondents' growth or new
correspondents' high transaction volumes; our increased focus on the direct
access and online sector of the brokerage industry, the pricing model for which
reflects the high-volume, low-cost nature of this business; and pricing
pressures from competitors.

Interest Income, Net of Interest Expense. Net interest income increased to
$9.5 million in 1999, of which $17.8 million was revenue and $8.3 million was
interest expense, from $3.4 million in 1998, of which $6.4 million was revenue
and $3.0 million was interest expense, representing an increase of $6.1 million
or 175.5%. Net interest income increased to $3.4 million in 1998, of which $6.4
million was revenue and $3.0 million was interest expense, from $2.0 million in
1997, of which $3.8 million was revenue and $1.8 million was interest expense,
representing an increase of $1.4 million or 71.1%. These increases were
primarily attributable to a significant increase in the amount of margin loans
we financed. Our margin loans outstanding averaged $220.4 million during 1999
compared to $135.7 million during 1998 and $92.2 million during 1997. In
addition, during 1999 we increased our focus on our securities lending
activities, which we engage in to provide additional financing for our
operations and to generate interest income.

Employee Compensation and Benefits Expense. Employee compensation and
benefits expense increased to $10.1 million in 1999 from $3.6 million in 1998,
representing an increase of $6.5 million or 185.3%. Employee compensation and
benefits expense decreased to $3.6 million in 1998 from $3.8 million in 1997
representing a decrease of $0.2 million or 7.0%. The increase from 1998 to 1999
was primarily attributable to the additional staff hired to support the growth
of our clearing operations and margin lending activities. The decrease from 1997
to 1998 was primarily attributable to pre-tax performance based incentive
compensation for key personnel. Total employee headcount associated with
continuing operations was 129 as of December 31, 1999, compared to 74 as of
December 31, 1998 and 56 as of December 31, 1997. Employee compensation and
benefits expense grew to 27.7% of total revenues during 1999, compared to 20.6%
in 1998 and 25.9% in 1997. This increase was attributable to the growth in both
clearing and margin lending activities that required additional managerial and
operational personnel to

31
<PAGE> 36

support the growth. In addition, employee compensation expense paid to members
of executive management pursuant to bonus payment arrangements increased to $3.9
million in 1999 from $0.7 million in 1998, representing an increase of $3.2
million or 457.0%. These arrangements were amended recently.

Floor Brokerage, Exchange and Clearance Fees. Floor brokerage, exchange and
clearance fees increased to $5.6 million in 1999 from $3.9 million in 1998,
representing an increase of $1.7 million or 45.1%. Floor brokerage, exchange and
clearance fees increased to $3.9 million in 1998 from $1.5 million in 1997,
representing an increase of $2.4 million or 156.1%. These increases were
attributable to the increases in our clearing operations, where the floor
brokerage, exchange and clearance fees we incur in connection with these
activities vary substantially with our revenues. Floor brokerage, exchange and
clearance fees as a percentage of total revenues were 15.4% in 1999, compared to
22.5% in 1998 and 10.3% in 1997. These expenses were higher as a percentage of
revenues in 1998 due to the loss of a large correspondent in late 1997 and the
resulting change in our business mix.

Communications and Data Processing Expense. Communications and data
processing expense increased to $8.0 million in 1999 from $4.6 million in 1998,
representing an increase of $3.4 million or 75.1%. Communications and data
processing expense increased to $4.6 million in 1998 from $4.1 million in 1997,
representing an increase of $0.5 million or 11.0%. The largest component of this
expense is the charge for SunGard Phase3, our clearing software system. The
communications and data processing expenses we incur are variable with our net
revenues from clearing operations, and therefore may be expected to grow as our
net revenues from clearing operations increase. Communications and data
processing expense as a percentage of total revenues was 21.8% in 1999, compared
to 26.4% in 1998 and 27.8% in 1997. These decreases were due to a reduction in
net revenues from clearing operations as a percentage of total revenues as our
margin lending activity has grown, as well as certain efficiencies of scale
achieved with the significant growth of our clearing operations.

Occupancy and Equipment Expense. Occupancy and equipment expense increased
to $2.2 million in 1999 from $1.5 million in 1998, representing an increase of
$0.7 million or 43.0%. Occupancy and equipment expense increased to $1.5 million
in 1998 from $0.8 million in 1997, representing an increase of $0.7 million or
93.7%. Occupancy and equipment expense has increased significantly in recent
years as a result of the expansion of our infrastructure to support our rapid
growth. We expanded our corporate headquarters in Dallas from approximately
9,200 square feet to 19,400 square feet in July 1998, and expanded again to
approximately 25,650 square feet in July 1999. In conjunction with these
facilities expansions and our significant staff increases, we incurred capital
expenditures for furniture and equipment of $2.5 million in 1999, $1.7 million
in 1998 and $1.6 million in 1997, which resulted in increases in depreciation
expense to $1.5 million in 1999 from $1.0 million in 1998 and $0.5 million in
1997. Occupancy and equipment expense as a percentage of total revenues was 5.9%
in 1999, compared to 8.8% in 1998 and 5.3% in 1997.

Other Expenses. Other expenses increased to $2.3 million in 1999 from $1.3
million in 1998, representing an increase of $1.0 million or 76.0%. The increase
in other expenses was primarily attributable to additional promotional and
marketing expenditures necessary to grow our business. Other expenses increased
to $1.3 million in 1998 from $0.9 million in 1997, representing an increase of
$0.4 million or 38.0%. Other expenses as a percentage of total revenues were
6.1% in 1999, compared to 7.4% in 1998 and 6.3% in 1997.

Interest Expense on Notes Payable. Interest expense increased to $1.5
million in 1999 from $0.9 million in 1998, representing an increase of $0.6
million or 57.3%. Interest expense increased to $0.9 million in 1998 from $0.8
million in 1997, representing an increase of $0.1 million or 12.5%. This
increase is attributable to an increase in notes payable to $24.0 million from
$9.2 million. These notes payable will be repaid from the proceeds of this
offering.

32
<PAGE> 37

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth unaudited quarterly operating information
for each of the eleven quarters in the period ended September 30, 2000. This
data has been prepared on the same basis as the audited financial statements
contained elsewhere in this prospectus and, in the opinion of management,
includes all adjustments necessary for the fair presentation of the information
for the periods presented. This information should be read in conjunction with
the financial statements and notes thereto. We believe that future operating
results will be subject to quarterly fluctuations, and, as a result, we believe
that results of operations for interim periods should not be relied upon as any
indication of the results to be expected in any future period.

<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30,
1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND CORRESPONDENTS DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Net revenues from clearing operations........... $ 2,973 $ 3,169 $ 3,783 $ 3,892 $ 4,893 $ 6,374
Interest, net................................... 554 867 1,029 990 1,223 2,104
------- ------- ------- ------- ------- -------
Total revenues............................ 3,527 4,036 4,812 4,882 6,116 8,478
Expenses:
Employee compensation and benefits.............. 732 953 872 993 1,450 2,049
Floor brokerage, exchange and clearance fees.... 617 845 1,164 1,257 1,319 1,817
Communications and data processing.............. 711 1,024 1,464 1,359 1,537 1,723
Occupancy and equipment......................... 319 345 385 467 494 530
Other expenses.................................. 308 292 397 285 393 555
Non-cash employee stock option awards........... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total expenses............................ 2,687 3,459 4,282 4,361 5,193 6,674
------- ------- ------- ------- ------- -------
Operating income (loss).......................... 840 577 530 521 923 1,804
Interest expense on notes payable................ (230) (245) (245) (227) (216) (343)
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations before
income taxes.................................... 610 332 285 294 707 1,461
Provision for income taxes....................... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Income (loss) from continuing operations......... 610 332 285 294 707 1,461
Income from discontinued operations, net of
tax............................................. (38) (55) 32 272 200 253
------- ------- ------- ------- ------- -------
Net income (loss)................................ $ 572 $ 277 $ 317 $ 566 $ 907 $ 1,714
======= ======= ======= ======= ======= =======
Pro forma information:
Income (loss) from continuing operations........ $ 610 $ 332 $ 285 $ 294 $ 707 $ 1,461
Pro forma adjustment for income taxes........... (213) (116) (99) (102) (248) (512)
------- ------- ------- ------- ------- -------
Pro forma income (loss) from continuing
operations.................................... $ 397 $ 216 $ 186 $ 192 $ 459 $ 949
======= ======= ======= ======= ======= =======
Earnings (loss) per share -- basic and diluted:
Earnings (loss) per share from continuing
operations.................................... $ 0.02 $ 0.01 $ 0.01 $ 0.01 $ 0.03 $ 0.06
Earnings (loss) per share from discontinued
operations.................................... (0.00) (0.00) 0.00 0.01 0.01 0.01
------- ------- ------- ------- ------- -------
Earnings (loss) per share....................... $ 0.02 $ 0.01 $ 0.01 $ 0.02 $ 0.04 $ 0.07
======= ======= ======= ======= ======= =======
Pro forma earnings (loss) per share from
continuing operations......................... $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.02 $ 0.04
======= ======= ======= ======= ======= =======
Weighted average shares outstanding -- basic..... 29,181 28,451 28,451 28,445 25,263 24,835
Weighted average shares outstanding -- diluted... 29,181 28,451 28,451 27,258 25,263 25,835
Supplemental Information:
Number of correspondents........................ 41 46 53 52 60 63
Total transactions.............................. 1,133 1,380 1,839 1,882 2,642 3,899

<CAPTION>
QUARTER ENDED
-----------------------------------------------------
SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1999 1999 2000 2000 2000
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND CORRESPONDENTS DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Net revenues from clearing operations........... $ 6,855 $ 9,002 $11,270 $11,894 $13,619
Interest, net................................... 2,498 3,648 4,758 4,603 6,664
------- ------- -------- ------- -------
Total revenues............................ 9,353 12,650 16,028 16,497 20,283
Expenses:
Employee compensation and benefits.............. 2,659 3,969 3,747 4,616 4,871
Floor brokerage, exchange and clearance fees.... 956 1,539 1,739 1,838 1,791
Communications and data processing.............. 2,021 2,699 3,198 3,484 4,026
Occupancy and equipment......................... 515 627 688 777 1,012
Other expenses.................................. 574 734 902 1,696 720
Non-cash employee stock option awards........... -- -- 24,000 -- --
------- ------- -------- ------- -------
Total expenses............................ 6,725 9,568 34,274 12,411 12,420
------- ------- -------- ------- -------
Operating income (loss).......................... 2,628 3,082 (18,246) 4,086 7,863
Interest expense on notes payable................ (549) (382) (512) (866) (968)
------- ------- -------- ------- -------
Income (loss) from continuing operations before
income taxes.................................... 2,079 2,700 (18,758) 3,220 6,895
Provision for income taxes....................... -- -- 2,139 1,408 2,678
------- ------- -------- ------- -------
Income (loss) from continuing operations......... 2,079 2,700 (20,897) 1,812 4,217
Income from discontinued operations, net of
tax............................................. 350 1,188 2,285 1,263 (176)
------- ------- -------- ------- -------
Net income (loss)................................ $ 2,429 $ 3,888 $(18,612) $ 3,075 $ 4,041
======= ======= ======== ======= =======
Pro forma information:
Income (loss) from continuing operations........ $ 2,079 $ 2,700 $(20,897) $ 1,812 $ 4,217
Pro forma adjustment for income taxes........... (727) (945) -- -- --
------- ------- -------- ------- -------
Pro forma income (loss) from continuing
operations.................................... $ 1,352 $ 1,755 $(20,897) $ 1,812 4,217
======= ======= ======== ======= =======
Earnings (loss) per share -- basic and diluted:
Earnings (loss) per share from continuing
operations.................................... $ 0.08 $ 0.10 $ (0.77) $ 0.06 $ 0.15
Earnings (loss) per share from discontinued
operations.................................... 0.01 0.04 0.09 0.04 (0.01)
------- ------- -------- ------- -------
Earnings (loss) per share....................... $ 0.09 $ 0.14 $ (0.68) $ 0.10 $ 0.14
======= ======= ======== ======= =======
Pro forma earnings (loss) per share from
continuing operations......................... $ 0.05 $ 0.06 $ (0.77) $ 0.06 $ 0.15
======= ======= ======== ======= =======
Weighted average shares outstanding -- basic..... 25,707 27,085 27,258 28,658 28,658
Weighted average shares outstanding -- diluted... 27,258 27,258 27,258 29,322 29,313
Supplemental Information:
Number of correspondents........................ 67 70 99 108 121
Total transactions.............................. 4,245 5,821 8,334 8,938 9,687
</TABLE>

33
<PAGE> 38

The following table summarizes our operating results as a percentage of net
revenues for each of the periods shown.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Net revenues from clearing
operations...................... 84.3% 78.5% 78.6% 79.7% 80.0% 75.2% 73.3% 71.2%
Interest, net..................... 15.7 21.5 21.4 20.3 20.0 24.8 26.7 28.8
----- ----- ----- ----- ----- ----- ----- -----
Total revenues.............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Expenses:
Employee compensation and
benefits........................ 20.8 23.6 18.1 20.3 23.7 24.2 28.4 31.4
Floor brokerage, exchange and
clearance fees.................. 17.5 20.9 24.2 25.7 21.6 21.4 10.2 12.2
Communications and data
processing...................... 20.2 25.4 30.4 27.8 25.1 20.3 21.6 21.3
Occupancy and equipment........... 9.0 8.5 8.0 9.6 8.1 6.3 5.5 5.0
Other expenses.................... 8.7 7.2 8.3 5.9 6.4 6.5 6.1 5.8
Non-cash employee stock option
awards.......................... -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total expenses.............. 76.2 85.6 89.0 89.3 84.9 78.7 71.8 75.7
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss)............ 23.8 14.4 11.0 10.7 15.1 21.3 28.2 24.3
Interest expense on notes
payable........................... (6.5) (6.1) (5.1) (4.7) (3.5) (4.0) (5.9) (3.0)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from continuing
operations before income taxes.... 17.3 8.3 5.9 6.0 11.6 17.3 22.3 21.3
Provision for income taxes......... -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from continuing
operations........................ 17.3 8.3 5.9 6.0 11.6 17.3 22.3 21.3
Income from discontinued
operations, net of tax............ (1.1) (1.4) 0.7 5.6 3.3 3.0 3.7 9.4
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss).................. 16.2 6.9 6.6 11.6 14.9 20.3 26.0 30.7
===== ===== ===== ===== ===== ===== ===== =====
Pro forma information:
Income (loss) from continuing
operations...................... 17.3 8.3 5.9 6.0 11.6 17.3 22.3 21.3
Pro forma adjustment for income
taxes........................... (6.0) (2.9) (2.0) (2.1) (4.1) (6.1) (7.8) (7.4)
----- ----- ----- ----- ----- ----- ----- -----
Pro forma income (loss) from
continuing operations........... 11.3% 5.4% 3.9% 3.9% 7.5% 11.2% 14.5% 13.9%
===== ===== ===== ===== ===== ===== ===== =====

<CAPTION>
THREE MONTHS ENDED
------------------------------
MAR. 31, JUN. 30, SEP. 30,
2000 2000 2000
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Net revenues from clearing
operations...................... 70.3% 72.1% 67.1%
Interest, net..................... 29.7 27.9 32.9
------ ----- -----
Total revenues.............. 100.0 100.0 100.0
Expenses:
Employee compensation and
benefits........................ 23.4 28.0 24.0
Floor brokerage, exchange and
clearance fees.................. 8.8 11.1 10.8
Communications and data
processing...................... 20.0 21.1 19.8
Occupancy and equipment........... 4.3 4.7 5.0
Other expenses.................... 5.6 10.3 3.6
Non-cash employee stock option
awards.......................... 149.7 -- --
------ ----- -----
Total expenses.............. 213.8 75.2 61.2
------ ----- -----
Operating income (loss)............ (113.8) 24.8 38.8
Interest expense on notes
payable........................... (3.2) (5.3) (4.8)
------ ----- -----
Income (loss) from continuing
operations before income taxes.... (117.0) 19.5 34.0
Provision for income taxes......... 13.4 8.5 13.2
------ ----- -----
Income (loss) from continuing
operations........................ (130.4) 11.0 20.8
Income from discontinued
operations, net of tax............ 14.3 7.7 (0.9)
------ ----- -----
Net income (loss).................. (116.1) 18.7 19.9
====== ===== =====
Pro forma information:
Income (loss) from continuing
operations...................... (130.4) 11.0 20.8
Pro forma adjustment for income
taxes........................... -- -- --
------ ----- -----
Pro forma income (loss) from
continuing operations........... (130.4)% 11.0% 20.8%
====== ===== =====
</TABLE>

34
<PAGE> 39

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our business through cash provided by
operations, contributions from stockholders and borrowings under credit
facilities with banks or other financial institutions. In addition, we have
numerous agreements with other broker-dealers to provide financing related to
our securities lending activities.

We use short-term bank loans as a means of financing a portion of our
margin lending activities. As of September 30, 2000, we have $65.7 million in
short-term bank loans outstanding under our four existing uncommitted lines of
credit. Three of the lines of credit permit us to borrow up to $47.3 million
while the fourth line of credit does not have a stated borrowing capacity. The
lender of the fourth line of credit reassesses the line as our capital needs
change. Borrowings under these agreements bear interest at a variable rate,
which was approximately 7.5% at September 30, 2000, are secured primarily by our
firm inventory and customers' margin account securities, and are repayable on
demand.

We intend to use the proceeds of this offering to repay outstanding
indebtedness of approximately $41.9 million under various bank and promissory
notes whose terms range from 6 months to 7 years with a weighted average
interest rate of 9.7% as of September 30, 2000. Of this amount, $25.0 million
was incurred in March 2000 and was used for working capital and to repay
outstanding promissory notes. An additional $10.0 million was incurred in July
2000 for working capital.

As of September 30, 2000, we had cash and cash equivalents of $11.5 million
compared to $5.3 million as of December 31, 1999, an increase of $6.2 million or
117.0%, and $2.8 million as of December 31, 1998. In addition, we had, as
defined on the accompanying balance sheet as "Segregated assets," cash and cash
equivalents held in a special reserve account for the exclusive benefit of
customers as defined under Rule 15c3-3 of the Securities and Exchange
Commission, other regulatory requirements, and required margin on option
contracts in customer accounts. As of September 30, 2000, we had segregated cash
and cash equivalents of $249.2 million compared to $62.0 million as of December
31, 1999, an increase of $187.2 million or 301.9%, and $9.5 million as of
December 31, 1998. Net cash provided by operations was $3.1 million for the nine
months ended September 30, 2000 compared to cash used in operations of $7.0
million for the year ended December 31, 1999 and cash provided by operations of
$6.3 million for the year ended December 31, 1998.

We have historically experienced negative cash flows from operations, due
primarily to the growth of our margin lending activities. We have financed this
growth primarily through short-term and long-term borrowings. Continued growth
in our margin lending business may be expected to cause continued negative cash
flows from operations in the future, which we intend to finance through
short-term borrowings as well as proceeds from this equity offering.

We intend to use a portion of the net proceeds from this offering to repay
indebtedness, a portion of which is secured by a pledge of the stock of our
subsidiaries. Following the repayment of this indebtedness, we will not have any
secured debt. In the future, we expect that we will incur new indebtedness to
finance growth in our business, and we may pledge stock of our subsidiaries or
other assets to secure this indebtedness. Our ability to borrow funds in the
future may be limited to the extent that lenders require a pledge of stock of
our subsidiaries or other assets to secure this indebtedness.

Cash used in investing activities for the nine months ended September 30,
2000 included $1.7 million for the acquisitions of Worldwide Settlements Limited
and ECE Electronic Clearing Inc. and $3.1 million in purchases of property and
equipment. Cash used in investing activities, consisting of purchases of
property and equipment, was $2.4 million for the year ended December 31, 1999
and $1.6 million for the year ended December 31, 1998. Net cash provided by
financing activities, which include capital contributions from stockholders, net
of dividends

35
<PAGE> 40

paid, as well as borrowings under lines of credit, was $7.9 million for the nine
months ended September 30, 2000, $11.8 million for the year ended December 31,
1999, compared to cash used in financing activities of $3.4 million for the year
ended December 31, 1998.

We are subject to the requirements of the SEC and the NASD relating to
liquidity, capital standards and the use of customer funds and securities. We
have historically exceeded minimum net capital requirements. We believe that our
available cash resources and credit facilities, combined with our net proceeds
from this offering, will meet our presently anticipated working capital, capital
expenditure and net capital requirements for at least 12 months. However, we may
need to raise additional funds in order to support more rapid growth, develop
new or enhanced services, respond to competitive pressures, acquire
complementary businesses or technologies or respond to unanticipated
requirements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk generally represents the risk of loss that may be expected to
result from the potential change in value of a financial instrument as a result
of fluctuations in credit ratings of the issuer, equity prices or foreign
currency exchange rates. Our exposure to market risk is directly related to our
role as a financial intermediary in client-related transactions and
international operations. Following is a description of our primary market risk
exposures and how we manage those exposures:

Credit Risk. Credit risk arises from the potential nonperformance by
counter parties, clients or debt security issuers. We are exposed to credit risk
as a margin lender to the customers of our correspondents, as a trading counter
party to dealers and clients, as a holder of securities and as a member of
exchanges and clearing organizations. In the normal course of business, we
purchase and sell securities as both principal and agent. If another party to
the transaction fails to fulfill its contractual obligation, we may incur a loss
if the market value of the security fluctuates from the contract amount of the
transaction.

We extend credit to customers through margin transactions, which are
subject to various regulatory and internal margin requirements. Cash and
securities held in customer accounts serve as collateral for the extension of
credit. Our compliance with various regulatory and internal guidelines
concerning customer activities provides a means of controlling risks associated
with these transactions. We deposit customer margin account securities with
lending institutions as collateral for borrowings. If a lending institution does
not return a security, we may be obligated to purchase the security in order to
return it to the customer. In such circumstances, we may incur a loss equal to
the amount by which the market value of the security on the date of
nonperformance exceeds the value of the loan from the institution. We also enter
into reverse repurchase agreements, whereby we purchase securities under
agreements to resell them. In the event that the counter party is unable to
fulfill its contractual obligation, we would have credit risk exposure if the
value of the collateral is less than the related receivable. We monitor our
exposure to counter party risk through the use of credit exposure information,
the monitoring of collateral values and the establishment of credit limits.

Equity Price Risk. Permitting customers to purchase securities on margin
exposes us to equity price risk, especially during periods of rapidly declining
markets in which the value of our collateral could fall below the amount of a
customer's indebtedness before the collateral could be liquidated. We monitor
margin levels daily and initiate action when additional collateral or a
reduction in customer security positions is necessary.

36
<PAGE> 41

The following table illustrates the loss we could incur in a sample margin
lending transaction due to our exposure to credit risk and equity price risk:

<TABLE>
<CAPTION>
DECLINE IN VALUE OF SECURITIES HELD AS COLLATERAL
BEGINNING -------------------------------------------------
CUSTOMER ACCOUNT BALANCE BALANCE(1) 10% 25% 50% 75%
------------------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Securities owned............. $1,000,000 $ 900,000 $ 750,000 $ 500,000 $ 250,000
Margin loan outstanding...... (750,000) (750,000) (750,000) (750,000) (750,000)
---------- --------- --------- --------- ---------
Account equity............... $ 250,000 $ 150,000 $ -- $(250,000) $(500,000)
========== ========= ========= ========= =========
Potential loss(2).......... $ -- $ -- $ -- $(250,000) $(500,000)
========== ========= ========= ========= =========
</TABLE>

---------------

(1) Assumes account equity is maintained at the minimum regulatory requirement
prior to any decline in the value of securities held as collateral.

(2) The potential loss would be realized by us only if the following events
occur:

- the customer fails to meet the margin call requirement that additional
securities or cash be deposited when total account equity drops below
25%;

- we are unable to liquidate the customer's securities before the value of
the collateral falls below the amount of indebtedness; and

- our correspondent fails to fulfill its contractual obligation to
indemnify us against a margin loan default by its customer.

Foreign Currency Exchange Rate Risk. We transact business in various
foreign currencies and, accordingly, we are subject to exposure from adverse
movements in foreign currency exchange rates. The effect of changes in foreign
currency exchange rates on revenues and operating expenses are not expected to
be material, as only a small percentage of our revenues are earned and expenses
are incurred in currencies other than U.S. dollars. Revenues earned and expenses
incurred by our European and Canadian subsidiaries are denominated primarily in
U.K. pounds sterling and Canadian dollars, respectively.

In addition, our U.K. and Canadian subsidiaries are subject to capital
adequacy tests denominated in local currencies. In the event of substantial
currency exchange fluctuations, we may be unable to meet these capital adequacy
requirements.

We currently do not use financial instruments to hedge revenues or expenses
in the U.K. or Canada denominated in their respective local currency. We intend
to assess the need to utilize financial instruments to hedge foreign currency
exchange rate risk exposures on an ongoing basis.

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BUSINESS

OVERVIEW

We are a technology-focused provider of a broad range of securities
clearing, margin lending and other related services to the brokerage industry,
primarily to direct access and online broker-dealers. We provide our clients,
which we refer to as our correspondents, with securities clearing services that
include clearing and custody services, customer account maintenance and
customized data processing services. We have made substantial investments in the
development of customized data processing systems that we use to provide these
"back-office" services to our correspondents, reducing the need for our
correspondents to make significant capital investments in a clearing
infrastructure and allowing them to focus on their core competencies. These
systems also enable us to provide customized information directly to our
correspondents' customers through our integration with our correspondents' Web
sites as well as through direct electronic transmission of transaction and
account data to our correspondents' customers.

As a result of our clearing relationships with our correspondents, we have
developed a significant margin lending business with our correspondents'
customers. We also engage in securities lending activities as a means of
financing our business and generating additional net interest income.

We had 121 correspondents as of September 30, 2000, an increase from 67
correspondents as of September 30, 1999. We have increased our quarterly
clearing volume to approximately 9.6 million confirmed transactions for the
quarter ended September 30, 2000 as compared to approximately 4.2 million
confirmed transactions for the quarter ended September 30, 1999, an increase of
128.6%. We have also increased our margin loans outstanding to approximately
$550.3 million at September 30, 2000 from approximately $246.6 million at
September 30, 1999, an increase of 123.2%.

INDUSTRY BACKGROUND

Several significant trends have influenced the market for securities
clearing and related services to the brokerage industry, including the growth in
direct access and online brokerage business, an increase in equity trading
volumes and an increase in margin loan activity. These trends have resulted in
the increased need for outsourced clearing services by many direct access and
online broker-dealers. A direct access broker-dealer enables an investor to make
securities trades based on direct electronic access to real-time bid, ask and
volume information for a security and through direct execution links to various
exchanges and other execution providers. An online broker-dealer enables an
investor to interact with and perform trades through his broker via the
Internet.

