##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





Form 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended December 31, 2007

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number 0-19483





SWS GROUP, INC.

(Exact name of registrant as specified in its charter)







|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                      |  | 75-2040825                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)



|                                           |  |           
|------------------------------------------ |  | ----------
|1201 Elm Street, Suite 3500, Dallas, Texas |  | 75270     
|(Address of principal executive offices)   |  | (Zip Code)

Registrants telephone number, including area code (214) 859-1800





Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   ̈    Accelerated filer  x    Non-accelerated filer   ̈

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

As of January 31, 2008, there were 27,398,318 shares of the registrants common stock, $.10 par value, outstanding.









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##### Table of Contents

SWS GROUP, INC. AND SUBSIDIARIES

INDEX



|                                                                                                                                                              |  |                                                                                       |  |   
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                                                                                                
|                                                                                                                                                              |  |                                                                                      
|Item 1.                                                                                                                                                       |  | Financial Statements                                                                  |  |   
|                                                                                                                                                              | 
|Consolidated Statements of Financial Condition December 31, 2007 (unaudited)and June 29, 2007                                                                 |  | 1                                                                                    
|                                                                                                                                                              | 
|Consolidated Statements of Income and Comprehensive Income for the three and six-months ended December 31, 2007 (unaudited) and December 29, 2006 (unaudited) |  | 2                                                                                    
|                                                                                                                                                              | 
|Consolidated Statements of Cash Flows for the six-months ended December 31, 2007(unaudited) and December 29, 2006 (unaudited)                                 |  | 3                                                                                    
|                                                                                                                                                              | 
|Notes to Consolidated Financial Statements (unaudited)                                                                                                        |  | 5                                                                                    
|                                                                                                                                                              |  |                                                                                      
|Item 2.                                                                                                                                                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 24
|                                                                                                                                                              |  |                                                                                      
|Item 3.                                                                                                                                                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 51
|                                                                                                                                                              |  |                                                                                      
|Item 4.                                                                                                                                                       |  | Controls and Procedures                                                               |  | 51
|                                                                                                                                                             
|PART II. OTHER INFORMATION                                                                                                                                   
|                                                                                                                                                              |  |                                                                                      
|Item 1.                                                                                                                                                       |  | Legal Proceedings                                                                     |  | 51
|                                                                                                                                                              |  |                                                                                      
|Item 1A.                                                                                                                                                      |  | Risk Factors                                                                          |  | 51
|                                                                                                                                                              |  |                                                                                      
|Item 2.                                                                                                                                                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 52
|                                                                                                                                                              |  |                                                                                      
|Item 3.                                                                                                                                                       |  | Defaults Upon Senior Securities                                                       |  | 52
|                                                                                                                                                              |  |                                                                                      
|Item 4.                                                                                                                                                       |  | Submission of Matters to a Vote of Security Holders                                   |  | 52
|                                                                                                                                                              |  |                                                                                      
|Item 5.                                                                                                                                                       |  | Other Information                                                                     |  | 53
|                                                                                                                                                              |  |                                                                                      
|Item 6.                                                                                                                                                       |  | Exhibits                                                                              |  | 53
|                                                                                                                                                              | 
|SIGNATURES                                                                                                                                                    |  | 54                                                                                   
|                                                                                                                                                              | 
|EXHIBIT INDEX                                                                                                                                                 |  | 55                                                                                   



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##### Table of Contents

SWS Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

December 31, 2007 and June 29, 2007

(In thousands, except par values and share amounts)



|                                                                                                                                                                                                             |  |             |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------- | --------- | - | ---- | - | --------- | -
|                                                                                                                                                                                                             |  | December    |           |   | June |  
|                                                                                                                                                                                                             |  | (Unaudited) |           |   |      |  
|Assets                                                                                                                                                                                                       |  |             |           |   |      |   |           |  
|Cash and cash equivalents                                                                                                                                                                                    |  | $           | 68,898    |   |      | $ | 128,760   |  
|Assets segregated for regulatory purposes                                                                                                                                                                    |  |             | 302,565   |   |      |   | 319,265   |  
|Receivable from brokers, dealers and clearing organizations                                                                                                                                                  |  |             | 2,842,621 |   |      |   | 3,117,766 |  
|Receivable from clients, net                                                                                                                                                                                 |  |             | 363,473   |   |      |   | 344,125   |  
|Loans held for sale                                                                                                                                                                                          |  |             | 319,305   |   |      |   | 148,013   |  
|Loans, net                                                                                                                                                                                                   |  |             | 806,327   |   |      |   | 756,037   |  
|Securities owned, at market value                                                                                                                                                                            |  |             | 90,898    |   |      |   | 119,621   |  
|Securities purchased under agreements to resell                                                                                                                                                              |  |             | 14,098    |   |      |   | 42,486    |  
|Goodwill                                                                                                                                                                                                     |  |             | 7,552     |   |      |   | 7,552     |  
|Marketable equity securities available for sale                                                                                                                                                              |  |             | 10,488    |   |      |   | 3,793     |  
|Other assets                                                                                                                                                                                                 |  |             | 89,539    |   |      |   | 87,167    |  
|                                                                                                                                                                                                             |  |             |           |   |      |   |           |  
|                                                                                                                                                                                                             |  | $           | 4,915,764 |   |      | $ | 5,074,585 |  
|                                                                                                                                                                                                             |  |             |           |   |      |   |           |  
|                                                                                                                                                                                                             |  |            
|Liabilities and Stockholders Equity                                                                                                                                                                         |  |             |           |   |      |   |           |  
|Short-term borrowings                                                                                                                                                                                        |  | $           |          |   |      | $ | 4,000     |  
|Payable to brokers, dealers and clearing organizations                                                                                                                                                       |  |             | 2,778,376 |   |      |   | 3,051,956 |  
|Payable to clients                                                                                                                                                                                           |  |             | 592,044   |   |      |   | 581,118   |  
|Deposits                                                                                                                                                                                                     |  |             | 976,092   |   |      |   | 897,150   |  
|Securities sold under agreements to repurchase                                                                                                                                                               |  |             | 3,673     |   |      |   | 17,829    |  
|Securities sold, not yet purchased, at market value                                                                                                                                                          |  |             | 41,554    |   |      |   | 63,470    |  
|Drafts payable                                                                                                                                                                                               |  |             | 27,143    |   |      |   | 25,718    |  
|Advances from Federal Home Loan Bank                                                                                                                                                                         |  |             | 128,881   |   |      |   | 66,989    |  
|Other liabilities                                                                                                                                                                                            |  |             | 50,189    |   |      |   | 59,482    |  
|                                                                                                                                                                                                             |  |             |           |   |      |   |           |  
|                                                                                                                                                                                                             |  |             | 4,597,952 |   |      |   | 4,767,712 |  
|                                                                                                                                                                                                             |  |            
|Minority interest in consolidated subsidiaries                                                                                                                                                               |  |             | 50        |   |      |   | 426       |  
|                                                                                                                                                                                                             |  |            
|Stockholders equity:                                                                                                                                                                                        |  |             |           |   |      |   |           |  
|Preferred stock of $1.00 par value. Authorized 100,000 shares; none issued                                                                                                                                   |  |             |          |   |      |   |          |  
|Common stock of $.10 par value. Authorized 60,000,000 shares; issued 28,213,971 and outstanding 27,617,777 shares at December 31, 2007;
issued 28,197,278 and outstanding 27,491,528 shares at June 29, 2007 |  |             | 2,821     |   |      |   | 2,819     |  
|Additional paid-in capital                                                                                                                                                                                   |  |             | 268,675   |   |      |   | 268,575   |  
|Retained earnings                                                                                                                                                                                            |  |             | 50,014    |   |      |   | 39,729    |  
|Accumulated other comprehensive income  unrealized holding gain net of tax of $500 at December 31, 2007 and $692 at June 29,
2007                                                                           |  |             | 1,085     |   |      |   | 1,417     |  
|Deferred compensation, net                                                                                                                                                                                   |  |             | 1,975     |   |      |   | 1,644     |  
|Treasury stock (596,194 shares at December 31, 2007 and 705,750 shares at June 29, 2007, at cost)                                                                                                            |  |             | (6,808    | ) |      |   | (7,737    | )
|                                                                                                                                                                                                             |  |             |           |   |      |   |           |  
|Total stockholders equity                                                                                                                                                                                   |  |             | 317,762   |   |      |   | 306,447   |  
|Commitments and contingencies                                                                                                                                                                                |  |             |           |   |      |   |           |  
|                                                                                                                                                                                                             |  |             |           |   |      |   |           |  
|Total liabilities and stockholders equity                                                                                                                                                                   |  | $           | 4,915,764 |   |      | $ | 5,074,585 |  
|                                                                                                                                                                                                             |  |             |           |   |      |   |           |  

See accompanying Notes to Consolidated Financial Statements.



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##### Table of Contents

SWS Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

For the three and six-months ended December 31, 2007 and December 29, 2006

(In thousands, except per share and share amounts)

(Unaudited)



|                                                                                                                                                                                                                                                                              |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ---------- | - | ----------------------- | - | ---------- | ---------------- |  | - | ---------------- | - |  | - | ---------- | -
|                                                                                                                                                                                                                                                                              |  | For the Three MonthsEnded |            |   | For the Six MonthsEnded |  
|                                                                                                                                                                                                                                                                              |  | December 31,2007          |            |   | December 29,2006        |   |            | December 31,2007 |  |   | December 29,2006 |  
|Revenues:                                                                                                                                                                                                                                                                     |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Net revenues from clearing operations                                                                                                                                                                                                                                         |  | $                         | 3,737      |   |                         | $ | 3,056      |                  |  | $ | 7,088            |   |  | $ | 6,127      |  
|Commissions                                                                                                                                                                                                                                                                   |  |                           | 26,101     |   |                         |   | 24,360     |                  |  |   | 48,273           |   |  |   | 43,299     |  
|Interest                                                                                                                                                                                                                                                                      |  |                           | 69,649     |   |                         |   | 74,877     |                  |  |   | 138,854          |   |  |   | 144,782    |  
|Investment banking, advisory and administrative fees                                                                                                                                                                                                                          |  |                           | 8,819      |   |                         |   | 8,050      |                  |  |   | 18,860           |   |  |   | 18,425     |  
|Net gains on principal transactions                                                                                                                                                                                                                                           |  |                           | 2,534      |   |                         |   | 5,655      |                  |  |   | 3,877            |   |  |   | 13,853     |  
|Other                                                                                                                                                                                                                                                                         |  |                           | 6,003      |   |                         |   | 9,111      |                  |  |   | 12,431           |   |  |   | 14,769     |  
|                                                                                                                                                                                                                                                                              |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Total revenue                                                                                                                                                                                                                                                                 |  |                           | 116,843    |   |                         |   | 125,109    |                  |  |   | 229,383          |   |  |   | 241,255    |  
|Interest expense                                                                                                                                                                                                                                                              |  |                           | 44,019     |   |                         |   | 50,802     |                  |  |   | 89,613           |   |  |   | 96,607     |  
|                                                                                                                                                                                                                                                                              |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Net revenues                                                                                                                                                                                                                                                                  |  |                           | 72,824     |   |                         |   | 74,307     |                  |  |   | 139,770          |   |  |   | 144,648    |  
|                                                                                                                                                                                                                                                                              |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Non-Interest Expenses:                                                                                                                                                                                                                                                        |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Commissions and other employee compensation                                                                                                                                                                                                                                   |  |                           | 43,285     |   |                         |   | 40,837     |                  |  |   | 83,509           |   |  |   | 81,681     |  
|Occupancy, equipment and computer service costs                                                                                                                                                                                                                               |  |                           | 6,375      |   |                         |   | 5,489      |                  |  |   | 12,898           |   |  |   | 10,829     |  
|Communications                                                                                                                                                                                                                                                                |  |                           | 2,484      |   |                         |   | 2,103      |                  |  |   | 4,710            |   |  |   | 4,289      |  
|Floor brokerage and clearing organization charges                                                                                                                                                                                                                             |  |                           | 889        |   |                         |   | 1,106      |                  |  |   | 2,016            |   |  |   | 2,276      |  
|Advertising and promotional                                                                                                                                                                                                                                                   |  |                           | 922        |   |                         |   | 604        |                  |  |   | 1,515            |   |  |   | 1,059      |  
|Other                                                                                                                                                                                                                                                                         |  |                           | 7,022      |   |                         |   | 4,841      |                  |  |   | 11,329           |   |  |   | 10,467     |  
|                                                                                                                                                                                                                                                                              |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Total non-interest expenses                                                                                                                                                                                                                                                   |  |                           | 60,977     |   |                         |   | 54,980     |                  |  |   | 115,977          |   |  |   | 110,601    |  
|                                                                                                                                                                                                                                                                              |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Income from continuing operations before income tax expense                                                                                                                                                                                                                   |  |                           | 11,847     |   |                         |   | 19,327     |                  |  |   | 23,793           |   |  |   | 34,047     |  
|Income tax expense                                                                                                                                                                                                                                                            |  |                           | 4,599      |   |                         |   | 6,422      |                  |  |   | 8,841            |   |  |   | 11,059     |  
|                                                                                                                                                                                                                                                                              |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Income from continuing operations                                                                                                                                                                                                                                             |  |                           | 7,248      |   |                         |   | 12,905     |                  |  |   | 14,952           |   |  |   | 22,988     |  
|Discontinued operations:                                                                                                                                                                                                                                                      |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Income from discontinued operation                                                                                                                                                                                                                                            |  |                           |           |   |                         |   | 45         |                  |  |   | 29               |   |  |   | 86         |  
|Income tax expense                                                                                                                                                                                                                                                            |  |                           |           |   |                         |   | (14        | )                |  |   | (9               | ) |  |   | (27        | )
|Minority interest                                                                                                                                                                                                                                                             |  |                           |           |   |                         |   | (5         | )                |  |   | (3               | ) |  |   | (9         | )
|                                                                                                                                                                                                                                                                              |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Income from discontinued operations                                                                                                                                                                                                                                           |  |                           |           |   |                         |   | 26         |                  |  |   | 17               |   |  |   | 50         |  
|                                                                                                                                                                                                                                                                              |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Net income                                                                                                                                                                                                                                                                    |  |                           | 7,248      |   |                         |   | 12,931     |                  |  |   | 14,969           |   |  |   | 23,038     |  
|Net income (loss) recognized in other comprehensive income, net of tax of ($70) and $233 for the three-months ended December 31, 2007 and
December 29, 2006, respectively and ($191) and $214 for the six-months ended December 31, 2007 and December 29, 2006, respectively. |  |                           | (107       | ) |                         |   | 456        |                  |  |   | (332             | ) |  |   | 431        |  
|                                                                                                                                                                                                                                                                              |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Comprehensive income                                                                                                                                                                                                                                                          |  | $                         | 7,141      |   |                         | $ | 13,387     |                  |  | $ | 14,637           |   |  | $ | 23,469     |  
|                                                                                                                                                                                                                                                                              |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Earnings per share  basic                                                                                                                                                                                                                                                    |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Income from continuing operations                                                                                                                                                                                                                                             |  | $                         | 0.26       |   |                         | $ | 0.48       |                  |  | $ | 0.55             |   |  | $ | 0.86       |  
|Income from discontinued operations                                                                                                                                                                                                                                           |  |                           |           |   |                         |   |           |                  |  |   |                 |   |  |   |           |  
|                                                                                                                                                                                                                                                                              |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Net income                                                                                                                                                                                                                                                                    |  | $                         | 0.26       |   |                         | $ | 0.48       |                  |  | $ | 0.55             |   |  | $ | 0.86       |  
|                                                                                                                                                                                                                                                                              |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Weighted average shares outstanding  basic                                                                                                                                                                                                                                   |  |                           | 27,465,601 |   |                         |   | 26,836,303 |                  |  |   | 27,437,367       |   |  |   | 26,654,553 |  
|                                                                                                                                                                                                                                                                              |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Earnings per share  diluted                                                                                                                                                                                                                                                  |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Income from continuing operations                                                                                                                                                                                                                                             |  | $                         | 0.26       |   |                         | $ | 0.48       |                  |  | $ | 0.54             |   |  | $ | 0.85       |  
|Income from discontinued operations                                                                                                                                                                                                                                           |  |                           |           |   |                         |   |           |                  |  |   |                 |   |  |   |           |  
|                                                                                                                                                                                                                                                                              |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Net income                                                                                                                                                                                                                                                                    |  | $                         | 0.26       |   |                         | $ | 0.48       |                  |  | $ | 0.54             |   |  | $ | 0.85       |  
|                                                                                                                                                                                                                                                                              |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  
|Weighted average shares outstanding  diluted                                                                                                                                                                                                                                 |  |                           | 27,584,415 |   |                         |   | 27,147,549 |                  |  |   | 27,599,738       |   |  |   | 26,950,075 |  
|                                                                                                                                                                                                                                                                              |  |                           |            |   |                         |   |            |                  |  |   |                  |   |  |   |            |  

See accompanying Notes to Consolidated Financial Statements.



