Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations


OVERVIEW

Management of The Charles Schwab Corporation (CSC) and its subsidiaries
(collectively referred to as the Company) focuses on several key financial and
non-financial metrics in evaluating the Company's financial position and
operating performance. Results for the third quarters and first nine months of
2009 and 2008 are shown in the following table:



                                                                   Three Months                                           Nine Months
                                                                      Ended                                                  Ended
                                                                  September 30,                  Percent                 September 30,                Percent
                                                             2009               2008              Change             2009              2008            Change
Client Activity Metrics:
Net new client assets (in billions)                       $      19.9        $      24.4               (18 %)     $     62.5        $     91.7              (32 %)
Client assets (in billions, at quarter end)               $   1,363.6        $   1,304.5                 5 %
Clients' daily average trades (in thousands)                    318.5              334.8                (5 %)          342.2             320.3                7 %

Company Financial Metrics:
Net revenues                                              $     1,011        $     1,251               (19 %)     $    3,207        $    3,866              (17 %)
Expenses excluding interest                                       691                752                (8 %)          2,197             2,345               (6 %)

Income from continuing operations before taxes on
income                                                            320                499               (36 %)          1,010             1,521              (34 %)
Taxes on income                                                  (120 )             (195 )             (38 %)           (387 )            (599 )            (35 %)

Income from continuing operations                                 200                304               (34 %)            623               922              (32 %)
Loss from discontinued operations, net of tax                       -                  -                 -                 -               (18 )            N/M

Net income                                                $       200        $       304               (34 %)     $      623        $      904              (31 %)

Earnings per share from continuing operations -
diluted                                                   $       .17        $       .26               (35 %)     $      .54        $      .80              (33 %)
Earnings per share - diluted                              $       .17        $       .26               (35 %)     $      .54        $      .78              (31 %)
Net revenue (decline) growth from prior year                      (19 %)              (3 %)                              (17 %)              6 %
Pre-tax profit margin from continuing operations                 31.7 %             39.9 %                              31.5 %            39.3 %
Return on stockholders' equity (annualized)                        17 %               31 %                                19 %              31 %
Annualized net revenue per average full-time
equivalent employee (in thousands)                        $       331        $       371               (11 %)     $      345        $      384              (10 %)

N/M Not meaningful.

Economic and market conditions remained challenging in the third quarter of 2009, marked by declines in home valuations, further increases in home foreclosures and delinquencies, and continued tight credit markets. At the same time, a measure of optimism returned to the equity markets as the Nasdaq Composite Index, the Standard and Poor's 500 Index, and the Dow Jones Industrial Average increased 16%, 15%, and 15%, respectively, during the quarter. The equity markets were mixed when compared to the third quarter of 2008 as the Nasdaq Composite Index increased 1%, and the Standard and Poor's 500 Index and the Dow Jones Industrial Average decreased 9% and 10%, respectively. In addition, the low interest rate environment continued in the third quarter as the federal funds target rate remained unchanged at a range of zero to 0.25% and the three-month LIBOR further decreased by 32 basis points to 0.30%.

During the third quarter of 2009, clients remained actively engaged with the Company. The Company attracted $19.9 billion in net new client assets during the third quarter. Total client assets ended the third quarter at $1.36 trillion, up 5% from the prior year, reflecting the Company's success in continuing to attract and retain clients. Client trading activity slowed modestly in the third quarter as clients' daily average trades decreased 5% on a year-over-year basis to 318,500. This was the second highest third quarter trading activity in the Company's history - surpassed only by the trading volume experienced in the third quarter of 2008.

Net revenues decreased by 19% and 17% in the third quarter and first nine months of 2009 compared to the same periods in 2008, respectively, primarily due to the decreases in asset management and administration fees and net interest revenue. Asset management and administration fees decreased in the third quarter of 2009 primarily due to money market mutual

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

fund fee waivers of $78 million in the quarter. Asset management and administration fees decreased in the first nine months of 2009 due to lower average equity market valuations and money market mutual fund fee waivers of $114 million. There were no money market mutual fund fee waivers in 2008. Net interest revenue decreased as a result of the low interest rate environment, partially offset by higher average interest-earning assets. These decreases were partially offset by the increase in other revenue. Other revenue in the first nine months of 2009 included a $31 million gain on the repurchase of a portion of the Company's long-term debt. Other revenue in the third quarter and first nine months of 2008 included a loss of $29 million on the sale of a corporate debt security. Net revenues were also negatively impacted by net impairment charges of $11 million and $38 million in the third quarter and first nine months of 2009, respectively, relating to certain residential mortgage-backed securities available for sale. Net impairment losses on securities in the third quarter and first nine months of 2008 included an other-than-temporary impairment charge of $44 million related to a corporate debt security.