Growth in Direct Access and Online Brokerage Business

The direct access and online brokerage business originated in the
mid-1990's as a result of advances in data communications and processing
technology as well as the development of the Internet. During the last several
years, direct access and online broker-dealers have benefited from wider
acceptance of and confidence in the Internet as a reliable, secure and
cost-effective medium for securities order placement and trade execution. In
addition, during the last several years, there has been a significant increase
and improvement in investment analysis information available to investors from a
variety of sources, including the web sites of direct access and online
broker-dealers. As a result, customers of direct access and online
broker-dealers have increasingly been provided access to much of the same
information that full-service brokers have traditionally provided to their
customers, such as research and analyst recommendations regarding individual
securities, real-time quotes, market news and other company-specific
information. In addition, the ability of direct access brokers to provide direct
electronic access to

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<PAGE> 43

real-time information relating to bid and ask prices for securities as well as
quantities available for purchase or sale at specified prices is an attractive
capability for active traders that is generally not available through
traditional full-service brokerage firms. The direct access and online brokerage
firms have also benefited by offering lower trading commissions than many
traditional full-service brokers.

Due to these factors, the direct access and online brokerage business has
grown rapidly over the past several years. According to International Data
Corporation, or IDC, since the early stages of Internet access for online
brokerage services, the number of online brokerage accounts in the U.S. has
increased to 12.7 million accounts at the end of 1999, representing $875.3
billion in assets, from an estimated 3.5 million accounts at the end of 1997,
representing $319.7 billion in assets, and is estimated to reach 28.3 million
accounts at the end of 2004, representing $2,469.3 billion in assets. In
addition, direct access trading accounts for an estimated 15% of the Nasdaq
National Market's daily trading volume.

Increase in Trading Volumes

The U.S. securities industry has experienced significant increases in
trading volumes over the last several years. The average daily volume of
securities traded on Nasdaq grew to 1.1 billion shares in 1999 from 401.6
million shares in 1995. For the nine month period ended September 30, 2000, the
average daily volume of securities traded on Nasdaq increased to 1.6 billion
shares. The average daily volume of securities traded on the NYSE increased to
809.7 million shares in 1999 from 346.4 million shares in 1995. For the nine
month period ended September 30, 2000, the average daily volume of securities
traded on the NYSE increased to 1.0 billion shares. In addition, the number of
transactions processed by The Depository Trust & Clearing Corporation, or DTCC,
in 1999 was approximately 1.6 billion, an increase of 69% from the previous
year. The average daily number of transactions processed by DTCC has increased
to 6.3 million in 1999 from 1.4 million in 1995. We believe that these increases
in trading volume have resulted from the increase in the number of individual
investors who actively manage their own accounts without a broker's assistance,
lower transaction costs for individual traders, the growth of active trading,
the increase in the number of U.S. equities traded in the public markets, the
lengthening of trading sessions, shorter settlement periods and greater
volatility in the trading prices of many U.S. equity securities. The increases
in trading volumes have increased the number of transactions required to be
executed, processed and settled by the clearing operations of broker-dealers or
by outsourced clearing companies.

Increase in Margin Loans

During the past several years, there has been a significant increase in the
volume of margin loans. The dollar amount of margin loans made by all NYSE- and
NASD-designated clearing firms has grown to $242.0 billion at December 31, 1999
from $76.7 billion at December 31, 1995, an increase of 216%. The dollar amount
of margin loans made by all NYSE and NASD-designated clearing firms increased
further to $265.2 billion at September 30, 2000. We believe that this increase
in margin lending is due to a number of factors, including the lower risk
perceived by many investors with respect to margin loans in the environment of
rising stock prices that has been experienced over the last several years as
well as increased awareness by individuals of the opportunity to purchase stock
on margin.

Need for Outsourced Clearing Services by Many Brokerage Firms

As individual investors demand faster, broader and better service from
their securities brokers, broker-dealers that provide superior customer service
enjoy a competitive advantage. Direct access and online broker-dealers often
outsource the clearing function in order to allow their management to focus on
their core businesses and to maintain flexibility of clearing costs

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<PAGE> 44

that vary based on their levels of trading volume rather than the substantial
fixed infrastructure costs associated with self-clearing.

Broker-dealers are subject to supervision and regulation under federal and
state securities laws, the SEC, the NASD and other regulatory authorities with
respect to numerous aspects of their business. Many direct access and online
broker-dealers seek to minimize the administrative expense and complexity of
compliance with these requirements, particularly those relating to record
keeping and safeguarding customer securities and cash, by outsourcing these
functions. In addition, many of these direct access and online brokerage firms
may not have sufficient capital to satisfy the demand by their customers for
margin loans due to the stringent rules of the SEC, the NASD and other
regulatory agencies with respect to the maintenance of specific levels of net
capital. Accordingly, direct access and online broker-dealers may choose to
avoid the net capital requirements imposed by regulatory agencies by outsourcing
their securities clearing needs.

OUR SOLUTION

We provide our correspondents with securities clearing, margin lending and
other related services. Our correspondents outsource these activities to us in
order to avoid the capital required by regulatory authorities to support these
activities as well as to reduce the need for specialized margin lending and
clearing technology and support personnel. We believe that our services provide
the following benefits to our correspondents:

- Offer Variable Clearing Costs and Economies of Scale. We offer
clearing services to our correspondents on a variable cost structure
based on transaction volume. We believe that our pricing structure
allows our correspondents to take advantage of economies of scale by
leveraging our investment in software and systems at a significantly
lower cost than these broker-dealers would generally incur to
self-clear. The ability to obtain securities clearing services on a
cost-effective basis is a key factor in enabling direct access and
online broker-dealers to charge their customers lower commissions
than those charged by traditional broker-dealers.

- Provide Enhanced Account Portfolio Information Services. We have
created customized software solutions to enable our correspondents
to manage and analyze their accounts, which enables them to improve
service levels to their customers while lowering fixed costs.

- Facilitate Compliance with Government Regulation. By outsourcing
regulated activities, such as margin lending, our correspondents are
able to eliminate reporting requirements and reduce the burden on
management of dealing with related compliance issues. In addition,
we can facilitate broker-dealer compliance with other regulatory
requirements by providing automated reporting, record keeping and
other tasks.

- Generate Margin Lending Revenue. Our net capital position enables us
to make margin loans directly to the customers of our correspondent
broker-dealers. As a result, our correspondents can compete more
effectively in attracting their customers by earning commissions
relating to margin loans without having to manage interest rates or
satisfy related capital requirements.

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OUR STRATEGY

Our goal is to be the leading provider of securities clearing, margin
lending and other related services to direct access and online broker-dealers.
To accomplish this goal, we are pursuing the following key strategies:

- Focus on High-Volume Direct Access and Online Broker-Dealers. We
will continue to target our clearing services primarily to the
growing direct access and online broker-dealer markets. In addition,
we plan to continue to focus on margin lending as a complementary
service to our clearing services. By enhancing our customized
software solutions that we provide to our correspondents, we believe
that our clearing and margin lending activities will increase as the
market for direct access and online brokerage services increases,
thereby providing us with significant opportunities for growth in
revenues and operating income.

- Continue to be Selective in the Correspondents We Serve. We are
selective in the brokerage firms that we serve. We evaluate a
brokerage firm's experience in the industry, its financial condition
and the background of the principals of the firm when determining
whether to accept a prospective correspondent. After selecting a
correspondent, we continue to monitor their activities as part of
our risk assessment program. We will continue to follow these
selectivity standards and monitor our correspondents, which will
promote our ongoing success by allowing us to create long-term
relationships with correspondents who demonstrate growth potential,
while minimizing turnover among our client base as well as our
exposure to litigation.

- Continue to Invest in Highly Scalable Sophisticated Clearing
Solutions. We have developed sophisticated Internet-based
information systems that provide our correspondents and their
customers with the detailed information needed to be successful in
the rapidly changing marketplace. Our clearing solution is automated
and "exception driven," meaning that it requires manual intervention
only when a transaction or process violates one of our internal
parameters. An example of this would be a "trade break," which
occurs when we are unable to match an order executed by one of our
correspondents with an order submitted by a counter party. Our
exception-driven processing allows us to scale our business to
handle an increase in transaction volume without having to make a
corresponding increase in our workforce.

- Continue to Provide Timely, Updated Information to Enhance and
Differentiate Our Service Offerings. Our internally developed
systems enable us to update customer information and process
transactions in real time as we receive them from our
correspondents. We provide our correspondents with customized
information processing that is integrated with our correspondents'
Web site information systems, enabling our correspondents to
differentiate the services they offer to their customers from those
of their competitors.

- Expand Our Operations Internationally. We recently acquired a
London-based clearing company with extensive experience in agency
clearing operations in the European securities markets and a
Canadian clearing company that provides clearing services to the
direct access and retail markets in Canada. We intend to use these
platforms to significantly increase our international capabilities
to clear securities transactions. We believe this capability will
become more important as investors increasingly trade on a global
basis. In addition, we intend to expand our margin lending business
internationally.

- Develop Multi-Currency Clearing Capabilities for International
Applications. In response to the globalization of securities
markets, we are working in conjunction with SunGard

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<PAGE> 46

to add multi-currency settlement capabilities to our back-office
software platform, SunGard Phase3. Our objective is to be one of the
first clearing companies to have the ability to facilitate the
execution of an order for our correspondents and their customers in
any major global market in any major currency. We began internally
testing this new capability in September 2000.

- Invest in and Develop Our Employees and Our Culture. We believe that
investing in people is critical to delivering best execution
practices and high quality client service. We intend to continue our
practice of aggressively recruiting high caliber people and
retaining these individuals by providing appropriate compensation
incentives and by fostering a cooperative, teamwork oriented
culture. We encourage the development of our employees and often
offer financial assistance in their endeavors to further their
training and education.

OUR SERVICES

Clearing Operations

United States. We provide securities clearing services to our
correspondents on a fully disclosed basis. In a fully disclosed clearing
transaction, the identity of the correspondent's customer is known to us and we
maintain the customer's account and perform a variety of services as agent for
the correspondent.

The execution and clearing process requires the performance of a series of
complex steps, many of which are accomplished with data processing equipment.
The execution process begins when the correspondent accepts its customer's order
for the purchase or sale of securities and electronically transmits the order
for execution. While our direct access correspondents typically execute their
own trades, we are generally involved in the execution process for our online
and other correspondents by routing an order to a desired market. When we route
a trade for execution, we receive information electronically from the market
maker, electronic communication network or exchange and this information is
electronically entered into our processing system. As we execute transactions,
or as they are reported to us by our correspondents, customer account balances
and records are updated on a real-time basis both in the SunGard Phase3
databases and in our own proprietary databases.

After the execution process is complete, we clear the transaction by taking
possession of the cash of the correspondent's customer, if securities are being
purchased, or certificates, if securities are being sold, and by delivering cash
or certificates to the broker for the other party to the transaction. Both we
and our correspondents generally require that cash, margin buying power or
securities be in the customer's account prior to the execution of an order. We
deduct the money, or credit the proceeds, due on the transaction from the
customer's account, including the commission charged by the correspondent,
withhold from the commission our charge for execution and clearing and any other
amounts due to us, and remit the net commission to the correspondent on a
monthly basis. Cash or certificates received by us for the correspondent's
customer will generally be held in the account, although we will deliver these
items to the customer upon request. We send the customer a monthly or quarterly
statement of the customer's account on behalf of the correspondent.

The actual clearing functions for multiple transactions involving many
brokerage firms are even more complex. Instead of matching each purchaser and
seller in a transaction and making delivery to and receiving payment from each
of them, the securities industry has established a netting process through which
securities and money are delivered or received between brokerage firms using
central clearing houses such as the DTC or NSCC. As of December 31, 1999, on a
pro forma basis giving effect to the acquisition of our United Kingdom and
Canadian operations as if they had occurred on January 1, 1999, substantially
all of the transactions we processed were in the United States.

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<PAGE> 47

Canada. Canada has four types of approved clearing models and our Canadian
operation is approved for all of these. We are concentrating on type 3 clearing
services, which resemble our U.S. fully disclosed clearing model.

Under the rules of the Investment Dealers Association of Canada,
arrangements between members of a self-regulatory organization in Canada that
are participating institutions in the Canadian Investor Protection Fund are
referred to as "type 3 introducing and carrying broker arrangements." Under such
an arrangement, the "carrying broker" would be the Canadian equivalent of a
clearing firm in the U.S. and the "introducing broker" would be the Canadian
equivalent of a correspondent in the U.S.

As a "type 3 carrying broker," our key responsibilities include the trading
of securities for customers' accounts and for the introducing broker's principal
business, making deliveries and settlements of cash and securities in connection
with such trades, holding securities and/or cash of customers and of the
introducing broker and preparing and delivering directly to customers documents
as required by applicable law and regulatory requirements with respect to the
trades cleared by us, including confirmation of trades, >monthly statements
summarizing transactions for the preceding month and, for inactive accounts,
statements of securities and money balances held by us for customers.

United Kingdom. Our U.K. clearing operation currently processes
transactions in the U.K. and other international markets by providing a purely
administrative back-office service. We act as agent for our correspondents'
customers, whom we classify as market counterparties under the rules of the
Securities and Futures Authority, referred to as the SFA, and supply these
customers with the information needed to settle their transactions. However, we
have applied for the authority to process transactions under a fully disclosed
clearing model similar to the U.S., which the SFA defines as Model B clearing.
Under Model B clearing, our U.K. operations will be able to offer our clearing
services throughout all of the European Union, Norway, Lichtenstein and Iceland.
We will assume the positions and therefore full liability for the clearing and
settlement of the trades. We intend to introduce this line of business by the
end of this year, following SFA regulatory approval.

Internet Account Portfolio Information Services

We have created customized software solutions to enable our correspondents
and their customers to review their account portfolio information through the
Internet. Through the use of our internally developed technology, combined with
technology licensed from third parties, we are able to update the account
portfolios of our correspondents' customers as securities transactions are
executed and cleared. A customer is able to access detailed and personalized
information about his account, including current buying power, trading history
and account balances. Further, our solution allows a customer to download his
brokerage account information into Quicken, a personal financial management
software program, and other financial and spreadsheet applications so that all
of his financial data can be integrated.

Margin Lending

United States. We derive revenues in our margin lending business by
extending credit to customers of our correspondents, which allows the customer
to purchase securities on margin. We extend credit for a portion of the purchase
price of the securities, which is collateralized by existing securities and cash
in the customer's account. Our margin lending activities are subject to the
margin rules of the Board of Governors of the Federal Reserve System and the
NASD, which generally permit margin loans of up to 50% of the value of the
securities collateralizing the loan at the time the loan is made. The actual
amount of any margin loan to a customer of one of our correspondents is subject
to our internal credit analysis which is based on a variety of factors,
including an evaluation of the securities in the margin account, the volatility
of the stock

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<PAGE> 48

prices of these securities and the concentration of securities in one or more
companies or industries. From time to time we may also perform a credit analysis
on the correspondent firm and the credit of its customer. As a result of our
risk management practices, we may restrict margin loans to amounts less than 50%
of the value of the securities collateralizing the loans.

In permitting customers to purchase securities on margin, we are subject to
the risk of a market decline that could reduce the value of the collateral held
by us to below the customers' indebtedness before the collateral could be
liquidated, which could result in losses to us. Under applicable NASD rules, in
the event of a decline in the market value of the securities in a margin
account, we are generally obligated to require the customer to deposit
additional securities or cash in the account so that at all times the customer's
equity in the account is at least 25% of the value of the securities in the
account. Although we have agreements with margin account customers that permit
us to liquidate their securities with or without prior notice in the event of an
insufficient amount of margin collateral, we may be unable to liquidate such
securities for various reasons, such as the pledged securities not being
actively traded, an undue concentration of certain pledged securities or a rapid
decline in the price of the pledged securities. We also have agreements with our
correspondents that provide indemnity to us by our correspondents for defaults
on margin loans by the correspondents' customers. As of September 30, 2000, we
had outstanding $546.9 million of margin loans in the U.S.

We are subject to the SEC's net capital rule, Rule 15c3-1, promulgated
under the Securities Exchange Act of 1934, which specifies minimum net capital
requirements for registered broker-dealers and requires, among other things,
that at least a minimum part of a broker-dealer's assets be kept in relatively
liquid form. Our margin lending activities constitute the major portion of the
basis on which our net capital requirements are determined under the net capital
rule. See "Risk Factors -- If we fail to abide by net capital requirements
imposed on broker-dealers, we may be subject to suspension, revocation of
registration or expulsion by the SEC, the NASD or foreign regulatory
authorities" and "Risk Factors -- Our margin lending business is subject to the
risk that the value of the collateral we hold could fall below the amount of a
customer's indebtedness, which could harm the profitability of our business." As
of September 30, 2000, our net capital was approximately $46.4 million, which
exceeded by $34.8 million our required net capital of approximately $11.6
million. Following the receipt of the net proceeds from this offering, our net
capital will increase, which will allow us to further expand our margin lending
activities.

Canada. Margin lending is relatively common in the Canadian markets, but is
subject to a different set of rules than in the U.S. markets. There are not
separate initial and maintenance rules, but rather one set of rules promulgated
by the exchanges and self regulatory organizations. The practice of our Canadian
subsidiary is to finance up to 50% of the market value of eligible transactions
and to maintain these margin accounts at a minimum of 50% equity.

Canadian rules allow for the use of customer credits to finance customer
debits, but are more limiting than similar U.S. rules. The amount of credits
that may be used in this fashion is related directly to total capital. This will
have the effect of requiring significant additional capital in our proposed
Canadian operations as customer margin loans grow. As of September 30, 2000, our
Canadian subsidiary had outstanding $1.9 million Canadian dollars, or $1.3
million U.S. dollars, of margin loans in Canada.

United Kingdom. In the future, we may offer margin lending services through
our U.K. subsidiary. To do this, we would need to obtain approval from the SFA.
Also, in order to lend money or extend credit, the Office of Fair Trading, or
OFT, may require that our U.K. subsidiary obtain a consumer credit license under
the Consumer Credit Act of 1974. While margin lending is significantly less
common in the U.K. markets than in the U.S. markets, we believe that margin
lending will become more accepted in this market as direct access and online
brokerage becomes more accepted. If margin lending does grow and we obtain the
proper approvals, the capital requirements for our U.K. operations may increase
significantly.

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A major difference in the U.K. lending model is the source of funds. With
respect to firms regulated by the SFA, all customer money which is protected
under the SFA client money rules must be segregated and may not be used to
finance customer margin balances, unlike the U.S. model that allows such
activity. This reduces the profitability of margin lending activities in the
U.K.

Holding and Safeguarding Securities and Cash Deposits

We hold and safeguard securities and cash deposits of our correspondents'
customers. Many of our correspondents do not have the ability to hold securities
and cash deposits since the holder must comply with the net capital rules of the
Federal Reserve and the NASD with respect to these activities.

Securities Lending and Borrowing

We lend securities that we hold for our correspondents and their customers
to other broker-dealers as a means of financing our business and generating
interest income. This lending is permitted under and governed by SEC rules. We
also engage in conduit activities where we act as a middleman by borrowing
securities from one broker-dealer and lending the same securities to another
broker-dealer. All of our securities borrowing and lending activities are
performed under a standard form of securities lending agreement, which governs
each party's rights to mark securities to market.

SALES AND MARKETING

United States

We focus our sales and marketing efforts in the U.S. on the direct access
and online sector of the brokerage industry. We have two marketing
representatives, one located on each coast, which enables us to effectively
deploy our sales efforts throughout the U.S. In addition, we are currently
seeking to hire a North American marketing director to oversee our entire
marketing efforts. We participate in industry conferences and trade shows and
seek to differentiate our company from our competitors based on our reputation
as a premier provider of technology-focused clearing solutions.

International

We believe that a significant opportunity exists in foreign markets as the
adoption of online trading expands in other countries. We intend to capitalize
on this opportunity by being one of the first companies to develop cross-border
and multi-currency trade processing capabilities.

In Canada, our marketing efforts have historically been handled primarily
by the president of our Canadian subsidiary. We recently added two executives
with marketing responsibilities and opened a Toronto office to facilitate our
Canadian marketing efforts. In addition, we intend to integrate some of these
responsibilities into our U.S. marketing operations as we move toward a North
American sales force.

In the U.K., our marketing efforts are led by the six directors of our U.K.
firm. These individuals have had significant experience in the U.K. and European
markets. We also use industry publications and other events to promote our
services.

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OUR CORRESPONDENTS

Our target correspondents are direct access and online broker-dealers. The
following table presents a list of our largest correspondents based on revenues
for the nine months ended September 30, 2000:

- A.B. Watley, Inc.

- All-Tech Investment Group, Inc.

- Blackwood Trading, LLC

- CFC Securities, Inc.

- CyBerCorp, Inc. (a subsidiary of The Charles Schwab Company)

- Mt. Pleasant Brokerage Services, LLP

Three correspondents, CyBerCorp, A.B. Watley and Mt. Pleasant Brokerage
Services, each accounted for more than 10% of our total revenues for the year
ended December 31, 1999. CyBerCorp also accounted for more than 10% of our total
revenues for the nine months ended September 30, 2000. In addition, for the year
ended December 31, 1999 and the nine months ended September 30, 2000, our five
largest correspondents accounted for 48.5% and 39.6%, respectively, of our total
revenues from clearing operations.

We perform transaction clearing and margin lending services for CyBerCorp
according to the terms and conditions of our Fully Disclosed Clearing Agreement
dated October 3, 1997. CyBerCorp pays us a fixed fee per customer ticket, with a
reduction in transaction charges for active day trading transactions. The
agreement is effective for a five-year term, after which time the agreement may
be terminated by either party. CyBerCorp may also terminate the contract upon 45
days' prior notice to us of its desire to perform its own clearing services.
CyBerCorp was recently acquired by The Charles Schwab Company. Due to the
significant resources of The Charles Schwab Company, CyBerCorp may decide in the
future to exercise its right to terminate its clearing services contract with
us. We have not received any notice from, or had any discussions with, CyBerCorp
that would lead us to believe that CyBerCorp intends to terminate its contract
with us on this basis or any other basis.

A.B. Watley, one of our other large correspondents, had given us notice of
termination of its clearing services contract with us based on its desire to
perform its own clearing services. Subsequent to this notice, A.B. Watley
decided not to perform its own clearing services and has entered into a one-year
contract extension with us.

As of September 30, 2000, we had 121 correspondents, an increase from 67
correspondents as of September 30, 1999. Before conducting business with a
brokerage firm, we review a variety of factors relating to the prospective
correspondent, including the brokerage firm's experience in the securities
industry, its financial condition and the personal backgrounds of the principals
of the firm. We seek to establish relationships with brokerage firms whose
management teams and operations we believe will be successful in the long term,
so that we may benefit from increased clearing volume and margin lending
activity as the businesses of our correspondents grow. Our quarterly clearing
volume increased to approximately 9.6 million confirmed transactions for the
quarter ended September 30, 2000 from approximately 4.2 million confirmed
transactions for the quarter ended September 30, 1999, an increase of 128.6%. In
addition, our margin loans outstanding increased to approximately $550.3 million
at September 30, 2000 from approximately $246.6 million at September 30, 1999,
an increase of 123.2%.

TECHNOLOGY

Our success is largely attributable to management's ability to identify and
deploy emerging technologies that facilitate securities clearing. Technology has
enhanced our ability to handle an

46
<PAGE> 51

increasing volume of transactions without a corresponding increase in personnel.
We use our proprietary technology and technology licensed from third parties to
provide customized, detailed account information to our correspondents and their
customers.

We license a software program called Phase3 from SunGard Financial Systems,
a subsidiary of SunGard Data Systems. Phase3 is an online, real-time data
processing system for securities transactions. As trades are entered into the
Phase3 system, via electronic transmission from our correspondents, directly by
customers from online trading systems, or in other ways, the customer records
are updated. Phase3 performs the core settlement functions with the industry
clearing and depository corporations, and maintains the regulatory books and
records for our correspondents, their customers and us.

We receive information from the Phase3 databases on a real-time basis
through replication technology, a software functionality that allows us to
provide real-time transaction information to our correspondents. We use this
information to update our databases and internal programs. We in turn replicate
this information to our correspondents for use in their databases and to update
their trading systems and Web sites. This flexible access to information is one
of our major competitive advantages.

From a software development perspective, we rely on Phase3 for the core
processes and for improvements and changes in the core processes. This is
largely accomplished through the work of the Penson custom team at SunGard,
which is a development group of three to five people who work solely on our
projects.

We have built custom processes for many of the non-core processes through
the use of the data that we receive from Phase3. These custom processes make us
less dependent on Phase3 and increase the reliability and efficiency of our
overall data processing model. We are able to process more trades in a shorter
period of time than if we relied solely on the standard Phase3 product. We are
also able to offer our correspondents and their customers more flexible access
to information and data regarding their accounts.

Our processes are developed to run on Microsoft applications using Compaq
servers and Dell workstations. These software and hardware platforms are
scalable and reliable, and are inexpensive when compared to main frames and the
core back-office processing systems such as SunGard Phase3. We anticipate that
we will be able to continue to develop value-added custom processing models,
which will make us more efficient as our business continues to grow.

We license Phase3 from SunGard Financial Systems under a Remote Processing
Agreement. The current term of this agreement will expire on May 1, 2002, but is
renewable for consecutive one-year terms. Under the agreement, SunGard provides
us with online processing, report services, implementation support, training and
ongoing support services. The agreement acknowledges that all code, visual
expressions, report formats and other design features of the Phase3 System are
trade secrets and proprietary technology of SunGard; however, SunGard has agreed
that it has no claim to our proprietary stand-alone application software that
exchanges data with Phase3. The agreement can be terminated upon 10 to 30 days'
notice in the event that we breach the agreement. SunGard charges us a
transaction cost per trade which is reduced as monthly trade volume is
increased. Our expenses for data processing and software development services
under the agreement were $2.5 million in 1997, $3.9 million in 1998, $5.2
million in 1999 and $7.8 million for the nine months ended September 30, 2000.

We strive to develop and implement straight-through processing solutions in
all of our operation processes. This means that we examine each process to
determine ways to minimize manual intervention and to maximize automated or
straight-through processing. Our objective in each process is to intervene
manually only to handle exceptions, and to allow normal transactions to process
automatically. This growth in efficiency allows us to handle more transactions
without adding staff in proportion to our transaction growth. We are also
examining

47
<PAGE> 52

our processes to determine which ones can be efficiently provided to our
correspondents' customers on our correspondents' Web sites. Processes that we
can make available to these customers make us more competitive and more
efficient.

COMPETITION

The market for securities clearing and margin lending services is highly
competitive. We expect competition to continue and intensify in the future. We
encounter direct competition from firms that offer services to direct access and
online brokers. Some of these competitors include Computer Clearing Services,
Inc.; Herzog Heine Geduld, Inc.; JB Oxford Holdings, Inc.; Southwest Securities,
Inc.; Spear, Leeds & Kellogg LP; and U.S. Clearing (a division of Fleet
Securities, Inc.) We encounter indirect competition from many other clearing
firms that provide clearing and execution services to the securities industry.

We believe that the principal competitive factors affecting the market for
our clearing and margin lending services are price, technology, financial
strength, client service and breadth of services. Based on management's
experience, we believe that we presently compete effectively with respect to
each of these factors.

A number of competitors have significantly greater financial, technical,
marketing and other resources than we have. Some of our competitors offer a
wider range of services and products than we offer and have greater name
recognition and more extensive client bases. These competitors may be able to
respond more quickly to new or evolving opportunities, technologies and client
requirements than we can and may be able to undertake more extensive promotional
activities and offer more attractive terms to clients. Recent advancements in
computing and communications technology are substantially changing the means by
which securities transactions are effected and processed, including more direct
access online to a wide variety of services and information, and have created a
demand for more sophisticated levels of client service. The provision of these
services may entail considerable cost without an offsetting increase in
revenues. Moreover, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties or
may consolidate to enhance their services and products. New competitors or
alliances among competitors may emerge and they may acquire significant market
share. Additionally, large brokerage firms that currently perform their own
clearing functions may decide to start marketing their clearing services to
other brokerage firms.