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##### Table of Contents

SWS Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six-months ended December 31, 2007 and December 29, 2006

(In thousands)

(Unaudited)



|                                                                                            |  |                          |          |   |                  |   |            |  
|------------------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---------------- | - | ---------- | -
|                                                                                            |  | For the Six Months Ended |         
|                                                                                            |  | December 31,2007         |          |   | December 29,2006 |  
|Cash flows from operating activities:                                                       |  |                          |          |   |                  |   |            |  
|Net income                                                                                  |  | $                        | 14,969   |   |                  | $ | 23,038     |  
|Income from discontinued operations                                                         |  |                          | (17      | ) |                  |   | (50        | )
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                          |          |   |                  |   |            |  
|Depreciation and amortization                                                               |  |                          | 2,433    |   |                  |   | 2,417      |  
|Amortization of premiums on loans purchased                                                 |  |                          | (358     | ) |                  |   | (771       | )
|Provision for doubtful accounts                                                             |  |                          | 2,218    |   |                  |   | 1,240      |  
|Deferred income tax expense (benefit)                                                       |  |                          | 3,711    |   |                  |   | (2,086     | )
|Deferred compensation                                                                       |  |                          | 1,245    |   |                  |   | 1,462      |  
|Gain on sale of loans                                                                       |  |                          | (493     | ) |                  |   | (497       | )
|Loss (gain) on sale of fixed assets                                                         |  |                          | 187      |   |                  |   | (5         | )
|Loss (gain) on sale of real estate                                                          |  |                          | 188      |   |                  |   | (49        | )
|Equity in (earnings) losses of unconsolidated ventures                                      |  |                          | (421     | ) |                  |   | 528        |  
|Dividend received on investment in Federal Home Loan Bank stock                             |  |                          | (86      | ) |                  |   | (80        | )
|Windfall tax benefits                                                                       |  |                          | (218     | ) |                  |   | (227       | )
|Net change in minority interest in consolidated subsidiaries                                |  |                          | __       |   |                  |   | 231        |  
|Cash flow from operating activities of discontinued operations                              |  |                          | 4        |   |                  |   | 148        |  
|Change in operating assets and liabilities:                                                 |  |                          |          |   |                  |   |            |  
|Increase in assets segregated for regulatory purposes                                       |  |                          | 16,700   |   |                  |   | 6,236      |  
|Net change in broker, dealer and clearing organization accounts                             |  |                          | 1,565    |   |                  |   | (25,590    | )
|Net change in client accounts                                                               |  |                          | (8,902   | ) |                  |   | 15,227     |  
|Net change in loans held for sale                                                           |  |                          | (171,292 | ) |                  |   | (3,335     | )
|Decrease in securities owned                                                                |  |                          | 21,505   |   |                  |   | 951        |  
|Decrease in securities purchased under agreements to resell                                 |  |                          | 28,388   |   |                  |   | 19,003     |  
|Decrease (increase) in other assets                                                         |  |                          | 6,581    |   |                  |   | (3,512     | )
|Increase (decrease) in drafts payable                                                       |  |                          | 1,425    |   |                  |   | (2,511     | )
|Decrease in securities sold, not yet purchased                                              |  |                          | (21,916  | ) |                  |   | (14,886    | )
|Decrease in other liabilities                                                               |  |                          | (9,947   | ) |                  |   | (759       | )
|                                                                                            |  |                          |          |   |                  |   |            |  
|Net cash provided by (used in) operating activities                                         |  |                          | (112,531 | ) |                  |   | 16,123     |  
|                                                                                            |  |                          |          |   |                  |   |            |  
|                                                                                            |  |                         
|Cash flows from investing activities:                                                       |  |                          |          |   |                  |   |            |  
|Purchase of fixed assets                                                                    |  |                          | (4,135   | ) |                  |   | (2,790     | )
|Purchase of real estate                                                                     |  |                          |         |   |                  |   | (284       | )
|Proceeds from the sale of fixed assets                                                      |  |                          | 6        |   |                  |   | 5          |  
|Proceeds from the sale of real estate                                                       |  |                          | 1,947    |   |                  |   | 1,419      |  
|Loan originations and purchases                                                             |  |                          | (337,028 | ) |                  |   | (367,223   | )
|Loan repayments                                                                             |  |                          | 275,489  |   |                  |   | 296,963    |  
|Cash paid for purchase of correspondent clients of Ameritrade                               |  |                          | (2,677   | ) |                  |   | (2,382     | )
|Cash paid on investments                                                                    |  |                          | (1,500   | ) |                  |   |           |  
|Cash received on investments                                                                |  |                          | 639      |   |                  |   |           |  
|Cash flow from investing activities of discontinued operations                              |  |                          | 3,818    |   |                  |   |           |  
|Purchases of Federal Home Loan Bank stock                                                   |  |                          | (2,453   | ) |                  |   | (7         | )
|                                                                                            |  |                          |          |   |                  |   |            |  
|Net cash used in investing activities                                                       |  |                          | (65,894  | ) |                  |   | (74,299    | )
|                                                                                            |  |                          |          |   |                  |   |            |  
|                                                                                            |  |                         
|Cash flows from financing activities:                                                       |  |                          |          |   |                  |   |            |  
|Payments on short-term borrowings                                                           |  |                          | (375,424 | ) |                  |   | (1,050,700 | )
|Cash proceeds from short-term borrowings                                                    |  |                          | 371,424  |   |                  |   | 1,030,880  |  
|Increase in deposits                                                                        |  |                          | 78,942   |   |                  |   | 97,948     |  
|Advances from the Federal Home Loan Bank                                                    |  |                          | 111,769  |   |                  |   | 26,972     |  
|Payments on advances from Federal Home Loan Bank                                            |  |                          | (49,877  | ) |                  |   | (14,729    | )



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##### Table of Contents

|                                                                           |  |                          |         |   |                  |   |        |  
|-------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---------------- | - | ------ | -
|                                                                           |  | For the Six Months Ended |        
|                                                                           |  | December 31,2007         |         |   | December 29,2006 |  
|Payment of cash dividends on common stock                                  |  |                          | (4,438  | ) |                  |   | (3,993 | )
|Windfall tax benefits                                                      |  |                          | 218     |   |                  |   | 227    |  
|Cash (payments) proceeds on securities sold under agreements to repurchase |  |                          | (14,156 | ) |                  |   | 2,283  |  
|Net proceeds from exercise of stock options                                |  |                          | 157     |   |                  |   | 8,114  |  
|Cash flow from financing activities of discontinued operations             |  |                          | (382    | ) |                  |   |       |  
|Proceeds related to the Deferred Compensation Plan                         |  |                          | 330     |   |                  |   | 157    |  
|Purchase of treasury stock related to Deferred Compensation Plan           |  |                          |        |   |                  |   | (232   | )
|                                                                           |  |                          |         |   |                  |   |        |  
|Net cash provided by financing activities                                  |  |                          | 118,563 |   |                  |   | 96,927 |  
|                                                                           |  |                          |         |   |                  |   |        |  
|Net increase (decrease) in cash and cash equivalents                       |  |                          | (59,862 | ) |                  |   | 38,751 |  
|Cash and cash equivalents at beginning of period                           |  |                          | 128,760 |   |                  |   | 41,674 |  
|                                                                           |  |                          |         |   |                  |   |        |  
|Cash and cash equivalents at end of period                                 |  | $                        | 68,898  |   |                  | $ | 80,425 |  
|                                                                           |  |                          |         |   |                  |   |        |  
|Supplemental schedule of non-cash investing and financing activities:      |  |                          |         |   |                  |   |        |  
|Granting of restricted stock                                               |  | $                        | 1,268   |   |                  | $ | 917    |  
|                                                                           |  |                          |         |   |                  |   |        |  
|Forclosures on loans                                                       |  | $                        | 10,311  |   |                  | $ | 542    |  
|                                                                           |  |                          |         |   |                  |   |        |  
|Supplemental disclosure of cash flow information:                          |  |                          |         |   |                  |   |        |  
|Cash paid during the period for:                                           |  |                          |         |   |                  |   |        |  
|Interest from continuing operations                                        |  | $                        | 89,175  |   |                  | $ | 54,768 |  
|                                                                           |  |                          |         |   |                  |   |        |  
|Income taxes                                                               |  | $                        |        |   |                  | $ | 11,600 |  
|                                                                           |  |                          |         |   |                  |   |        |  

See accompanying Notes to Consolidated Financial Statements.



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##### Table of Contents

SWS Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Three and Six-Months Ended December 31, 2007 and December 29, 2006

(Unaudited)

GENERAL AND BASIS OF PRESENTATION

The interim consolidated financial statements as of December 31, 2007, and for the three and six-months ended December 31, 2007 and December 29, 2006, are unaudited; however, in the opinion of
management, these interim statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows. These financial statements should be
read in conjunction with the audited consolidated financial statements and related notes as of and for the year ended June 29, 2007 filed on Form 10-K. Amounts included for June 29, 2007 are derived from the audited consolidated financial
statements as filed on Form 10-K. All significant intercompany balances and transactions have been eliminated.

The consolidated financial statements
include the accounts of SWS Group, Inc. (SWS Group) and the consolidated active subsidiaries listed below (collectively with SWS Group, SWS or the Company), 100% owned unless otherwise noted:



|                                            |  |                              
|------------------------------------------- |  | -----------------------------
|Southwest Securities, Inc.*                 |  | Southwest Securities       
|SWS Financial Services, Inc.                |  | SWS Financial              
|Southwest Financial Insurance Agency, Inc.  |  |                              
|Southwest Insurance Agency, Inc.            |  |                              
|Southwest Insurance Agency of Alabama, Inc. |  | collectively, SWS Insurance
|SWS Banc Holdings, Inc.                     |  | SWS Banc                   
|Southwest Securities, FSB                   |  | Bank                       
|SWS A, LLC (90%)                            |  | SWS A                      
|SWS B, LTD (88.2%)                          |  | SWS B                      
|FSB Development, LLC                        |  | FSB Development            



|* | At December 31, 2007, 50 shares of Southwest Securities, Inc. Series A Preferred Stock were held by an outside broker/dealer which clears its proprietary transactions
through Southwest Securities.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Southwest Securities is a New York Stock Exchange (NYSE) member broker/dealer and Southwest
Securities and SWS Financial are members of the Financial Industry Regulatory Authority (FINRA). Each is registered with the Securities and Exchange Commission (the SEC) as a broker/dealer under the Securities Exchange Act of
1934 (Exchange Act) and as registered investment advisors under the Investment Advisors Act of 1940.

SWS Insurance holds insurance agency
licenses in 46 states for the purpose of facilitating the sale of insurance and annuities for Southwest Securities and its correspondents. We retain no risk of insurance related to the insurance and annuity products SWS Insurance sells.

The Bank is a federally chartered savings association regulated by the Office of Thrift Supervision (OTS). SWS Banc was incorporated as a wholly owned
subsidiary of SWS Group and became the sole shareholder of the Bank in 2004.

SWS A (formerly known as FSBF, LLC) is a 2% general partner of SWS B
(formerly known as FSB Financial, LTD). In March 2006, FSB Financial, LTD (FSB Financial), a purchaser, originator and servicer of non-prime automobile loans, sold substantially all of its assets. See -Discontinued
Operations discussion below.



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##### Table of Contents

FSB Development was formed to develop single-family residential lots. As of December 31, 2007, it has no
investments.

Consolidated Financial Statements. The consolidated financial statements of SWS are prepared as of the close of business on the last
Friday of each month except for December for which the consolidated financial statements are prepared as of December 31, 2007. The Banks financial statements are prepared as of the end of each month. Any individually material transactions
are reviewed and recorded in the appropriate period. All significant intercompany balances and transactions have been eliminated.

Discontinued
Operations.In March 2006, the Bank sold the assets of its subsidiary, FSB Financial. Pursuant to the sale agreement, 10% of the sale price, or $3,587,000, was placed in escrow to secure purchase price adjustments and sellers
indemnification obligations. This money was released from escrow on July 3, 2007 at which time the Bank received $3,818,000, representing the original $3,587,000 and $231,000 in interest. The minority interest holder received $382,000 on this
transaction.

The results of FSB Financial, as summarized below, have been classified as discontinued operations for all periods presented, (in thousands).
As of December 31, 2007, this entity had been dissolved.



|                                    |  |                                |   |                              |   |      |  |      |    |  |   |   
|----------------------------------- |  | ------------------------------ | - | ---------------------------- | - | ---- |  | ---- | -- |  | - | --
|                                    |  | Three Months EndedDecember 31, |   | Six Months EndedDecember 31,
|                                    |  | 2007                           |   | 2006                         |   | 2007 |  | 2006
|Net revenues                        |  | $                              |  |                              | $ | 45   |  | $    | 29 |  | $ | 87
|Net income before taxes             |  |                                |  |                              |   | 45   |  |      | 29 |  |   | 86
|Income tax expense                  |  |                                |  |                              |   | 14   |  |      | 9  |  |   | 27
|Minority interest                   |  |                                |  |                              |   | 5    |  |      | 3  |  |   | 9 
|Income from discontinued operations |  |                                |  |                              |   | 26   |  |      | 17 |  |   | 50

Amortization Expense. The Company has recorded a customer relationship intangible which is amortized over a
five year period at a rate based on the estimated future economic benefit of the customer relationships. See additional discussion in -Intangible Assets.