Expenses excluding interest decreased by 8% and 6% in the third quarter and first nine months of 2009 compared to the same periods in 2008, respectively, primarily due to decreases in compensation and benefits expense, professional services expense, and advertising and market development expense. The decrease in expenses excluding interest in the first nine months of 2009 was partially offset by the increase in occupancy and equipment expense. Expenses excluding interest in the first nine months of 2009 include total facilities and severance charges of $99 million relating to the Company's cost reduction measures and a $16 million Federal Deposit Insurance Corporation (FDIC) special industry assessment that was recorded in the second quarter. Expenses excluding interest in the first nine months of 2009 were reduced by a net credit of $13 million relating to insurance recoveries of certain charges for individual client complaints and arbitration claims relating to Schwab YieldPlus Fund investments.

As a result of the Company's cost reduction measures and ongoing expense discipline, the Company achieved a pre-tax profit margin of 31.7% and return on stockholders' equity of 17% in the third quarter of 2009. Annualized net revenue per average full-time equivalent employee decreased 11% in the third quarter of 2009 compared to the same period in 2008 due to lower net revenues, partially offset by the decrease in average full-time equivalent employees.

CURRENT MARKET ENVIRONMENT

The market conditions discussed above continue to negatively impact the Company's revenues.

The Company earns mutual fund service fees and asset management fees based upon daily balances of certain client assets. Fluctuations in these client asset balances caused by changes in equity valuations directly impact the amount of fee revenue earned by the Company. If equity valuations decline when compared to corresponding year-earlier periods, asset management and administration fees will be negatively impacted on a year-over-year basis. Additionally, mutual fund service fees may be reduced if the current interest rate environment persists. The overall yields on certain money market mutual funds have fallen to levels at or below the management fees on those funds, and the Company is waiving a portion of its fees in order to continue providing a positive return to clients. To the extent these and other money market mutual funds find it necessary to replace maturing securities with lower yielding securities on an ongoing basis, the amount of fees waived may increase.

Given the low interest rate environment, the Company's revenue from interest-earning assets, such as securities held and loans to clients, has been declining more than the rates that the Company pays on funding sources, such as customer deposits. The Company's ability to reduce those rates has been limited as short-term rates have approached zero. Continuation of the current interest rate environment will negatively impact net interest revenue.

The level at which clients utilize margin loans will also impact net interest revenue. Although the average balance of margin loans for the third quarter of 2009 increased $744 million, or 12%, from the second quarter of 2009, the average balance decreased by $4.1 billion, or 37%, from the third quarter of 2008. The average yield earned on margin loans decreased to 5.04% for the third quarter of 2009 from 5.25% for the second quarter of 2009 and from 5.68% for the third quarter of 2008. The average balance of margin loans decreased in the first nine months of 2009 by $4.9 billion, or 43%, from the first nine months of 2008 and the average yield earned on margin loans decreased to 5.26% from 5.98% for the same period.

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

The Company recorded net impairment charges of $11 million and $38 million related to certain non-agency residential mortgage-backed securities in the third quarter and first nine months of 2009, respectively, due to credit deterioration of the securities' underlying collateral. Further deterioration in the performance of the underlying loans in the Company's residential mortgage-backed securities portfolio could result in the recognition of additional future impairment charges.

RESULTS OF OPERATIONS

The following discussion presents an analysis of the Company's results of operations for the third quarter and first nine months of 2009 compared to the same periods in 2008.

Net Revenues

The Company's major sources of net revenues are asset management and administration fees, net interest revenue, and trading revenue. Asset management and administration fees and net interest revenue decreased in the third quarter and first nine months of 2009 compared to the same periods in 2008. Trading revenue decreased in the third quarter and increased in the first nine months of 2009 compared to the same periods in 2008.