In addition to companies that provide clearing services to the securities
industry, we are subject to the risk that one or more of our correspondents may
elect to perform their clearing functions themselves. The option to convert to
self-clearing operations is attractive due to the fact that as the transaction
volume of the broker-dealer increases, the cost of implementing the necessary
infrastructure for self-clearing may be eventually offset by the elimination of
per-transaction processing fees that would otherwise be paid to a clearing firm.
Additionally, performing their own clearing services allows self-clearing
correspondents to retain customer free credit balances and securities for use in
margin lending activities. In order to make a clearing arrangement with us more
attractive to these high-volume broker-dealers, we may offer such firms
transaction volume discounts or other incentives.

Many of the contracts between us and our correspondents permit a
correspondent to terminate its contract, following the giving of written notice
ranging from 45 days to six months, if the correspondent desires to perform its
own clearing service. Our clearing services contract with CyBerCorp, our largest
correspondent, permits CyBerCorp to terminate the contract upon 45 days' prior
written notice to us of its desire to perform its own clearing services.
CyBerCorp was recently acquired by The Charles Schwab Company. Due to the
significant resources of The Charles Schwab Company, CyBerCorp may decide in the
future to exercise its right to terminate its clearing services contract with
us. We have not received any notice from, or had any

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<PAGE> 53

discussions with, CyBerCorp that would lead us to believe that CyBerCorp intends
to terminate its contract with us on this basis or any other basis. A.B. Watley,
one of our other large correspondents, had given us notice of termination of its
clearing services contract with us based on its desire to perform its own
clearing services. Subsequent to this notice, A.B. Watley decided not to perform
its own clearing services and has entered into a one-year contract extension
with us.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

Despite the precautions we take to protect our intellectual property
rights, it is possible that third parties may copy or otherwise obtain and use
our proprietary technology without authorization or otherwise infringe upon our
proprietary rights. It is also possible that third parties may independently
develop technologies similar to ours. It may be difficult for us to police
unauthorized use of our intellectual property. We cannot assure you that the
steps we take will prevent misappropriation of our technology. In addition,
litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Litigation, whether or not successful, could result in substantial
costs and diversions of resources.

We may in the future receive notices of claims of infringement of other
parties' proprietary rights. We cannot assure you that claims of infringement or
invalidity (or claims for indemnification resulting from infringement claims)
will not be asserted or prosecuted against us. Any such claims, with or without
merit, could be time consuming to defend, result in costly litigation, divert
management's attention and resources or require us to enter into royalty or
licensing agreements. We cannot assure you that these royalties or licenses
would be available on reasonable terms, if at all.

GOVERNMENT REGULATION

The securities industry in the United States is subject to extensive
regulation under both federal and state laws. In addition, the SEC, the NASD,
other self regulatory organizations, commonly known as SROs, such as the various
stock exchanges, and other regulatory bodies, such as state securities
commissions, require strict compliance with their rules and regulations. As a
matter of public policy, regulatory bodies are charged with safeguarding the
integrity of the securities and other financial markets and with protecting the
interests of investors participating in those markets, not protecting creditors
or stockholders of broker-dealers. Companies that operate in the securities
industry are subject to regulation concerning many aspects of their business,
including trade practices, capital structure, record retention and the conduct
of directors, officers and employees. Failure to comply with any of these laws,
rules or regulations could result in censure, fine, the issuance of
cease-and-desist orders or the suspension or disqualification of our directors,
officers or employees. We and some of our officers and other employees have, in
the past, been subject to claims arising from the violation of such laws, rules
and regulations. In the past five years, we have paid aggregate fines of less
than $6,000 for infractions of these rules and regulations. Neither we nor any
of our directors, officers or employees are currently subject to any
cease-and-desist orders, suspensions or disqualifications under the rules of any
of these regulatory organizations. An adverse ruling in the future against us or
our directors, officers or employees, including censure or suspension, could
result in our company, directors, officers and other employees being required to
pay a substantial fine or settlement, and could result in their suspension or
expulsion.

The regulatory environment in which we operate is subject to change. Our
profitability may be adversely affected as a result of new or revised
legislation or regulations imposed by the SEC, other United States or foreign
governmental regulatory authorities or the NASD. We may also be adversely
affected by changes in the interpretation or enforcement of existing laws and
49
<PAGE> 54

rules by these governmental authorities and the NASD. Additional regulation,
changes in existing laws and rules, or changes in interpretations or enforcement
of existing laws and rules often directly affect the method of operation and
profitability of securities firms. We cannot predict what effect any such
changes might have.

Our business, both directly and indirectly, relies on the Internet and
other electronic communications gateways. We intend to expand our use of these
gateways. To date, the use of the Internet has been relatively free from
regulatory restraints. However, the SEC, SROs and states are beginning to
address regulatory issues that may arise in connection with the use of the
Internet. Accordingly, new regulations or interpretations may be adopted that
constrain our own and our correspondents' abilities to transact business through
the Internet or other electronic communications gateways.

In addition, we have recently established subsidiaries in the U.K. and
Canada and may expand our business into other countries in the future. To expand
our services internationally, we will have to comply with the regulatory
controls of each country in which we conduct business. The brokerage industry in
many foreign countries is heavily regulated. The varying compliance requirements
of these different regulatory jurisdictions and other factors may limit our
ability to expand internationally. We cannot assure you that we will be
successful in obtaining the necessary regulatory approvals for any such
expansion, or if such approvals are obtained, that we will be able to continue
to comply with such regulations. The failure to obtain or comply with such
approvals could negatively affect our international operations.

NET CAPITAL REQUIREMENTS

As a registered broker-dealer and member of the NASD, our broker-dealer
subsidiary is subject to the SEC's net capital rule. The net capital rule, which
specifies minimum net capital requirements for registered broker-dealers, is
designed to measure the general financial integrity and liquidity of a
broker-dealer and requires that at least a minimum part of its assets be kept in
relatively liquid form. In general, net capital is defined as net worth, plus
qualifying subordinated borrowings and specified discretionary liabilities, less
specified mandatory deductions that result from excluding assets that are not
readily convertible into cash and from the conservative valuation of other
specified assets. Among these deductions are adjustments, which are commonly
called "haircuts," which reflect the possibility of a decline in the market
value of firm inventory prior to disposition.

Failure to maintain the required net capital may subject us to suspension
or revocation of registration by the SEC and suspension or expulsion by the NASD
and other regulatory bodies and, if not cured, could ultimately require our
liquidation. The net capital rule prohibits payments of dividends, redemption of
stock, the prepayment of subordinated indebtedness and the making of any
unsecured advance or loan to a stockholder, employee or affiliate, if such
payment would reduce our net capital below required levels.

The net capital rule also provides that the SEC may restrict for up to 20
business days any capital withdrawal, including the withdrawal of equity
capital, or unsecured loans or advances to stockholders, employees or
affiliates, if such capital withdrawal, together with all other net capital
withdrawals during a 30-day period, exceeds 30% of excess net capital and the
SEC concludes that the capital withdrawal may be detrimental to the financial
integrity of the broker-dealer. In addition, the net capital rule provides that
the total outstanding principal amount of a broker-dealer's indebtedness under
specified subordination agreements, the proceeds of which are included in its
net capital, may not exceed 70% of the sum of the outstanding principal amount
of all subordinated indebtedness included in net capital, par or stated value of
capital stock, paid in capital in excess of par, retained earnings and other
capital accounts for a period in excess of 90 days.

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<PAGE> 55

A change in the net capital rule, the imposition of new rules or any
unusually large charges against net capital could limit some of our operations
that require the intensive use of capital and also could restrict our ability to
withdraw capital from our broker-dealer subsidiaries, which in turn could limit
our ability to pay dividends, repay debt or repurchase shares of outstanding
stock. A significant operating loss or any unusually large charge against net
capital could adversely affect our ability to expand or even maintain our
present levels of business.

As we transition our clearing operations to a Model B strategy in Europe,
our U.K. subsidiary will be subject to a capital adequacy test that requires our
subsidiary to maintain stockholders equity and qualifying subordinated loans in
excess of 730,000 euros. If we fail to maintain the required capital, we may be
subject to fine, suspension or revocation of our license with the SFA. If our
license is suspended or revoked or if the capital adequacy requirements are
changed or expanded, we may be required to discontinue our U.K. operations,
which could result in diminished revenues.

Penson Financial Services Canada is a member of the Investment Dealers
Association of Canada, or the IDA, and a holder of permits with the Montreal
Exchange and is therefore subject to the IDA and Montreal Exchange rules
relating to the maintenance of capital. The IDA regulates the maintenance of
capital by member broker-dealers by requiring that broker-dealers periodically
calculate their risk adjusted capital, referred to as RAC, in accordance with a
prescribed formula which is intended to ensure that members will be in a
position to meet their liabilities as they become due.

A member's RAC is calculated by starting with its net allowable assets,
which are assets that are conservatively valued with emphasis on liquidity, and
excluding assets that cannot be disposed of in a short time frame or whose
current realizable value is not readily known, net of all liabilities, and
deducting the applicable minimum capital and margin requirements, adding tax
recoveries, if any, and subtracting the member's securities concentration
charge.

Furthermore, the IDA rules provide for an early warning system which is
designed to provide advance warning of a member firm encountering financial
difficulties. Various parameters based on prescribed calculations involving the
firm's RAC are designed to identify firms with capital adequacy problems. If any
of the parameters are violated, several sanctions or restrictions are imposed on
the member firm. These sanctions, which may include the early filing of a
monthly financial report, a written explanation to the IDA from the Chief
Executive Officer and Chief Financial Officer, a description of the resolution,
and an on-site visit by an examiner, are designed to reduce further financial
deterioration and prevent a subsequent capital deficiency.

Failure of a member firm to maintain required RAC as computed in accordance
with applicable IDA and ME requirements can result in further sanctions such as
monetary penalties, suspension or other sanctions, including expulsion of the
member.

RISK MANAGEMENT

Our margin lending activities expose our capital to significant risks.
These risks include, but are not limited to, absolute and relative price
movements, price volatility or changes in liquidity, over which we have
virtually no control.

We attempt to minimize the risks inherent in our margin lending activities
by retaining in our margin lending agreements the ability to adjust margin
requirements as needed and by exercising a high degree of selectivity when
accepting new correspondents. When determining whether to accept a new
correspondent, we evaluate, among other factors, the brokerage firm's experience
in the industry, its financial condition and the background of the principals of
the firm. In addition, we have multiple layers of protection, including the
balances in customers' accounts, correspondents' commissions on deposit,
clearing deposits and equity in correspondent firms, in the event that a
correspondent or one of its customers does not deliver payment for our services.
We also

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<PAGE> 56

maintain a bad debt reserve. Our customer agreements and fully disclosed
clearing agreements require industry arbitration in the event of a dispute.
Arbitration is generally less expensive and more timely than dispute resolution
through the court system.

EMPLOYEES

As of September 30, 2000, we had 213 full-time employees associated with
continuing operations, of whom 140 were employed in clearing operations, 37 in
technology support and development, 5 in sales and marketing and 31 in finance
and administration. Of our 213 full-time employees, 179 are employed in the
United States, 17 in the U.K. and 17 in Canada. Our employees are not
represented by any collective bargaining organization or covered by a collective
bargaining agreement. We believe that our relationship with our employees is
good.

Our continued success depends largely on our ability to attract and retain
highly skilled personnel. Competition for such personnel is intense, and should
we be unable to recruit and retain the necessary personnel, the development,
sale and performance of new or enhanced services would likely be delayed or
prevented. In addition, difficulties we encounter in attracting and retaining
qualified personnel may result in higher than anticipated salaries, benefits and
recruiting costs, which could adversely affect our business.

PROPERTIES

Our headquarters are located in Dallas, Texas, where we lease approximately
41,045 square feet under a lease that expires in December 2008. We have two
five-year options to extend the lease at the prevailing market rate. We also
lease approximately 3,000 square feet in London and 1,100 square feet in
Montreal for our subsidiaries. We believe that our present facilities, together
with our current options to extend lease terms and occupy additional space, are
adequate for our current needs.

LEGAL PROCEEDINGS

We may be subject to various claims and legal actions arising in the
ordinary course of business from time to time. We are not currently a party to
any legal proceedings, the adverse outcome of which, individually or in the
aggregate, we believe will have a material adverse effect on our business,
financial condition or operating results. We and certain of our officers and
employees have been subject to legal proceedings in the past and may be subject
to legal proceedings in the future. See "Risk Factors -- All aspects of our
business are subject to extensive government regulation. If we fail to comply
with these regulations, we may be subject to disciplinary or other action by
regulatory organizations."

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Our executive officers and directors and their ages as of September 30,
2000 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Roger J. Engemoen, Jr.(2)................. 47 Chairman of the Board
Daniel P. Son............................. 62 President and Director
Philip A. Pendergraft..................... 40 Executive Vice President, Treasurer and
Director
Richard N. Hart III....................... 32 Senior Vice President and Operations
Manager of Penson Financial Services, Inc.
Ronald D. Morrison........................ 36 Vice President and Chief Financial Officer
of Penson Financial Services, Inc.
Jill M. Zacha............................. 34 Vice President and General Counsel of
Penson Financial Services, Inc.
James S. Dyer(1)(2)....................... 57 Director
J. Kelly Gray(1).......................... 47 Director
William D. Gross.......................... 57 Director
David M. Kelly(1)(2)...................... 61 Director
</TABLE>

---------------

(1) Member of Audit Committee.

(2) Member of Compensation Committee.

Roger J. Engemoen, Jr. has served as our Chairman of the Board of Directors
since September 2000, when we effected our corporate restructuring. Prior to
that, he served as the President and a member of the board of directors of
Service Asset Holdings, Inc., our predecessor company, as well as an executive
officer of various affiliated subsidiaries since 1995. He will continue to serve
as Chairman of the Board of Directors of SAMCO Holdings, Inc. and of certain of
its subsidiary companies. Mr. Engemoen holds a B.B.A. in finance and accounting
and an M.B.A. in finance from Southern Methodist University.

Daniel P. Son has served as our President and a member of our board of
directors since September 2000, when we effected our corporate restructuring.
Prior to that, he served as a Vice President and a member of the board of
directors of Service Asset Holdings, Inc., our predecessor company, as well as
an executive officer of various affiliated subsidiaries since 1995. Mr. Son
holds a B.B.A. in accounting from Southern Methodist University.

Philip A. Pendergraft has served as our Executive Vice President, Treasurer
and a member of our board of directors since September 2000, when we effected
our corporate restructuring. Prior to that, he served as a Vice President of
Service Asset Holdings, Inc., our predecessor company, as well as an executive
officer of various affiliated subsidiaries since 1995. Mr. Pendergraft holds a
B.A. in economics from Trinity University.

Richard N. Hart III has served as the Senior Vice President and Operations
Manager of Penson Financial Services, Inc., our U.S. broker-dealer subsidiary,
since May 1999. Prior to joining us, Mr. Hart served as a Senior Consultant for
Berry, Dunn, McNell and Parker from June 1998 to January 1999 and, prior to
that, as an Account Manager and Consulting Services Manager for SunGard
Brokerage Systems from November 1994 to May 1998. Mr. Hart holds a B.S. in
business administration/finance from Merrimack College and an M.B.A. from the
F.W. Olin Graduate School of Business at Babson College.

Ronald D. Morrison has served as the Vice President and Chief Financial
Officer of Penson Financial Services, Inc., our U.S. broker-dealer subsidiary,
since April 1999. Prior to that, he

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<PAGE> 58

served as the Senior Research Analyst with SAMCO Capital Markets. Prior to
joining SAMCO, Mr. Morrison served as the Financial Manager of Public Finance
for Dain Rauscher, Inc. from January 1998 to May 1998 and, prior to that, as the
Financial Manager of the Fixed Income department of Rauscher Pierce Refsnes from
June 1996 to December 1997. Prior to that, he was a Project Analyst for ENSR
Consulting and Engineering from April 1992 to May 1996. Mr. Morrison holds a
B.S. from Baylor University and an M.B.A. from The University of Texas at
Dallas.

Jill M. Zacha has served as the Vice President and General Counsel of
Penson Financial Services, Inc., our U.S. broker-dealer subsidiary, since
November 1998. Prior to joining us, she was a Senior Compliance Officer with
Dain Rauscher, Inc. from January 1997 to October 1998. She has also served as
the compliance officer and in-house counsel for Concepts, Inc., a local
broker-dealer from July 1996 to December 1996, and as a broker-dealer consultant
for Addison Securities, Inc. from December 1994 to June 1996. Ms. Zacha holds a
B.B.A. in business from Baylor University and a J.D. from Baylor Law School.

James S. Dyer has served as a member of our board of directors since
September 2000. Dr. Dyer holds the Fondren Centennial Chair in Business at the
McCombs School of Business at The University of Texas at Austin, where he has
been a professor of management since 1979. Dr. Dyer served as the Chairman of
the Department of Management Science/Information Systems at the McCombs School
of Business at The University of Texas at Austin from 1988 to 1997. Dr. Dyer
holds a B.A. in physics and a Ph.D. in business administration from The
University of Texas at Austin.

J. Kelly Gray has served as a member of our board of directors since
September 2000, when we effected our corporate restructuring. Prior to that, he
served as a member of the board of directors of Service Asset Holdings, Inc.,
our predecessor company, since 1995. Since 1986, Mr. Gray has served in various
capacities for Service Life & Casualty Insurance Company, an insurance company,
most recently as Chairman and Chief Executive Officer since January 1999. Since
1986, Mr. Gray has also served in various capacities for Service Lloyds
Insurance Company, an insurance company, most recently as Chairman and Chief
Executive Officer since April 2000. Mr. Gray holds a B.B.A. in general business
from The University of Texas at Austin.

William D. Gross has served as a member of our board of directors since
September 2000, when we effected our corporate restructuring. Prior to that, he
served as a member of the board of directors of Service Asset Holdings, Inc.,
our predecessor company, since 1995. Mr. Gross has served as the Vice President
of SAMCO since 1988. Mr. Gross holds a B.A. in liberal arts from The University
of Texas at Austin.

David M. Kelly has served as a member of our board of directors since
September 2000. Mr. Kelly recently retired from his position as President and
Chief Executive Officer of the National Securities Clearing Corporation, a
position he held from 1985 to 2000. Mr. Kelly holds a B.A. in economics and
business from Michigan State University.

CLASSIFIED BOARD

Our board currently has seven members. Under our bylaws, our board is
divided into three classes of directors serving staggered three-year terms, with
one class of directors to be elected at each annual meeting of stockholders.
Class I directors, whose terms expire in 2001, are Messrs. Gross and
Pendergraft. Class II directors, whose terms expire in 2002, are Dr. Dyer and
Mr. Gray. Class III directors, whose terms expire in 2003, are Messrs. Engemoen,
Kelly and Son.

BOARD COMMITTEES

Audit Committee. The audit committee of the board of directors reviews,
acts on and reports to the board of directors with respect to various auditing
and accounting matters, including the

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<PAGE> 59

recommendation of our auditors, the scope of the annual audits, fees to be paid
to the auditors, the performance of our independent auditors and our accounting
practices. The members of the audit committee are Dr. Dyer, Mr. Gray and Mr.
Kelly.

Compensation Committee. The compensation committee of the board of
directors recommends, reviews and oversees the salaries, benefits and stock
option plans for our employees, consultants, directors and other individuals
compensated by us. The compensation committee also administers our compensation
plans. The members of the compensation committee are Dr. Dyer, Mr. Engemoen and
Mr. Kelly.

DIRECTOR COMPENSATION

Employee directors do not receive cash compensation for their service on
our board of directors. Non-employee directors receive an annual retainer of
$12,000 and payment of $1,000 per meeting, as well as reimbursement for
reasonable expenses incurred in connection with serving as a director. Each
individual who first becomes a non-employee member of the board of directors at
any time after the offering will receive an option to purchase 25,000 shares of
common stock on the date such individual joins the board of directors, provided
such individual has not previously been employed by us or any parent or
subsidiary corporation. In addition, on the date of each annual stockholders
meeting beginning in 2001, each non-employee member of the board of directors
will automatically be granted an option to purchase 5,000 shares of common
stock.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Our compensation committee currently consists of Dr. Dyer, Mr. Engemoen and
Mr. Kelly. None of our executive officers serves as a member of the board of
directors or compensation committee of any other company that has one or more
executive officers serving as a member of our board of directors or compensation
committee.

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<PAGE> 60

EXECUTIVE COMPENSATION

The following table sets forth all compensation received during fiscal 1999
by our Chief Executive Officer and three of our other most highly compensated
executive officers whose salary and bonus exceeded $100,000 in 1999. Perquisites
and other personal benefits paid to officers in the table below are less than
the minimum reporting thresholds and are represented in the table below by "--."

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
NAME AND PRINCIPAL ---------------------------- OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
------------------ ---- -------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Roger J. Engemoen, 1999 $150,000 $ 549,671 -- -- --
Jr..................
Chairman
Daniel P. Son......... 1999 100,000 1,686,454 -- -- --
President
Philip A. 1999 100,000 1,686,454 -- -- --
Pendergraft.........
Executive Vice
President
Richard N. Hart III... 1999 106,865 30,000 -- 67,500 --
Senior Vice
President and
Operations Manager
of Penson Financial
Services, Inc.
</TABLE>

STOCK OPTION GRANTED IN LAST FISCAL YEAR

The following table provides information concerning individual grants of
stock options made during 1999 to each of our executive officers named in the
summary compensation table who received an option to purchase shares of our
common stock during 1999.

The exercise price represents our board's estimate of the fair market value
of the common stock on the grant date. In establishing these prices, our board
considered many factors, including, but not limited to, the book value of our
common stock and the lack of marketability of our common stock.

OPTION GRANT DURING THE YEAR ENDED 1999

<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
----------------------------- OF ASSUMED
PERCENT OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM
OPTION THE YEAR ENDED PRICE PER EXPIRATION ----------------
NAME GRANTED(#) 1999(%) SHARE DATE 5% 10%
---- ---------- ---------------- --------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Richard N. Hart
III(1)............. 67,500 4% $.33 8/31/99 $90.66 $177.53
</TABLE>

56
<PAGE> 61

---------------

(1) This option was granted on July 30, 1999 and was exercised in full prior to
its expiration on August 31, 1999.

AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 1999 AND YEAR-END
OPTION VALUES

The following table provides information about stock options exercised by
our executive officers named in the Summary Compensation Table who exercised
options to purchase shares of our common stock during the Fiscal Year ended
December 31, 1999. Actual gains on exercise, if any, will depend on the value of
our common stock on the date on which the shares are sold.

YEAR END 1999 OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE DECEMBER 31, 1999 DECEMBER 31, 1999($)
ACQUIRED ON REALIZED --------------------------- ---------------------------
EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard N. Hart
III................ 67,500 --(1) -- -- -- --
Philip A.
Pendergraft(2)..... 887,625 56,686.50 -- -- -- --
</TABLE>

---------------

(1) This option was granted to Mr. Hart in 1999 with an exercise price equal to
fair market value at the time of grant. The option was exercised in full 30
days subsequent to the date of grant and the fair market value at the time
of grant was equal to the exercise price.

(2) This option was granted to Mr. Pendergraft on August 17, 1998 and exercised
in full during 1999.

STOCK OPTIONS GRANTED IN 2000

Messrs. Son and Pendergraft were each granted options to purchase 1,143,450
shares of our common stock at an exercise price of $0.64 per share. As of August
15, 2000, Messrs. Son and Pendergraft had each purchased 786,375 shares of
common stock underlying these options. The options will expire January 13, 2001
and the underlying shares were fully vested at the time the options were
granted.

STOCK OPTION AND OTHER COMPENSATION PLANS

2000 Stock Incentive Plan. The 2000 Stock Incentive Plan became effective
upon its adoption by the board of directors on August 30, 2000. The plan was
approved by the stockholders effective as of September 1, 2000.

5,872,500 shares of common stock have been authorized for issuance under
the 2000 Stock Incentive Plan. Of this amount, options to purchase 188,000
shares of common stock have been granted and 5,684,500 shares remain available
for future grant. The share reserve will automatically be increased on the first
trading day of January each calendar year, beginning in January 2002, by a
number of shares equal to 4% of the total number of shares of common stock
outstanding on the last trading day of the immediately preceding calendar year,
but no such annual increase will exceed 1,552,500 shares. However, in no event
may any one participant in the 2000 Stock Incentive Plan receive option grants
or direct stock issuances for more than 388,125 shares in the aggregate per
calendar year.

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<PAGE> 62

The 2000 Stock Incentive Plan has five separate programs:

- the discretionary option grant program under which eligible
individuals in our employ or service (including officers,
non-employee board members and consultants) may be granted options
to purchase shares of our common stock;

- the stock issuance program under which such individuals may be
issued shares of common stock directly, through the purchase of such
shares or as a bonus tied to the performance of services;

- the salary investment option grant program under which executive
officers and other highly compensated employees may elect to apply a
portion of their base salary to the acquisition of special
below-market stock option grants;

- the automatic option grant program under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members; and

- the director fee option grant program under which non-employee board
members may elect to apply a portion of their retainer fee to the
acquisition of special below-market stock option grants.

The discretionary option grant and stock issuance programs will be
administered by our compensation committee. This committee will determine which
eligible individuals are to receive option grants or stock issuances, the time
or times when such option grants or stock issuances are to be made, the number
of shares subject to each such grant or issuance, the exercise or purchase price
for each such grant or issuance (which may be less than, equal to or greater
than the fair market value of the shares), the status of any granted option as
either an incentive stock option or a non-statutory stock option under the
federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance and the maximum term for which any granted option is to remain
outstanding. The committee will also select the executive officers and other
highly compensated employees who may participate in the salary investment option
grant program in the event that program is activated for one or more calendar
years. Neither the compensation committee nor the board will exercise any
administrative discretion with respect to option grants made under the salary
investment option grant program or under the automatic option grant program or
director fee option grant program for the non-employee board members.

The exercise price for the options may be paid in cash or in shares of our
common stock valued at fair market value on the exercise date. The option may
also be exercised through a same-day sale program without any cash outlay by the
optionee. In addition, the compensation committee may allow a participant to pay
the option exercise price or direct issue price (and any associated withholding
taxes incurred in connection with the acquisition of shares) with a full-
recourse, interest-bearing promissory note.

In the event that the company is acquired, whether by merger or asset sale
or board-approved sale by the stockholders of more than 50% of our voting stock,
each outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation or otherwise continued will
automatically accelerate in full, and all unvested shares under the
discretionary option grant and stock issuance programs will immediately vest,
except to the extent the repurchase rights with respect to those shares are to
be assigned to the successor corporation or otherwise continued in effect. The
compensation committee may grant options and issue shares which will accelerate
(i) in the acquisition even if the options are assumed and repurchase rights
assigned, (ii) in connection with a hostile change in control (effected through
a successful tender offer for more than 50% of our outstanding voting stock or
by proxy contest for the election of board members) or (iii) upon a termination
of the individual's service following a change in control or hostile take-over.