Income Taxes.In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB
Statement 109 (FIN 48) with respect to all income tax positions accounted for under FASB Statement 109, Accounting for Income Taxes. The interpretation addresses the recognition, measurement, accrual of
interest and penalties, balance sheet classification and disclosure of any uncertain tax positions. The provisions of FIN 48 were effective for SWS beginning July 2007, with the cumulative effect of the change in accounting principal recorded as an
adjustment to the opening balance of retained earnings. The Company recorded the cumulative effect of adopting FIN 48 by decreasing the opening balance of retained earnings $271,000. Upon adoption, the Company also recorded a net liability for
uncertain positions as of July 1, 2007 of $271,000. At December 31, 2007, the Company had approximately $640,000 of unrecognized tax benefits. The net liability increased $369,000 from September 30, 2007 to December 31, 2007 due
to unrecognized tax benefits related to tax positions taken on filed returns and returns expected to be filed in the current year. While the Company expects that the net liability for uncertain positions will change during the next twelve months,
the Company does not believe that the change will have a significant impact on its consolidated financial position or results of operations.

The Company
recognizes interest and penalties on income taxes in income tax expense. Included in the net liability is accrued interest and penalties of $125,000, net of federal benefit. The total amount of unrecognized income tax benefits that, if recognized,
would reduce income tax expense is approximately $515,000, net of federal benefit.



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##### Table of Contents

SWS is subject to U.S. Federal income tax examinations for the tax years 2004 through 2006. State tax returns are subject
to examinations for varying periods, but generally for the tax years 2003 through 2006. The Company is currently under examination for state tax returns only.

STOCK OPTION AND RESTRICTED STOCK PLANS

Stock Option Plans. There were no active stock option plans at December 31, 2007. The
Company has eliminated the use of options as a compensation tool and currently grants restricted stock to reward and incentivize officers, employees and directors. All current outstanding options under the SWS Group, Inc. Stock Option Plan (the
1996 Plan) and the SWS Group, Inc. 1997 Stock Option Plan (the 1997 Plan) may still be exercised until their contracted expiration date occurs. Options granted under the 1996 and 1997 Plans have a maximum ten-year term, and
all options are fully vested.

Restricted Stock Plan. On November 12, 2003, the stockholders of SWS Group approved the adoption of the SWS
Group, Inc. 2003 Restricted Stock Plan (Restricted Stock Plan). In November 2007, the stockholders of SWS Group approved an amendment to the plan to increase the number of shares available under the plan by 500,000. The Restricted Stock
Plan allows for awards of up to 1,250,000 shares of SWS Groups common stock to SWS directors, officers and employees. No more than 300,000 of the authorized shares may be newly issued shares of common stock. The Restricted Stock Plan
terminates on August 21, 2013. The vesting period is determined on an individualized basis by the Compensation Committee of the Board of Directors. In general, restricted stock granted to employees under the Restricted Stock Plan is fully
vested after three years, and restricted stock granted to non-employee directors vests on the one year anniversary of the date of grant.

SWS accounts for
the plan under the recognition and measurement principles of the FASB Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment.

At various times in fiscal 2007, the Board of Directors approved grants to various officers and employees totaling 91,140 shares with a weighted average market value of
$16.53 per share. During the first six months of fiscal 2008, the Board of Directors approved grants to various officers and employees totaling 132,609 shares with a weighted average market value of $18.57 per share. As a result of these grants, SWS
recorded deferred compensation in Additional Paid in Capital of approximately $1,364,000 in fiscal 2007 and $2,294,000 in fiscal 2008. For the three and six-months ended December 31, 2007, SWS recognized compensation expense related to
restricted stock grants of approximately $443,000 and $852,000, respectively. For the three and six-months ended December 29, 2006, SWS has recognized compensation expense related to restricted stock grants of approximately $414,000 and
$747,000, respectively.

At December 31, 2007, the total number of unvested shares outstanding under the Restricted Stock Plan was 255,623 and the
total number of securities available for future grants was 707,916.

CASH AND CASH EQUIVALENTS

For the purpose of the consolidated statements of cash flows, SWS considers cash to include cash on hand and in depository accounts. In addition, SWS considers funds due
from banks and interest bearing deposits in other banks to be cash.

The Bank is required to maintain balances on hand or with the Federal Reserve Bank. At
December 31, 2007 and June 30, 2007, these reserve balances amounted to $32,021,000 and $20,100,000, respectively.



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##### Table of Contents

INVESTMENTS

Comprehensive Software Systems, Inc. (CSS). In 1993, SWS became a part owner of CSS, a software development company formed to develop a new brokerage front and back office system. By fiscal 2002, SWS held a 25.08%
ownership interest in CSS, and implemented the equity method of accounting prescribed by APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock.

SWS completed its installation of the system in September 2002. In June 2002, SWS determined that the investment in CSS and its related goodwill were fully impaired
based on an analysis of the projected cash flow from the investment.

To facilitate the continued enhancement of the CSS system, SWS entered into an
agreement in December 2002, amended in June 2003, to loan CSS $3,500,000 under a note bearing interest at 6% per annum. This note was ultimately forgiven in January 2005. In December 2003, SWS agreed to an additional equity investment of
approximately $2,900,000, resulting in the purchase of 5.8 million shares of CSS common stock. The purchases were made in equal quarterly installments (two purchases were made in fiscal years 2004 and 2005 totaling approximately $1,443,000 in
each fiscal year) and ultimately resulted in increasing SWS position in CSS to 30.22%. These investments were made to insure the continued operation of CSS while needed enhancements to the system were built.

SWS did not participate in CSS equity offering in January 2005. SWS had developed many of the functions needed to run the CSS system in-house and was longer
dependent on CSS for enhancements. Subsequent to the equity offering in January 2005, SWS owned 13.7% of CSS.

In April 2006, SWS signed an agreement with
CSS to pay a $1,700,000 maintenance fee to CSS if a specific member of the consortium of broker/dealers had successfully converted to the CSS system by December 31, 2006. CSS made written demand of the $1,700,000 under this agreement in January
2007. SWS disputed the payment and settled the dispute in calendar 2007 for an immaterial amount.

Effective November 30, 2007, CSS was sold and
merged with one of the members of the consortium. SWS proceeds from the sale were minimal and SWS now has no ownership interest in CSS.

Also in
November 2007, SWS and CSS entered into a three year maintenance agreement pursuant to which SWS made maintenance payments of $3,000,000 for calendar year 2007 and will make payments of $2,500,000 in 2008 and 2009. SWS will also receive assistance
in converting to an updated version of the CSS software and a new broker front end platform in exchange for the increased maintenance payments.

Other
Equity Investments. SWS has two other investment vehicles that are accounted for under the equity method. One is a limited partnership venture capital fund to which SWS has committed $5,000,000. As of December 31, 2007, SWS had contributed
$4,000,000 of this commitment. During the three and six-months ended December 31, 2007, SWS reported losses of $169,000 and income of $406,000, respectively related to this investment. In comparison, during the three and six-months ended
December 29, 2006, SWS recorded income of $73,000 and losses of $528,000, respectively related to this investment.

In fiscal 2007, the Bank committed
$3,000,000 to a limited partnership equity fund as a cost effective way of meeting its obligations under the Community Reinvestment Act. As of December 31, 2007, the Bank has invested $2,400,000 of its commitment. During the three and
six-months ended December 31, 2007, the Bank recorded gains of $12,000 and $15,000 related to this investment.

ASSETS SEGREGATED FOR REGULATORY
PURPOSES

At December 31, 2007, SWS had cash of approximately $302,565,000 segregated in special reserve bank accounts for the exclusive benefit of
customers under Rule 15c3-3 pursuant to the Exchange Act. SWS had no positions in special reserve bank accounts for the Proprietary Accounts of Introducing Brokers (PAIB) at December 31, 2007.



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##### Table of Contents

At June 29, 2007, SWS had cash of approximately $319,265,000 segregated in special reserve bank accounts for the
exclusive benefit of customers under Rule 15c3-3 pursuant to the Exchange Act. SWS had no positions in special reserve bank accounts for the PAIB at June 29, 2007.

MARKETABLE EQUITY SECURITIES

SWS owns shares of common stock in U.S. Home Systems, Inc. (USHS), Westwood
Holdings Group, Inc. (Westwood) and NYSE Euronext, Inc. (NYX), which are classified as marketable equity securities available for sale. Consequently, the unrealized holding gains (losses), net of tax, are recorded as a
separate component of stockholders equity on the consolidated statements of financial condition.

At December 31, 2007 and June 29, 2007,
SWS held 357,154 shares of USHS with a cost basis of $1,576,000. The market value of the USHS shares was $1,914,000 at December 31, 2007 and $3,553,000 at June 29, 2007.

At December 31, 2007 and June 29, 2007, SWS held 7,018 shares of Westwood, within the deferred compensation plan with a cost basis of $108,000. The market value of the Westwood shares was $264,000 at
December 31, 2007 and $240,000 at June 29, 2007.

Southwest Securities has been a member of the NYSE since 1972 owning one seat carried at a cost
of $230,000. Upon the merger of the NYSE and Archipelago Holdings, L.L.C. (Archipelago) in March 2006, Southwest Securities surrendered its seat for the right to receive from the new entity, NYX, $300,000 in cash and 80,177 restricted
shares of NYX common stock, par value $0.01 per share.

Prior to the merger, SWS owned 23,721 shares of Archipelago common stock recorded at its cost of
zero. Upon the merger, each outstanding share of Archipelago common stock was converted into one share of NYX stock.

In lieu of a seat, Southwest
Securities now has an annual trading license. This license allows Southwest Securities continued physical and electronic access to the NYSE trading facilities.

The 80,177 NYX shares received from the merger were restricted by agreement. These restrictions prohibit any direct or indirect assignment, sale, exchange, transfer, tender or other disposition of NYX stock. The restrictions on
the shares lapse based on a three year vesting schedule with restrictions lapsing on one-third of the restricted shares annually. The restriction on 26,727 shares of stock lapsed as of March 7, 2007. On June 7, 2007, NYX announced an early
release of the restriction on an additional 26,725 shares. As of December 31, 2007, 26,725 shares are still restricted. There are no restrictions on the 23,721 shares received on the conversion of the Companys investment in Archipelago.

In July 2007, Southwest Securities transferred its ownership of the NYX stock at cost to SWS Group. These shares are now recorded as Marketable Equity
Securities Available for Sale and changes in valuation on the 77,173 unrestricted shares appear in Other Comprehensive Income in the income statement. The remaining restricted 26,725 NYX shares have been recorded at cost at December 31, 2007.
The restriction on these shares is scheduled to lapse in March of 2009. For the three and six-months ended December 31, 2007, the Company recorded a gain in Other Comprehensive Income of $440,000, net of tax of $286,000 and $1,092,000, net of
tax of $710,000, respectively, on the 77,173 unrestricted shares that the Company own. For the three and six-months ended December 29, 2006, the Company recorded gains of $2,308,000 and $3,122,000, respectively in Net Gains (Losses) on
Principal Transactions.



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##### Table of Contents

As of December 31, 2007, the Companys total investment of 103,898 of NYX shares was valued at $8,310,000 with
a cost basis of $7,218,000 (the value of the NYX shares upon transfer from Southwest Securities to SWS Group.) As of June 29, 2007, the Companys total investment in NYX shares was valued at $7,209,000 and was included in Securities Owned
on the Consolidated Statement of Financial Condition.

RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS

At December 31, 2007 and June 29, 2007, SWS had receivable from and payable to brokers, dealers and clearing organizations related to the following (in
thousands):



|                             |  |          |           |      |   |          
|---------------------------- |  | -------- | --------- | ---- | - | ---------
|                             |  | December |           | June
|Receivable                   |  |          |           |      |   |          
|Securities failed to deliver |  | $        | 36,236    |      | $ | 26,786   
|Securities borrowed          |  |          | 2,727,083 |      |   | 2,987,907
|Correspondent broker/dealers |  |          | 24,774    |      |   | 33,943   
|Clearing organizations       |  |          | 9,647     |      |   | 12,853   
|Other                        |  |          | 44,881    |      |   | 56,277   
|                             |  |          |           |      |   |          
|                             |  | $        | 2,842,621 |      | $ | 3,117,766
|                             |  |          |           |      |   |          
|Payable                      |  |          |           |      |   |          
|Securities failed to receive |  | $        | 54,754    |      | $ | 52,907   
|Securities loaned            |  |          | 2,692,179 |      |   | 2,961,001
|Correspondent broker/dealers |  |          | 17,526    |      |   | 25,254   
|Other                        |  |          | 13,917    |      |   | 12,794   
|                             |  |          |           |      |   |          
|                             |  | $        | 2,778,376 |      | $ | 3,051,956
|                             |  |          |           |      |   |          

SWS participates in the securities borrowing and lending business by borrowing and lending securities other than
those of its clients. SWS obtains or releases collateral as prices of the underlying securities fluctuate. At December 31, 2007, SWS had collateral of $2,727,066,000 under securities lending agreements, of which SWS had repledged
$2,670,483,000. SWS had collateral of $2,987,905,000 under securities lending agreements, of which SWS had repledged $2,939,853,000 at June 29, 2007.

LOANS HELD FOR SALE

Loans held for sale are valued at the lower of cost or market value as determined by outstanding commitments from
investors or current investor yield requirements calculated on the aggregate note basis. Loans held for sale consist of first mortgage loans and home improvement loans which have been purchased or originated but not yet sold in the secondary market.
Gains and losses on the sale of loans held for sale are determined using the specific identification method.

LOANS AND ALLOWANCE FOR PROBABLE LOAN
LOSSES

The Bank grants loans to customers primarily within the Dallas-Fort Worth metropolitan area. The Bank also purchases loans, in the ordinary
course of business, which have been originated in various other areas of the United States. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors ability to honor their contracts is dependent upon the general
economic conditions of North Texas.



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##### Table of Contents

Loans receivable at December 31, 2007 and June 30, 2007 are summarized as follows (in thousands):



|                                                 |  |          |         |   |      |   |         |  
|------------------------------------------------ |  | -------- | ------- | - | ---- | - | ------- | -
|                                                 |  | December |         |   | June |  
|First mortgage loans (principally conventional): |  |          |         |   |      |   |         |  
|Real estate                                      |  | $        | 520,763 |   |      | $ | 454,111 |  
|Construction                                     |  |          | 198,051 |   |      |   | 226,617 |  
|                                                 |  |          |         |   |      |   |         |  
|                                                 |  |          | 718,814 |   |      |   | 680,728 |  
|                                                 |  |          |         |   |      |   |         |  
|Consumer and other loans:                        |  |          |         |   |      |   |         |  
|Commercial                                       |  |          | 82,947  |   |      |   | 70,847  |  
|Other                                            |  |          | 7,166   |   |      |   | 6,664   |  
|                                                 |  |          |         |   |      |   |         |  
|                                                 |  |          | 90,113  |   |      |   | 77,511  |  
|                                                 |  |          |         |   |      |   |         |  
|Factored receivables                             |  |          | 5,743   |   |      |   | 5,969   |  
|                                                 |  |          |         |   |      |   |         |  
|                                                 |  |          | 814,670 |   |      |   | 764,208 |  
|Unearned income                                  |  |          | (2,331  | ) |      |   | (2,674  | )
|Allowance for probable loan losses               |  |          | (6,012  | ) |      |   | (5,497  | )
|                                                 |  |          |         |   |      |   |         |  
|                                                 |  | $        | 806,327 |   |      | $ | 756,037 |  
|                                                 |  |          |         |   |      |   |         |  

Impairment of loans with a recorded investment of approximately $5,609,000 and $3,528,000 at December 31,
2007 and June 30, 2007, respectively, has been recognized in conformity with SFAS No. 114, Accounting by Creditors for Impairment of a Loanan Amendment of SFAS No. 5 and SFAS No. 15, as amended by SFAS
No. 118 Accounting for Creditors for Impairment of a Loan-Income Recognition and Disclosures-an amendment of SFAS No. 114. The year to date average recorded investment in impaired loans was approximately $3,939,000 for
the period ending December 31, 2007 and $713,000 for the period ending December 31, 2006. No specific allowance for loan losses is recorded if the impaired loans are adequately collateralized. The total allowance for loan losses related to
these loans was approximately $1,042,000 and $49,000 at December 31, 2007 and 2006, respectively. The total allowance for loan losses related to these loans was approximately $532,000 and $66,000 at June 30, 2007 and 2006, respectively. No
material amount of interest income on impaired loans was recognized for cash payments received in the second quarter of either fiscal 2008 or fiscal 2007.