Three Months Ended September 30,                                              2009                            2008
                                                                                      % of                            % of
                                                      Percent                      Total Net                       Total Net
                                                      Change         Amount         Revenues         Amount         Revenues
Asset management and administration fees
Mutual fund service fees:
Proprietary funds (Schwab Funds® and Laudus Funds®)       (34 %)    $     207              21 %     $     312              25 %
Mutual Fund OneSource®                                    (12 %)          126              12 %           143              12 %
Clearing and other                                        (18 %)           23               2 %            28               2 %
Investment management and trust fees                      (20 %)           70               7 %            88               7 %
Other                                                       -              25               3 %            25               2 %

Asset management and administration fees                  (24 %)          451              45 %           596              48 %


Net interest revenue
Interest revenue                                          (28 %)          356              35 %           497              40 %
Interest expense                                           24 %           (62 )            (6 %)          (50 )            (4 %)

Net interest revenue                                      (34 %)          294              29 %           447              36 %


Trading revenue
Commissions                                                (2 %)          217              21 %           222              18 %
Principal transactions                                    (20 %)           24               3 %            30               2 %

Trading revenue                                            (4 %)          241              24 %           252              20 %


Other                                                     N/M              36               3 %             -               -


Net impairment losses on securities                       (75 %)          (11 )            (1 %)          (44 )            (4 %)


Total net revenues                                        (19 %)    $   1,011             100 %     $   1,251             100 %

N/M Not meaningful.

                         THE CHARLES SCHWAB CORPORATION

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

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



Nine Months Ended September 30,                                                2009                            2008
                                                                                       % of                            % of
                                                      Percent                       Total Net                       Total Net
                                                       Change         Amount         Revenues         Amount         Revenues
Asset management and administration fees
Mutual fund service fees:
Proprietary funds (Schwab Funds® and Laudus Funds®)        (18 %)    $     780              24 %     $     949              25 %
Mutual Fund OneSource®                                     (28 %)          321              10 %           446              12 %
Clearing and other                                         (23 %)           66               2 %            86               2 %
Investment management and trust fees                       (27 %)          199               6 %           271               7 %
Other                                                       (3 %)           73               3 %            75               1 %

Asset management and administration fees                   (21 %)        1,439              45 %         1,827              47 %


Net interest revenue
Interest revenue                                           (28 %)        1,063              33 %         1,485              38 %
Interest expense                                           (16 %)         (161 )            (5 %)         (192 )            (5 %)

Net interest revenue                                       (30 %)          902              28 %         1,293              33 %


Trading revenue
Commissions                                                  7 %           679              21 %           634              17 %
Principal transactions                                      (1 %)           93               3 %            94               2 %

Trading revenue                                              6 %           772              24 %           728              19 %


Other                                                      113 %           132               4 %            62               2 %


Net impairment losses on securities                        (14 %)          (38 )            (1 %)          (44 )            (1 %)


Total net revenues                                         (17 %)    $   3,207             100 %     $   3,866             100 %

Asset Management and Administration Fees

Asset management and administration fees include mutual fund service fees and fees for other asset-based financial services provided to individual and institutional clients. The Company earns mutual fund service fees for shareholder services, administration, and investment management provided to its proprietary funds, recordkeeping and shareholder services provided to third-party funds, and transfer agent services (through July 2009). These fees are based upon the daily balances of client assets invested in third-party funds and the Company's proprietary funds. The Company also earns asset management fees for advisory and managed account services, which are based on the daily balances of client assets subject to the specific fee for service. The fair values of client assets, which include proprietary and third-party mutual funds, are based on quoted market prices and other observable market data. Asset management and administration fees may vary with changes in the balances of client assets due to market fluctuations and client activity. For discussion of the impact of current market conditions on asset management and administration fees, see "Current Market Environment."

Asset management and administration fees decreased by $145 million, or 24%, and $388 million, or 21%, in the third quarter and first nine months of 2009 compared to the same periods in 2008, respectively, primarily due to decreases in mutual fund service fees and investment management and trust fees, which resulted from money market mutual fund fee waivers and lower average equity market valuations of client assets.

Mutual fund service fees decreased by $127 million, or 26%, and $314 million, or 21%, in the third quarter and first nine months of 2009 compared to the same periods in 2008, respectively. Given the low interest rate environment in the third quarter and first nine months of 2009, the overall yields on certain of the Company's money market mutual funds have fallen to levels at or below the management fees on those funds. As a result, the Company waived a portion of its fees which totaled $78 million and $114 million in the third quarter and first nine months of 2009, respectively, in order to provide a positive return to clients. The decrease in the third quarter of 2009 was also due to a 7% decrease in the average balances of client assets invested in the Company's proprietary funds. The decrease in the first nine months of 2009 was also due to

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

decreases of 18% and 21% in the average balances of client assets invested in the Company's Mutual Fund OneSource funds and mutual fund clearing services, respectively.

Investment management and trust fees decreased by $18 million, or 20%, and $72 million, or 27%, in the third quarter and first nine months of 2009 compared to the same periods in 2008, respectively, primarily due to temporary fee waivers of $21 million and $39 million, respectively, relating to client asset balances participating in advisory and managed account services programs. The decrease in the first nine months of 2009 was also due to lower average client asset balances in these programs.