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<PAGE> 63

Stock appreciation rights may be issued under the discretionary option
grant program which will provide the holders with the election to surrender
their outstanding options for an appreciation distribution from the company
equal to the fair market value of the vested shares subject to the surrendered
option less the aggregate exercise price payable for such shares. Such
appreciation distribution may be made in cash or in shares of common stock.
There are currently no outstanding stock appreciation rights under the
predecessor plan.

The compensation committee has the authority to cancel outstanding options
under the discretionary option grant program (including options incorporated
from predecessor plan) in return for the grant of new options for the same or
different number of option shares with an exercise price per share based upon
the fair market value of the common stock on the new grant date.

In the event the compensation committee elects to activate the salary
investment option grant program for one or more calendar years, each of our
executive officers and other highly compensated employees selected for
participation may elect to reduce his or her base salary for that calendar year
by a specified dollar amount not less than $5,000 nor more than $50,000. In
return, the individual will automatically be granted, on the first trading day
in the calendar year for which the salary reduction is to be in effect, a
non-statutory option to purchase that number of shares of common stock
determined by dividing the salary reduction amount by two-thirds of the fair
market value per share of our common stock on the grant date. The option
exercise price will be equal to one-third of the fair market value of the option
shares on the grant date. As a result, the fair market value of the option
shares on the grant date less the exercise price payable for those shares will
be equal to the salary reduction amount. The option will become exercisable in a
series of 12 equal monthly installments over the calendar year for which the
salary reduction is to be in effect and will be subject to full and immediate
vesting in the event of an acquisition or change in control of the company.

Under the automatic option grant program, each individual who first joins
the board after the date of this offering as a non-employee board member will
automatically be granted an option for 25,000 shares of our common stock at the
time of his or her commencement of board service, provided such individual has
not been in our prior employ. In addition, on the date of each annual
stockholders meeting held after the date of this offering, each individual who
is to continue to serve as a non-employee board member after such meeting will
receive an option grant to purchase 5,000 shares of common stock. Each automatic
grant will have an exercise price equal to the fair market value per share of
our common stock on the grant date and will have a maximum term of 10 years,
subject to earlier termination following the optionee's cessation of board
service. Each option will be immediately exercisable, subject to the company's
right to repurchase any unvested shares, at the original exercise price, at the
time of the board member's cessation of service. Each 25,000 share option grant
will vest, and the repurchase right will lapse, in a series of four equal
successive annual installments upon the optionee's completion of each year of
board service over the four-year period measured from the grant date. Each 5,000
share option grant will vest, and the repurchase right will lapse, upon the
optionee's completion of one year of board service measured from the grant date.
However, each such outstanding option will immediately vest upon a change in
control, a hostile take-over or the death or disability of the optionee while
serving as a board member.

If the director fee option grant program is put into effect in the future,
then each non-employee board member may elect to apply all or a portion of any
cash retainer fee for the year to the acquisition of a below-market option
grant. The option grant will automatically be made on the first trading day in
January in the year for which the non-employee board member would otherwise be
paid the cash retainer fee in the absence of his or her election. The option
will have an exercise price per share equal to one-third of the fair market
value of the option shares on the grant date, and the number of shares subject
to the option will be determined by dividing the amount of the retainer fee
applied to the program by two-thirds of the fair market value per
59
<PAGE> 64

share of Penson common stock on the grant date. As a result, the fair market
value of the option shares on the grant date less the exercise price payable for
those shares will be equal to the portion of the retainer fee applied to that
option. The option will become exercisable in a series of 12 equal monthly
installments over the calendar year for which the election is in effect.
However, the option will become immediately exercisable for all the option
shares upon the death or disability of the optionee while serving as a board
member.

Limited stock appreciation rights will automatically be included as part of
each grant made under the automatic option grant and salary investment option
grant programs and may be granted to one or more officers as part of their
option grants under the discretionary option grant program. Options with such a
limited stock appreciation right may be surrendered to the company upon the
successful completion of a hostile tender offer for more than 50% of our
outstanding voting stock. In return for the surrendered option, the optionee
will be entitled to a cash distribution from the company in an amount per
surrendered option share equal to the highest price per share of common stock
paid in connection with the tender offer less the exercise price payable for
such share.

The board may amend or modify the 2000 Stock Incentive Plan at any time,
subject to any required stockholder approval. The 2000 Stock Incentive Plan will
terminate no later than August 27, 2010.

Employee Stock Purchase Plan. Our Employee Stock Purchase Plan was adopted
by the board of directors on August 30, 2000 and was approved by the
stockholders effective as of September 1, 2000. The plan will become effective
immediately upon the execution of the underwriting agreement for this offering.
The plan is designed to allow eligible employees of the company and its
participating subsidiaries to purchase shares of common stock, at semi-annual
intervals, through their periodic payroll deductions. A total of 776,250 shares
of our common stock will initially be issued under the plan. The share reserve
will automatically increase on the first trading day of January each year
beginning in January 2002, by 2% of the total shares of common stock outstanding
on the last trading day of the immediately preceding calendar year, but no such
annual increase will exceed 776,250 shares. In no event, however, may any
participant purchase more than 2,700 shares, nor may all participants in the
aggregate purchase more than 388,125 shares on any one semi-annual purchase
date.

The plan will have a series of successive offering periods, each with a
maximum duration of 24 months. However, the initial offering period will begin
on the day the underwriting agreement is executed in connection with this
offering and will end on the last business day in October 2002. The next
offering period will begin on the first business day in November 2002, and
subsequent offering periods will be set by the compensation committee. Shares
will be purchased for the participants semi-annually (the last business day of
October and April each year) during the offering period. The first purchase date
will occur on April 30, 2001. Should the fair market value of the common stock
on any semi-annual purchase date be less than the fair market value on the first
day of the offering period, then the current offering period will automatically
end and a new offering period will begin, based on the lower fair market value.

Individuals who are eligible employees on the start date of the initial
offering period may enter the plan on that start date or on any subsequent
semi-annual entry date (generally May 1 or November 1 each year). Individuals
who become eligible employees after the start date of the initial offering
period may join the plan on any subsequent semi-annual entry date.

A participant may contribute up to 15% of his or her cash compensation
through payroll deductions and the accumulated payroll deductions will be
applied to the purchase of shares on the participant's behalf on each
semi-annual purchase date. The purchase price per share will be 85% of the lower
of the fair market value of our common stock on the participant's entry date
into the offering period or the fair market value on the semi-annual purchase
date.

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<PAGE> 65

The board may at any time amend or modify the plan. The plan will terminate
no later than the last business day in October 2010.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:

- any breach of their duty of loyalty to the corporation or its
stockholders;

- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or

- any transaction from which the director derived an improper personal
benefit.

Such limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission. Our certificate of
incorporation and bylaws provide that we shall indemnify our directors and
executive officers and may indemnify our other officers and employees and other
agents to the fullest extent permitted by law. We believe that indemnification
under our bylaws covers at least negligence and gross negligence on the part of
the indemnified parties. Our bylaws also permit us to secure insurance on behalf
of any officer, director, employee or other agent for any liability arising out
of his or her actions in such capacity, regardless of whether the bylaws would
permit indemnification.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted for our directors and officers under the provisions
contained in our charter documents, Delaware law or otherwise, we are aware that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities, other than for
the payment by us of expenses incurred or paid by one of our directors or
officers for the successful defense of any action, suit or proceeding, is
asserted by such director or officer, we will submit to a court of appropriate
jurisdiction the question whether such indemnification by us is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue, unless in the opinion of our counsel the
matter has been settled by controlling precedent.

We have entered into agreements to indemnify our directors and executive
officers in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for expenses specified in the agreements, including
attorneys' fees, judgments, fines and settlement amounts incurred by any such
person in any action or proceeding arising out of such person's services as a
director or executive officer of our company, any subsidiary of our company or
any other entity to which the person provides services at our request. In
addition, prior to the consummation of this offering, we will obtain directors'
and officers' insurance. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.

At present, we are not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent in which
indemnification would be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.

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<PAGE> 66

CERTAIN TRANSACTIONS

PRIVATE PLACEMENT OF EQUITY

5% Stockholders, Directors and Executive Officers. Since July 1995, we have
raised capital primarily through the sale of our common stock, including the
following sales to holders of more than 5% of our common stock and to our
directors and executive officers.

We sold shares of common stock at a weighted average price of $0.04 per
share to the following executive officers, directors and holders of more than 5%
of our securities during 1995:

<TABLE>
<CAPTION>
SHARES OF
PURCHASER COMMON STOCK
--------- ------------
<S> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Roger J. Engemoen, Jr. ..................................... 7,518,150
J. Kelly Gray............................................... 2,004,750
William D. Gross............................................ 2,784,375
5% STOCKHOLDERS:
JoAnn Gray Smith............................................ 2,004,750
Janey Gray Trowbridge....................................... 2,004,750
</TABLE>

We sold shares of common stock at $0.09 per share to the following
executive officer in 1996:

<TABLE>
<CAPTION>
SHARES OF
PURCHASER COMMON STOCK
--------- ------------
<S> <C>
EXECUTIVE OFFICER AND DIRECTOR:
Philip A. Pendergraft....................................... 56,700
</TABLE>

We sold shares of common stock at a weighted average price of $0.16 per
share to the following executive officers and directors during 1997:

<TABLE>
<CAPTION>
SHARES OF
PURCHASER COMMON STOCK
--------- ------------
<S> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Daniel P. Son............................................... 1,219,050
Philip A. Pendergraft....................................... 274,725
</TABLE>

We sold shares of common stock at a weighted average price of $0.28 per
share to the following executive officers and directors during 1999:

<TABLE>
<CAPTION>
SHARES OF
PURCHASER COMMON STOCK
--------- ------------
<S> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Philip A. Pendergraft....................................... 887,625
Richard N. Hart III......................................... 67,500
Ronald D. Morrison.......................................... 67,500
Jill M. Zacha............................................... 67,500
</TABLE>

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<PAGE> 67

We sold shares of common stock at a weighted average price of $0.64 per
share to the following executive officers and directors during 2000:

<TABLE>
<CAPTION>
SHARES OF
PURCHASER COMMON STOCK
--------- ------------
<S> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Daniel P. Son............................................... 786,375
Philip A. Pendergraft....................................... 786,375
</TABLE>

See the notes to the table on beneficial ownership in "Principal
Stockholders" for information relating to the beneficial ownership of such
shares.

OTHER TRANSACTIONS

Pledged Securities. In connection with the loans outstanding to Service
Lloyds Insurance Company, an entity owned by certain of our stockholders, all of
the shares of common stock of Service Asset Holdings, Inc. are currently pledged
as security.

Personal Guarantees. Pursuant to the $10 million term loan from Guaranty
Federal Bank, F.S.B., dated July 31, 2000, Roger J. Engemoen, Jr., J. Kelly
Gray, William D. Gross, Philip A. Pendergraft and Daniel P. Son executed
Guaranty Agreements dated July 31, 2000. Under the Guaranty Agreements, the
above guarantors' respective liabilities are limited as follows:

<TABLE>
<CAPTION>
GUARANTOR
---------
<S> <C>
Roger J. Engemoen, Jr. ..................................... $2,600,000
J. Kelly Gray............................................... $2,600,000
William D. Gross............................................ $1,600,000
Philip A. Pendergraft....................................... $1,600,000
Daniel P. Son............................................... $1,600,000
</TABLE>

None of the foregoing persons has been compensated by the company for
executing the Guaranty Agreements. We believe that the foregoing transactions
were on terms no less favorable to us than could be obtained from unaffiliated
third parties.

Registration Rights. For information on registration rights we have granted
to some of our officers and directors, please see "Description of Capital
Stock -- Registration Rights."

Clearing Agreements with Affiliates. On July 1, 1997 we entered into a
clearing agreement with Yee, Desmond, Schroeder & Allen, Inc. whereby we agreed
to clear and maintain cash, margin, option or other accounts and otherwise act
as clearing broker for Yee, Desmond, Schroeder & Allen, Inc. In May 1998, Yee,
Desmond, Schroeder & Allen, Inc. became one of our affiliates. We believe that
the terms of this agreement were negotiated at arms length and on terms no more
favorable than those given independent third parties.

On May 18, 1998, we entered into a clearing agreement with an affiliate of
ours, IBI, Inc., whereby we agreed to clear and maintain cash, margin, option or
other accounts and otherwise act as clearing broker for IBI, Inc. We believe
that the terms of this agreement were negotiated at arms length and on terms no
more favorable than those given independent third parties.

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<PAGE> 68

PRINCIPAL STOCKHOLDERS

The following table sets forth information known to us regarding the
beneficial ownership of our common stock as of September 30, 2000, as adjusted
to reflect the sale of common stock offered in this offering, by:

- each person, or group of affiliated persons, known by us to own
beneficially more than 5% of our outstanding common stock;

- each director;

- each of our directors and our executive officers named in the
Summary Compensation Table; and

- all of our directors and executive officers as a group.

Except as otherwise noted, the address of each person listed in the table
is c/o Penson Worldwide, Inc., 1700 Pacific Avenue, Suite 1400, Dallas, Texas
75201. Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power with
respect to shares. To our knowledge, except under applicable community property
laws or as otherwise indicated, the persons named in the table have sole voting
and sole investment control with respect to all shares shown as beneficially
owned. The applicable percentage of ownership for each stockholder is based on
28,657,800 shares of common stock outstanding as of September 30, 2000 and
36,657,800 shares outstanding after the completion of this offering, in each
case together with applicable options for that stockholder. Shares of common
stock issuable upon exercise of options and other rights beneficially owned that
are exercisable on or before November 30, 2000 are deemed outstanding for the
purpose of computing the percentage ownership of the person holding those
options and other rights but are not deemed outstanding for computing the
percentage ownership of any other person. A portion of the shares issued to
officers or issuable upon exercise of options by officers is subject to
repurchase by us at the original exercise price in the event of termination of
that officers' employment, which repurchase right lapses over time.

<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED
TOTAL --------------------
NUMBER OF BEFORE AFTER
NAME AND ADDRESS SHARES OFFERING OFFERING
---------------- ---------- -------- --------
<S> <C> <C> <C>
Named Executive Officers and Directors:
Roger J. Engemoen, Jr. ............................... 7,518,150 26% 21%
Daniel P. Son(1)...................................... 2,362,500 8% 6%
Philip A. Pendergraft(1).............................. 2,362,500 8% 6%
J. Kelly Gray(2)...................................... 4,009,500 14% 11%
William D. Gross...................................... 2,784,375 10% 8%
Richard N. Hart III................................... 67,500 * *
James S. Dyer......................................... -- * *
David M. Kelly........................................ -- * *
Other 5% Stockholders:
JoAnn Gray Smith(3)................................... 2,004,750 7% 5%
Janey Gray Trowbridge(4).............................. 2,004,750 7% 5%
All of our executive officers and directors as a group
(10 persons).......................................... 19,239,525 67% 52%
</TABLE>

---------------

* Represents beneficial ownership of less than one percent of the outstanding
shares of our common stock.

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<PAGE> 69

(1) Includes 357,075 shares issuable upon exercise of stock options exercisable
until January 14, 2001.

(2) Includes 2,004,750 shares held by Mr. Gray as trustee of the Gray Family
1999 Investment Trust.

(3) The address for this stockholder is Route 1, Box 731E, Aransas Pass, Texas
78336.

(4) The address for this stockholder is 7108 Park Terrace Drive, Alexandria,
Virginia 22307.

65
<PAGE> 70

DESCRIPTION OF CAPITAL STOCK

The following information describes our common stock and certain provisions
of our certificate of incorporation and our bylaws as in effect upon the closing
of this offering. This description is only a summary. You should also refer to
the certificate of incorporation and bylaws, which have been filed with the SEC
as exhibits to our registration statement, of which this prospectus forms a
part. The descriptions of the common stock and preferred stock reflect changes
to our capital structure that will occur upon the receipt of the requisite board
and stockholder approvals and upon the closing of this offering in accordance
with the terms of the certificate of incorporation.

Upon the completion of the offering our authorized capital stock will
consist of 65,000,000 shares of common stock, par value $0.01 per share, and
10,000,000 shares of preferred stock, par value $0.01 per share.

COMMON STOCK

As of September 30, 2000, there were 28,657,800 shares of common stock
outstanding and held of record by 69 stockholders. Based upon the number of
shares outstanding and giving effect to the issuance of the 8,000,000 shares of
common stock offered hereby, there will be 36,657,800 shares of common stock
outstanding upon the closing of this offering.

Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the board of directors out of
funds legally available for that purpose, subject to any preferential dividend
rights of any outstanding preferred stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of common stock are, and the shares offered by us in this offering will
be, when issued in consideration for payment thereof, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock which we may designate and issue in the
future. Upon the closing of this offering, there will be no shares of preferred
stock outstanding.

OPTIONS

As of September 30, 2000, options to purchase a total of 902,150 shares of
common stock were outstanding, all of which are subject to lock-up agreements.

REGISTRATION RIGHTS

According to the terms of a registration rights agreement we have entered
into with Roger J. Engemoen, Jr., Daniel P. Son and Philip A. Pendergraft,
beginning 180 days after the closing of this offering, the parties to the
registration rights agreement, who will hold in the aggregate 12,243,150 shares
of common stock, may require us to file a registration statement under the
Securities Act of 1933 with respect to the resale of their shares. To demand
such registration, the parties must request that the registration statement
register the resale of at least 10% of these shares that are then outstanding.
We are not required to effect more than three demand registrations.

Additionally, the parties to the registration rights agreement will have
piggyback registration rights with respect to future registration of our shares
of common stock under the Securities Act. If we propose to register any shares
of common stock under the Securities Act, the holders of shares having piggyback
registration rights are entitled to receive notice of such registration and are
entitled to include their shares in the registration.

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<PAGE> 71

In addition to the foregoing rights, at any time after we become eligible
to file a registration statement of Form S-3 under the Securities Act, the
parties to the registration rights agreement may require us to file up to six
registration statements on Form S-3 with respect to their shares of common
stock, resulting in an aggregate offering of at least $10,000,000 on each Form
S-3 registration statement. We are not required to file more than one
registration statement on Form S-3 in any six-month period.

These registration rights are subject to conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares of common stock to be included in the registration. We are generally
required to bear all of the expenses of all registrations under the registration
rights agreement, except underwriting discounts and commissions. The
registration rights agreement also contains our commitment to indemnify the
holders of registration rights for losses they incur in connection with
registrations under the agreement. Registration of any of the shares of common
stock held by security holders with registration rights would result in those
shares becoming freely tradeable without restriction under the Securities Act.

ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE
OF INCORPORATION AND BYLAWS

General. Certain provisions of Delaware law and our certificate of
incorporation and bylaws could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, control
of us. Such provisions could limit the price that certain investors might be
willing to pay in the future for shares of our common stock. These provisions of
Delaware law and the certificate of incorporation and bylaws may also have the
effect of discouraging or preventing certain types of transactions involving an
actual or threatened change of control of us, including unsolicited takeover
attempts, even though such a transaction may offer our stockholders the
opportunity to sell their stock at a price above the prevailing market price.

Delaware Law. We are subject to the "business combination" provisions of
Section 203 of the Delaware General Corporation Law. Subject to certain
exceptions, Section 203 prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless:

- the transaction is approved by the board of directors prior to the
date the interested stockholder obtained interested stockholder
status;

- upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of our voting stock outstanding at
the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned by
(a) persons who are directors and also officers and (b) employee
stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or

- on or subsequent to the date the business combination is approved by
the board of directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least
two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.

A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to certain exceptions, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years did own,
15% or more of the corporation's voting stock. This statute could prohibit or
delay the

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<PAGE> 72

accomplishment of mergers or other takeover or change in control attempts with
respect to us and, accordingly, may discourage attempts to acquire us.

Charter and Bylaw Provisions. In addition, certain provisions of our
certificate of incorporation and bylaws summarized in the following paragraphs
may be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders.

Classified Board of Directors; Removal; Filling Vacancies and
Amendment. The certificate of incorporation and bylaws provide that upon the
closing of this offering the board shall be divided into three classes of
directors serving staggered, three-year terms. The classification of the board
has the effect of requiring at least two annual stockholder meetings, instead of
one, to replace a majority of members of the board. Subject to the rights of the
holders of any outstanding series of preferred stock, the certificate of
incorporation authorizes only the board to fill vacancies, including newly
created directorships. Accordingly, this provision could prevent a stockholder
from obtaining majority representation on the board by enlarging the board of
directors and filling the new directorships with its own nominees. The
certificate of incorporation also provides that directors may be removed by
stockholders only for cause and only be the affirmative vote of holders of
two-thirds of the outstanding shares of voting stock.

Stockholder Action; Special Meeting of Stockholders. The certificate of
incorporation provides that stockholders may not take action by written consent,
but may only take action at duly called annual or special meetings of
stockholders. The certificate of incorporation further provides that special
meetings of our stockholders may be called only by the chairman of the board of
directors or a majority of the board of directors. This limitation on the right
of stockholders to call a special meeting could make it more difficult for
stockholders to initiate actions that are opposed by the board of directors.
These actions could include the removal of an incumbent director or the election
of a stockholder nominee as a director. They could also include the
implementation of a rule requiring stockholder ratification of specific
defensive strategies that have been adopted by the board of directors with
respect to unsolicited takeover bids. In addition, the limited ability of the
stockholders to call a special meeting of stockholders may make it more
difficult to change the existing board and management.

Advance Notice Requirements for Stockholder Proposals and Director
Nomination. The bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide timely notice
thereof in writing. To be timely, a stockholder's notice must be delivered to or
mailed and received at our principal executive offices not less than 120 days
prior to the date of our annual meeting. The bylaws also specify certain
requirements as to the form and content of a stockholder's notice. These
provisions may preclude stockholders from bringing matters before an annual
meeting of stockholders or from making nominations for directors at an annual
meeting of stockholders.

Authorized but Unissued Shares. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares of common stock and preferred stock could render
more difficult or discourage an attempt to obtain control of us by means of a
proxy contest, tender offer, merger or otherwise.

Supermajority Vote to Amend Charter and Bylaws. The Delaware General
Corporation Law provides generally that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless a corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage.
Following the completion of this offering, our present directors, and executive

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<PAGE> 73

officers and principal stockholders will beneficially own approximately 67% of
our common stock. This gives them veto power with respect to any stockholder
action or approval requiring a simple majority.

NASDAQ NATIONAL MARKET

We have applied to list our common stock on the Nasdaq National Market
under the trading symbol "PNSN."

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C.

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<PAGE> 74

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of our common stock in the public market after
the offering could adversely affect the market price of our common stock and our
ability to raise equity capital in the future on terms favorable to us.

After the offering, 36,657,800 shares of our common stock will be
outstanding, assuming that the underwriters do not exercise the over-allotment
option. Of these shares, all of the shares sold in this offering will be freely
tradeable without restriction or further registration under the Securities Act,
unless these shares are purchased by "affiliates" as that term is defined in
Rule 144 under the Securities Act. The remaining shares of common stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 under the Securities Act. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 under the Securities Act, which rules are
summarized below.

The following table shows approximately when the shares of our common stock
that are not being sold in this offering but which will be outstanding when this
offering is complete will be eligible for sale in the public market:

ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET

<TABLE>
<CAPTION>
NUMBER OF
SHARES ELIGIBLE
FOR FUTURE
RELEVANT DATES SALE COMMENT
-------------- --------------- -------
<S> <C> <C>
On effective date................... 0 Immediately after the date of this
prospectus
90 days after effective date........ 188,000 Additional shares eligible for sale
under Rules 144 and 701
180 days after effective date....... 28,657,800 All shares subject to lock-up
agreements released; additional
shares eligible for sale under
Rules 144 and 701
</TABLE>

Resale of most of the restricted shares that will become available for sale
in the public market starting 180 days after the effective date will be limited
by volume and other resale restrictions under Rule 144 because the holders are
our affiliates.

RULE 144

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year is entitled to sell, within any three-month
period, a number of shares that is not more than the greater of:

- 1% of the number of shares of common stock then outstanding, which
will equal approximately 366,578 shares immediately after this
offering; or

- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice of
the sale on Form 144 is filed.

Sales under Rule 144 must also comply with manner of sale provisions and
notice requirements and are subject to the availability of current public
information about us.

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RULE 144(K)

Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days before a sale, and who has beneficially owned the
restricted shares for at least two years, is entitled to sell the shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.

RULE 701

In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchase shares from us under
a stock option plan or other written agreement can resell those shares 90 days
after the effective date of this offering in reliance on Rule 144, but without
complying with some of the restrictions, including the holding period, contained
in Rule 144.

LOCK-UP AGREEMENTS

Executive officers, directors and security holders will sign lock-up
agreements under which they will agree not to transfer or dispose of, directly
or indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for shares of common stock, for a period of 180 days
after the date of this prospectus. Chase Securities Inc. may, however, in its
sole discretion, at any time, without notice, release all or any portion of the
shares subject to lock-up agreements.

STOCK PLANS

As soon as practicable after the completion of this offering, we intend to
file a registration statement under the Securities Act covering shares of our
common stock reserved for issuance under our 2000 Stock Incentive Plan and our
2000 Employee Stock Purchase Plan.

REGISTRATION RIGHTS

After this offering, the holders of 12,243,150 shares of our common stock
will be entitled to specified rights with respect to the registration of their
shares under the Securities Act. See "Description of Capital
Stock -- Registration Rights." After any sale of shares pursuant to a
registration statement, these shares will be freely tradeable without
restriction under the Securities Act. These sales could cause the market price
of our common stock to decline.

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<PAGE> 76

UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS

The following is a general discussion of the principal United States
federal income and estate tax consequences of the acquisition, ownership and
disposition of our common stock by a Non-U.S. Holder. As used in this
prospectus, the term "Non-U.S. Holder" is a person who holds our common stock
other than:

- a citizen or resident of the United States;

- a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or of any political
subdivision of the United States;

- an estate the income of which is includable in gross income for United
States federal income tax purposes regardless of its source; or

- a trust subject to the primary supervision of a United States court and
the control of one or more United States persons, or a trust (other than
a wholly-owned grantor trust) that was treated as a domestic trust
despite not meeting the requirements described above.

This discussion does not consider:

- state, local or foreign tax consequences;

- specific facts and circumstances that may be relevant to a particular
Non-U.S. Holder's tax position in light of their particular
circumstances;

- the tax consequences for the stockholders or beneficiaries of a Non-U.S.
Holder;

- special tax rules that may apply to certain Non-U.S. Holders, including
without limitation, partnerships, banks, insurance companies, dealers in
securities and traders in securities; or

- special tax rules that may apply to a Non-U.S. Holder that holds our
common stock as part of a "straddle," "hedge" or "conversion
transaction."

The following discussion is based on provisions of the United States
Internal Revenue Code of 1986, as amended, also known as the Code, applicable
Treasury regulations and administrative and judicial interpretations, all as of
the date of this prospectus, and all of which are subject to change,
retroactively or prospectively. The following discussion assumes that our common
stock is held as a capital asset. The following summary is for general
information. Accordingly, each Non-U.S. Holder should consult a tax advisor
regarding the United States federal, state, local and foreign income and other
tax consequences of acquiring, holding and disposing of shares of our common
stock.

