Both of these Internet upstarts have rebounded from tough times by appealing to Schwab's bread-and-butter audience — independent-minded, bargain-loving individual investors searching for an alternative to the financial services establishment.

"It's a market that's ours to win now," E-Trade CEO Mitch Caplan said. "We believe we have the best value proposition on the Internet."

Since his appointment early last year, Caplan has positioned New York-based E-Trade as an online financial services bazaar that supplements stock trades with a variety of banking products.

The strategy has paid off so far, with E-Trade's market value more than doubling since Caplan took over. During the same 18-month stretch, Schwab's long-slumping stock has declined by another 8 percent.

Industry analysts say Schwab became more vulnerable in recent years as it started acting more like a conventional broker with more services aimed at upper-crust investors and fees that disillusioned frugal customers.

"Schwab once defined the discount brokerage industry, but now the company has lost its way and is trying to find its way back," said analyst Matthew Snowling of Friedman, Billings, Ramsey & Co. "There is a painful reinvention process to be done."

Schwab's distress provoked last month's ouster of David Pottruck as CEO, clearing the way for founder and chairman Charles Schwab to try to get the San Francisco-based company back on track.

Since his return two weeks ago, Charles Schwab has declined to talk to the media except for a brief interview with Dow Jones to deny a published report that the company's recent troubles might lead to its sale. He also turned down an interview request from The Associated Press.

"We believe our path of success as a firm is to remain independent and continue to appeal to a broad range of investors," Schwab spokesman Glen Mathison said.

Schwab's appeal has been fading for many customers. The brokerage ended June with 7.5 million customer accounts, down by about 3 percent from 7.7 million at the same time last year. Both Ameritrade and E-Trade have been expanding during the same period, although they remain far smaller than Schwab. Ameritrade had 3.5 million customer accounts in June while E-Trade's brokerage accounts totaled 2.9 million.

To become more competitive, Schwab has vowed to lower its annual expenses by $150 million to $200 million — a wrenching process that has already started with 245 layoffs and a plan to close 53 branches, or 16 percent of Schwab's 339 offices. That comes on top of the retrenchment Schwab began in 2001, when it laid off nearly 10,000 workers and closed dozens of offices.

The most recent quarter helps illustrate why Schwab still needs to shake things up. While Schwab's profit declined 10 percent, E-Trade and Ameritrade delivered healthy earnings increases despite suffering a downturn in customer trading late in the quarter.

Ameritrade has emerged as the busiest online brokerage, averaging 164,000 daily trades during the second quarter compared with an average of 142,200 at Schwab and average of 127,400 at E-Trade.

Omaha, Neb.-based Ameritrade offers a flat-rate commission of $10.99 per trade regardless of a customer's wealth. E-Trade charges $12.99 per trade for customers with more than $50,000 in their accounts. Schwab, which cut its prices in June, has a more discriminating pricing menu, ranging from $9.95 per trade for customers with at least $1 million to $29.95 for customers with less than $100,000.

Although successful recently, both E-Trade and Ameritrade underwent traumatic reorganizations during the stock market turmoil that dampened customer trading through most of 2001 and 2002. The overhaul produced slimmer, more focused operations that can make money catering to the middle-income customers who have become a lower priority for Schwab.

"We feel we have done a lot of things right in the last few years," Ameritrade CEO Joe Moglia said.

Moglia, a former Merrill Lynch executive hired by Ameritrade in 2001, might not stay on the job much longer. The 55-year-old Moglia says he is contemplating retirement when his contract expires in March. He plans to announce his decision in the fall.

Most analysts believe Schwab made a critical mistake by trying to create a brokerage hybrid straddling the lower and upper ends of the market.

The strategy hasn't paid off because Schwab still can't offer the same array of services as full-service brokers like Merrill Lynch and now has too much overhead to keep its prices competitive with E-Trade and Ameritrade, said Hoefer & Arnett analyst Richard Bove.

Although hopeful he can continue to exploit Schwab's weaknesses, E-Trade's Caplan isn't about to discount his rival.