An analysis of the allowance for probable loan losses for the three and six-month periods ended December 31, 2007 and 2006 is as follows (in thousands):



|                               |  |                                |        |   |                              |   |       |      |  |   |        |   |  |   |       |  
|------------------------------ |  | ------------------------------ | ------ | - | ---------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                               |  | Three Months EndedDecember 31, |        |   | Six Months EndedDecember 31, |  
|                               |  | 2007                           |        |   | 2006                         |   |       | 2007 |  |   | 2006   |  
|Balance at beginning of period |  | $                              | 5,547  |   |                              | $ | 5,347 |      |  | $ | 5,497  |   |  | $ | 5,047 |  
|Provision for loan losses      |  |                                | 1,687  |   |                              |   | 421   |      |  |   | 1,738  |   |  |   | 715   |  
|Net charge-offs                |  |                                | (1,222 | ) |                              |   | (271  | )    |  |   | (1,223 | ) |  |   | (265  | )
|                               |  |                                |        |   |                              |   |       |      |  |   |        |   |  |   |       |  
|                               |  |                                | 465    |   |                              |   | 150   |      |  |   | 515    |   |  |   | 450   |  
|                               |  |                                |        |   |                              |   |       |      |  |   |        |   |  |   |       |  
|Balance at end of period       |  | $                              | 6,012  |   |                              | $ | 5,497 |      |  | $ | 6,012  |   |  | $ | 5,497 |  
|                               |  |                                |        |   |                              |   |       |      |  |   |        |   |  |   |       |  

The reserve to loan ratio for the six-months ended December 31, 2007 and 2006 was 0.74% and 0.77%,
respectively.



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SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED

Securities owned and securities sold, not yet purchased at December 31, 2007 and June 29, 2007, which are carried at market value, include the following (in
thousands):



|                                                  |  |          |        |      |   |        
|------------------------------------------------- |  | -------- | ------ | ---- | - | -------
|                                                  |  | December |        | June
|Securities owned                                  |  |          |        |      |   |        
|Corporate equity securities                       |  | $        | 7,498  |      | $ | 17,135 
|Municipal obligations                             |  |          | 21,681 |      |   | 20,471 
|U.S. Government and Government agency obligations |  |          | 15,089 |      |   | 27,443 
|Corporate obligations                             |  |          | 42,742 |      |   | 45,391 
|Other                                             |  |          | 3,888  |      |   | 9,181  
|                                                  |  |          |        |      |   |        
|                                                  |  | $        | 90,898 |      | $ | 119,621
|                                                  |  |          |        |      |   |        
|Securities sold, not yet purchased                |  |          |        |      |   |        
|Corporate equity securities                       |  | $        | 848    |      | $ | 1,070  
|Municipal obligations                             |  |          | 49     |      |   |       
|U.S. Government and Government agency obligations |  |          | 28,433 |      |   | 49,581 
|Corporate obligations                             |  |          | 12,122 |      |   | 12,726 
|Other                                             |  |          | 102    |      |   | 93     
|                                                  |  |          |        |      |   |        
|                                                  |  | $        | 41,554 |      | $ | 63,470 
|                                                  |  |          |        |      |   |        

During the quarter, certain of the above securities were pledged to secure short-term borrowings and as security
deposits at clearing organizations for SWS clearing business. Securities pledged as security deposits at clearing organizations were $5,048,000 and $4,130,000 at December 31, 2007 and June 29, 2007, respectively. Additionally, at
December 31, 2007 and June 29, 2007, SWS had pledged firm securities valued at $76,000 and $277,000, respectively, in conjunction with securities lending activities.

SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL

Transactions involving purchases of securities under agreement to
resell (reverse repurchase agreements) are accounted for as collateralized financings except where SWS does not have an agreement to sell the same or substantially the same securities before maturity at a fixed or determinable price. At
December 31, 2007, SWS held reverse repurchase agreements totaling $14,098,000, collateralized by U.S. Government and Government agency obligations with a market value of approximately $14,111,000. At June 29, 2007, SWS held reverse
repurchase agreements totaling $42,486,000, collateralized by U.S. Government and Government agency obligations with a market value of approximately $42,572,000.

GOODWILL

SWS accounts for goodwill under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. SWS
performed its annual assessment of the fair value of goodwill during fiscal 2007 in June 2007, as required by SFAS No. 142 and based on the results of the assessment, SWS goodwill balance was not impaired. There have been no events in the
last six-months that would trigger an interim assessment on the fair value of goodwill.

SWS has two reporting segments within its broker/dealer operations
with goodwill, clearing and institutional. There were no changes in the carrying value of goodwill during the last six-months.

INTANGIBLE ASSETS

On March 22, 2006, the Company entered into an agreement with TD Ameritrade Holding Corporation (Ameritrade), to transfer 15 correspondent
clients to the Company. This transaction closed in July 2006, with 12 of the 15 correspondents agreeing to transfer to the Companys clearing platform. The purchase price was based on the estimated value of the transferred correspondents.
$2,382,000 million of the maximum agreed upon purchase price of $5,800,000 was paid upon closing



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with the remainder to be paid on the one year anniversary of the closing date. Ameritrade received 78% of the remaining amount, $2,678,000, in July 2007. As
the agreed upon ticket volumes were not met, the second payment was pro-rated by the ticket volumes achieved compared to the agreed upon ticket volume. As a result of these transactions, the Company has recorded a customer relationship intangible of
$5,060,000 at December 31, 2007. The amount of the intangible at June 29, 2007 was $5,022,000. The intangible asset is amortized over a five year period at a rate based on the estimated future economic benefit of the customer
relationships. SWS recognized approximately $337,000 and $674,000 respectively, and $307,000 and $372,000, respectively, of amortization expense for the three and six-months ended December 31, 2007 and December 29, 2006, respectively. The
intangible is included in Other Assets on the Consolidated Statement of Financial Condition.

SHORT-TERM BORROWINGS

Southwest Securities has credit arrangements with commercial banks, which include broker loan lines up to $275,000,000. These lines of credit are used primarily to
finance securities owned, securities held for correspondent broker/dealer accounts and receivables in customers margin accounts. These lines may also be used to release pledged collateral against day loans. These credit arrangements are
provided on an as offered basis and are not committed lines of credit. These arrangements can be terminated at any time by the lender. Any outstanding balance under these credit arrangements is due on demand and bears interest at rates
indexed to the federal funds rate. At December 31, 2007, there were no amounts outstanding under these secured arrangements. At June 29, 2007, the amount outstanding under these secured arrangements was $4,000,000, which was collateralized
by securities held for firm accounts valued at $38,849,000.

SWS had $250,000 outstanding under unsecured letters of credit at both December 31, 2007
and June 29, 2007, pledged to support its open positions with securities clearing organizations, which bear a 1% commitment fee and are renewable semi-annually.

At December 31, 2007 and June 29, 2007, SWS had an additional unsecured letter of credit issued for a sub-lease of space previously occupied by Mydiscountbroker.com, a subsidiary of SWS dissolved in July
2004, in the amount of $429,000 and $571,000, respectively. The letter of credit bears a 1% commitment fee and is renewable annually.

In addition to the
broker loan lines, SWS had a $20,000,000 unsecured line of credit that is due on demand and bears interest at rates indexed to the federal funds rate. The total amount of borrowings available under this line of credit is reduced by the amount
outstanding on the line and under the unsecured letters of credit at the time of borrowing. At December 31, 2007 and June 29, 2007, the total amount available for borrowings was $19,321,000 and $19,179,000, respectively. There were no
amounts outstanding on this line other than $679,000 and $821,000 under unsecured letters of credit at December 31, 2007 and June 29, 2007, respectively.

At December 31, 2007 and June 29, 2007, SWS has an irrevocable letter of credit agreement aggregating $46,000,000 and $48,000,000, respectively, pledged to support customer open options positions with an options clearing
organization. The letter of credit bears interest at the brokers call rate, if drawn, and is renewable semi-annually. The letter of credit is fully collateralized by marketable securities held in client and non-client margin accounts with a
value of $80,095,000 and $66,381,000 at December 31, 2007 and June 29, 2007, respectively.

In addition to using customer securities to
collateralize bank loans, SWS also loans client securities as collateral in conjunction with SWS securities lending activities. At December 31, 2007, approximately $456,227,000 of client securities under customer margin loans was
available to be pledged, of which SWS has pledged $21,533,000 under securities loan agreements. At June 29, 2007, approximately $414,673,000 of client securities under customer margin loans was available to be pledged, of which SWS had pledged
$20,855,000 under securities loan agreements.



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DEPOSITS

Deposits at
December 31, 2007 and June 30, 2007 are summarized as follows (dollars in thousands):



|                                              |  |          |         |         |       |   |        |   |         |  |       |  
|--------------------------------------------- |  | -------- | ------- | ------- | ----- | - | ------ | - | ------- |  | ----- | -
|                                              |  | December |         |         | June  |  
|                                              |  | Amount   |         | Percent |       |   | Amount |   | Percent | 
|Non-interest bearing demand accounts          |  | $        | 50,294  |         | 5.2   | % |        | $ | 46,367  |  | 5.2   | %
|Interest bearing demand accounts              |  |          | 57,137  |         | 5.8   |   |        |   | 56,035  |  | 6.2   |  
|Savings accounts                              |  |          | 746,352 |         | 76.5  |   |        |   | 687,239 |  | 76.6  |  
|Limited access money market accounts          |  |          | 37,303  |         | 3.8   |   |        |   | 30,712  |  | 3.4   |  
|Certificates of deposit, less than $100,000   |  |          | 54,940  |         | 5.6   |   |        |   | 52,370  |  | 5.9   |  
|Certificates of deposit, $100,000 and greater |  |          | 30,066  |         | 3.1   |   |        |   | 24,427  |  | 2.7   |  
|                                              |  |          |         |         |       |   |        |   |         |  |       |  
|                                              |  | $        | 976,092 |         | 100.0 | % |        | $ | 897,150 |  | 100.0 | %
|                                              |  |          |         |         |       |   |        |   |         |  |       |  

The weighted average interest rate on deposits was approximately 4.0% at December 31, 2007 and 4.1% at
June 30, 2007.

At December 31, 2007, scheduled maturities of certificates of deposit were as follows (in thousands):



|                                              |  |            |        |            |   |            |  |            |       |            |   |       |  |   |       |  |   |       
|--------------------------------------------- |  | ---------- | ------ | ---------- | - | ---------- |  | ---------- | ----- | ---------- | - | ----- |  | - | ----- |  | - | ------
|                                              |  | Fiscal2008 |        | Fiscal2009 |   | Fiscal2010 |  | Fiscal2011 |       | Thereafter |   | Total
|Certificates of deposit, less than $100,000   |  | $          | 32,270 |            | $ | 16,169     |  | $          | 4,162 |            | $ | 1,227 |  | $ | 1,112 |  | $ | 54,940
|Certificates of deposit, $100,000 and greater |  |            | 15,131 |            |   | 11,293     |  |            | 2,975 |            |   | 508   |  |   | 159   |  |   | 30,066
|                                              |  |            |        |            |   |            |  |            |       |            |   |       |  |   |       |  |   |       
|                                              |  | $          | 47,401 |            | $ | 27,462     |  | $          | 7,137 |            | $ | 1,735 |  | $ | 1,271 |  | $ | 85,006
|                                              |  |            |        |            |   |            |  |            |       |            |   |       |  |   |       |  |   |       

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under repurchase agreements, which are secured borrowings, generally mature within one to four days from the transaction date. Securities sold under
repurchase agreements are reflected at the amount of cash received in connection with the transactions. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company monitors the fair
value of the underlying securities on a daily basis. Securities sold under repurchase agreements at December 31, 2007 and June 29, 2007 were $3,673,000 and $17,829,000, respectively.

ADVANCES FROM THE FEDERAL HOME LOAN BANK (FHLB)

At
December 31, 2007 and June 30, 2007, advances from the FHLB were due as follows (in thousands):



|                        |  |          |         |      |   |       
|----------------------- |  | -------- | ------- | ---- | - | ------
|                        |  | December |         | June
|Maturity:               |  |          |         |      |   |       
|Due within one year     |  | $        | 53,800  |      | $ |      
|Due within two years    |  |          | 328     |      |   | 696   
|Due within five years   |  |          | 23,778  |      |   | 17,202
|Due within seven years  |  |          | 4,805   |      |   | 1,521 
|Due within ten years    |  |          | 4,103   |      |   | 7,089 
|Due within twenty years |  |          | 32,020  |      |   | 30,344
|Due beyond twenty years |  |          | 10,047  |      |   | 10,137
|                        |  |          |         |      |   |       
|                        |  | $        | 128,881 |      | $ | 66,989
|                        |  |          |         |      |   |       

Pursuant to collateral agreements, the advances from the FHLB, with interest rates ranging from 2% to 8%, are
collateralized by approximately $309,000,000 of collateral value (as defined) in qualifying first mortgage loans at December 31, 2007 (calculated at September 30, 2007). At June 30, 2007 (calculated at March 31, 2007), advances
with interest rates from 3% to 8% were collateralized by approximately $282,000,000 of collateral value in qualifying first mortgage loans.



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BANK BORROWINGS

The
Bank has an agreement with an unaffiliated bank for a $30,000,000 unsecured line of credit for the purchase of federal funds with a floating interest rate. The unaffiliated bank is not obligated by this agreement to sell federal funds to the Bank.
The agreement is being used by the Bank to support short-term liquidity needs. At December 31, 2007 and June 30, 2007, there were no amounts outstanding on this line of credit.

REGULATORY CAPITAL REQUIREMENTS

Brokerage. The broker/dealer subsidiaries are subject to the SECs
Uniform Net Capital Rule (the Rule), which requires the maintenance of minimum net capital. Southwest Securities has elected to use the alternative method, permitted by the Rule, which requires that it maintain minimum net capital, as
defined in Rule 15c3-1 pursuant to the Exchange Act, equal to the greater of $1,000,000 or 2% of aggregate debit balances, as defined in Rule 15c3-3 pursuant to the Exchange Act. At December 31, 2007, Southwest Securities had net capital of
$129,538,000, or approximately 27.8% of aggregate debit balances, which was $120,380,000 in excess of its minimum net capital requirement of $9,158,000 at that date. Additionally, the net capital rule of the NYSE provides that equity capital may not
be withdrawn or cash dividends paid if resulting net capital would be less than 5% of aggregate debit items. At December 31, 2007, Southwest Securities had net capital of $106,642,000 in excess of 5% of aggregate debit items.