DIVIDENDS

We do not anticipate paying cash dividends on our common stock in the
foreseeable future. See "Dividend Policy." In the event, however, that dividends
are paid on shares of our common stock, dividends paid to a Non-U.S. Holder of
our common stock generally will be subject to withholding of United States
federal income tax at a 30% rate, or such lower rate as may be provided by an
applicable income tax treaty. Non-U.S. Holders should consult their tax advisors
regarding their entitlement to benefits under a relevant income tax treaty.

Dividends that are effectively connected with a Non-U.S. Holder's conduct
of a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment in the United States, known as "United
States trade or business income," are generally subject to United States federal
income tax on a net income basis at regular graduated rates, but are not
generally subject to the 30% withholding tax if the Non-U.S. Holder files the
appropriate United States Internal Revenue Service form with the payor. Any
United States trade or business income received by a Non-U.S. Holder that is a
corporation may also, under certain

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<PAGE> 77

circumstances, be subject to an additional "branch profits tax" at a 30% rate or
such lower rate as specified by an applicable income tax treaty.

Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
such country for purposes of the withholding discussed above and for purposes of
determining the applicability of a tax treaty rate. For dividends paid after
2000, a Non-U.S. Holder of our common stock who claims the benefit of an
applicable income tax treaty rate generally will be required to satisfy
applicable certification and other requirements.

A Non-U.S. Holder of our common stock that is eligible for a reduced rate
of United States withholding tax under an income tax treaty may obtain a refund
or credit of any excess amounts withheld by filing an appropriate claim for a
refund with the United States Internal Revenue Service.

GAIN ON DISPOSITION OF COMMON STOCK

A Non-U.S. Holder generally will not be subject to United States federal
income tax in respect of gain recognized on a disposition of our common stock
unless:

- the gain is United States trade or business income, in which case the
branch profits tax described above may apply to a corporate Non-U.S.
Holder;

- the Non-U.S. Holder is an individual who holds our common stock as a
capital asset within the meaning of Section 1221 of the Code, is present
in the United States for more than 182 days in the taxable year of the
disposition and meets certain other requirements;

- the Non-U.S. Holder is subject to tax pursuant to the provisions of the
United States tax law applicable to certain United States expatriates; or

- we are or have been a "United States real property holding corporation"
for United States federal income tax purposes at any time during the
shorter of the five-year period ending on the date of disposition or the
period that the Non-U.S. Holder held our common stock.

Generally, a corporation is a "United States real property holding
corporation" if the fair market value of its "United States real property
interest," such as interest in real property located in the United States or the
Virgin Islands, and certain interests in other United States real property
holding corporations, equals or exceeds 50% of the sum of the fair market value
of its worldwide real property interests plus its other assets used or held for
use in a trade or business. We believe we have never been, are not currently and
are not likely to become a United States real property holding corporation for
United States federal income tax purposes.

FEDERAL ESTATE TAX

Common stock owned or treated as owned by an individual who is a Non-U.S.
Holder at the time of death will be included in the individual's gross estate
for United States federal estate tax purposes, unless an applicable estate tax
or other treaty provides otherwise.

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

We must report annually to the United States Internal Revenue Service and
to each Non-U.S. Holder the amount of dividends paid to that holder and the tax
withheld with respect to those dividends. Copies of the information returns
reporting those dividends and withholding may also be made available to the tax
authorities in the country in which the Non-U.S. Holder is a resident under the
provisions of an applicable income tax treaty or agreement.

Under certain circumstances, United States Treasury Regulations require
information reporting and backup withholding at a rate of 31% on certain
payments on our common stock.

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<PAGE> 78

Under currently applicable law, Non-U.S. Holders of our common stock generally
will be exempt from these information reporting requirements and from backup
withholding on dividends paid prior to 2001 to an address outside the United
States. For dividends paid after 2000, however, a Non-U.S. Holder of our common
stock that fails to certify its Non-U.S. Holder status in accordance with
applicable United States Treasury Regulations may be subject to backup
withholding at a rate of 31% of dividends.

The payment of the proceeds of the disposition of our common stock by a
holder to or through the United States office of a broker generally will be
subject to information reporting and backup withholding at a rate of 31% unless
the holder either certifies its status as a Non-U.S. Holder under penalties of
perjury or otherwise establishes an exemption. The payment of the proceeds of
the disposition by a Non-U.S. Holder of our common stock to or through a foreign
office of a foreign broker will not be subject to backup withholding or
information reporting unless the foreign broker is a "United States related
person." In the case of the payment of proceeds from the disposition of our
common stock by or through a foreign office of a broker that is a United States
person or a "United States related person," information reporting, but currently
not backup withholding, on the payment applies unless the broker receives a
statement from the owner, signed under penalty of perjury, certifying its
foreign status or the broker has documentary evidence in its files that the
holder is a Non-U.S. Holder and the broker has no actual knowledge to the
contrary. For this purpose, a "United States related person" is:

- a "controlled foreign corporation" for United States federal income tax
purposes;

- a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment, or for such part of the period that the broker has been in
existence, is derived from activities that are effectively connected with
the conduct of a United States trade or business;

- effective after 2000, a foreign partnership if, at any time during the
taxable year, (A) at least 50% of the capital or profits interest in the
partnership is owned by United States persons, or (B) the partnership is
engaged in a United States trade or business; or

- certain U.S. branches of foreign banks or insurance companies.

Effective after 2000, backup withholding may apply to the payment of
disposition proceeds by or through a foreign office or a broker that is a United
States person or a United States related person unless certain certification
requirements are satisfied or an exemption is otherwise established and the
broker has no actual knowledge that the holder is a United States person.
Non-U.S. Holders should consult their own tax advisors regarding the application
of the information reporting and backup withholding rules to them, including
changes to these rules that will become effective after 2000.

Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be refunded, or credited against the holder's United States
federal income tax liability, if any, provided that the required information is
furnished to the United States Internal Revenue Service.

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UNDERWRITING

Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Chase Securities Inc.,
Robertson Stephens, Inc. and U.S. Bancorp Piper Jaffray, have severally agreed
to purchase from us the following numbers of shares of common stock:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Chase Securities Inc. ...................
Robertson Stephens, Inc. ................
U.S. Bancorp Piper Jaffray...............
---------
TOTAL.................................... 8,000,000
=========
</TABLE>

The underwriting agreement provides that the obligations of the
underwriters are conditioned on the absence of any material adverse change in
our business and the receipt of certificates, opinions and letters from us, our
counsel and our independent auditors. The underwriters are committed to purchase
all shares of common stock offered in this prospectus if any shares are
purchased.

The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus and to dealers at the public offering price less a concession not in
excess of $ per share. The underwriters may allow and the dealers may
reallow a concession not in excess of $ per share to other dealers. After
the public offering of the shares, the underwriters may change the offering
price and other selling terms. The representatives of the underwriters have
informed us that the underwriters do not intend to confirm discretionary sales
in excess of 5% of the shares of common stock offered by this prospectus.

We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to 1,200,000 additional
shares of common stock at the public offering price, less the underwriting
discount set forth on the cover page of this prospectus. To the extent that the
underwriters exercise this option, each underwriter will have a firm commitment
to purchase a number of shares that approximately reflects the same percentage
of total shares the underwriter purchased in the above table. We will be
obligated to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise this option only to cover
over-allotments made in connection with the sale of common stock offered in this
prospectus.

The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by us. The underwriting discount
was determined based on an arms' length negotiation between the representatives
of the underwriters and Penson Worldwide. These amounts are shown assuming both
no exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares.

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<PAGE> 80

UNDERWRITING DISCOUNTS AND COMMISSIONS

<TABLE>
<CAPTION>
PAID BY PENSON
WORLDWIDE
---------------------------
NO FULL
EXERCISE EXERCISE
----------- -------------
<S> <C> <C>
Per share.......................... $ $
Total.............................. $ $
</TABLE>

We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ . The
offering of the shares is made for delivery when, as and if accepted by the
underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act, and to contribute to payments the
underwriters may be required to make in respect of those liabilities.

All of our stockholders, including all of our executive officers and
directors, have agreed that they will not, without the prior written consent of
Chase Securities Inc., offer, sell or otherwise dispose of any shares of common
stock, options or warrants to acquire shares of common stock or securities
exchangeable for or convertible into shares of common stock owned by them during
the 180-day period following the date of this prospectus. We have agreed that we
will not, without the prior written consent of Chase Securities Inc., offer,
sell or otherwise dispose of any shares of common stock, options or warrants to
acquire shares of common stock or securities exchangeable for or convertible
into shares of common stock during the 180-day period following the date of this
prospectus, except that we may issue shares upon the exercise of options granted
prior to the date of this prospectus and may grant additional options under our
stock plans, provided that, without the prior written consent of Chase
Securities Inc., any additional options shall not be exercisable during the
180-day period.

At our request, the underwriters have reserved up to 400,000 shares of
common stock to be sold in the offering and offered for sale, at the public
offering price, to our directors, officers, employees, business associates such
as clients and suppliers and persons related to, or affiliated with the
foregoing persons. The number of shares available for sale to the general public
in the offering will be reduced to the extent these persons purchase the
reserved shares. Any reserved shares not so purchased will be offered to the
general public on the same basis as other shares offered by this prospectus.

Persons participating in this offering may over-allot or effect
transactions that stabilize, maintain or otherwise affect the market price of
the common stock at levels above those that might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or the effecting of any purchase for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.
Stabilizing, if commenced, may be discontinued at any time.

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<PAGE> 81

Before this offering, there was no public market for the common stock. The
initial public offering price for the common stock will be determined by
negotiations between ourselves and the representatives. Among the factors to be
considered in determining the initial public offering price will be prevailing
market and economic conditions, our revenues and earnings, market valuations of
other companies engaged in activities similar to ours, estimates of our business
potential and prospects, the present state of our business operations, our
management and other factors deemed relevant.

We own 100% of the common stock of Penson Financial Services, Inc., a
member of the National Association of Securities Dealers, Inc., referred to as
the NASD, and we are therefore an affiliate of this entity. As a result of the
foregoing, this offering is subject to the provision of Rule 2720 of the Conduct
Rules of the NASD. Accordingly, the underwriting terms for the offering conform
with the requirements set forth in Rule 2720. In particular, the price at which
our common stock is to be distributed to the public must be at a price no higher
than that recommended by a "qualified independent underwriter" who has also
participated in the preparation of this prospectus and the registration
statement of which this prospectus is a part and who meets certain standards. In
accordance with this requirement, Chase Securities Inc. will serve in such role
and will recommend the public offering price in compliance with the requirements
of Rule 2720. Chase Securities Inc., in its role as qualified independent
underwriter, has performed the due diligence investigations and reviewed and
participated in the preparation of this prospectus and the registration
statement of which this prospectus is a part.

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LEGAL MATTERS

The validity of the common stock offered in this offering will be passed
upon for us by Brobeck, Phleger & Harrison LLP, Austin, Texas. Legal matters
will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Austin, Texas.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1998 and 1999 and at June 30,
2000, and for each of the three years in the period ended December 31, 1999 and
the six months ended June 30, 2000, as set forth in their reports. We have
included our consolidated financial statements and schedule in the prospectus
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
reports, given on their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement on Form S-1 with the SEC for our
common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement. You should refer to the
registration statement and its exhibits for additional information. Whenever we
make reference in this prospectus to any of our contracts, agreements or other
documents, the references are not necessarily complete and you should refer to
the exhibits attached to the registration statement for the copies of the actual
contract, agreement or other document. When we complete this offering, we will
also be required to file annual, quarterly and special reports, proxy statements
and other information with the SEC.

You may read our SEC filings, including the registration statement, over
the Internet at the SEC's Web site at http://www.sec.gov. You may also read and
copy any document we file with the SEC at its public reference facilities at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade
Center, Thirteenth Floor, New York, New York 10048. You may also obtain copies
of the documents at prescribed rates by writing to the Public Reference Section
of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference facilities.

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<PAGE> 83

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
PENSON WORLDWIDE, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.............................. F-2
Consolidated Statements of Financial Condition as of
December 31, 1998 and 1999 and June 30, 2000.............. F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 and the six months ended
June 30, 1999 (Unaudited) and 2000........................ F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1998 and 1999 and
the six months ended June 30, 2000........................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 and the six months ended
June 30, 1999 (Unaudited) and 2000........................ F-6
Notes to Consolidated Financial Statements.................. F-7

PENSON WORLDWIDE, INC. CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Condensed Consolidated Statements of Financial Condition as
of December 31, 1999 and September 30, 2000 (Unaudited)... F-23
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 1999 and
2000 (Unaudited).......................................... F-24
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 2000 (Unaudited)...... F-25
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-26
</TABLE>

F-1
<PAGE> 84

PENSON WORLDWIDE, INC.

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and
the Shareholders of Penson Worldwide, Inc.

We have audited the accompanying consolidated statements of financial
condition of Penson Worldwide, Inc. as of December 31, 1998 and 1999 and as of
June 30, 2000, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999 and for the six months ended June 30, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Penson
Worldwide, Inc. as of December 31, 1998 and 1999 and as of June 30, 2000, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 and for the six months ended
June 30, 2000, in conformity with accounting principles generally accepted in
the United States.

Dallas, Texas

October 18, 2000, except for Note 17, as to which the date is [to be defined],
2000.

Ernst & Young LLP
Ernst & Young LLP, Independent Auditors

The foregoing report is in the form that will be signed upon the Company's
formal commitment to discontinue certain operations as described in Note 17 to
the consolidated financial statements.

Dallas, Texas

October 18, 2000

/s/ Ernst & Young LLP
Ernst & Young LLP, Independent Auditors

F-2
<PAGE> 85

PENSON WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS

Cash and cash equivalents................................ $ 2,844,490 $ 5,250,746 $ 8,917,507
Segregated assets........................................ 9,508,766 62,020,446 127,821,452
Receivable from broker-dealers and clearing
organizations.......................................... 23,907,253 11,106,938 14,429,334
Receivable from customers................................ 71,747,133 343,472,656 472,225,839
Receivable from correspondents........................... 21,451,949 36,983,805 78,231,650
Securities borrowed...................................... 3,208,570 55,620,796 36,362,427
Securities owned, at market value........................ 4,101,395 16,446,740 5,754,156
Deposits with clearing organizations..................... 2,543,914 8,253,772 3,123,913
Furniture and equipment, at cost, net of accumulated
depreciation of $1,669,987 at December 31, 1998,
$3,168,485 at December 31, 1999 and $4,207,491 at June
30, 2000............................................... 2,296,423 3,204,852 4,200,975
Other assets............................................. 1,434,369 1,230,745 3,369,942
------------ ------------ ------------
TOTAL ASSETS............................................. $143,044,262 $543,591,496 $754,437,195
============ ============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Payable to broker-dealers and clearing organizations..... $ 3,900,673 $ 28,765,003 $ 23,528,616
Payable to customers..................................... 57,716,311 220,376,343 255,637,857
Payable to correspondents................................ 10,603,621 18,322,132 22,713,652
Short-term bank loans.................................... 54,267,525 67,430,000 69,275,330
Notes payable............................................ 9,150,000 23,984,436 32,642,218
Securities loaned........................................ -- 164,181,100 320,643,400
Accounts payable, accrued expenses and other
liabilities............................................ 1,955,237 9,184,624 11,321,126
------------ ------------ ------------
Total liabilities............................... 137,593,367 532,243,638 735,762,199
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 65,000,000 shares
authorized and 29,564,325 shares issued; 28,450,575
shares outstanding at December 31, 1998, 27,085,050
shares outstanding at December 31, 1999 and 28,657,800
shares outstanding at June 30, 2000.................... 295,643 295,643 295,643
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued or outstanding................. -- -- --
Additional paid-in capital............................... 1,198,731 1,360,642 26,671,220
Options outstanding...................................... -- -- 7,486,125
Treasury stock, at cost, 1,113,750 shares at December 31,
1998, 2,479,275 shares at December 31, 1999 and 906,525
shares at June 30, 2000................................ (237,355) (659,157) (241,015)
Retained earnings (accumulated deficit).................. 4,193,876 10,350,730 (15,536,977)
------------ ------------ ------------
Total stockholders' equity...................... 5,450,895 11,347,858 18,674,996
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $143,044,262 $543,591,496 $754,437,195
============ ============ ============
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-3
<PAGE> 86

PENSON WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Net revenues from clearing
operations................... $12,743,314 $13,816,989 $27,122,699 $11,266,288 $ 23,163,911
Interest, net.................. 2,009,963 3,439,170 9,473,290 3,326,548 9,361,546
----------- ----------- ----------- ----------- ------------
14,753,277 17,256,159 36,595,989 14,592,836 32,525,457
EXPENSES:
Employee compensation and
benefits..................... 3,816,353 3,549,728 10,126,788 3,499,302 8,362,917
Floor brokerage, exchange and
clearance fees............... 1,516,343 3,882,459 5,630,887 3,135,512 3,577,460
Communications and data
processing................... 4,106,399 4,557,797 7,979,902 3,260,331 6,682,762
Occupancy and equipment........ 782,009 1,515,349 2,166,069 1,024,006 1,465,600
Other expenses................. 927,679 1,280,871 2,255,507 947,776 2,597,577
Non-cash employee stock option
awards....................... -- -- -- -- 24,000,000
----------- ----------- ----------- ----------- ------------
11,148,783 14,786,204 28,159,153 11,866,927 46,686,316
----------- ----------- ----------- ----------- ------------
OPERATING INCOME (LOSS)........ 3,604,494 2,469,955 8,436,836 2,725,909 (14,160,859)
OTHER EXPENSE:
Interest expense on notes
payable...................... (822,150) (947,152) (1,489,636) (558,735) (1,377,916)
----------- ----------- ----------- ----------- ------------
(822,150) (947,152) (1,489,636) (558,735) (1,377,916)
----------- ----------- ----------- ----------- ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES........................ 2,782,344 1,522,803 6,947,200 2,167,174 (15,538,775)
Provision for income taxes..... 994,974 -- -- -- 3,546,628
----------- ----------- ----------- ----------- ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS................... 1,787,370 1,522,803 6,947,200 2,167,174 (19,085,403)
Income from discontinued
operations, net of tax of
$1,943,155 in 2000........... -- 210,929 1,990,972 452,815 3,548,426
----------- ----------- ----------- ----------- ------------
NET INCOME (LOSS).............. $ 1,787,370 $ 1,733,732 $ 8,938,172 $ 2,619,989 $(15,536,977)
=========== =========== =========== =========== ============
PRO FORMA INFORMATION:
Income (loss) from continuing
operations................. $ 1,787,370 $ 1,522,803 $ 6,947,200 $ 2,167,174 $(19,085,403)
Pro forma adjustment for
income taxes............... -- (532,981) (2,431,520) (758,511) --
----------- ----------- ----------- ----------- ------------
Pro forma income (loss) from
continuing operations...... $ 1,787,370 $ 989,822 $ 4,515,680 $ 1,408,663 $(19,085,403)
=========== =========== =========== =========== ============
EARNINGS (LOSS) PER SHARE --
BASIC AND DILUTED:
Earnings (loss) per share
from continuing
operations................. $ 0.06 $ 0.05 $ 0.27 $ 0.09 $ (0.68)
=========== =========== =========== =========== ============
Earnings (loss) per share.... $ 0.06 $ 0.06 $ 0.35 $ 0.10 $ (0.56)
=========== =========== =========== =========== ============
Pro forma earnings (loss) per
share from continuing
operations................. $ 0.06 $ 0.03 $ 0.18 $ 0.06 $ (0.68)
=========== =========== =========== =========== ============
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-4
<PAGE> 87

PENSON WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
--------------------- PAID-IN OUTSTANDING TREASURY (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL OPTIONS STOCK DEFICIT) EQUITY
---------- -------- ----------- ------------ ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997... 26,956,800 $269,568 $ 751,745 $ -- $ -- $ 1,212,925 $ 2,234,238
Issuance of common stock... 1,493,775 14,938 230,062 -- -- -- 245,000
Net income................. -- -- -- -- -- 1,787,370 1,787,370
---------- -------- ----------- ------------ ----------- ------------- ------------
BALANCE, DECEMBER 31,
1997...................... 28,450,575 284,506 981,807 -- -- 3,000,295 4,266,608
Issuance of common stock... 1,113,750 11,137 216,924 -- -- -- 228,061
Purchase of treasury stock
(1,113,750 shares)........ -- -- -- -- (237,355) -- (237,355)
Dividends.................. -- -- -- -- -- (540,151) (540,151)
Net income................. -- -- -- -- -- 1,733,732 1,733,732
---------- -------- ----------- ------------ ----------- ------------- ------------
BALANCE, DECEMBER 31,
1998...................... 29,564,325 295,643 1,198,731 -- (237,355) 4,193,876 5,450,895
Purchase of treasury stock
(5,011,875 shares)........ -- -- -- -- (1,332,947) -- (1,332,947)
Sale of treasury stock
(3,646,350 shares)........ -- -- 161,911 -- 911,145 -- 1,073,056
Dividends.................. -- -- -- -- -- (2,781,318) (2,781,318)
Net income................. -- -- -- -- -- 8,938,172 8,938,172
---------- -------- ----------- ------------ ----------- ------------- ------------
BALANCE, DECEMBER 31,
1999...................... 29,564,325 295,643 1,360,642 -- (659,157) 10,350,730 11,347,858
Reclassification of
undistributed S
corporation earnings...... -- -- 10,350,730 -- -- (10,350,730) --
Grant of stock options..... -- -- -- 24,000,000 -- -- 24,000,000
Sale of treasury stock
(1,572,750 shares)........ -- -- 17,095,733 (16,513,875) 418,142 -- 1,000,000
Dividends.................. -- -- (2,135,885) -- -- -- (2,135,885)
Net loss................... -- -- -- -- -- (15,536,977) (15,536,977)
---------- -------- ----------- ------------ ----------- ------------- ------------
BALANCE, JUNE 30, 2000..... 29,564,325 $295,643 $26,671,220 $ 7,486,125 $ (241,015) $(15,536,977) $ 18,674,996
========== ======== =========== ============ =========== ============= ============
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-5
<PAGE> 88

PENSON WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------- ---------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).............. $ 1,787,370 $ 1,733,732 $ 8,938,172 $ 2,619,989 $(15,536,977)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation................. 491,626 998,091 1,500,815 672,715 1,039,005
Non-cash employee stock
option awards.............. -- -- -- -- 24,000,000
Changes in operating assets
and liabilities, net of
effects of acquisitions:
Segregated assets.......... 27,093,991 (4,100,394) (52,511,680) 3,973,579 (65,801,006)
Net receivable from
customers................ (52,540,305) 15,776,761 (109,065,491) (68,509,166) (93,491,669)
Net receivable from
correspondents........... (2,546,787) (9,187,540) (7,813,345) (2,303,655) (36,856,325)
Securities borrowed........ (1,616,997) 452,952 (52,412,226) (168,040) 19,258,369
Securities owned........... 1,868,606 (4,101,395) (12,345,345) 3,158,360 10,692,584
Deposits with clearing
organizations............ (430,000) (2,104,580) (5,709,858) 102,278 5,129,859
Other assets............... 157,507 (989,971) 203,624 500,879 (905,797)
Net payable to or
receivable from
broker-dealers and
clearing organizations... (1,134,940) (18,094,720) 37,664,645 11,210,062 (8,558,783)
Short-term bank loans...... 21,124,000 26,564,525 13,162,475 (22,528,089) 1,845,330
Securities loaned.......... -- -- 164,181,100 65,079,737 156,462,300
Accounts payable, accrued
expenses and other
liabilities.............. 1,048,487 (686,420) 7,229,387 2,265,775 2,136,502
------------ ------------ ------------- ------------ ------------
Net cash provided by (used in)
operating activities......... (4,697,442) 6,261,041 (6,977,727) (3,925,576) (586,608)
------------ ------------ ------------- ------------ ------------
INVESTING ACTIVITIES:
Acquisition of subsidiary...... -- -- -- -- (1,233,400)
Purchases of furniture and
equipment, net............... (1,583,270) (1,582,602) (2,409,244) (1,222,383) (2,035,128)
------------ ------------ ------------- ------------ ------------
Net cash used in investing
activities................... (1,583,270) (1,582,602) (2,409,244) (1,222,383) (3,268,528)
------------ ------------ ------------- ------------ ------------
FINANCING ACTIVITIES:
Proceeds from notes payable.... 7,000,000 -- 15,684,436 5,850,000 25,000,000
Repayments of notes payable.... (734,562) (2,850,000) (850,000) -- (16,342,218)
Issuance of common stock....... 245,000 228,061 -- -- --
Dividends...................... -- (540,151) (2,781,318) (1,950,601) (2,135,885)
Purchase of treasury stock..... -- (237,355) (1,332,947) (1,332,947) --
Sale of treasury stock......... -- -- 1,073,056 431,916 1,000,000
------------ ------------ ------------- ------------ ------------
Net cash provided by (used in)
financing activities......... 6,510,438 (3,399,445) 11,793,227 2,998,368 7,521,897
------------ ------------ ------------- ------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............. 229,726 1,278,994 2,406,256 (2,149,591) 3,666,761
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD.......... 1,335,770 1,565,496 2,844,490 2,844,490 5,250,746
------------ ------------ ------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD................ $ 1,565,496 $ 2,844,490 $ 5,250,746 $ 694,899 $ 8,917,507
============ ============ ============= ============ ============
SUPPLEMENTAL CASH FLOW
DISCLOSURES:
Income tax payments............ $ 307,747 $ 699,071 $ -- $ -- $ 3,750,000
Interest payments.............. $ 2,578,807 $ 3,535,001 $ 9,651,379 $ 3,256,183 $ 15,795,876
</TABLE>

See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 89

PENSON WORLDWIDE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF BUSINESS

Penson Worldwide, Inc., formerly known as Service Asset Holdings, Inc., is
a holding company incorporated in Delaware. Through its principal wholly-owned
subsidiaries, Penson Financial Services, Inc. ("PFSI"), formerly an
unincorporated division of Service Asset Management Company ("SAMCO"), and
Penson Worldwide Settlements Limited ("WSL") (collectively, "the Company"), it
provides securities clearing services in an agency capacity including integrated
trade execution, clearing and custody services, trade settlement, customer
account processing and customized data processing services. The Company also
participates in margin lending practices, securities lending and borrowing
transactions, and market making activities as a principal. The Company will
discontinue its market making activities immediately prior to its planned
initial public offering (Note 17), after which time it will operate in one line
of business. PFSI is a broker-dealer registered with the Securities and Exchange
Commission ("SEC") and a member of the National Association of Securities
Dealers, Inc. ("NASD"), and is licensed to do business in all fifty states of
the United States of America. The Company expanded its operations in March 2000
into the United Kingdom with the acquisition of Penson Worldwide Settlements
Limited (Note 15).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the accounts of
Penson Worldwide, Inc., Service Asset Investments, Inc. and PFSI, formerly an
unincorporated division of SAMCO. The interim consolidated financial statements
as of and for the six months ended June 30, 2000 also include Penson Holdings,
Inc., a wholly owned subsidiary, and its wholly-owned subsidiary, WSL, since the
date of incorporation and acquisition, respectively. All significant
intercompany transactions have been eliminated. The accompanying consolidated
financial statements exclude the financial position, operating results and cash
flows of certain non-core operations that were distributed to the Company's
shareholders in a restructuring effected in September 2000 (Note 18).