Net Interest Revenue

Net interest revenue is the difference between interest earned on interest-earning assets and interest paid on funding sources. Net interest revenue is affected by changes in the volume and mix of these assets and liabilities, as well as by fluctuations in interest rates and portfolio management strategies. The Company is positioned so that the consolidated balance sheet produces an increase in net interest revenue when interest rates rise and, conversely, a decrease in net interest revenue when interest rates fall (i.e., interest-earning assets generally reprice more quickly than interest-bearing liabilities). When interest rates fall, the Company attempts to mitigate some of this negative impact by extending the maturities of assets in investment portfolios to lock-in asset yields as well as by lowering rates paid to clients on interest-bearing liabilities. Since the Company establishes the rates paid on certain brokerage client cash balances and deposits from banking clients, as well as the rates charged on receivables from brokerage clients, and also controls the composition of its investment securities, it has some ability to manage its net interest spread. However, the spread is influenced by external factors such as the interest rate environment and competition. For discussion of the impact of current market conditions on net interest revenue, see "Current Market Environment."

In clearing its clients' trades, Charles Schwab & Co., Inc. (Schwab) holds cash balances payable to clients. In most cases, Schwab pays its clients interest on cash balances awaiting investment, and may invest these funds and earn interest revenue. Receivables from brokerage clients consist primarily of margin loans to brokerage clients. Margin loans are loans made by Schwab to clients on a secured basis to purchase securities. Pursuant to Securities and Exchange Commission (SEC) regulations, client cash balances that are not used for margin lending are generally segregated into investment accounts that are maintained for the exclusive benefit of clients which are recorded in cash and investments segregated on the Company's condensed consolidated balance sheet.

The Company's interest-earning assets are financed primarily by brokerage client cash balances and deposits from banking clients. Other funding sources include non-interest-bearing brokerage client cash balances and proceeds from stock-lending activities, as well as stockholders' equity.

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

The following tables present net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheet:

Three Months Ended September 30,                      2009                                     2008
                                                     Interest     Average                     Interest     Average
                                        Average      Revenue/     Yield/         Average      Revenue/     Yield/
                                        Balance      Expense       Rate          Balance      Expense       Rate
Interest-earning assets:
Cash and cash equivalents              $    9,366   $        7        0.30 %    $    4,333   $       27        2.48 %
Cash and investments segregated            16,584           16        0.38 %        10,506           64        2.42 %
Broker-related receivables (1)                383            -        0.14 %           435            2        1.83 %
Receivables from brokerage clients          7,006           89        5.04 %        11,133          159        5.68 %
Other securities owned (2)                    158            -        0.87 %             -            -           -
Securities available for sale (3)          18,942          127        2.66 %        13,493          145        4.28 %
Securities held to maturity                 2,874           28        3.87 %             -            -           -
Loans to banking clients                    6,795           61        3.56 %         5,232           62        4.71 %
Loans held for sale                            69            1        5.75 %            51            1        7.80 %

Total interest-earning assets              62,177          329        2.10 %        45,183          460        4.05 %

Other interest revenue                                      27                                       37

Total interest-earning assets          $   62,177   $      356        2.27 %    $   45,183   $      497        4.38 %


Funding sources:
Deposits from banking clients          $   33,792   $       32        0.38 %    $   20,416   $       22        0.43 %
Payables to brokerage clients (2)          18,474            -        0.01 %        15,084            6        0.16 %
Short-term borrowings (4)                       -            -           -              47            -        2.27 %
Long-term debt                              1,535           22        5.69 %           882           14        6.31 %

Total interest-bearing liabilities         53,801           54        0.40 %        36,429           42        0.46 %

Non-interest-bearing funding sources        8,376                                    8,754
Provision for credit losses                                  7                                        5
Other interest expense                                       1                                        3

Total funding sources                  $   62,177   $       62        0.39 %    $   45,183   $       50        0.44 %

Net interest revenue                                $      294        1.88 %                 $      447        3.94 %

(1) Includes receivables from brokers, dealers, and clearing organizations. Interest revenue on broker-related receivables was less than $500,000 in the third quarter of 2009.

(2) Interest revenue on other securities owned and interest expense on payables to brokerage clients was less than $500,000 in the third quarter of 2009.

(3) Amounts have been calculated based on amortized cost.

(4) Interest expense on short-term borrowings was less than $500,000 in the third quarter of 2008.

. . .