SWS Financial follows the basic (aggregate indebtedness) method under Rule 15c3-1, which requires the maintenance of the larger of minimum net capital of $250,000 or
1/15 of aggregate indebtedness. At December 31, 2007, the net capital and excess net capital of SWS Financial were $845,000 and $595,000, respectively.

Banking. The Bank is subject to various regulatory capital requirements administered by federal agencies. Quantitative measures, established by regulation to ensure capital adequacy, require maintaining minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in 12 CFR 565 and 12 CFR 567) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of
December 31, 2007 and June 30, 2007, that the Bank met all capital adequacy requirements to which it is subject.

As of December 31, 2007
and June 30, 2007, the Bank is considered well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios.

The Banks actual capital amounts and ratios are presented in the following tables (dollars in thousands):



|                                        |  |        |         |       |                             |   |        |                                                               |        |  |     |        |  |       |        |  |      |  
|--------------------------------------- |  | ------ | ------- | ----- | --------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | --- | ------ |  | ----- | ------ |  | ---- | -
|                                        |  | Actual |         |       | For CapitalAdequacyPurposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                        |  | Amount |         | Ratio |                             |   | Amount |                                                               | Ratio  |  |     | Amount |  | Ratio |       
|December 31, 2007:                      |  |        |         |       |                             |   |        |                                                               |        |  |     |        |  |       |        |  |      |  
|Total capital to risk weighted assets   |  | $      | 111,091 |       | 11.2                        | % |        | $                                                             | 79,684 |  | 8.0 | %      |  | $     | 99,605 |  | 10.0 | %
|Tier I capital to risk weighted assets  |  |        | 105,078 |       | 10.5                        |   |        |                                                               | 39,842 |  | 4.0 |        |  |       | 59,763 |  | 6.0  |  
|Tier I capital to adjusted total assets |  |        | 105,078 |       | 8.7                         |   |        |                                                               | 48,533 |  | 4.0 |        |  |       | 60,667 |  | 5.0  |  



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|                                        |  |        |        |       |                             |   |        |                                                               |        |  |     |        |  |       |        |  |      |  
|--------------------------------------- |  | ------ | ------ | ----- | --------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  | --- | ------ |  | ----- | ------ |  | ---- | -
|                                        |  | Actual |        |       | For CapitalAdequacyPurposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                        |  | Amount |        | Ratio |                             |   | Amount |                                                               | Ratio  |  |     | Amount |  | Ratio |       
|June 30, 2007:                          |  |        |        |       |                             |   |        |                                                               |        |  |     |        |  |       |        |  |      |  
|Total capital to risk weighted assets   |  | $      | 90,436 |       | 10.4                        | % |        | $                                                             | 69,482 |  | 8.0 | %      |  | $     | 86,853 |  | 10.0 | %
|Tier I capital to risk weighted assets  |  |        | 84,939 |       | 9.8                         |   |        |                                                               | 34,741 |  | 4.0 |        |  |       | 52,112 |  | 6.0  |  
|Tier I capital to adjusted total assets |  |        | 84,939 |       | 8.0                         |   |        |                                                               | 42,274 |  | 4.0 |        |  |       | 52,842 |  | 5.0  |  

On December 27, 2007, SWS Group provided SWS Banc $15,000,000 in additional capital. The amount was eliminated in
consolidation.

EARNINGS PER SHARE

A reconciliation
between the weighted average shares outstanding used in the basic and diluted EPS computations is as follows for the three and six-month periods ended December 31, 2007 and December 29, 2006 (in thousands, except share and per share
amounts):



|                                              |  |                    |            |                  |   |                  |  |                  |            |  |   |           
|--------------------------------------------- |  | ------------------ | ---------- | ---------------- | - | ---------------- |  | ---------------- | ---------- |  | - | ----------
|                                              |  | Three Months Ended |            | Six Months Ended
|                                              |  | December 31,2007   |            | December 29,2006 |   | December 31,2007 |  | December 29,2006
|Income from continuing operations             |  | $                  | 7,248      |                  | $ | 12,905           |  | $                | 14,952     |  | $ | 22,988    
|Income from discontinued operations           |  |                    |           |                  |   | 26               |  |                  | 17         |  |   | 50        
|                                              |  |                    |            |                  |   |                  |  |                  |            |  |   |           
|Net income                                    |  | $                  | 7,248      |                  | $ | 12,931           |  | $                | 14,969     |  | $ | 23,038    
|                                              |  |                    |            |                  |   |                  |  |                  |            |  |   |           
|Weighted average shares outstanding  basic   |  |                    | 27,465,601 |                  |   | 26,836,303       |  |                  | 27,437,367 |  |   | 26,654,553
|Effect of dilutive securities:                |  |                    |            |                  |   |                  |  |                  |            |  |   |           
|Assumed exercise of stock options             |  |                    | 95,956     |                  |   | 239,042          |  |                  | 123,182    |  |   | 223,215   
|Restricted stock                              |  |                    | 22,858     |                  |   | 72,204           |  |                  | 39,189     |  |   | 72,307    
|                                              |  |                    |            |                  |   |                  |  |                  |            |  |   |           
|Weighted average shares outstanding  diluted |  |                    | 27,584,415 |                  |   | 27,147,549       |  |                  | 27,599,738 |  |   | 26,950,075
|                                              |  |                    |            |                  |   |                  |  |                  |            |  |   |           
|Earnings per share  basic                    |  |                    |            |                  |   |                  |  |                  |            |  |   |           
|Income from continuing operations             |  | $                  | 0.26       |                  | $ | 0.48             |  | $                | 0.55       |  | $ | 0.86      
|Income from discontinued operations           |  |                    |           |                  |   |                 |  |                  |           |  |   |          
|                                              |  |                    |            |                  |   |                  |  |                  |            |  |   |           
|Net income                                    |  | $                  | 0.26       |                  | $ | 0.48             |  | $                | 0.55       |  | $ | 0.86      
|                                              |  |                    |            |                  |   |                  |  |                  |            |  |   |           
|Earnings per share  diluted                  |  |                    |            |                  |   |                  |  |                  |            |  |   |           
|Income from continuing operations             |  | $                  | 0.26       |                  | $ | 0.48             |  | $                | 0.54       |  | $ | 0.85      
|Income from discontinued operations           |  |                    |           |                  |   |                 |  |                  |           |  |   |          
|                                              |  |                    |            |                  |   |                  |  |                  |            |  |   |           
|Net income                                    |  | $                  | 0.26       |                  | $ | 0.48             |  | $                | 0.54       |  | $ | 0.85      
|                                              |  |                    |            |                  |   |                  |  |                  |            |  |   |           

At December 31, 2007 and December 29, 2006, there were approximately 621,000 and 909,000 options
outstanding under the two stock option plans, respectively. See Stock Options and Restricted Stock Plans. As of December 31, 2007, approximately 12,074 outstanding options were anti-dilutive and therefore were not included in the
calculation of weighted average shares outstanding-dilutive. As of December 29, 2006, there were no anti-dilutive options outstanding.

REPURCHASE
OF TREASURY STOCK

Periodically, SWS repurchases SWS Group common stock under a plan approved by our Board of Directors. As of December 31, 2007,
we had authorization, which expires on June 30, 2008, to repurchase up to 500,000 shares. No shares were repurchased by SWS under this program or the previous program, which expired December 2006, for the six-month periods ended
December 31, 2007 and December 29, 2006, respectively. See -Subsequent Events.

Additionally, the trustee under SWS
deferred compensation plan periodically purchases stock in the open market in accordance with the terms of the plan. This stock is classified as treasury stock in



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the consolidated financial statements, but participates in future dividends declared by SWS. No shares were purchased by the plan in the three and six-months
ended December 31, 2007. No shares were purchased by the plan in the three-months ended December 29, 2006. The plan purchased 13,340 shares in the six-months ended December 29, 2006 at a cost of approximately $232,000 or $14.88 per
share. The plan distributed 15,572 shares in the six-months ended December 29, 2006.

Upon vesting of the shares granted under the Restricted Stock
Plan, a portion of the grantees may choose to sell a portion of their vested shares to the Company to cover the tax liabilities arising from the vesting. As a result, 17,142 shares were repurchased with a market value of approximately $335,784 or an
average of $19.59 per share in the first half of fiscal 2008. In the first half of fiscal 2007, 13,581 shares were repurchased with a market value of $239,000 or an average of $17.60 per share.

SEGMENT REPORTING

SWS operates four business segments:



| |  |  | Clearing: The clearing segment provides clearing and execution services (generally on a fully disclosed basis) for general securities broker/dealers, for bank
affiliated firms and firms specializing in high volume trading.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Retail: The retail segment includes retail securities products and services (equities, mutual funds and fixed income products), insurance products and managed
accounts and encompasses the activities of our employee registered representatives and our independent representatives who are under contract with SWS Financial.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Institutional: The institutional segment serves institutional customers in securities lending, investment banking and public finance, fixed income sales and
trading, proprietary trading and agency execution services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Banking: The Bank offers traditional banking products and services and focuses on several sectors of the residential housing market, including interim construction
and short-term funding for mortgage bankers.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Clearing and institutional brokerage services are offered exclusively through Southwest
Securities. The Bank and its subsidiaries comprise the bank segment. Retail brokerage services are offered through Southwest Securities (the Private Client Group and the Managed Advisors Accounts department), the insurance subsidiaries and through
SWS Financial (which contracts with independent representatives for the administration of their securities business).

SWS segments are managed
separately based on types of products and services offered and their related client bases. The segments are consistent with how we manage our resources and assess our performance. Management assesses performance based primarily on income before
income taxes and discontinued operations and net interest revenue (expense). As a result, SWS reports net interest revenue (expense) by segment. SWS business segment information is prepared using the following methodologies:



| |  |  | the financial results for each segment are determined using the same policies as those described in Note 1, Significant Accounting Policies, to the
Companys audited consolidated financial statements contained in the Companys Form 10-K for the fiscal year ended June 29, 2007;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | segment financial information includes the allocation of interest based on each segments earned interest spreads;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | information system and operation expenses are allocated based on each segments usage, which is primarily determined by trading volumes;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | shared securities execution facilities expenses are allocated to the segments based on production levels;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | money market fee revenue is allocated based on each segments average balances; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | clearing charges are allocated based on clearing levels from each segment.
| | - |  | --------------------------------------------------------------------------

Intersegment balances are eliminated upon consolidation and have been applied to the appropriate segment.

The
other category includes SWS Group, corporate administration and SWS Capital Corporation. SWS Capital Corporation is a dormant entity which holds approximately $25,000 of assets. SWS Group is a holding company that owns various
investments, including USHS and NYX common stock.



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The following table presents the Companys operations by the segments outlined above for the three and six-months
ended December 31, 2007 and December 29, 2006:



|                                                      |  |          |        |   |        |   |               |  |   |         |   |       |   |        |                             |   |        |   |  |   |       
|----------------------------------------------------- |  | -------- | ------ | - | ------ | - | ------------- |  | - | ------- | - | ----- | - | ------ | --------------------------- | - | ------ | - |  | - | ------
|UNAUDITED QUARTERLY FINANCIAL INFORMATION            
|(in thousands)                                        |  | Clearing |        |   | Retail |   | Institutional |  |   | Banking |   | Other |   |        | ConsolidatedSWS Group, Inc.
|Three-months ended December 31, 2007                  |  |          |        |   |        |   |               |  |   |         |   |       |   |        |                             |   |        |   |  |   |       
|Operating revenue                                     |  | $        | 6,336  |   |        | $ | 20,380        |  | $ | 20,061  |   |       | $ | 676    |                             | $ | (259   | ) |  | $ | 47,194
|Net intersegment revenues                             |  |          | (251   | ) |        |   | 339           |  |   | (114    | ) |       |   | 1,743  |                             |   | (1,717 | ) |  |   |      
|Net interest revenue                                  |  |          | 3,683  |   |        |   | 1,544         |  |   | 8,198   |   |       |   | 12,194 |                             |   | 11     |   |  |   | 25,630
|Net revenues                                          |  |          | 10,019 |   |        |   | 21,924        |  |   | 28,259  |   |       |   | 12,870 |                             |   | (248   | ) |  |   | 72,824
|Operating expenses                                    |  |          | 7,338  |   |        |   | 17,806        |  |   | 17,937  |   |       |   | 9,155  |                             |   | 8,741  |   |  |   | 60,977
|Depreciation and amortization                         |  |          | 342    |   |        |   | 186           |  |   | 106     |   |       |   | 205    |                             |   | 356    |   |  |   | 1,195 
|Income (loss) from continuing operations before taxes |  |          | 2,681  |   |        |   | 4,118         |  |   | 10,322  |   |       |   | 3,715  |                             |   | (8,989 | ) |  |   | 11,847
|Income from discontinued operations                   |  |          |       |   |        |   |              |  |   |        |   |       |   |       |                             |   |       |   |  |   |      
|                                                      |  |          |        |   |        |  
|Three-months ended December 29, 2006                  |  |          |        |   |        |   |               |  |   |         |   |       |   |        |                             |   |        |   |  |   |       
|Operating revenue                                     |  | $        | 5,753  |   |        | $ | 17,879        |  | $ | 21,503  |   |       | $ | 708    |                             | $ | 4,389  |   |  | $ | 50,232
|Net intersegment revenues                             |  |          | (234   | ) |        |   | 256           |  |   | 365     |   |       |   | 1,421  |                             |   | (1,808 | ) |  |   |      
|Net interest revenue                                  |  |          | 4,144  |   |        |   | 1,821         |  |   | 5,263   |   |       |   | 12,265 |                             |   | 582    |   |  |   | 24,075
|Net revenues                                          |  |          | 9,897  |   |        |   | 19,700        |  |   | 26,766  |   |       |   | 12,973 |                             |   | 4,971  |   |  |   | 74,307
|Operating expenses                                    |  |          | 4,664  |   |        |   | 16,062        |  |   | 18,638  |   |       |   | 6,221  |                             |   | 9,395  |   |  |   | 54,980
|Depreciation and amortization                         |  |          | 323    |   |        |   | 138           |  |   | 114     |   |       |   | 140    |                             |   | 556    |   |  |   | 1,271 
|Income (loss) from continuing operations before taxes |  |          | 5,233  |   |        |   | 3,638         |  |   | 8,128   |   |       |   | 6,752  |                             |   | (4,424 | ) |  |   | 19,327
|Income from discontinued operations                   |  |          |       |   |        |   |              |  |   |        |   |       |   | 26     |                             |   |       |   |  |   | 26    