Unaudited Interim Consolidated Financial Statements

The accompanying interim consolidated financial statements presented for
the six months ended June 30, 1999, as well as information contained in the
notes to the consolidated financial statements with respect to the six months
ended June 30, 1999, are unaudited. The Company's management is of the opinion
that all material adjustments, consisting only of normal recurring adjustments
necessary for a fair presentation of the Company's consolidated interim results
of operations and financial condition, have been included.

Unaudited Pro Forma Information

Pro forma income (loss) and per share information as reflected on the
consolidated statements of operations are unaudited, are based on historical
income from continuing operations, and give effect to the impact of adjustments
as if the Company had filed a consolidated federal income tax return as a C
corporation under the Internal Revenue Code of 1986, as amended, for the years
ended December 31, 1998 and 1999 and the six months ended June 30, 1999.

F-7
<PAGE> 90
PENSON WORLDWIDE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Securities Transactions

Securities transactions from market making activities are recorded on a
trade date basis with resulting gains and losses recorded in income. Customer
securities transactions are reported on a settlement date basis with related
commission income and expenses recorded on a trade date basis. Amounts
receivable and payable for securities transactions that have not reached their
contractual settlement dates are recorded net on the consolidated statements of
financial condition.

Securities owned are valued at market value with the resulting gain or loss
recorded in income. Securities traded on a national exchange (including Nasdaq)
are valued at the last sales price. Securities for which over-the-counter market
quotations are available are valued at the average of the last bid and ask
prices.

Securities Failed to Receive and Failed to Deliver

Transactions executed as agent for customers are reflected in the
consolidated statements of financial condition on a settlement date basis to the
extent the customer or counter party fails on the settlement date to deliver
cash or financial instruments. Such transactions are included on the
consolidated statements of financial condition within receivable from and
payable to broker-dealers and clearing organizations.

Securities Lending Activities

Securities borrowed and securities loaned transactions are generally
reported as collateralized financings except where letters of credit or other
securities are used as collateral. Securities borrowed transactions require the
Company to deposit cash or other collateral with the lender. With respect to
securities loaned, the Company receives cash in an amount generally in excess of
the market value of securities loaned. The Company monitors the market value of
securities borrowed and loaned on a daily basis, with additional collateral
obtained or refunded as necessary.

The Company reports assets it has pledged to third parties as collateral in
secured borrowings and other arrangements when the secured party cannot sell or
re-pledge the assets or the Company can substitute collateral or otherwise
redeem it on short notice. The Company generally does not report assets received
as collateral in secured lending and other arrangements because the debtor
typically has the right to redeem the collateral on short notice.

Taxation

For the year ended December 31, 1997 and the six months ended June 30,
2000, the Company has recognized the amount of current taxes payable as well as
deferred tax assets and liabilities utilizing tax laws and rates in effect as of
the date of the consolidated financial statements. Deferred tax assets and
liabilities are the result of the expected future tax consequences of temporary
differences between the consolidated financial statement carrying amounts and
the tax basis of assets and liabilities. Income taxes have not been provided for
by the Company for the years ended December 31, 1998 and 1999 or the six months
ended June 30, 1999, as the Company was a Subchapter S corporation under the
Internal Revenue Code, as amended in 1986. Accordingly, its shareholders were
liable for the taxes on the Company's net income for those periods.

F-8
<PAGE> 91
PENSON WORLDWIDE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Depreciation

Depreciation is generally provided on a straight-line basis using estimated
useful lives of three to five years.

Stock-Based Compensation

The Company accounts for employee stock-based compensation using the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. In accordance with
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation,the Company provides pro forma disclosures of net income and
earnings per share for stock option grants as if the fair value method had been
applied.

Cash and Cash Equivalents

The Company considers cash equivalents to be highly liquid investments with
original maturities of less than 90 days that are not held for sale in the
ordinary course of business.

Fair Value of Financial Instruments

The financial instruments of the Company are reported on the consolidated
statements of financial condition at market or fair values, or at carrying
amounts that approximate fair values as such financial instruments are
short-term in nature, bear interest at current market rates or are subject to
frequent repricing.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts that represents
amounts, in the judgment of management, necessary to adequately absorb losses
from known and inherent risks in outstanding receivables. Provisions made to
this allowance are charged to operations.

Technology Development

All qualifying costs of developing or obtaining internal-use software
incurred during the application development stage are capitalized. Costs
incurred during the preliminary project stage and post implementation
stage/operation stage are expensed as incurred. Capitalized costs are amortized
over the expected service life of the related software, generally three to five
years and are included in furniture and equipment on the consolidated statements
of financial condition. The Company assesses the recoverability of these costs
by determining whether the amortization of the capitalized costs over the
remaining life of the projects can be recovered through undiscounted future
operating cash flows.

Earnings (Loss) per Share

F-9
<PAGE> 92
PENSON WORLDWIDE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

convertible securities. Diluted earnings (loss) per share considers the impact
of potential common shares, unless the inclusion of such shares would have an
anti-dilutive effect.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ------------
UNAUDITED
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Average shares outstanding............... 27,720,464 28,629,080 25,727,573 25,048,001 27,957,840
Income (loss) from continuing
operations............................. $ 1,787,370 $ 1,522,803 $ 6,947,200 $ 2,167,174 $(19,085,403)
----------- ----------- ----------- ----------- ------------
Earnings (loss) per share from continuing
operations -- basic.................... $ 0.06 $ 0.05 $ 0.27 $ 0.09 $ (0.68)
----------- ----------- ----------- ----------- ------------
DILUTED EARNINGS PER SHARE:
Average shares outstanding............... 27,720,464 28,629,080 25,727,573 25,048,001 27,957,840
Net effect of dilutive stock options,
based on the treasury stock method..... -- -- -- -- --
----------- ----------- ----------- ----------- ------------
Total.................................... 27,720,464 28,629,080 25,727,573 25,048,001 27,957,840
Income (loss) from continuing
operations............................. $ 1,787,370 $ 1,522,803 $ 6,947,200 $ 2,167,174 $(19,085,403)
----------- ----------- ----------- ----------- ------------
Earnings (loss) per share from continuing
operations -- diluted.................. $ 0.06 $ 0.05 $ 0.27 $ 0.09 $ (0.68)
=========== =========== =========== =========== ============
</TABLE>

Options to purchase 714,150 shares of common stock, exercisable at 125% of
the Company's Book Value (Note 11) per share at the date of exercise, were
outstanding as of June 30, 2000, but were not included in the computation of
diluted earnings per share because to do so would have been anti-dilutive for
the periods presented.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.

3. SEGREGATED ASSETS

Cash and cash equivalents of $7,046,600, $33,524,529 and $103,591,040 have
been segregated in a special reserve bank account for the benefit of customers
under Rule 15c3-3 of the Securities and Exchange Commission as of December 31,
1998 and 1999 and June 30, 2000, respectively.

As a clearing broker-dealer, the Company has elected to compute a reserve
requirement for Proprietary Accounts of Introducing Broker/Dealers (PAIB
calculation), as defined by NASD regulations. The PAIB calculation is completed
in order for each correspondent firm that uses the Company as its clearing
broker-dealer to classify its assets held by the Company as allowable assets in
the correspondent's net capital calculation. As PAIB requirements did not become
effective until June 1, 1999, no PAIB deposit was required at December 31, 1998.
At December 31, 1999 and June 30, 2000, the Company had on deposit in a Special
Reserve Bank Account $11,661,973 and $6,505,787, respectively, in compliance
with PAIB reserve requirements.

F-10
<PAGE> 93
PENSON WORLDWIDE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Cash of $2,462,166 as of December 31, 1998, $16,833,944 as of December 31,
1999 and $17,724,625 as of June 30, 2000 has been segregated and held on deposit
for required margin on option contracts in customer accounts.

4. RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CLEARING ORGANIZATIONS

Amounts receivable from and payable to broker-dealers and clearing
organizations consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
<S> <C> <C> <C>
Receivable:
Securities failed to deliver............ $ 66,996 $ 15,348 $ 101,969
Receivable from clearing
organizations........................ 3,361,730 7,191,241 9,505,019
Receivable from dealers................. 20,478,527 3,900,349 4,822,346
----------- ----------- -----------
$23,907,253 $11,106,938 $14,429,334
=========== =========== ===========
Payable:
Securities failed to receive............ $ 1,706,494 $ 874,592 $ 2,848,204
Payable to clearing organizations....... 2,194,179 6,138,354 14,077,085
Payable to dealers...................... -- 21,752,057 6,603,327
----------- ----------- -----------
$ 3,900,673 $28,765,003 $23,528,616
=========== =========== ===========
</TABLE>

5. RECEIVABLE FROM AND PAYABLE TO CUSTOMERS AND CORRESPONDENTS

Receivable from and payable to customers and correspondents include amounts
due on cash and margin transactions. Securities owned by customers and
correspondents are held as collateral for receivables. Such collateral is not
reflected in the consolidated financial statements. Payable to correspondents
also includes commissions due on customer transactions.

6. SECURITIES OWNED

Securities owned as of December 31, 1998 and 1999 and June 30, 2000 consist
of trading and investment securities at quoted market values as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
<S> <C> <C> <C>
Corporate equities:
Securities owned.......................... $4,295,804 $16,610,350 $5,984,999
Securities sold, not yet purchased........ (194,409) (163,610) (230,843)
---------- ----------- ----------
$4,101,395 $16,446,740 $5,754,156
========== =========== ==========
</TABLE>

F-11
<PAGE> 94
PENSON WORLDWIDE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. SHORT-TERM BANK LOANS AND NOTES PAYABLE

A summary of short-term bank loans and notes payable as of December 31,
1998 and 1999 and June 30, 2000 is as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ -----------
<S> <C> <C> <C>
SHORT-TERM BANK LOANS:
Loans payable under uncommitted lines of credit
with weighted average interest rates of 6.06%,
5.90% and 7.76% at December 31, 1998 and 1999
and June 30, 2000, respectively, secured by firm
inventory and customers' margin account
securities, repayable on demand................. $54,267,525 $67,430,000 $69,275,330
=========== =========== ===========
NOTES PAYABLE:
Notes payable to Service Lloyds Insurance Company
with interest at 10.00% per annum, payable in
annual principal installments beginning July 25,
1996, with final payment due October 25, 2000... $ 2,500,000 $ 2,000,000 $ 1,000,000
Notes payable to Service Lloyds Insurance Company
with interest equal to the bankers prime rate,
which approximated 7.75%, 8.50% and 9.50% at
December 31, 1998 and 1999 and June 30, 2000,
respectively, payable in annual principal
installments beginning October 1, 1998, with
final payment due October 1, 2004............... 6,650,000 6,300,000 6,300,000
Balance payable to a former shareholder of the
Company pursuant to a stock purchase agreement,
with interest equal to the Bank of New York
prime rate, which approximated 7.75%, 8.50% and
9.50% at December 31, 1998 and 1999 and June 30,
2000, respectively, payable in annual principal
installments beginning March 3, 1999, with final
payment due March 3, 2001....................... -- 684,436 342,218
Bank term notes with interest ranging from 7.75%
to 8.50%, payable in annual principal
installments beginning July 1, 2000, repaid in
full on March 30, 2000.......................... -- 15,000,000 --
Bank term note with a variable rate of interest
that approximated 10.00% at June 30, 2000,
payable in full on March 30, 2001............... -- -- 10,000,000
Bank term note with a variable rate of interest
that approximated 8.90% at June 30, 2000,
payable in quarterly principal installments
beginning October 1, 2000, with final payment
due March 30, 2005.............................. -- -- 15,000,000
----------- ----------- -----------
$ 9,150,000 $23,984,436 $32,642,218
=========== =========== ===========
</TABLE>

F-12
<PAGE> 95
PENSON WORLDWIDE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The above notes payable, excluding the balance payable to a former
shareholder, are all collateralized by substantially all of the net assets of
the Company.

The Company's short-term bank loans consist of lines of credit that permit
the Company to borrow up to $60,000,000 as of December 31, 1998. As of December
31, 1999 and June 30, 2000, two of the lines of credit permit the Company to
borrow in aggregate up to $35,000,000 and $45,000,000, respectively, and the
third line of credit does not have a stated borrowing capacity. These lines of
credit have no stated expiration dates.

The Company's notes payable contain certain restrictive covenants. These
covenants require that the Company meet certain requirements such as the
maintenance of minimum net worth, liquidity and income levels, and restrict
additional borrowings, dividends or other distributions without prior consent of
the lenders.

Approximate future annual maturities of the Company's notes payable at June
30, 2000 are listed below:

<TABLE>
<S> <C>
July 1 to December 31, 2000................................. $ 2,450,000
2001............................. 14,742,218
2002............................. 4,400,000
2003............................. 4,400,000
2004............................. 4,400,000
Thereafter............................. 2,250,000
-----------
$32,642,218
===========
</TABLE>

8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

In the normal course of business, the Company purchases and sells
securities as both principal and agent. If another party to the transaction
fails to fulfill its contractual obligation, the Company may incur a loss if the
market value of the security is different from the contract amount of the
transaction.

Customer securities transactions are executed on a cash or margin basis.
The Company extends credit to customers through margin transactions, which are
subject to various regulatory and internal margin requirements. Cash and
securities held in customer accounts serve as collateral for the extension of
credit. The Company's compliance with various regulatory and internal guidelines
concerning customer activities provides a means of controlling risks associated
with these transactions. The Company monitors margin levels daily and initiates
action when additional collateral or a reduction in customer security positions
is necessary.

The Company deposits customers' margin account securities with lending
institutions as collateral for borrowings. If a lending institution does not
return a security, the Company may be obligated to purchase the security in
order to return it to the customer. In such circumstances, the Company may incur
a loss equal to the amount by which the market value of the security on the date
of non-performance exceeds the value of the loan from the institution.

At times, the Company lends money using reverse repurchase agreements. All
such loans are collateralized by U.S. Government or U.S. Government-guaranteed
securities. The Company generally has such securities deposited in an account
designated for the exclusive benefit of the Company's customers. Such
transactions may expose the Company to off-balance-sheet risk in the event such
borrowers do not repay the loans and the value of collateral held is less than
that

F-13
<PAGE> 96
PENSON WORLDWIDE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of the underlying loan receivable. These agreements provide the Company with the
right to maintain the relationship between market value of the collateral and
the receivable.

The Company's policy is to continually monitor its market exposure and
counter party risk. The Company does not anticipate non-performance by counter
parties and maintains a policy of reviewing the credit standing of all parties
on a regular basis, including customers with which it conducts business.

For customers introduced on a fully disclosed basis by other
broker-dealers, the Company has the contractual right of recovery from such
introducing broker-dealers in the event of non-performance by the customer.

9. TRANSACTIONS WITH RELATED PARTIES

The Company provides securities clearing and related services to and
finances security inventory positions for SAMCO Capital Markets and Yee,
Desmond, Schroeder & Allen, Inc., divisions or entities affiliated with the
Company through common ownership. Net revenues generated from SAMCO Capital
Markets and Yee, Desmond, Schroeder & Allen, Inc. were $451,553, $753,075 and
$685,096 for the years ended December 31, 1997, 1998 and 1999, respectively, and
$345,050 and $673,053 for the six months ended June 30, 1999 (unaudited) and
2000, respectively. Amounts receivable under these arrangements were $15,035,288
and $25,948,828 as of December 31, 1998 and 1999, respectively, and $67,990,744
as of June 30, 2000, and are included in receivables from correspondents on the
consolidated statements of financial condition. Collateral in the amount of
$16,253,275, $28,546,447 and $72,355,041 was held by the Company as of December
31, 1998 and 1999 and June 30, 2000, respectively, to securitize these balances.

The Company has entered into long-term notes payable with Service Lloyds
Insurance Company (Note 7), an entity owned by certain stockholders of the
Company. Amounts outstanding under these notes were $9,150,000, $8,300,000 and
$7,300,000 at December 31, 1998 and 1999 and June 30, 2000, respectively, and
are included in notes payable on the consolidated statements of financial
condition.

10. TRANSACTIONS WITH MAJOR CUSTOMERS

Two correspondents accounted for more than 10% each of the Company's total
revenues for the year ended December 31, 1997, representing approximately 33%
and 14%, respectively. Three correspondents accounted for approximately 18%, 15%
and 11%, respectively, of the Company's total revenues for the year ended
December 31, 1998, and three correspondents accounted for approximately 13%, 12%
and 11%, respectively, of the Company's total revenues for the year ended
December 31, 1999. For the six months ended June 30, 2000, one correspondent
accounted for approximately 16% of the Company's total revenues.

11. PROFIT SHARING PLAN

The Company sponsors a defined contribution 401(k) profit sharing plan (the
"Plan") that covers substantially all employees. Under the Plan, the Company may
make a discretionary contribution determined by the Board of Directors. All
employees are eligible to participate in the Plan, based on meeting certain age
and term of employment requirements. Contributions made by the Company to the
Plan were $47,106, $101,336 and $135,313 for the years ended December 31, 1997,
1998 and 1999. No contributions have been made by the Company to the Plan for
the six months ended June 30, 2000.

F-14
<PAGE> 97
PENSON WORLDWIDE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. STOCK OPTIONS

The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25, to
the extent the exercise price of employee stock options equals or is greater
than the market price of the underlying stock on the measurement date, no
compensation expense is recognized.

Stock options granted by the Company during 1997, 1998 and 1999 (the
"Original Options") were issued at management's discretion with terms specifying
that all options were fully vested at date of grant, were exercisable at Service
Asset Holdings, Inc.'s book value, including the non-core assets (Note 18) (the
"Book Value"), calculated as of the date of exercise and were exercisable over a
period ranging from three to twelve months, generally. Once exercised,
shareholders were subject to the terms of an agreement between the Company's
shareholders (the "Shareholders' Agreement"). Pursuant to the Shareholders'
Agreement, the Company had a right of first refusal to purchase, at Book Value,
a shareholder's outstanding stock upon that shareholder receiving a bona fide
third-party purchase offer (the "Company's Refusal Right"). Also pursuant to the
Shareholders' Agreement, under restricted circumstances, including but not
limited to death, divorce and termination, and generally subject to a majority
vote of the shareholders, the Company had an option to purchase and the
shareholder had the right to sell all or part of the then outstanding stock
owned by that shareholder, as applicable based on the circumstance
(collectively, the "Restricted Rights"). As the Shareholders' Agreement
established the market price of each share purchase transaction and as each
share sale transaction was subject to the Company Option, the Company's per
share book value was considered to have approximated its fair value for the
years ended December 31, 1997, 1998 and 1999, and accordingly, no compensation
expense was recognized for the issuance of the Original Options as of the
respective measurement dates. As of December 31, 1999, all Original Options had
been exercised or had expired.

For the six months ended June 30, 2000, the Company granted stock options
to certain key employees ("Key Employee Options"). Key Employee Options
exercised prior to March 31, 2000 were exercisable at Book Value as of the date
of exercise. Key Employee Options outstanding at March 31, 2000 are exercisable
at 125% of the Book Value per share as of the date of exercise. By October 2000,
all Key Employee Options remaining outstanding as of June 30, 2000, had been
exercised. Additionally, effective September 1, 2000, the Shareholders'
Agreement was terminated. Considering the proximity of the grant date to the
expected effective date of registration of stock under the Securities Act of
1933, the Company's management estimated the intrinsic value of the Key Employee
Options exercised during the six months ended June 30, 2000 as the difference
between the estimated market price based on the expected initial public offering
price, discounted for lack of marketability and giving effect to a minority
interest discount (the "Estimated Market Price"), and the Company's Book Value
per share at the date of exercise. For Key Employee Options outstanding as of
June 30, 2000, management assessed the intrinsic value based on the Company's
Book Value per share at June 30, 2000 and the Estimated Market Price. The
Company recognized compensation expense of $24,000,000 associated with the Key
Employee Options, which is recorded on the consolidated statement of operations
as non-cash employee stock option awards.

Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"). SFAS 123 requires accounting for employee
stock options under the fair value method. As the Original Options were granted
at exercise prices that equaled the underlying

F-15
<PAGE> 98
PENSON WORLDWIDE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock's estimated market price at the measurement date and considering a
volatility factor of approximately zero, fair value, as determined under SFAS
123, is approximately zero. Therefore, the effect of applying FAS 123 for the
years ended December 31, 1997, 1998 and 1999 results in net income and earnings
per share that are equivalent to the amounts reported.

For the Key Employee Options, the fair value at the earlier of the date of
exercise or June 30, 2000, for exercised and unexercised Key Employee Options,
respectively, was estimated using the Black-Scholes option pricing model based
on the following assumptions: risk free interest rate of 6.32%; expected
dividend yield of 10.00%; volatility factor of 0.01%; and expected option life
of six months. This valuation method results in compensation expense that
approximates the compensation expense actually recorded by the Company under APB
25. Therefore, the effect of applying SFAS 123 for the six months ended June 30,
2000 results in net income and earnings per share that are not materially
different from the amounts reported.

A summary of the Company's stock option activity for the years ended
December 31, 1997, 1998 and 1999 and the six months ended June 30, 2000 is as
follows:

<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
OUTSTANDING, JANUARY 1, 1997............................ 1,493,775 $ .12
Exercised............................................... (1,493,775) .16
---------- -----
OUTSTANDING, DECEMBER 31, 1997.......................... -- --
Granted................................................. 1,495,125 .24
---------- -----
OUTSTANDING, DECEMBER 31, 1998.......................... 1,495,125 .26
Granted................................................. 1,728,000 .33
Exercised............................................... (3,089,475) .27
Forfeited............................................... (133,650) .33
---------- -----
OUTSTANDING, DECEMBER 31, 1999.......................... -- --
Granted................................................. 2,286,900 .55
Exercised............................................... (1,572,750) .64
---------- -----
OUTSTANDING, JUNE 30, 2000.............................. 714,150 $1.05
========== =====
</TABLE>

13. COMMITMENTS AND CONTINGENCIES

The Company has obligations under operating leases with initial
non-cancelable terms in excess of one year. Approximate future rental
obligations for office space and equipment at June 30, 2000 are listed below:

<TABLE>
<S> <C>
July 1 to December 31, 2000........................... $ 640,612
2001............................................ 1,423,885
2002............................................ 1,352,818
2003............................................ 1,329,584
2004............................................ 1,183,234
Thereafter............................................ 4,997,724
-----------
$10,927,857
===========
</TABLE>

F-16
<PAGE> 99
PENSON WORLDWIDE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Rent expense for the years ended December 31, 1997, 1998 and 1999
aggregated $148,895, $361,225 and $630,967, respectively. Rent expense for the
six months ended June 30, 1999 (unaudited) and 2000 aggregated $295,742 and
$551,476, respectively.

The Company is named in various legal matters arising in the ordinary
course of business. Management does not believe the resolution of these matters
will have a material adverse impact on the Company's financial condition.

In connection with a reorganization in September 2000, the Company effected
a spin-off of certain operations, the historical results of which have not been
included in the accompanying consolidated financial statements (Note 18).
Management of the Company believes the spin-off qualifies as a tax-free
distribution to its shareholders. The spin-off was effected partially by a
deemed sale of certain non-core assets. This transaction will be taxable to the
Company to the extent the fair value of the net assets transferred at the date
of the transaction exceeded their tax basis. Management believes this will not
have a material adverse impact on the Company's financial condition.

14. INCOME TAXES

For the year ended December 31, 1997, the Company operated as a C
corporation and was subject to federal and state income taxes. For the period
January 1, 1998 through December 31, 1999, the Company elected to be treated as
an S corporation under Subchapter S of the Internal Revenue Code of 1986.
Accordingly, the Company has not provided for current and deferred income tax
amounts for the years ended December 31, 1998 and 1999 and the six months ended
June 30, 1999. The Company's S corporation status was terminated effective
January 1, 2000, after which time it has been subject to and required to provide
for federal and state income taxes.

The current and deferred portions of income tax expense for the year ended
December 31, 1997 and the six months ended June 30, 2000 are as follows:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1997 2000
------------ ----------------
<S> <C> <C>
Continuing Operations:
Current............................................. $1,039,692 $4,065,597
Deferred............................................ (44,718) (518,969)
---------- ----------
$ 994,974 $3,546,628
========== ==========
Discontinued Operations:
Current............................................. $ -- $1,943,155
========== ==========
</TABLE>

F-17
<PAGE> 100
PENSON WORLDWIDE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes as of June 30, 2000 are as follows:

<TABLE>
<CAPTION>
JUNE 30,
2000
---------
<S> <C>
Deferred tax assets:
Bad debt allowance.................................... $ 638,966
Foreign operating loss................................ 211,283
Other................................................. 3,700
---------
853,949
Less: Valuation allowance............................. (211,283)
---------
$ 642,666
---------
Deferred tax liabilities:
Prepaid assets........................................ $(123,697)
---------
$(123,697)
---------
Total net deferred taxes...................... $ 518,969
=========
</TABLE>

Management has determined that a $211,283 valuation allowance at June 30,
2000 (unaudited) is necessary to reduce the deferred tax assets to the amount
that will more likely than not be realized.

The following is a reconciliation of the amount computed by applying the
federal statutory rate to income from continuing operations before income taxes
for each period to the actual provision for income taxes for the year ended
December 31, 1997 and the six months ended June 30, 2000:

<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997 2000
------------ ----------
<S> <C> <C>
Federal statutory income tax rate........................... 34.0% 35.0%
State and local income taxes, net of federal income tax..... 1.0 2.0
Non-cash employee stock option awards....................... -- (62.0)
Other, net.................................................. 0.8 2.2
---- -----
35.8% (22.8)%
==== =====
</TABLE>

15. ACQUISITION OF PENSON WORLDWIDE SETTLEMENTS LIMITED

In March 2000, the Company acquired control of WSL, which is based in
London, England, by purchasing 51% of WSL's outstanding shares. In April 2000,
the Company exercised its option to purchase the remaining 49% of WSL's
outstanding shares. The total purchase price for the stock was approximately
$1,200,000, which approximated WSL's carrying value of its net assets at the
respective purchase dates. In addition, the Company paid approximately $460,000
in bonuses to certain employees of WSL in connection with the acquisition of
WSL. These bonuses are reflected in the consolidated statement of operations for
the six months ended June 30, 2000 within employee compensation and benefits
expense.

F-18
<PAGE> 101
PENSON WORLDWIDE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. REGULATORY REQUIREMENTS

Prior to the reorganization (Note 18), PFSI was an unincorporated division
of SAMCO, the regulated broker-dealer through which PFSI operated its business.
PFSI and SAMCO (collectively for purposes of net capital requirements, "the
Broker-Dealer") is subject to the SEC Uniform Net Capital Rule (SEC Rule
15c3-1), which requires the maintenance of minimum net capital. The
Broker-Dealer has elected to use the alternative method, permitted by Rule
15c3-1, which requires that the Broker-Dealer maintain minimum net capital, as
defined, equal to the greater of $250,000 or 2% of aggregate debit balances, as
defined in the SEC's Reserve Requirement Rule (Rule 15c-3). At December 31,
1998, the Broker-Dealer had net capital of $9,803,481, representing 13% of
aggregate debit balances and $8,245,734 in excess of its required net capital of
$1,557,747. At December 31, 1999, the Broker-Dealer had net capital of
$28,563,244, representing 8% of aggregate debit balances and $21,126,059 in
excess of its required net capital of $7,437,185. At June 30, 2000, the
Broker-Dealer had net capital of $40,677,166, representing 8% of aggregate debit
balances and $30,817,718 in excess of its required net capital of $9,859,448.

The regulatory rules referred to above, and certain covenants contained in
various instruments governing indebtedness of the Company, may restrict the
Company's ability to withdraw capital from its regulated subsidiaries, which in
turn could limit the Company's ability to pay dividends or satisfy its debt
obligations. At December 31, 1998 and 1999 and June 30, 2000, approximately
$3,904,367, $18,592,965 and $24,648,621, respectively, of the assets of Penson
Financial Services, Inc. were restricted as to the payment of cash dividends and
advances to the Company.

17. DISCONTINUED OPERATIONS

The Company will discontinue its market making operations immediately prior
to the effectiveness of its planned IPO by selling assets and transferring
approximately 33 employees associated with this line of business to an entity
affiliated with the Company through common ownership. No gain or loss is
expected to be realized as a result of the discontinuance of the Company's
market making operations, as the sale price of this segment is expected to equal
its net book value at the date of disposal. Management does not anticipate
restructuring charges to have a material impact on the financial results of the
Company.

F-19
<PAGE> 102
PENSON WORLDWIDE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Set forth below is a summary of the operating results of the Company's
market making operations for the years ended December 31, 1997, 1998 and 1999
and the six months ended June 30, 1999 (unaudited) and 2000. In accordance with
Accounting Principles Board Opinion No. 30, Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, these results have been segregated and reflected as
discontinued operations in the accompanying consolidated statements of
operations.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------- -------------------------
1997 1998 1999 1999 2000
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues..................... $ -- $1,541,206 $12,332,036 $4,057,454 $17,668,436
Expenses:
Employee compensation and
benefits................ -- 892,470 7,553,153 2,454,682 9,811,089
Floor brokerage, exchange
and clearance fees...... -- 200,408 1,727,829 669,298 1,528,820
Communications and data
processing.............. -- 22,258 93,296 51,786 40,286
Occupancy and equipment.... -- 57,276 370,943 159,267 305,532
Other expenses............. -- 157,865 595,843 269,606 491,128
---------- ---------- ----------- ---------- -----------
-- 1,330,277 10,341,064 3,604,639 12,176,855
---------- ---------- ----------- ---------- -----------
Income before income taxes... -- 210,929 1,990,972 452,815 5,491,581
Provision for income taxes... -- -- -- -- 1,943,155
---------- ---------- ----------- ---------- -----------
Net income................... $ -- $ 210,929 $ 1,990,972 $ 452,815 $ 3,548,426
========== ========== =========== ========== ===========
Earnings per share -- basic
and diluted................ $ .00 $ .01 $ .08 $ .01 $ .12
========== ========== =========== ========== ===========
</TABLE>

Net assets associated with the Company's market making operations as of
December 31, 1998 and 1999 and June 30, 2000 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ ------------ ----------
<S> <C> <C> <C>
Assets:
Securities owned, at market value................. $4,101,395 $12,762,353 $5,979,075
Furniture and equipment, at cost, net of
accumulated depreciation of $13,983 at December
31, 1998, $110,058 at December 31, 1999 and
$203,199 at June 30, 2000...................... 165,106 517,218 801,391
---------- ----------- ----------
4,266,501 13,279,571 6,780,466
---------- ----------- ----------
Liabilities:
Accounts payable, accrued expenses and other
liabilities.................................... 7,148 1,456,333 1,417,799
---------- ----------- ----------
7,148 1,456,333 1,417,799
---------- ----------- ----------
Net assets.......................................... $4,259,353 $11,823,238 $5,362,667
========== =========== ==========
</TABLE>

F-20
<PAGE> 103
PENSON WORLDWIDE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

18. SUBSEQUENT EVENTS

Corporate Reorganization

In September 2000, the Company changed its name and state of domicile by
effectuating a merger between Service Asset Holdings, Inc. and Penson Worldwide,
Inc., a newly formed Delaware corporation, and effected a restructuring for the
purpose of distributing certain non-core operations ("non-core assets") to its
shareholders in a tax-free distribution. The non-core assets include a division
of SAMCO (Note 1), and the stock of two other subsidiaries of Service Asset
Investments, Inc. The operations of the non-core assets have not been included
in the accompanying consolidated financial statements in accordance with Staff
Accounting Bulletin No. 93, Accounting for the Spin-off of a Subsidiary, as
applied to initial registrants, and Accounting Principles Board Opinion No. 20,
Accounting Changes, Change in Reporting Entity. In conjunction with the
restructuring, the Company contributed an additional $10,000,000 to one of the
subsidiary companies included in the non-core assets prior to the distribution
to shareholders.

In connection with the merger, each outstanding share of common stock of
Service Asset Holdings, Inc. was converted into 675 shares of common stock of
Penson Worldwide, Inc. Penson Worldwide, Inc. has authorized capital of
65,000,000 shares of common stock, par value $.01, and 10,000,000 shares of
preferred stock, par value $.01.

Cash Dividend

In August 2000, the Company declared a cash dividend of $1,669,645, paid on
August 14, 2000 to shareholders of record on August 1, 2000.

Acquisition of ECE Electronic Clearing Inc.

In September 2000, the Company acquired ECE Electronic Clearing Inc., a
clearing firm located in Montreal, Canada, for a purchase price of $500,000, the
majority of which was allocated to acquired goodwill and will be amortized on a
straight-line basis over seven years.

Stock Incentives

In September 2000, the Company adopted the 2000 Stock Incentive Plan, under
which 5,872,500 shares of common stock have been authorized for issuance. Of
this amount, options to purchase 188,000 shares of common stock have been
granted and 5,684,500 shares remain available for future grant. The share
reserve will automatically be increased on the first trading day of January each
calendar year, beginning in January 2002, by a number of shares equal to 4% of
the total number of shares of common stock outstanding on the last trading day
of the immediately preceding calendar year, but no such annual increase will
exceed 1,552,500 shares. However, in no event may any one participant in the
2000 Stock Incentive Plan receive option grants or direct stock issuances for
more than 388,125 shares in the aggregate per calendar year.

F-21
<PAGE> 104
PENSON WORLDWIDE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

automatic option grant program under which option grants will automatically be
made at periodic intervals to eligible non-employee board members; and the
director fee option grant program under which non-employee board members may
elect to apply a portion of their retainer fee to the acquisition of special
below-market stock option grants. The Company's board of directors may amend or
modify the 2000 Stock Incentive Plan at any time, subject to any required
stockholder approval, and the 2000 Stock Incentive Plan will terminate no later
than August 27, 2010.

In September 2000, the Company's board of directors adopted the Employee
Stock Purchase Plan (the "ESPP"), designed to allow eligible employees of the
Company to purchase shares of common stock, at semi-annual intervals, through
periodic payroll deductions. A total of 776,250 shares of common stock have
initially been reserved under the ESPP. The share reserve will automatically
increase on the first trading day of January each year beginning in January
2002, by 2% of the total shares of common stock outstanding on the last trading
day of the immediately preceding calendar year, but no such annual increase will
exceed 776,250 shares. In no event, however, may any participant purchase more
than 2,700 shares, nor may all participants in the aggregate purchase more than
388,125 shares on any one semi-annual purchase date.

The ESPP will have a series of successive offering periods, each with a
maximum duration of 24 months. Individuals who are eligible employees on the
start date of the initial offering period may enter the plan on that start date
or on any subsequent semi-annual entry date. Individuals who become eligible
employees after the start date of the initial offering period may join the ESPP
on any subsequent semi-annual entry date. A participant may contribute up to 15%
of his base salary through payroll deductions and the accumulated payroll
deductions will be applied to the purchase of shares on the participant's behalf
on each semi-annual purchase date. The purchase price per share will be 85% of
the lower of the fair market value of the Company's common stock on the
participant's entry date into the offering period or the fair market value on
the semi-annual purchase date. The Company's board of directors may amend or
modify the ESPP at any time, and the ESPP will terminate no later than October
31, 2010.

Notes Payable

On July 31, 2000, the Company entered into a term note with Guaranty
Federal Bank, F.S.B. in the amount $10,000,000, which is payable in full on
January 1, 2001 and bears interest at a variable rate that approximated 10.50%
as of September 30, 2000.

F-22
<PAGE> 105

PENSON WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS

Cash and cash equivalents................................... $ 5,250,746 $ 11,515,269
Segregated assets........................................... 62,020,446 249,179,580
Receivable from broker-dealers and clearing organizations... 11,106,938 39,794,434
Receivable from customers................................... 343,472,656 550,322,024
Receivable from correspondents.............................. 36,983,805 64,275,085
Securities borrowed......................................... 55,620,796 56,315,984
Securities owned, at market value........................... 16,446,740 8,896,192
Deposits with clearing organizations........................ 8,253,772 5,050,799
Furniture and equipment, at cost, net of accumulated
depreciation of $3,168,485 at December 31, 1999 and
$4,913,859 at September 30, 2000.......................... 3,204,852 4,511,605
Other assets................................................ 1,230,745 5,997,841
------------ ------------
TOTAL ASSETS................................................ $543,591,496 $995,858,813
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Payable to broker-dealers and clearing organizations........ $ 28,765,003 $ 29,071,368
Payable to customers........................................ 220,376,343 304,656,880
Payable to correspondents................................... 18,322,132 26,954,252
Short-term bank loans....................................... 67,430,000 65,659,835
Notes payable............................................... 23,984,436 41,892,218
Securities loaned........................................... 164,181,100 500,247,160
Accounts payable, accrued expenses and other liabilities.... 9,184,624 13,502,954
------------ ------------
Total liabilities................................. 532,243,638 981,984,667
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 65,000,000 shares authorized
and 29,564,325 shares issued; 27,085,050 shares
outstanding at December 31, 1999 and 28,657,800 shares
outstanding at September 30, 2000......................... 295,643 295,643
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued or outstanding.................... -- --
Additional paid-in capital.................................. 1,360,642 17,829,044
Options outstanding......................................... -- 7,486,125
Treasury stock, at cost, 2,479,275 shares at December 31,
1999 and 906,525 shares at September 30, 2000............. (659,157) (241,015)
Retained earnings (accumulated deficit)..................... 10,350,730 (11,495,651)
------------ ------------
Total stockholders' equity........................ 11,347,858 13,874,146
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $543,591,496 $995,858,813
============ ============
</TABLE>

See accompanying Notes to Condensed Consolidated Financial Statements.

F-23
<PAGE> 106

PENSON WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ --------------------------
1999 2000 1999 2000
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Net revenues from clearing operations......... $6,854,622 $13,619,257 $18,120,910 $ 36,783,168
Interest, net................................. 2,498,338 6,663,228 5,824,886 16,024,774
---------- ----------- ----------- ------------
9,352,960 20,282,485 23,945,796 52,807,942
EXPENSES:
Employee compensation and benefits............ 2,658,892 4,871,278 6,158,194 13,234,195
Floor brokerage, exchange and clearance
fees........................................ 956,080 1,790,461 4,091,592 5,367,921
Communications and data processing............ 2,020,919 4,024,853 5,281,250 10,707,615
Occupancy and equipment....................... 514,604 1,011,542 1,538,610 2,477,142
Other expenses................................ 573,728 720,100 1,521,504 3,317,677
Non-cash employee stock option awards......... -- -- -- 24,000,000
---------- ----------- ----------- ------------
6,724,223 12,418,234 18,591,150 59,104,550
---------- ----------- ----------- ------------
OPERATING INCOME (LOSS)....................... 2,628,737 7,864,251 5,354,646 (6,296,608)
OTHER EXPENSE:
Interest expense on notes payable............. (549,271) (968,281) (1,108,006) (2,346,197)
---------- ----------- ----------- ------------
(549,271) (968,281) (1,108,006) (2,346,197)
---------- ----------- ----------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES......................... 2,079,466 6,895,970 4,246,640 (8,642,805)
Provision for income taxes.................... -- 2,678,594 -- 6,225,222
---------- ----------- ----------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS...... 2,079,466 4,217,376 4,246,640 (14,868,027)
Income (loss) from discontinued operations,
net of tax of $(94,795) and $1,848,360,
respectively, for the three months and nine
months ended September 30, 2000............. 350,101 (176,050) 802,916 3,372,376
---------- ----------- ----------- ------------
NET INCOME (LOSS)............................. $2,429,567 $ 4,041,326 $ 5,049,556 $(11,495,651)
========== =========== =========== ============
PRO FORMA INFORMATION:
Income (loss) from continuing operations.... $2,079,466 $ 4,217,376 $ 4,246,640 $(14,868,027)
---------- ----------- ----------- ------------
Pro forma adjustment for income taxes....... (727,813) -- (1,486,324) --
Pro forma income (loss) from continuing
operations................................ $1,351,653 $ 4,217,376 $ 2,760,316 $(14,868,027)
========== =========== =========== ============
EARNINGS (LOSS) PER SHARE -- BASIC:
Earnings (loss) per share from continuing
operations................................ $ 0.08 $ 0.15 $ 0.17 $ (0.53)
========== =========== =========== ============
Earnings (loss) per share................... $ 0.09 $ 0.14 $ 0.20 $ (0.41)
========== =========== =========== ============
Pro forma earnings (loss) per share from
continuing operations..................... $ 0.05 $ 0.15 $ 0.11 $ (0.53)
========== =========== =========== ============
EARNINGS (LOSS) PER SHARE -- DILUTED:
Earnings (loss) per share from continuing
operations................................ $ 0.08 $ 0.14 $ 0.17 $ (0.53)
========== =========== =========== ============
Earnings (loss) per share................... $ 0.09 $ 0.14 $ 0.20 $ (0.41)
========== =========== =========== ============
Pro forma earnings (loss) per share from
continuing operations..................... $ 0.05 $ 0.14 $ 0.11 $ (0.53)
========== =========== =========== ============
</TABLE>

See accompanying Notes to Condensed Consolidated Financial Statements.

F-24
<PAGE> 107

PENSON WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------
1999 2000
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................... $ 5,049,556 $ (11,495,651)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation.............................................. 1,064,239 1,745,374
Non-cash employee stock option awards..................... -- 24,000,000
Changes in operating assets and liabilities, net of
effects of acquisitions:
Segregated assets...................................... (27,978,709) (187,159,134)
Net receivable from customers.......................... (43,663,983) (122,568,831)
Net receivable from correspondents..................... 5,245,408 (18,659,160)
Securities borrowed.................................... (58,513,010) (695,188)
Securities owned....................................... 2,825,559 7,550,548
Deposits with clearing organizations................... (1,483,527) 3,202,973
Other assets........................................... 490,299 (3,053,696)
Net payable to or receivable from broker-dealers and
clearing organizations............................... 26,935,726 (28,381,131)
Short-term bank loans.................................. (51,292,525) (1,770,165)
Securities loaned...................................... 128,928,495 336,066,060
Accounts payable, accrued expenses and other
liabilities.......................................... 2,796,812 4,318,330
------------ -------------
Net cash provided by (used in) operating activities......... (9,595,660) 3,100,329
------------ -------------
INVESTING ACTIVITIES:
Acquisition of subsidiary................................... -- (1,713,400)
Purchases of furniture and equipment, net................... (1,780,482) (3,052,127)
------------ -------------
Net cash used in investing activities....................... (1,780,482) (4,765,527)
------------ -------------
FINANCING ACTIVITIES:
Proceeds from notes payable................................. 15,684,437 35,000,000
Repayments of notes payable................................. (250,000) (17,092,218)
Dividends................................................... (2,768,043) (10,978,061)
Purchase of treasury stock.................................. (1,332,947) --
Sale of treasury stock...................................... 1,073,056 1,000,000
------------ -------------
Net cash provided by financing activities................... 12,406,503 7,929,721
------------ -------------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 1,030,361 6,264,523
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 2,844,490 5,250,746
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 3,874,851 $ 11,515,269
============ =============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income tax payments......................................... $ -- $ 5,250,000
Interest payments........................................... $ 6,121,154 $ 25,318,136
</TABLE>

See accompanying Notes to Condensed Consolidated Financial Statements.

F-25
<PAGE> 108

PENSON WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND NATURE OF BUSINESS

Penson Worldwide, Inc., formerly known as Service Asset Holdings, Inc., is
a holding company incorporated in Delaware. Through its principal wholly-owned
subsidiaries, Penson Financial Services, Inc. ("PFSI"), formerly an
unincorporated division of Service Asset Management Company ("SAMCO"), and
Penson Worldwide Settlements Limited ("WSL") (collectively, "the Company"), it
provides securities clearing services in an agency capacity including integrated
trade execution, clearing and custody services, trade settlement, customer
account processing and customized data processing services. The Company also
participates in margin lending practices, securities lending and borrowing
transactions, and market making activities as a principal. The Company will
discontinue its market making activities immediately prior to its planned
initial public offering (Note 13), after which time it will operate in one line
of business. PFSI is a broker-dealer registered with the Securities and Exchange
Commission ("SEC") and a member of the National Association of Securities
Dealers, Inc. ("NASD") and is licensed to do business in all fifty states of the
United States of America. The Company expanded its operations in March 2000 into
the United Kingdom with the acquisition of WSL (Note 11).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements
include the accounts of Penson Worldwide, Inc., Service Asset Investments, Inc.
and PFSI, formerly an unincorporated division of SAMCO. The unaudited interim
condensed consolidated financial statements as of and for the nine months ended
September 30, 2000 also include Penson Holdings, Inc., a wholly owned
subsidiary, and its wholly owned subsidiary, WSL, since the date of
incorporation and acquisition, respectively. All significant intercompany
transactions have been eliminated. The accompanying condensed consolidated
financial statements exclude the financial position, operating results and cash
flows of certain non-core operations that were distributed to the Company's
shareholders in a restructuring effected in September 2000 (Note 14).

Unaudited Interim Condensed Consolidated Financial Statements

The accompanying interim condensed consolidated financial statements
presented as of September 30, 2000 and for the three months and nine months
ended September 30, 1999 and 2000, as well as information contained in the notes
to the condensed consolidated financial statements with respect to September 30,
2000 and the three months and nine months ended September 30, 1999 and 2000, are
unaudited. The Company's management is of the opinion that all material
adjustments, consisting only of normal recurring adjustments necessary for a
fair presentation of the Company's consolidated interim results of operations
and financial condition, have been included. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to Article 10 of Regulation S-X. The accompanying unaudited interim
condensed consolidated financial statements should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto for
the year ended December 31, 1999 and the six months ended June 30, 2000.

F-26
<PAGE> 109
PENSON WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

Unaudited Pro Forma Information

Pro forma income (loss) and per share information as reflected on the
condensed consolidated statements of operations are unaudited, are based on
historical income from continuing operations, and give effect to the impact of
adjustments as if the Company had filed a consolidated federal income tax return
as a C corporation under the Internal Revenue Code of 1986, as amended, for the
three months and nine months ended September 30, 1999.

Taxation

For the three months and nine months ended September 30, 2000, the Company
has recognized the amount of current taxes payable as well as deferred tax
assets and liabilities utilizing tax laws and rates in effect as of the date of
the condensed consolidated financial statements. Deferred tax assets and
liabilities are the result of the expected future tax consequences of temporary
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities. Income taxes have not been provided for by the
Company for the three months or nine months ended September 30, 1999, as the
Company was a Subchapter S corporation under the Internal Revenue Code, as
amended in 1986. Accordingly, its shareholders were liable for the taxes on the
Company's net income for those periods.

Earnings (Loss) per Share

Earnings (loss) per share is computed by dividing net income (loss)
applicable to common shares by the weighted average number of common shares
outstanding during each period presented. Basic earnings (loss) per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings (loss) per share considers the impact of potential common
shares, unless the inclusion of such shares would have an anti-dilutive effect.

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1999 2000 1999 2000
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Average shares outstanding................. 25,707,082 28,657,800 25,270,109 28,192,863
Income (loss) from continuing operations... $ 2,079,466 $ 4,217,376 $ 4,246,640 $(14,868,027)
----------- ----------- ----------- ------------
Earnings (loss) per share from continuing
operations -- basic...................... $ 0.08 $ 0.15 $ 0.17 $ (0.53)
=========== =========== =========== ============
DILUTED EARNINGS PER SHARE:
Average shares outstanding................. 25,707,082 28,657,800 25,270,109 28,192,863
Net effect of dilutive stock options, based
on the treasury stock method............. -- 655,576 -- --
----------- ----------- ----------- ------------
Total...................................... 25,707,082 29,313,376 25,270,109 28,192,863
Income (loss) from continuing operations... $ 2,079,466 $ 4,217,376 $ 4,246,640 $(14,868,027)
----------- ----------- ----------- ------------
Earnings (loss) per share from continuing
operations -- diluted.................... $ 0.08 $ 0.14 $ 0.17 $ (0.53)
=========== =========== =========== ============
</TABLE>

Options to purchase 714,150 shares of common stock, exercisable at 125% of
the Company's net book value per share at the date of exercise, were outstanding
as of September 30, 2000, but were not included in the computation of diluted
earnings per share for the nine months ended September 30, 2000 because to do so
would have been anti-dilutive for that period.

F-27
<PAGE> 110
PENSON WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

Use of Estimates

3. SEGREGATED ASSETS

Cash and cash equivalents of $33,524,529 and $226,051,060 have been
segregated in a special reserve bank account for the benefit of customers under
Rule 15c3-3 of the Securities and Exchange Commission as of December 31, 1999
and September 30, 2000, respectively.

As a clearing broker-dealer, the Company has elected to compute a reserve
requirement for Proprietary Accounts of Introducing Broker/Dealers (PAIB
calculation), as defined by NASD regulations. The PAIB calculation is completed
in order for each correspondent firm that uses the Company as its clearing
broker-dealer to classify its assets held by the Company as allowable assets in
the correspondent's net capital calculation. At December 31, 1999, the Company
had on deposit in a Special Reserve Bank Account $11,661,973 in compliance with
PAIB reserve requirements. No deposit was required to comply with PAIB reserve
requirements at September 30, 2000.

Cash of $16,833,944 as of December 31, 1999 and $23,128,520 as of September
30, 2000 has been segregated and held on deposit for required margin on option
contracts in customer accounts.

4. RECEIVABLE FROM AND PAYABLE TO BROKER-DEALERS AND CLEARING ORGANIZATIONS

Amounts receivable from and payable to broker-dealers and clearing
organizations consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Receivable:
Securities failed to deliver.............................. $ 15,348 $ 284,895
Receivable from clearing organizations.................... 7,191,241 26,476,849
Receivable from dealers................................... 3,900,349 13,032,690
----------- -----------
$11,106,938 $39,794,434
=========== ===========
Payable:
Securities failed to receive.............................. $ 874,592 $ 544,122
Payable to clearing organizations......................... 6,138,354 16,574,039
Payable to dealers........................................ 21,752,057 11,953,207
----------- -----------
$28,765,003 $29,071,368
=========== ===========
</TABLE>

5. RECEIVABLE FROM AND PAYABLE TO CUSTOMERS AND CORRESPONDENTS

Receivable from and payable to customers and correspondents include amounts
due on cash and margin transactions. Securities owned by customers and
correspondents are held as collateral for receivables. Such collateral is not
reflected in the condensed consolidated financial statements. Payable to
correspondents also includes commissions due on customer transactions.

F-28
<PAGE> 111
PENSON WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

6. SECURITIES OWNED

Securities owned as of December 31, 1999 and September 30, 2000 consist of
trading and investment securities at quoted market values as follows:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Corporate equities:
Securities owned.......................................... $16,533,797 $8,931,086
Securities sold, not yet purchased........................ (179,587) (34,894)
----------- ----------
$16,354,210 $8,896,192
=========== ==========
</TABLE>

F-29
<PAGE> 112
PENSON WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

7. SHORT-TERM BANK LOANS AND NOTES PAYABLE

A summary of short-term bank loans and notes payable as of December 31,
1999 and September 30, 2000 is as follows:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
SHORT-TERM BANK LOANS:
Loans payable under uncommitted lines of credit with
weighted average interest rates of 5.90% and 7.48% at
December 31, 1999 and September 30, 2000, respectively,
secured by firm inventory and customers' margin account
securities, repayable on demand........................... $67,430,000 $65,659,835
=========== ===========
NOTES PAYABLE:
Notes payable to Service Lloyds Insurance Company with
interest at 10.00% per annum, payable in annual principal
installments beginning July 25, 1996, with final payment
due October 25, 2000...................................... $ 2,000,000 $ 1,000,000
Notes payable to Service Lloyds Insurance Company with
interest equal to the bankers prime rate, which
approximated 8.50% and 9.50% at December 31, 1999 and
September 30, 2000, respectively, payable in annual
principal installments beginning October 1, 1998, with
final payment due October 1, 2004......................... 6,300,000 6,300,000
Balance payable to a former shareholder of the Company
pursuant to a stock purchase agreement, with interest
equal to the Bank of New York prime rate, which
approximated 8.50% and 9.50% at December 31, 1999 and
September 30, 2000, respectively, payable in annual
principal installments beginning March 3, 1999, with final
payment due March 3, 2001................................. 684,436 342,218
Bank term notes with interest ranging from 7.75% to 8.50%,
payable in annual principal installments beginning July 1,
2000, repaid in full on March 30, 2000.................... 15,000,000 --
Bank term note with a variable rate of interest that
approximated 10.50% at September 30, 2000, payable in full
on January 1,
2001...................................................... -- 10,000,000
Bank term note with a variable rate of interest that
approximated 10.00% at September 30, 2000, payable in full
on March 30,
2001...................................................... -- 10,000,000
Bank term note with a variable rate of interest that
approximated 8.86% at September 30, 2000, payable in
quarterly principal installments beginning October 1,
2000, with final payment due March 30, 2005............... -- 14,250,000
----------- -----------
$23,984,436 $41,892,218
=========== ===========
</TABLE>

The above notes payable, excluding the balance payable to a former
shareholder, are all collateralized by substantially all of the net assets of
the Company.

F-30
<PAGE> 113
PENSON WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

As of September 30, 2000, three of the Company's short-term bank loans
permit the Company to borrow in the aggregate up to $47,300,000, while the
fourth line of credit does not have a stated borrowing capacity. These lines of
credit have no stated expiration dates.

Approximate future annual maturities of the Company's notes payable at
September 30, 2000 are listed below:

<TABLE>
<S> <C>
October 1 to December 31, 2000.............................. $ 1,700,000
2001........................ 24,742,218
2002........................ 4,400,000
2003........................ 4,400,000
2004........................ 4,400,000
Thereafter......................... 2,250,000
-----------
$41,892,218
===========
</TABLE>

8. TRANSACTIONS WITH RELATED PARTIES

The Company provides securities clearing and related services to and
finances security inventory positions for SAMCO Capital Markets and Yee,
Desmond, Schroeder & Allen, Inc., divisions or entities affiliated with the
Company through common ownership. Net revenues generated from SAMCO Capital
Markets and Yee, Desmond, Schroeder & Allen, Inc. were $148,207 and $405,306 for
the three months ended September 30, 1999 and 2000, respectively and $493,257
and $1,078,359 for the nine months ended September 30, 1999 and 2000,
respectively. Amounts receivable under these arrangements were $15,035,288 and
$54,291,171 as of December 31, 1999 and September 30, 2000, respectively, and
are included in receivables from correspondents on the condensed consolidated
statements of financial condition. Collateral in the amount of $28,546,447 and
$54,291,171 is held by the Company as of December 31, 1999 and September 30,
2000, respectively, to securitize these balances.