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|                                                      |  |          |         |   |        |   |               |  |         |           |       |   |           |                             |   |         |   |  |   |          
|----------------------------------------------------- |  | -------- | ------- | - | ------ | - | ------------- |  | ------- | --------- | ----- | - | --------- | --------------------------- | - | ------- | - |  | - | ---------
|UNAUDITED SIX-MONTH FINANCIAL INFORMATION            
|(in thousands)                                        |  | Clearing |         |   | Retail |   | Institutional |  | Banking |           | Other |   |           | ConsolidatedSWS Group, Inc.
|Six-months ended December 31, 2007                    |  |          |         |   |        |   |               |  |         |           |       |   |           |                             |   |         |   |  |   |          
|Operating revenue                                     |  | $        | 12,135  |   |        | $ | 38,288        |  | $       | 38,515    |       | $ | 1,276     |                             | $ | 315     |   |  | $ | 90,529   
|Net intersegment revenues                             |  |          | (494    | ) |        |   | 590           |  |         | 403       |       |   | 3,444     |                             |   | (3,943  | ) |  |   |         
|Net interest revenue                                  |  |          | 8,162   |   |        |   | 3,275         |  |         | 13,697    |       |   | 24,085    |                             |   | 22      |   |  |   | 49,241   
|Net revenues                                          |  |          | 20,297  |   |        |   | 41,563        |  |         | 52,212    |       |   | 25,361    |                             |   | 337     |   |  |   | 139,770  
|Operating expenses                                    |  |          | 13,119  |   |        |   | 34,261        |  |         | 34,853    |       |   | 16,194    |                             |   | 17,550  |   |  |   | 115,977  
|Depreciation and amortization                         |  |          | 683     |   |        |   | 360           |  |         | 203       |       |   | 388       |                             |   | 799     |   |  |   | 2,433    
|Income (loss) from continuing operations before taxes |  |          | 7,178   |   |        |   | 7,302         |  |         | 17,359    |       |   | 9,167     |                             |   | (17,213 | ) |  |   | 23,793   
|Income from discontinued operations                   |  |          |        |   |        |   |              |  |         |          |       |   | 17        |                             |   |        |   |  |   | 17       
|Assets (*)                                            |  | $        | 493,273 |   |        | $ | 189,237       |  | $       | 2,839,134 |       | $ | 1,213,603 |                             | $ | 34,147  |   |  | $ | 4,769,394
|                                                      |  |          |         |   |        |  
|Six-months ended December 29, 2006                    |  |          |         |   |        |   |               |  |         |           |       |   |           |                             |   |         |   |  |   |          
|Operating revenue                                     |  | $        | 11,051  |   |        | $ | 33,765        |  | $       | 44,164    |       | $ | 1,360     |                             | $ | 6,133   |   |  | $ | 96,473   
|Net intersegment revenues                             |  |          | (438    | ) |        |   | 466           |  |         | 542       |       |   | 2,713     |                             |   | (3,283  | ) |  |   |         
|Net interest revenue                                  |  |          | 7,873   |   |        |   | 3,480         |  |         | 11,842    |       |   | 23,935    |                             |   | 1,045   |   |  |   | 48,175   
|Net revenues                                          |  |          | 18,924  |   |        |   | 37,245        |  |         | 56,006    |       |   | 25,295    |                             |   | 7,178   |   |  |   | 144,648  
|Operating expenses                                    |  |          | 9,295   |   |        |   | 30,687        |  |         | 37,786    |       |   | 12,327    |                             |   | 20,506  |   |  |   | 110,601  
|Depreciation and amortization                         |  |          | 405     |   |        |   | 267           |  |         | 231       |       |   | 337       |                             |   | 1,177   |   |  |   | 2,417    
|Income (loss) from continuing operations before taxes |  |          | 9,629   |   |        |   | 6,558         |  |         | 18,220    |       |   | 12,968    |                             |   | (13,328 | ) |  |   | 34,047   
|Income from discontinued operations                   |  |          |        |   |        |   |              |  |         |          |       |   | 50        |                             |   |        |   |  |   | 50       
|Assets (*)                                            |  | $        | 494,458 |   |        | $ | 199,655       |  | $       | 2,820,643 |       | $ | 949,071   |                             | $ | 26,641  |   |  | $ | 4,490,468



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|(*) | Assets are reconciled to total assets as presented in the December 31, 2007 and December 29, 2006 Consolidated
Statement of Financial Condition as follows:
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                             |  |                  |           |   |                  |   |           |  
|------------------------------------------------------------ |  | ---------------- | --------- | - | ---------------- | - | --------- | -
|                                                             |  | December 31,2007 |           |   | December 29,2006 |  
|Amount as presented above                                    |  | $                | 4,769,394 |   |                  | $ | 4,490,468 |  
|Reconciling items:                                           |  |                  |           |   |                  |   |           |  
|Unallocated assets:                                          |  |                  |           |   |                  |   |           |  
|Cash                                                         |  |                  | 18,381    |   |                  |   | 2,152     |  
|Receivables from brokers, dealers and clearing organizations |  |                  | 81,493    |   |                  |   | 47,084    |  
|Receivable from clients, net of allowances                   |  |                  | 37,597    |   |                  |   | 35,722    |  
|Other assets                                                 |  |                  | 16,244    |   |                  |   | 15,911    |  
|Unallocated eliminations                                     |  |                  | (7,345    | ) |                  |   | (785      | )
|                                                             |  |                  |           |   |                  |   |           |  
|Total Assets                                                 |  | $                | 4,915,764 |   |                  | $ | 4,590,552 |  
|                                                             |  |                  |           |   |                  |   |           |  



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COMMITMENTS, CONTINGENCIES and GUARANTEES

Commitment and Contingencies.

Litigation. In the general course of its brokerage business and
the business of clearing for other brokerage firms, SWS Group and/or its subsidiaries have been named as defendants in various lawsuits and arbitration proceedings. These claims allege violations of various federal and state securities laws. The
Bank is also involved in certain claims and legal actions arising in the ordinary course of business. Management believes that resolution of these claims will not result in any material adverse effect on SWS consolidated financial position,
results of operations or cash flows.

Venture Capital Funds.SWS has committed to invest $5,000,000 in a limited partnership venture
capital fund. As of December 31, 2007, SWS had contributed $4,000,000 of its commitment. The Bank has committed to invest $3,000,000 in a limited partnership equity fund. As of December 31, 2007, the Bank has invested $2,400,000 of its
commitment.

Underwriting. Through its participation in underwriting securities, both corporate and municipal, SWS could expose
itself to material risk since the possibility exists that securities SWS has committed to purchase cannot be sold at the initial offering price. Federal and state securities laws and regulations also affect the activities of underwriters and impose
substantial potential liabilities for violations in connection with sales of securities by underwriters to the public. There were no open underwritings at December 31, 2007.

Guarantees.The Bank has stand-by letters of credit primarily issued for real estate development purposes. The maximum potential amount of future
payments the Bank could be required to make under the letters of credit is $1,647,000. The collateral supporting these letters of credit consist of real estate, certificates of deposit, equipment, accounts receivable or furniture and fixtures.

The Company provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies
them against potential losses caused by the breach of those representations and warranties. These indemnifications generally are standard contractual indemnifications and are entered into in the normal course of business. The maximum potential
amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not
recorded any contingent liability in the consolidated financial statements for these indemnification obligations.

SWS is a member of various exchanges and
of multiple clearinghouses. Under the membership agreements, members are generally required to guarantee the performance of other members. If a member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to
meet shortfalls. To mitigate these risks, the exchange and clearinghouses often require members to post collateral. SWS maximum potential liability under these arrangements cannot be quantified. However, it is unlikely that SWS would be
required to make payments under these arrangements. Accordingly, no contingent liability is recorded in the consolidated financial statements for these arrangements.

ACCOUNTING PRONOUNCEMENTS

The FASB and the SEC have recently issued the following statements and interpretations,
which are applicable to SWS:

SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB
No. 51.In December 2007, FASB issued this standard which changes the accounting and reporting of non-controlling (or minority) interests in the consolidated financial statements. This statement requires 1) ownership interests in
subsidiaries held by entities other



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than the parent be displayed as a separate component of equity in the consolidated statement of financial condition and separate from the parent; 2) after
control is obtained, a change in ownership interests not resulting in a loss of control should be accounted for as an equity transaction; and 3) when a subsidiary is deconsolidated any retained non-controlling equity investment should be initially
measured at fair value. This standard is effective for fiscal years beginning after December 15, 2008, our fiscal 2010. SWS is assessing the impact of this statement on its financial statements and processes.

SFAS No. 141(R),Business Combinations.In December 2007, FASB issued this standard which changes the accounting and reporting of
business combinations. This statement could impact the annual goodwill and intangible impairment testing associated with acquisitions which closed prior to the effective date of this standard. This standard applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, our fiscal 2010. SWS is assessing the impact of this statement on its financial statements
and processes.

SFAS No. 159,The Fair Value Option of Financial Assets and Financial Liabilities.The FASB standard,
issued in February 2007, permits an entity to measure financial instruments and certain other items at estimated fair value. Most of the provisions of FASB No. 159 are elective; however, the amendment to FASB No. 115, Accounting
for Certain Investments in Debt and Equity Securities, applies to all entities that own trading and available-for-sale securities. The fair value option created by FASB 159 permits an entity to measure eligible items at fair value as of
specified election dates. The fair value option 1) may generally be applied instrument by instrument; 2) is irrevocable unless a new election date occurs; and 3) must be applied to the entire instrument and not to only a portion of the instrument.
The standard is effective for fiscal years beginning after November 15, 2007, our fiscal 2009. SWS is assessing the impact of this statement on its financial statements and processes.

SFAS No. 157,Fair Value Measurement.In September 2006, FASB issued this standard which defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The standard is effective for fiscal years beginning after November 15, 2007, our fiscal 2009. SWS is
assessing the impact of this statement on its financial statements and processes.

AFFILIATE TRANSACTIONS

A director of SWS owns a 9.1% interest in a local bank and one of SWS executive officers owns less than 1.0% interest in this bank. The adult son of our director
owns a controlling interest in this bank. The Bank has sold loan participations with outstanding balances of $8,957,000 and $10,588,000 at December 31, 2007 and June 30, 2007, respectively, to this local bank. The terms of the
participation agreements resulted in payments of interest and fees to the other bank of $215,000 and $512,000 for the three and six-months ending December 31, 2007, respectively, and $149,000 and $340,000 for the three and six-months ending
December 29, 2006, respectively. The interest rates on these participations were substantially the same as those participations sold by the Bank to unrelated banks.

SUBSEQUENT EVENT

On January 15, 2008, the board of directors of SWS Group approved a plan authorizing the
Company to purchase up to 750,000 shares of its common stock from time to time in the open market for an 18-month period beginning January 14, 2008 and ending on June 30, 2009. The 750,000 shares authorized for purchase are in
addition to the Companys current stock repurchase program, beginning on January 1, 2007 and expiring on June 30, 2008, which authorizes the purchase of 500,000 shares of SWS common stock in the open market. Under the current
plan, 349,423 shares of the authorized 500,000 shares had been purchased as of January 15, 2008 at an average price of $11.19 per share.

On
February 1, 2008, the Company entered into a definitive agreement to purchase M.L. Stern & Co., LLC (M.L. Stern) and its wholly-owned subsidiary, Tower Asset Management, LLC, (collectively, Stern) from a subsidiary
of Pacific Life Insurance Company (Pac Life). The acquisition is structured as a purchase of all the outstanding membership interests of M.L. Stern. The transaction, which is subject to customary closing conditions and regulatory
approval, is expected to close by March 31, 2008. The total cost to the Company including purchase price, retention and other acquisition related costs is anticipated to be between $10.5 and $12.5 million. Stern, which is based in Beverly
Hills, California, has seven retail office locations, approximately $4 billion in customer assets under custody, an additional $450 million in assets under management and approximately 100 financial advisors.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

OVERVIEW

SWS Group, Inc. (we, us, SWS or the company) is engaged in
full-service securities brokerage and full-service commercial banking. While brokerage and banking revenues are dependent upon trading volumes and interest rates, which may fluctuate significantly, a large portion of our expenses remain fixed.
Consequently, net operating results can vary significantly from period to period.

Our business is also subject to substantial governmental regulation and
changes in legal, regulatory, accounting, tax and compliance requirements may have a substantial impact on our business and results of operations. We also face substantial competition in each of our lines of business. See Forward-Looking
Statements and Risk Factors of our Form 10-K filed with the Securities and Exchange Commission on September 12, 2007.

We
operate through four segments grouped primarily by products and services: clearing, retail, institutional and banking.

Clearing. We provide clearing and execution services (generally on a fully disclosed basis) for general securities broker/dealers and for firms specializing in high volume trading. Revenues in this segment are generated
primarily through transaction charges to our correspondent firms for clearing their trades. Revenue is also earned from various fees and other processing charges, as well as through net interest earnings on correspondent customer balances. We seek
to grow our clearing business by expanding our correspondent base.

Retail. We offer retail securities products and services
(equities, mutual funds and fixed income products), insurance products and managed accounts through the activities of our employee registered representatives and our independent contractors. This segment generates revenue primarily through
commissions charged on securities transactions, fees from managed accounts and the sale of insurance products as well as net interest income from retail customer balances. We seek to grow our retail brokerage business by increasing our distribution
capabilities through the recruitment of additional registered representatives and through acquisition.

Institutional.We
serve institutional customers in securities lending, investment banking and public finance, fixed income sales and trading, proprietary trading and agency execution services. Revenues are derived from the net interest spread on stock loan
transactions, commission and trading income from fixed income and equity products and investment banking fees from corporate and municipal securities transactions.

Banking. We offer traditional banking products and services and focus on several sectors of the residential housing market, including interim construction and short-term funding for mortgage bankers
(warehouse lending). The Bank earns substantially all of its income on the spread between the rates charged to customers on loans and the rates paid to depositors. We seek to grow our Bank by adding experienced bankers and through acquisitions.



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The other category includes SWS Group, corporate administration and SWS Capital Corporation. SWS Group is a
holding company that owns various investments, including U.S. Home Systems, Inc. (USHS) and NYSE Euronext, Inc. (NYX) common stock.

Business Environment

Our business is sensitive to financial market conditions which were volatile during the second quarter of fiscal 2008.
Equity market indices improved from a year ago with the Dow Jones Industrial Average increasing 6% while the Standard & Poors 500 Index and the NASDAQ Composite Index rose 4% and 10%, respectively. Average daily volume on the New York
Stock Exchange rose 16% for the same period.

On the other hand, volatility in the credit markets caused disruption for the financial markets. In response
to this disruption, the Federal Reserve Board (FRB) lowered the federal funds rate by 100 basis points to 4.25% since the end of fiscal 2007. Subsequent to the end of the quarter, the FRB lowered rates an additional 125 basis points to
boost the economy.

Rates on 10 year U.S. Treasury Bonds dropped 67 basis points since December 2006 while 3-month treasury rates are down 166 basis points
over the same period providing a much steeper yield curve than in December 2006. We have managed our exposure to these markets by reducing our average inventory balances and limiting our investment in mortgage-backed securities.

Our brokerage businesses are positively impacted by active securities markets and positive directional movements in key equity indices, but negatively impacted by
volatile interest rates and an inverted yield curve. The current mix of positive and negative factors adversely impacted results for our banking business while bolstering our institutional business in the current quarter when compared to the second
quarter of fiscal 2007.