The Company has entered into long-term notes payable with Service Lloyds
Insurance Company (Note 7), an entity owned by certain stockholders of the
Company. Amounts outstanding under these notes were $8,300,000 and $7,300,000 at
December 31, 1999 and September 30, 2000, respectively, and are included in
notes payable on the condensed consolidated statements of financial condition.

9. TRANSACTIONS WITH MAJOR CUSTOMERS

Three correspondents accounted for approximately 12%, 9% and 13% of the
Company's total revenues for the three months ended September 30, 1999 and
approximately 12%, 16% and 10% for the nine months ended September 30, 1999. One
correspondent accounted for more than 10% of the Company's total revenues for
the three months and nine months ended September 30, 2000, representing
approximately 15% and 16% for each period, respectively.

F-31
<PAGE> 114
PENSON WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

10. STOCK INCENTIVES

For the nine months ended September 30, 2000, the Company granted stock
options to certain of its key employees ("Key Employee Options"). Key Employee
Options exercised prior to March 31, 2000 were exercisable at Service Asset
Holdings, Inc.'s book value per share, including the non-core assets (Note 18),
(the "Book Value") as of the date of exercise. Key Employee Options outstanding
at March 31, 2000 were exercisable at 125% of the Book Value as of the date of
exercise. Considering the proximity of the grant date to the expected effective
date of registration of stock under the Securities Act of 1933, the Company's
management estimated the intrinsic value of the Key Employee Options exercised
during the nine months ended September 30, 2000 as the difference between the
estimated market price based on the expected initial public offering price,
discounted for lack of marketability and giving effect to a minority interest
discount (the "Estimated Market Price"), and the Company's Book Value at the
date of exercise. The Company recognized compensation expense of $24,000,000
associated with the Key Employee Options, which is recorded on the condensed
consolidated statement of income as non-cash employee stock option awards.

The 2000 Stock Incentive Plan includes five separate programs: the
discretionary option grant program under which eligible individuals in the
Company's employ or service (including officers, non-employee board members and
consultants) may be granted options to purchase shares of common stock of the
Company; the stock issuance program under which such individuals may be issued
shares of common stock directly, through the purchase of such shares or as a
bonus tied to the performance of services; the salary investment option grant
program under which executive officers and other highly compensated employees
may elect to apply a portion of their base salary to the acquisition of special
below-market stock option grants; the automatic option grant program under which
option grants will automatically be made at periodic intervals to eligible
non-employee board members; and the director fee option grant program under
which non-employee board members may elect to apply a portion of their retainer
fee to the acquisition of special below-market stock option grants. The
Company's board of directors may amend or modify the 2000 Stock Incentive Plan
at any time, subject to any required stockholder approval, and the 2000 Stock
Incentive Plan will terminate no later than August 27, 2010.

F-32
<PAGE> 115
PENSON WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

immediately preceding calendar year, but no such annual increase will exceed
776,250 shares. In no event, however, may any participant purchase more than
2,700 shares, nor may all participants in the aggregate purchase more than
388,125 shares on any one semi-annual purchase date.

11. ACQUISITIONS OF WORLDWIDE SETTLEMENTS LIMITED AND ECE ELECTRONIC CLEARING
INC.

In March 2000, the Company acquired control of WSL, based in London,
England, by purchasing 51% of WSL's outstanding shares. In April 2000, the
Company exercised its option to purchase the remaining 49% of WSL's outstanding
shares. The total purchase price for the stock was approximately $1,200,000,
which approximated WSL's carrying value of its net assets at the respective
purchase dates. In addition, the Company paid approximately $460,000 in bonuses
to certain employees of WSL in connection with the acquisition of WSL. These
bonuses are reflected in the condensed consolidated statement of operations for
the nine months ended September 30, 2000 within employee compensation and
benefits expense.

In September 2000, the Company acquired ECE Electronic Clearing Inc.,
located in Montreal, Canada, for a purchase price of approximately $500,000,
which was allocated to acquired goodwill and will be amortized on a
straight-line basis over seven years.

12. REGULATORY REQUIREMENTS

Prior to the reorganization (Note 14), PFSI was an unincorporated division
of SAMCO, the regulated broker-dealer through which PFSI operated its business.
PFSI and SAMCO (collectively for purposes of net capital requirements, "the
Broker-Dealer") is subject to the SEC Uniform Net Capital Rule (SEC Rule
15c3-1), which requires the maintenance of minimum net capital. The
Broker-Dealer has elected to use the alternative method, permitted by Rule
15c3-1, which requires that the Broker-Dealer maintain minimum net capital, as
defined equal to the greater of $250,000 or 2% of aggregate debit balances, as
defined in the SEC's Reserve Requirement Rule (Rule 15c3-3). At December 31,
1999, the Broker-Dealer had net capital of $28,563,244, representing 8% of
aggregate debit balances and $21,126,059 in excess of its required net capital
of $7,437,185. At September 30, 2000, the Broker-Dealer had net capital of
$46,367,578, representing 8% of aggregate debit balances and $34,769,761 in
excess of its required net capital of $11,597,817.

The regulatory rules referred to above, and certain covenants contained in
various instruments governing indebtedness of the Company, may restrict the
Company's ability to withdraw capital from its regulated subsidiaries, which in
turn could limit the Company's ability to pay dividends or satisfy its debt
obligations. At December 31, 1999 and September 30, 2000,
F-33
<PAGE> 116
PENSON WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

approximately $18,592,965 and $29,732,913, respectively, of the assets of Penson
Financial Services, Inc. were restricted as to the payment of cash dividends and
advances to the Company.

13. DISCONTINUED OPERATIONS

Set forth below is a summary of the operating results of the Company's
market making operations for the three months and nine months ended September
30, 1999 and 2000. In accordance with Accounting Principles Board Opinion No.
30, Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,these
results have been segregated and reflected as discontinued operations in the
accompanying consolidated statements of income.

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1999 2000 1999 2000
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues................................ $2,375,832 $2,620,220 $6,433,286 $20,288,656
Expenses:
Employee compensation and benefits.... 1,342,223 1,312,767 3,796,905 11,123,856
Floor brokerage, exchange and
clearance fees..................... 387,236 1,134,499 1,056,534 2,663,319
Communications and data processing.... 20,253 21,624 72,038 61,910
Occupancy and equipment............... 117,150 134,374 276,417 439,907
Other expenses........................ 158,870 287,801 428,477 778,929
---------- ---------- ---------- -----------
2,025,731 2,891,065 5,630,371 15,067,921
---------- ---------- ---------- -----------
Income before income taxes.............. 350,101 (270,845) 802,915 5,220,735
Provision for income taxes.............. -- (94,795) -- 1,848,360
---------- ---------- ---------- -----------
Net income.............................. $ 350,101 $ (176,050) $ 802,915 $ 3,372,375
========== ========== ========== ===========
Earnings per share -- basic and
diluted............................... $ .01 $ (.01) $ .03 $ .12
========== ========== ========== ===========
</TABLE>

F-34
<PAGE> 117
PENSON WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)

Net assets associated with the Company's market making operations as of
December 31, 1999 and September 30, 2000 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Assets:
Securities owned, at market value......................... $12,762,353 $4,201,547
Furniture and equipment, at cost, net of accumulated
depreciation of $110,058 at December 31, 1999 and
$256,654 at September 30, 2000......................... 517,218 756,156
----------- ----------
13,279,571 4,957,703
----------- ----------
Liabilities:
Accounts payable, accrued expenses and other
liabilities............................................ 1,456,333 807,085
----------- ----------
1,456,333 807,085
----------- ----------
Net assets.................................................. $11,823,238 $4,150,618
=========== ==========
</TABLE>

14. CORPORATE REORGANIZATION

In September 2000, the Company changed its name and state of domicile by
effectuating a merger between Service Asset Holdings, Inc. and Penson Worldwide,
Inc., a newly formed Delaware corporation, and effected a restructuring for the
purpose of distributing certain non-core operations ("non-core assets") to its
shareholders in a tax-free distribution. The non-core assets include a division
of SAMCO (Note 1), and two other subsidiaries of Service Asset Investments, Inc.
The operations of the non-core assets have not been included in the accompanying
condensed consolidated financial statements in accordance with Staff Accounting
Bulletin No. 93, Accounting for the Spin-off of a Subsidiary, as applied to
initial registrants, and Accounting Principles Board Opinion No. 20, Accounting
Changes, Change in Reporting Entity. In conjunction with the restructuring, the
Company contributed an additional $10,000,000 to one of the subsidiary companies
included in the non-core assets prior to the distribution to shareholders.

15. CASH DIVIDEND

In August 2000, the Company declared a cash dividend of $1,669,645, paid on
August 14, 2000 to shareholders of record on August 1, 2000.

F-35
<PAGE> 118

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

[PENSON WORLDWIDE LOGO]

COMMON STOCK

CHASE H&Q

ROBERTSON STEPHENS

U.S. BANCORP PIPER JAFFRAY

, 2000

YOU SHOULD RELY ONLY UPON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.

NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF OUR COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS
PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM
THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE
DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.

UNTIL , 2000, ALL DEALERS THAT BUY, SELL OR TRADE IN OUR
COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 119

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses, other than
underwriting discounts, payable by the Registrant in connection with the offer
and sale of the common stock being registered. All amounts are estimates except
the registration fee, the NASD filing fee and the Nasdaq National Market entry
fee.

<TABLE>
<S> <C>
SEC registration fee...................................... $39,600
NASD filing fee........................................... 15,500
Blue Sky fees and expenses (including legal fees)......... *
Nasdaq National Market entry fee.......................... *
Accounting fees and expenses.............................. *
Other legal fees and expenses............................. *
Transfer agent and registrar fee.......................... *
Printing and engraving.................................... *
Miscellaneous............................................. *
-------
Total................................................... $ *
=======
</TABLE>

---------------

* To be completed by amendment

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act"). As permitted by the Delaware General Corporation Law, the Registrant's
Amended and Restated Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Registrant or its stockholders, (ii)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) under section 174 of the Delaware General
Corporation Law (regarding unlawful dividends and stock purchases) or (iv) for
any transaction from which the director derived an improper personal benefit. As
permitted by the Delaware General Corporation Law, the Bylaws of the Registrant
provide that (i) the Registrant is required to indemnify its directors and
officers to the fullest extent permitted by the Delaware General Corporation
Law, subject to certain very limited exceptions, (ii) the Registrant may
indemnify its other employees and agents as set forth in the Delaware General
Corporation Law, (iii) the Registrant is required to advance expenses, as
incurred, to its directors and executive officers in connection with a legal
proceeding to the fullest extent permitted by the Delaware General Corporation
Law, subject to certain very limited exceptions and (iv) the rights conferred in
the Bylaws are not exclusive. At present, there is no pending litigation or
proceeding involving a director, officer or employee of the Registrant regarding
which indemnification is sought, nor is the Registrant aware of any threatened
litigation that may result in claims for indemnification. Reference is also made
to Section 7 of the Underwriting Agreement, which provides for the
indemnification of officers, directors and controlling persons of the Registrant
against certain liabilities. In addition, certain of the intercompany agreements
provide for the indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities. The indemnification provisions in
the Registrant's Restated Certificate of Incorporation and in its Bylaws may be
sufficiently broad to permit indemnification of the Registrant's directors and
executive officers for liabilities arising

II-1
<PAGE> 120

under the Securities Act. The Registrant, with approval by the Registrant's
Board of Directors, expects to obtain directors' and officers' liability
insurance. Reference is made to the following documents filed as exhibits to
this registration statement regarding relevant indemnification provisions
described above and elsewhere herein:

<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------- -------
<S> <C>
Form of Underwriting Agreement.............................. 1.1
Amended and Restated Certificate of Incorporation of
Registrant................................................ 3.1
Amended and Restated Bylaws of Registrant................... 3.2
Form of Indemnity Agreement................................. 10.10
</TABLE>

The Company has entered into indemnification agreements with each of the
Company's directors, a form of which is attached as an exhibit hereto and is
incorporated herein by reference.

The Registrant may obtain insurance for the protection of its directors and
officers against any liability asserted against them in their official
capacities. The rights of indemnification described above are not exclusive of
any other rights of indemnification to which the persons indemnified may be
entitled under any bylaw, agreement, vote of stockholders or directors or
otherwise.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since September 1997, we have issued and sold the below listed unregistered
shares of our common stock. These issuances were deemed exempt from registration
under the Securities Act of 1933 in reliance on Rules 504, 505 and 701 of
Regulation D and in compliance with the specific requirements thereof. All
recipients of unregistered securities had adequate access, through their
relationship with us, to information about us.

Between September 1, 1997 and September 1, 2000, we issued an aggregate of
1,701,000 shares of our common stock at a range of $0.15 to $0.33 per share.

Between September 1, 1997 and September 1, 2000, we issued an aggregate of
188,000 shares of our common stock to certain of our employees at $13.00 per
share upon the exercise of stock options granted under our 2000 Stock Incentive
Plan.

Between September 1, 1997 and September 1, 2000, we issued an aggregate of
1,572,750 shares of our common stock to certain of our employees upon the
exercise of stock options granted at an exercise price of 125% of the net book
value of the common stock on the exercise date.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

a. Exhibits

II-2
<PAGE> 121

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
+4.2 -- Registration Rights Agreement between Roger J. Engemoen,
Jr., Philip A. Pendergraft and Daniel P. Son and Penson
Worldwide, Inc. dated September 14, 2000
*5.1 -- Opinion of Brobeck, Phleger & Harrison LLP
+10.1 -- 2000 Stock Incentive Plan
+10.2 -- 2000 Employee Stock Purchase Plan
+**10.3 -- Fully Disclosed Clearing Agreement by and between Penson
Financial Services, Inc., a division of Service Asset
Management Company, and CyBerBroker, Inc. dated October
3, 1997 and an amendment thereto dated July 19, 1999
+**10.4 -- Remote Processing Agreement between SunGard Financial
Systems Inc. and Penson Financial Services, Inc. dated
July 10, 1995 and amendments thereto dated September 13,
1996, May 1, 1998 and September 12, 2000
+10.5 -- 1700 Pacific Avenue Office Lease by and between F/P/D
Master Lease, Inc. as landlord and Service Asset
Management Company as tenant dated May 20, 1998 and
amendments thereto dated July 16, 1998, February 19,
1999, September 23, 1999, December 30, 1999 and June 9,
2000
+10.6 -- Stock Loan Guarantee Agreement by and among Service Asset
Management Company, Penson Financial Services, Inc. and
Banc of America Securities LLC dated December 14, 1999
+10.7 -- Stock Loan Guarantee Agreement by and among Service Asset
Management Company, Penson Financial Services, Inc. and
Goldman, Sachs & Co. dated December 14, 1999
+10.8 -- Promissory Notes and Security Agreements by and between
Service Asset Holdings, Inc. and Service Lloyds Insurance
Co. dated October 25, 1995, July 25, 1995, July 31, 1997
and August 15, 1997, respectively
+10.9 -- Loan Agreement by and between Service Asset Investments,
Inc. and Guaranty Federal Bank, F.S.B. dated March 30,
2000 and an amendment thereto dated July 31, 2000
+10.10 -- Form of Indemnity Agreement between Penson Worldwide,
Inc. and each of its executive officers and directors
+10.11 -- Guaranty Agreements by and between Service Asset
Investments, Inc., Guaranty Federal Bank, F.S.B. with
Daniel P. Son, Philip A. Pendergraft, William D. Gross,
Roger J. Engemoen, Jr. and J. Kelly Gray as Guarantors
with Stock Pledge Agreement by and between Penson
Worldwide, Inc. and Guaranty Federal Bank, F.S.B. all
dated July 31, 2000
10.12 -- Compensation Agreement by and between Penson Worldwide,
Inc. and Roger J. Engemoen, Jr. dated October 20, 2000
10.13 -- Compensation Agreement by and between Penson Worldwide,
Inc. and Daniel P. Son dated October 20, 2000
10.14 -- Compensation Agreement by and between Penson Worldwide,
Inc. and Philip A. Pendercraft dated October 20, 2000
11.1 -- Statement regarding computation of per share earnings
</TABLE>

II-3
<PAGE> 122

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
+21.1 -- List of Subsidiaries
23.1 -- Consent of Ernst & Young LLP
*23.2 -- Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1)
+24.1 -- Power of Attorney (included on signature page)
27.1 -- Financial Data Schedule
</TABLE>

---------------

* To be filed by amendment.

** Certain provisions of this Exhibit have been omitted based upon a request for
confidential treatment and the omitted portions have been filed separately
with the Securities and Exchange Commission.

+ Previously filed.

b. Financial Statement Schedules

<TABLE>
<C> <S>
S-1 -- Schedule I -- Condensed Financial Information of
Registrant
</TABLE>

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 123

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Dallas, State of Texas, on October 23, 2000.

PENSON WORLDWIDE, INC.

By: /s/ ROGER J. ENGEMOEN, JR.
----------------------------------
Roger J. Engemoen, Jr.
Chairman

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ ROGER J. ENGEMOEN, JR. Chairman (principal October 23, 2000
----------------------------------------------------- executive officer)
Roger J. Engemoen, Jr.

* Executive Vice President, October 23, 2000
----------------------------------------------------- Treasurer and Director
Philip A. Pendergraft (principal financial and
accounting officer)

* President and Director October 23, 2000
-----------------------------------------------------
Daniel P. Son

* Director October 23, 2000
-----------------------------------------------------
James S. Dyer

* Director October 23, 2000
-----------------------------------------------------
J. Kelly Gray

* Director October 23, 2000
-----------------------------------------------------
William D. Gross

* Director October 23, 2000
-----------------------------------------------------
David M. Kelly
</TABLE>

*By: /s/ ROGER J. ENGEMOEN, JR.
-------------------------------
Attorney-in-fact

II-5
<PAGE> 124

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and
the Shareholders of Penson Worldwide, Inc.

We have audited the consolidated financial statements of Penson Worldwide,
Inc. as of December 31, 1998 and 1999 and as of June 30, 2000, and for each of
the three years in the period ended December 31, 1999 and the six months ended
June 30, 2000, and have issued our report thereon dated October 18, 2000, except
for Note 17, as to which the date is [to be defined], 2000 (included elsewhere
in this Registration Statement). Our audits also included the financial
statement schedule listed in Item 16(b) of this Registration Statement. This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits.

In our opinion, the financial statement schedule referred to above when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

Dallas, Texas

October 18, 2000

Ernst & Young LLP
Ernst & Young LLP, Independent Auditors

The foregoing report is in the form that will be signed upon the Company's
formal commitment to discontinue certain operations as described in Note 17 to
the consolidated financial statements.

Dallas, Texas

October 18, 2000

/s/ Ernst & Young LLP
Ernst & Young LLP, Independent Auditors

S-1
<PAGE> 125

SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT

PENSON WORLDWIDE, INC.

CONDENSED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS

Cash and cash equivalents................................... $ 827 $ 128,315
Receivable from subsidiaries.............................. 265,743 220,517
Investment in subsidiaries................................ 14,559,077 20,210,404
----------- -----------
Total assets...................................... $14,825,647 $20,559,236
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Notes payable............................................... $ 9,150,000 $ 8,984,436
Accounts payable, accrued expenses and other liabilities.... 224,752 226,942
----------- -----------
Total liabilities...................................... 9,374,752 9,211,378
----------- -----------
Stockholders' equity:
Common stock................................................ 295,643 295,643
Other stockholders' equity.................................. 5,155,252 11,052,215
----------- -----------
Total stockholders' equity............................. 5,450,895 11,347,858
----------- -----------
Total liabilities and stockholders' equity........ $14,825,647 $20,559,236
=========== ===========
</TABLE>

PENSON WORLDWIDE, INC.

CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Management fees from subsidiaries.................. $ 552,078 $ 947,152 $ 925,955
Interest........................................... 7,300 2,800 5,845
---------- ---------- ----------
559,378 949,952 931,800
Expenses:
Interest expense on notes payable.................. 552,078 947,152 795,456
Other expenses..................................... -- 49,307 177,961
---------- ---------- ----------
552,078 996,459 973,417
---------- ---------- ----------
Income (loss) before income taxes and equity in net
income of subsidiaries............................. 7,300 (46,507) (41,617)
Equity in net income of subsidiaries................. 2,775,044 1,780,239 8,979,789
---------- ---------- ----------
Income before income taxes........................... 2,782,344 1,733,732 8,938,172
Provision for income taxes........................... 994,974 -- --
---------- ---------- ----------
Net income........................................... $1,787,370 $1,733,732 $8,938,172
========== ========== ==========
</TABLE>

S-2
<PAGE> 126

PENSON WORLDWIDE, INC.

CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income...................................... $ 1,787,370 $ 1,733,732 $ 8,938,172
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in net income of subsidiaries......... (2,775,044) (1,780,239) (8,979,789)
Changes in operating assets and liabilities:
Receivable from or payable to
subsidiaries............................ (271,581) 586,516 45,226
Accounts payable, accrued expenses and
other liabilities....................... 1,472,252 (833,207) 2,190
----------- ----------- -----------
Net cash provided by (used in) operating
activities...................................... 212,997 (293,198) 5,799
----------- ----------- -----------
Investing activities:
Capital contribution to subsidiaries............ (6,950,000) -- --
Dividends received from subsidiaries............ -- 1,685,236 3,328,462
----------- ----------- -----------
Net cash provided by (used in) investing
activities...................................... (6,950,000) 1,685,236 3,328,462
----------- ----------- -----------
Financing activities:
Net change in notes payable..................... 6,500,000 (850,000) (165,564)
Issuance of common stock........................ 245,000 228,061 --
Dividends....................................... -- (540,151) (2,781,318)
Purchase of treasury stock...................... -- (237,355) (1,332,947)
Sale of treasury stock.......................... -- -- 1,073,056
----------- ----------- -----------
Net cash provided by (used in) financing
activities...................................... 6,745,000 (1,399,445) (3,206,773)
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents..................................... 7,997 (7,407) 127,488
Cash and cash equivalents at beginning of year.... 237 8,234 827
----------- ----------- -----------
Cash and cash equivalents at end of year.......... $ 8,234 $ 827 $ 128,315
=========== =========== ===========
</TABLE>

S-3
<PAGE> 127

PENSON WORLDWIDE, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

In the parent company-only financial statements, the Company's investment
in subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The Company's share of net income of
its unconsolidated subsidiaries is included in net income using the equity
method. The parent company-only financial statements should be read in
conjunction with the Company's consolidated financial statements.

2. NOTES PAYABLE

A summary of notes payable as of December 31, 1998 and 1999 is as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Notes payable to Service Lloyds Insurance Company with
interest at 10.00% per annum, collateralized by net assets
of the Company, payable in annual principal installments
beginning July 25, 1996, with final payment due October
25, 2000.................................................. $2,500,000 $2,000,000
Notes payable to Service Lloyds Insurance Company with
interest equal to the bankers prime rate, which
approximated 7.75% and 8.50% at December 31, 1998 and
1999, respectively, collateralized by net assets of the
Company payable in annual principal installments beginning
October 1, 1998, with final payment due October 1, 2004... 6,650,000 6,300,000
Balance payable to a former shareholder of the Company
pursuant to a stock purchase agreement, with interest
equal to the Bank of New York prime rate, which
approximated 7.75% and 8.50% at December 31, 1998 and
1999, respectively, payable in annual principal
installments beginning March 3, 1999, with final payment
due March 3, 2001......................................... -- 684,436
---------- ----------
$9,150,000 $8,984,436
========== ==========
</TABLE>

Approximate future annual maturities of the Company's notes payable at
December 31, 1999 are listed below:

3. DIVIDENDS RECEIVED FROM SUBSIDIARIES

Dividends paid to the Company from the Company's subsidiaries accounted for
by the equity method were $1,685,236 for the year ended December 31, 1998 and
$3,328,462 for the year ended December 31, 1999.

S-4
<PAGE> 128

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
*1.1 -- Form of Underwriting Agreement
+3.1 -- Amended and Restated Certificate of Incorporation of
Penson Worldwide, Inc.
3.1a -- Correction to the Amended and Restated Certificate of
Incorporation of Penson Worldwide, Inc.
+3.2 -- Amended and Restated Bylaws of Penson Worldwide, Inc.
*4.1 -- Specimen certificate for shares of Common Stock
+4.2 -- Registration Rights Agreement between Roger J. Engemoen,
Jr., Philip A. Pendergraft and Daniel P. Son and Penson
Worldwide, Inc. dated September 14, 2000
*5.1 -- Opinion of Brobeck, Phleger & Harrison LLP
+10.1 -- 2000 Stock Incentive Plan
+10.2 -- 2000 Employee Stock Purchase Plan
+**10.3 -- Fully Disclosed Clearing Agreement by and between Penson
Financial Services, Inc., a division of Service Asset
Management Company, and CyBerBroker, Inc. dated October
3, 1997 and an amendment thereto dated July 19, 1999
+**10.4 -- Remote Processing Agreement between SunGard Financial
Systems Inc. and Penson Financial Services, Inc. dated
July 10, 1995 and amendments thereto dated September 13,
1996, May 1, 1998 and September 12, 2000
+10.5 -- 1700 Pacific Avenue Office Lease by and between F/P/D
Master Lease, Inc. as landlord and Service Asset
Management Company as tenant dated May 20, 1998 and
amendments thereto dated July 16, 1998, February 19,
1999, September 23, 1999, December 30, 1999 and June 9,
2000
+10.6 -- Stock Loan Guarantee Agreement by and among Service Asset
Management Company, Penson Financial Services, Inc. and
Banc of America Securities LLC dated December 14, 1999
+10.7 -- Stock Loan Guarantee Agreement by and among Service Asset
Management Company, Penson Financial Services, Inc. and
Goldman, Sachs & Co. dated December 14, 1999
+10.8 -- Promissory Notes and Security Agreements by and between
Service Asset Holdings, Inc. and Service Lloyds Insurance
Co. dated October 25, 1995, July 25, 1995, July 31, 1997
and August 15, 1997, respectively
+10.9 -- Loan Agreement by and between Service Asset Investments,
Inc. and Guaranty Federal Bank, F.S.B. dated March 30,
2000 and an amendment thereto dated July 31, 2000
+10.10 -- Form of Indemnity Agreement between Penson Worldwide,
Inc. and each of its executive officers and directors
</TABLE>

<PAGE> 129

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
+10.11 -- Guaranty Agreements by and between Service Asset
Investments, Inc., Guaranty Federal Bank, F.S.B. with
Daniel P. Son, Philip A. Pendergraft, William D. Gross,
Roger J. Engemoen, Jr. and J. Kelly Gray as Guarantors
with Stock Pledge Agreement by and between Penson
Worldwide, Inc. and Guaranty Federal Bank, F.S.B. all
dated July 31, 2000
10.12 -- Compensation Agreement by and between Penson Worldwide,
Inc. and Roger J. Engemoen, Jr. dated October 20, 2000
10.13 -- Compensation Agreement by and between Penson Worldwide,
Inc. and Daniel P. Son dated October 20, 2000
10.14 -- Compensation Agreement by and between Penson Worldwide,
Inc. and Philip A. Pendercraft dated October 20, 2000
11.1 -- Statement regarding computation of per share earnings
+21.1 -- List of Subsidiaries
23.1 -- Consent of Ernst & Young LLP
*23.2 -- Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1)
+24.1 -- Power of Attorney (included on signature page)
27.1 -- Financial Data Schedule
</TABLE>

---------------

* To be filed by amendment.

+ Previously filed.