Impact of Credit Markets

Brokerage:

On the brokerage side of the business, volatility in the credit and mortgage markets most significantly impacts our fixed income
trading business. Sub-prime collateralized debt obligations are not a primary market for us and we have no proprietary structured products. In addition, we do not have any off-balance sheet risk related to any of these types of transactions.

We do trade mortgage and asset backed securities on a regular basis. We monitor our trading limits daily to ensure that these securities are maintained at
levels we consider to be prudent given current market conditions. Inventories of these securities are priced using a third-party pricing service and are reviewed monthly to ensure reasonable valuation. At December 31, 2007, we held mortgage and
asset-backed securities of approximately $23.9 million included in Securities Owned on the Consolidated Statement of Financial Condition.

Bank:

The volatility of credit markets has impacted the Bank. During the past quarter many of the Banks warehouse lending competitors exited the business,
thus creating an opportunity to expand our purchased loan held for sale business line. The infrastructure and control environment we have in place allows us to take advantage of this opportunity and grow this business significantly. For the second
quarter of fiscal 2008, this division funded 7,399 loans totaling $1.354 billion compared to the September 2007 quarter when it funded 4,700 loans totaling $839 million. This represents a 61% increase in dollars funded and a 57% increase in the
number of loans funded. We finished the quarter with $315 million in loans outstanding in this business line which is an all-time record. Our exposure to sub-prime loans in this line of business is minimal and represents less than 1% of our
fundings. We are committed to continued growth in this business line. We believe mortgage rates are attractive at current levels and will provide opportunities for growth on a national basis.

While the purchased loan portfolio has grown, our single family construction business line has experienced weakness. As the credit markets became volatile many lenders
tightened their



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standards for mortgage qualification. These more stringent mortgage qualification standards and a more conservative lending culture eliminated a large group
of potential buyers from the new home market. As a result, there is an oversupply of new homes in North Texas. The supply of finished vacant housing units in North Texas was equivalent to 3.00 months of sales at December 31, 2007. A 2.50 month
supply is considered equilibrium. It will take some time to absorb the oversupply, which we believe will result in deterioration of our residential construction loan portfolio. Our focus is on the custom home builder in North Texas. There are
factors that will help mitigate this slow down such as very attractive mortgage rates and the fact that North Texas did not experience the same price appreciation in the past few years that other parts of the U.S. experienced. In addition,
employment is still strong in North Texas. However, even with these mitigating factors, we still anticipate additional losses in this loan portfolio. We experienced the first of these losses in the December quarter. We anticipate some deterioration
to continue over the next few quarters. See additional discussion on the allowance for loan losses at -Financial Condition-Loans and Allowance for Probable Loan Losses.

Other lines of business such as commercial real estate, commercial and small business administration (SBA) continue to show strong demand and we anticipate
solid growth in these lines. The mortgage industry problems have not had a negative effect on these lines. However, a continued downturn in the mortgage market could negatively impact these lines in the future.

The Bank also experienced a reduction in its net interest margins as a result of increased competition and significant reductions in interest rates by the FRB described
above. The impact of these decreases is felt immediately on our interest revenue as floating rate loans reprice. The corresponding change on the liability side lags, thus creating pressure on the net interest margin. As rates stabilize and the
lagging liabilities reprice, we expect our spread will return to historical levels.

The volatile markets have no impact on the Banks investment
portfolio as we have a small portfolio of $2.6 million invested in cash products.

Events and Transactions

Several material events and transactions impacted the results of operations in the periods presented. A description of the facts and circumstances surrounding these
transactions and the impact on our results are discussed below.

Payments to the Deferred Compensation Plan.We purchase company-owned life
insurance as a component of the companys deferred compensation plan. The policies are valued at the cash surrender values as of the balance sheet date and are included in other assets in the Consolidated Statement of Financial Condition.
During the second quarter of fiscal 2007, we received proceeds of $2,276,000 from company owned life insurance which were recorded in other revenue in the Consolidated Statements of Income and Comprehensive Income.

TD Ameritrade Transaction:On March 22, 2006, the company entered into an agreement with TD Ameritrade Holding Corporation
(Ameritrade) to transfer 15 correspondent clients to the company. This transaction closed in July 2006, with 12 of the 15 correspondents agreeing to transfer to our clearing platform. As an inducement to transfer, we offered substantial
clearing fee discounts for a transition period. As a result, we have recorded a customer relationship intangible of $5,060,000, which is being amortized over a five year period at a rate based on the future economic benefit of the customer
relationships. We recognized approximately $337,000 and $674,000 of amortization expense related to this intangible for the three and six-month periods ended December 31, 2007, respectively. See additional discussion in Intangible
Assets in the Notes to the Consolidated Financial Statements contained in this report.



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NYSE/Archipelago:SWS owned 23,721 shares of Archipelago Holdings, LLC (Archipelago) stock
prior to the merger of Archipelago and the NYSE in March 2006, for which it received 23,721 unrestricted shares of the new entity, NYX. As part of the merger, Southwest Securities also surrendered its NYSE seat (carried at a cost of $230,000) in
return for $300,000 in cash and 80,177 restricted shares of NYX common stock. As of December 31, 2007, 53,452 of the 80,177 shares were no longer restricted.

In July 2007, ownership of the NYX stock was transferred from Southwest Securities to SWS Group. These shares are now recorded as Marketable Equity Securities Available for Sale and changes in valuation appear in the Other Comprehensive
Income line of the income statement. For the three and six-month periods ended December 31, 2007, we recorded a gain in Other Comprehensive Income of $440,000, net of tax of $286,000, and $1,092,000, net of tax of $710,000, respectively, on the
77,173 unrestricted shares that we own. In the three and six-month periods ended December 29, 2006, we recorded gains of $2,308,000 and $3,122,000 in Net Gains (Losses) on Principal Transactions.

Distribution from an equity investment: In the first quarter of fiscal 2007, a limited partnership venture capital fund in which SWS has an equity
investment realized a gain and made a subsequent distribution to its partners. SWS portion of this gain was $575,000 and is included in Other Revenue in the Consolidated Statement of Income and Comprehensive Income. We received a cash
distribution of $289,000 related to this gain.

Investment in Comprehensive Software Systems, Inc. (CSS):In 1993, we
became a part owner of CSS, a software development company formed to develop a new brokerage front and back office system along with a consortium of other broker/dealers. We initially acquired a 7.6% interest in CSS and accounted for the investment
on the cost basis. Through subsequent investments, our ownership in CSS increased to 25.08% in fiscal 2002. Consequently, we implemented the equity method of accounting prescribed by APB Opinion No. 18, The Equity Method of Accounting
for Investments in Common Stock. Subsequent to an equity offering by CSS in January 2005, we owned 13.7% of CSS. To facilitate the continued enhancement of the CSS system, we invested an aggregate of $6,386,000 in CSS, all of which had
been written off by December 31, 2007.

In April 2006, we signed an agreement with CSS to pay a $1,700,000 maintenance fee to CSS if a specific member
of the consortium of broker/dealers successfully converted to the CSS system by December 31, 2006. CSS made written demand of $1,700,000 under this agreement in January 2007. We disputed the payment and settled the dispute in calendar 2007 for
an immaterial amount.

Effective November 30, 2007, CSS was sold and merged with one of the members of the consortium. Our proceeds from the sale were
minimal and we now have no ownership interest in CSS.

Also, in November 2007, we and CSS entered into a three year maintenance agreement pursuant to which
we made maintenance payments of $3,000,000 for calendar year 2007 and will make payments of $2,500,000 in 2008 and 2009. We will also receive assistance in converting to an updated version of the CSS software and a new broker front end platform in
exchange for the increased maintenance payments. See additional discussion in -Investmentsin the Notes to the Consolidated Financial Statements contained in this report.



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RESULTS OF OPERATIONS

Consolidated

Net income from continuing operations for the three and six-month periods ended December 31, 2007 was $7,248,000 and
$14,952,000, a decrease of $5,657,000 and $8,036,000, respectively, from net income for the comparable three and six-month periods ended December 29, 2006. Net income includes income of $17,000 from discontinued operations for the six-month
period ended December 31, 2007 compared to $26,000 and $50,000 for the three and six-month periods ended December 29, 2006, respectively. The three and six-month periods ended December 31, 2007 and December 29, 2006 contained 63
and 127 and 63 and 126 trading days, respectively.

The following is a summary of increases (decreases) in categories of net revenues and operating
expenses for the three and six-month periods ended December 31, 2007 compared to the three and six-month periods ended December 29, 2006 (dollars in thousands):



|                                                     |  |                   |        |   |                 |     |    |        |   |         |         |  |     |   
|---------------------------------------------------- |  | ----------------- | ------ | - | --------------- | --- | -- | ------ | - | ------- | ------- |  | --- | --
|                                                     |  | Three MonthsEnded |        |   | Six MonthsEnded |    
|                                                     |  | Amount            |        |   | %Change         |     |    | Amount |   |         | %Change | 
|Net revenues:                                        |  |                   |        |   |                 |     |    |        |   |         |         |  |     |   
|Net revenues from clearing operations                |  | $                 | 681    |   |                 | 22  | %  |        | $ | 961     |         |  | 16  | % 
|Commissions                                          |  |                   | 1,741  |   |                 | 7   |    |        |   | 4,974   |         |  | 11  |   
|Net interest                                         |  |                   | 1,555  |   |                 | 6   |    |        |   | 1,066   |         |  | 2   |   
|Investment banking, advisory and administrative fees |  |                   | 769    |   |                 | 10  |    |        |   | 435     |         |  | 2   |   
|Net gains on principal transactions                  |  |                   | (3,121 | ) |                 | (55 | )  |        |   | (9,976  | )       |  | (72 | ) 
|Other                                                |  |                   | (3,108 | ) |                 | (34 | )  |        |   | (2,338  | )       |  | (16 | ) 
|                                                     |  |                   |        |   |                 |     |    |        |   |         |         |  |     |   
|                                                     |  |                   | (1,483 | ) |                 | (2  | )  |        |   | (4,878  | )       |  | (3  | ) 
|                                                     |  |                   |        |   |                 |     |    |        |   |         |         |  |     |   
|Operating expenses:                                  |  |                   |        |   |                 |     |    |        |   |         |         |  |     |   
|Commissions and other employee compensation          |  | $                 | 2,448  |   |                 | 6   | %  |        | $ | 1,828   |         |  | 2   | % 
|Occupancy, equipment and computer service costs      |  |                   | 886    |   |                 | 16  |    |        |   | 2,069   |         |  | 19  |   
|Communications                                       |  |                   | 381    |   |                 | 18  |    |        |   | 421     |         |  | 10  |   
|Floor brokerage and clearing organization charges    |  |                   | (217   | ) |                 | (20 | )  |        |   | (260    | )       |  | (11 | ) 
|Advertising and promotional                          |  |                   | 318    |   |                 | 53  |    |        |   | 456     |         |  | 43  |   
|Other                                                |  |                   | 2,181  |   |                 | 45  |    |        |   | 862     |         |  | 8   |   
|                                                     |  |                   |        |   |                 |     |    |        |   |         |         |  |     |   
|                                                     |  |                   | 5,997  |   |                 | 11  |    |        |   | 5,376   |         |  | 5   |   
|                                                     |  |                   |        |   |                 |     |    |        |   |         |         |  |     |   
|Pretax income                                        |  | $                 | (7,480 | ) |                 | (39 | )% |        | $ | (10,254 | )       |  | (30 | )%
|                                                     |  |                   |        |   |                 |     |    |        |   |         |         |  |     |   

Net revenues decreased for the second quarter of fiscal 2008 by $1,483,000 as compared to the same period of
fiscal 2007. The largest component of the decrease was in net gains on principal transactions, $3,121,000 and other, $3,108,000 offset by an increase in commissions of $1,741,000 and net interest of $1,555,000. The decrease in net gains on principal
transactions is primarily due to a $2,308,000 gain on the valuation of NYX stock included in the December 2006 quarter. As a result of the transfer of ownership from Southwest Securities to SWS Group, in the December 2007 period, the changes in the
value of this stock are now in Other Comprehensive Income. The decrease in other is primarily due to $2,276,000 in proceeds from a company-owned life insurance policy in the December 2006 quarter. The increase in commissions is due primarily to
increased volumes and client activity in the Retail and Institutional segments. The increase in net interest is due primarily to a substantial increase in spread in the stock loan business.

Net revenues decreased for the first half of fiscal 2008 by $4,878,000 as compared to the same period of fiscal 2007. The largest component of the decrease was in net
gains on principal transactions,



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$9,976,000 and other revenues, $2,338,000, offset by an increase in commissions of $4,974,000. The decrease in net gains on principal transactions is
primarily due to a $3,122,000 gain on the valuation of NYX stock not included in the December 2007 quarter as a result of the transfer of ownership. Additionally, the prior year included a gain of $2,700,000 on the restructuring of a commercial
mortgage backed security. Lastly in the 2008 period, we carried lower inventories resulting in reduced trading profits. This is offset by increased commissions in fiscal 2008 in the taxable fixed income business due to an improved environment and
recruitment and hiring of new fixed income advisors.

Operating expenses increased $5,997,000 for the three months ended December 31, 2007 as compared
to the same period of fiscal 2007. The largest increases were in commissions and other employee compensation, $2,448,000 and other of $2,181,000. The increase in commissions and other employee compensation is due primarily to the hiring of a new
head of clearing and six new SBA lenders in fiscal 2008. The increase in other expenses is primarily due to $1,700,000 in the provision for loan loss in addition to an increase in fees for professional services.

Operating expenses increased $5,376,000 for the six months ended December 31, 2007 as compared to the same period of fiscal 2007. The largest increase was in
occupancy, equipment and other services, $2,069,000, and employee compensation, $1,828,000. The increase in occupancy, equipment and computer service costs is due primarily to the increased maintenance expenses for CSS as discussed above. The
increase in employee compensation is due primarily to the hiring of a new head of clearing and six new SBA lenders in fiscal 2008.

Net Interest Income

Net interest income from the brokerage segments is dependent upon the level of customer and stock loan balances as well as the spread between the rates
we earn on those assets compared with the cost of funds. Net interest is the primary source of income for the Bank and represents the amount by which interest and fees generated by earning assets exceed the cost of funds, primarily interest paid to
the Banks depositors on interest-bearing accounts. The components of interest earnings are as follows for the three and six-month periods ended December 31, 2007 and December 29, 2006 (in thousands):



|             |  |                    |        |                  |   |                  |  |                  |        |  |   |       
|------------ |  | ------------------ | ------ | ---------------- | - | ---------------- |  | ---------------- | ------ |  | - | ------
|             |  | Three Months Ended |        | Six Months Ended
|             |  | December 31,2007   |        | December 29,2006 |   | December 31,2007 |  | December 29,2006
|Brokerage    |  | $                  | 13,436 |                  | $ | 11,810           |  | $                | 25,156 |  | $ | 24,240
|Bank         |  |                    | 12,194 |                  |   | 12,265           |  |                  | 24,085 |  |   | 23,935
|             |  |                    |        |                  |   |                  |  |                  |        |  |   |       
|Net interest |  | $                  | 25,630 |                  | $ | 24,075           |  | $                | 49,241 |  | $ | 48,175
|             |  |                    |        |                  |   |                  |  |                  |        |  |   |       

For the three-months ended December 31, 2007, net interest income from our brokerage entities accounted for
approximately 18.5% of our net revenues. For the three-months ended December 29, 2006, net interest income generated by our brokerage entities accounted for approximately 15.9% of our net revenue.

For the six-months ended December 31, 2007, net interest income from our brokerage entities accounted for approximately 18.0% of our net revenues. For the
six-months ended December 29, 2006, net interest income generated by our brokerage entities accounted for approximately 16.8% of our net revenue.



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Average balances of interest-earning assets and interest-bearing liabilities are as follows (in thousands):



|                                          |  |                    |           |                  |   |                  |  |                  |           |  |   |          
|----------------------------------------- |  | ------------------ | --------- | ---------------- | - | ---------------- |  | ---------------- | --------- |  | - | ---------
|                                          |  | Three Months Ended |           | Six Months Ended
|                                          |  | December 31,2007   |           | December 29,2006 |   | December 31,2007 |  | December 29,2006
|Average interest-earning assets:          |  |                    |           |                  |   |                  |  |                  |           |  |   |          
|Customer margin balances                  |  | $                  | 290,000   |                  | $ | 288,000          |  | $                | 291,000   |  | $ | 309,000  
|Assets segregated for regulatory purposes |  |                    | 338,000   |                  |   | 380,000          |  |                  | 325,000   |  |   | 358,000  
|Stock borrowed                            |  |                    | 3,077,000 |                  |   | 3,072,000        |  |                  | 3,073,000 |  |   | 3,014,000
|                                          |  |                    |           |                 
|Average interest-bearing liabilities:     |  |                    |           |                  |   |                  |  |                  |           |  |   |          
|Customer funds on deposit                 |  |                    | 514,000   |                  |   | 546,000          |  |                  | 508,000   |  |   | 549,000  
|Stock loaned                              |  |                    | 3,042,000 |                  |   | 3,003,000        |  |                  | 3,036,000 |  |   | 2,957,000

Net interest revenue generated by each segment is reviewed in detail in the segment analysis below.

Income Tax Expense

For the first half of fiscal 2008, income tax
expense (effective rate of 37.2%) differed from the amount that would have otherwise been calculated by applying the federal corporate tax rate (35%) to income from continuing operations before income taxes. The effective rate was higher than
the statutory rate because of state income taxes and the net liability for uncertain tax positions recorded under Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an
Interpretation of FASB Statement 109 (FIN 48), partially offset by permanently excluded items, such as tax exempt interest.

Segment Information

The following is a summary of the increases (decreases) in categories of net revenues and pre-tax income by segment for
the three and six-month periods ended December 31, 2007 compared to the three and six-month periods ended December 29, 2006 (dollars in thousands):



|                |  |                    |        |   |                     |   |        |          |  |   |        |   |  |      |  
|--------------- |  | ------------------ | ------ | - | ------------------- | - | ------ | -------- |  | - | ------ | - |  | ---- | -
|                |  | Three Months Ended |        |   | Increase/(Decrease) |   |        | % Change | 
|                |  | December 31,2007   |        |   | December 29,2006    |   |        |         
|Net revenues:   |  |                    |        |   |                     |   |        |          |  |   |        |   |  |      |  
|Clearing        |  | $                  | 10,019 |   |                     | $ | 9,897  |          |  | $ | 122    |   |  | 1    |  
|Retail          |  |                    | 21,924 |   |                     |   | 19,700 |          |  |   | 2,224  |   |  | 11   |  
|Institutional   |  |                    | 28,259 |   |                     |   | 26,766 |          |  |   | 1,493  |   |  | 6    |  
|Banking         |  |                    | 12,870 |   |                     |   | 12,973 |          |  |   | (103   | ) |  | (1   | )
|Other           |  |                    | (248   | ) |                     |   | 4,971  |          |  |   | (5,219 | ) |  | (105 | )
|                |  |                    |        |   |                     |   |        |          |  |   |        |   |  |      |  
|Total           |  | $                  | 72,824 |   |                     | $ | 74,307 |          |  |   | (1,483 | ) |  | (2   | )
|                |  |                    |        |   |                     |   |        |          |  |   |        |   |  |      |  
|                |  |                    |        |  
|Pre-Tax Income: |  |                    |        |   |                     |   |        |          |  |   |        |   |  |      |  
|Clearing        |  | $                  | 2,681  |   |                     | $ | 5,233  |          |  | $ | (2,552 | ) |  | (49  | )
|Retail          |  |                    | 4,118  |   |                     |   | 3,638  |          |  |   | 480    |   |  | 13   |  
|Institutional   |  |                    | 10,322 |   |                     |   | 8,128  |          |  |   | 2,194  |   |  | 27   |  
|Banking         |  |                    | 3,715  |   |                     |   | 6,752  |          |  |   | (3,037 | ) |  | (45  | )
|Other           |  |                    | (8,989 | ) |                     |   | (4,424 | )        |  |   | (4,565 | ) |  | 103  |  
|                |  |                    |        |   |                     |   |        |          |  |   |        |   |  |      |  
|Total           |  | $                  | 11,847 |   |                     | $ | 19,327 |          |  |   | (7,480 | ) |  | (39  | )
|                |  |                    |        |   |                     |   |        |          |  |   |        |   |  |      |  



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|                |  |                  |         |   |                     |   |         |          |  |   |         |   |  |     |  
|--------------- |  | ---------------- | ------- | - | ------------------- | - | ------- | -------- |  | - | ------- | - |  | --- | -
|                |  | Six Months Ended |         |   | Increase/(Decrease) |   |         | % Change | 
|                |  | December 31,2007 |         |   | December 29,2006    |   |         |         
|Net revenues:   |  |                  |         |   |                     |   |         |          |  |   |         |   |  |     |  
|Clearing        |  | $                | 20,297  |   |                     | $ | 18,924  |          |  | $ | 1,373   |   |  | 7   |  
|Retail          |  |                  | 41,563  |   |                     |   | 37,245  |          |  |   | 4,318   |   |  | 12  |  
|Institutional   |  |                  | 52,212  |   |                     |   | 56,006  |          |  |   | (3,794  | ) |  | (7  | )
|Banking         |  |                  | 25,361  |   |                     |   | 25,295  |          |  |   | 66      |   |  | __  |  
|Other           |  |                  | 337     |   |                     |   | 7,178   |          |  |   | (6,841  | ) |  | (95 | )
|                |  |                  |         |   |                     |   |         |          |  |   |         |   |  |     |  
|Total           |  | $                | 139,770 |   |                     | $ | 144,648 |          |  |   | (4,878  | ) |  | (3  | )
|                |  |                  |         |   |                     |   |         |          |  |   |         |   |  |     |  
|                |  |                  |         |  
|Pre-Tax Income: |  |                  |         |   |                     |   |         |          |  |   |         |   |  |     |  
|Clearing        |  | $                | 7,178   |   |                     | $ | 9,629   |          |  | $ | (2,451  | ) |  | (25 | )
|Retail          |  |                  | 7,302   |   |                     |   | 6,558   |          |  |   | 744     |   |  | 11  |  
|Institutional   |  |                  | 17,359  |   |                     |   | 18,220  |          |  |   | (861    | ) |  | (5  | )
|Banking         |  |                  | 9,167   |   |                     |   | 12,968  |          |  |   | (3,801  | ) |  | (29 | )
|Other           |  |                  | (17,213 | ) |                     |   | (13,328 | )        |  |   | (3,885  | ) |  | 29  |  
|                |  |                  |         |   |                     |   |         |          |  |   |         |   |  |     |  
|Total           |  | $                | 23,793  |   |                     | $ | 34,047  |          |  |   | (10,254 | ) |  | (30 | )
|                |  |                  |         |   |                     |   |         |          |  |   |         |   |  |     |  

Clearing:

Three-months Ended:

The following is a summary of the results for the clearing segment for the three-months ended December 31, 2007
compared to the three-months ended December 29, 2006 (dollars in thousands):



|                                  |  |                    |         |                     |   |         |          |   |         |   |  |     |   
|--------------------------------- |  | ------------------ | ------- | ------------------- | - | ------- | -------- | - | ------- | - |  | --- | --
|                                  |  | Three Months Ended |         | Increase/(Decrease) |   |         | % Change |  
|                                  |  | December 31,2007   |         | December 29,2006    |   |        
|Net revenue from clearing         |  | $                  | 3,736   |                     | $ | 3,055   |          | $ | 681     |   |  | 22  | % 
|Net interest                      |  |                    | 3,683   |                     |   | 4,144   |          |   | (461    | ) |  | (11 | ) 
|Other                             |  |                    | 2,600   |                     |   | 2,698   |          |   | (98     | ) |  | (4  | ) 
|                                  |  |                    |         |                     |   |         |          |   |         |   |  |     |   
|Net revenues                      |  |                    | 10,019  |                     |   | 9,897   |          |   | 122     |   |  | 1   |   
|                                  |  |                    |         |                     |   |         |          |   |         |   |  |     |   
|Operating expenses                |  |                    | 7,338   |                     |   | 4,664   |          |   | 2,674   |   |  | 57  |   
|                                  |  |                    |         |                     |   |         |          |   |         |   |  |     |   
|Pre-Tax Income                    |  | $                  | 2,681   |                     | $ | 5,233   |          | $ | (2,552  | ) |  | (49 | )%
|                                  |  |                    |         |                     |   |         |          |   |         |   |  |     |   
|Average customer margin balance   |  | $                  | 187,000 |                     | $ | 189,000 |          | $ | (2,000  | ) |  | (1  | )%
|                                  |  |                    |         |                     |   |         |          |   |         |   |  |     |   
|Average customer funds on deposit |  | $                  | 321,000 |                     | $ | 334,000 |          | $ | (13,000 | ) |  | (4  | )%
|                                  |  |                    |         |                     |   |         |          |   |         |   |  |     |   

The following table reflects the number of client transactions processed for the three-months ended
December 31, 2007 and December 29, 2007 and number of correspondents at the end of the three-month period.



|                                              |  |                                   |  |                                  
|--------------------------------------------- |  | --------------------------------- |  | ---------------------------------
|                                              |  | Three MonthsEndedDecember 31,2007 |  | Three MonthsEndedDecember 29,2006
|Tickets for high-volume trading firms         |  | 7,724,153                         |  | 3,563,429                        
|Tickets for general securities broker/dealers |  | 281,016                           |  | 227,463                          
|                                              |  |                                   |  |                                  
|Total tickets                                 |  | 8,005,169                         |  | 3,790,892                        
|                                              |  |                                   |  |                                  
|Correspondents                                |  | 202                               |  | 215                              
|                                              |  |                                   |  |                                  



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The clearing segment posted an increase in net revenue of 1% and decrease in pretax income of 49%. Tickets processed
increased dramatically over the prior fiscal year due to increased volume from day trading customers; however, clearing revenue per ticket was down over the prior fiscal year as these customers are charged substantially lower rates than our general
securities clients. Revenue per ticket was $0.47 per ticket for the second quarter of fiscal 2008 versus $0.81 per ticket for the second quarter of fiscal 2007. Net revenues were up despite the decrease in revenue per ticket due to the increased
volume from day trading firms and increased revenue from correspondent clients acquired from Ameritrade. In the prior fiscal year these correspondents were charged reduced introductory rates. Additionally, the December 2007 quarter included $349,000
in fees for clearing a large underwriting transaction.

Correspondent count was down for the three months ended December 31, 2007 versus the same
period last fiscal year primarily due to correspondents we terminated as well as losses from correspondents leaving the brokerage business.

Net interest
revenue allocated to the clearing segment decreased 11% in the three-months ended December 31, 2007 over the same period last fiscal year. Net interest decreased primarily due to the decrease in the spread we earned due to the overall reduction
in interest rates.

Operating expenses were up for the three-months ended December 31, 2007 compared to the same period last fiscal year due primarily
to increased commission and employee compensation, information technology and operating expenses allocated to our clearing segment. These increases are primarily related to the hiring of a new head of clearing and the increase in CSS maintenance.

Six-months Ended:

The following is a summary of the
results for the clearing segment for the six-months ended December 31, 2007 compared to the six-months ended December 29, 2006 (dollars in thousands):



|                                  |  |                  |         |                     |   |         |          |   |         |   |  |     |   
|--------------------------------- |  | ---------------- | ------- | ------------------- | - | ------- | -------- | - | ------- | - |  | --- | --
|                                  |  | Six Months Ended |         | Increase/(Decrease) |   |         | % Change |  
|                                  |  | December 31,2007 |         | December 29,2006    |   |        
|Net revenue from clearing         |  | $                | 7,086   |                     | $ | 6,124   |          | $ | 962     |   |  | 16  | % 
|Net interest                      |  |                  | 8,162   |                     |   | 7,873   |          |   | 289     |   |  | 4   |   
|Other                             |  |                  | 5,049   |                     |   | 4,927   |          |   | 122     |   |  | 2   |   
|                                  |  |                  |         |                     |   |         |          |   |         |   |  |     |   
|Net revenues                      |  |                  | 20,297  |                     |   | 18,924  |          |   | 1,373   |   |  | 7   |   
|                                  |  |                  |         |                     |   |         |          |   |         |   |  |     |   
|Operating expenses                |  |                  | 13,119  |                     |   | 9,295   |          |   | 3,824   |   |  | 41  |   
|                                  |  |                  |         |                     |   |         |          |   |         |   |  |     |   
|Pre-Tax Income                    |  | $                | 7,178   |                     | $ | 9,629   |          | $ | (2,451  | ) |  | (25 | )%
|                                  |  |                  |         |                     |   |         |          |   |         |   |  |     |   
|Average customer margin balance   |  | $                | 193,000 |                     | $ | 207,000 |          | $ | (14,000 | ) |  | (7  | )%
|                                  |  |                  |         |                     |   |         |          |   |         |   |  |     |   
|Average customer funds on deposit |  | $                | 320,000 |                     | $ | 374,000 |          | $ | (54,000 | ) |  | (14 | )%
|                                  |  |                  |         |                     |   |         |          |   |         |   |  |     |   

The following table reflects the number of client transactions processed for the six-month periods ended
December 31, 2007 and December 29, 2006.



|                                              |  |                                 |  |                                
|--------------------------------------------- |  | ------------------------------- |  | -------------------------------
|                                              |  | Six MonthsEndedDecember 31,2007 |  | Six MonthsEndedDecember 29,2006
|Tickets for high-volume trading firms         |  | 14,768,608                      |  | 7,786,731                      
|Tickets for general securities broker/dealers |  | 540,013                         |  | 444,279                        
|                                              |  |                                 |  |                                
|Total tickets                                 |  | 15,308,621                      |  | 8,231,010                      
|                                              |  |                                 |  |                                



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The clearing segment posted an increase in net revenue of 7% and a decrease in pretax income of 25%. Tickets processed
increased dramatically over the prior fiscal year due to increased volume from day trading customers; however, clearing revenue per ticket was down over the prior fiscal year as these customers are charged substantially lower rates than our general
securities clients. Revenue per ticket was $0.46 for the first half of fiscal 2008 versus $0.74 per ticket for the first half of fiscal 2007. Net revenues were up despite this decrease due to the increased volume from day trading firms, and
increased revenue from correspondent clients acquired from Ameritrade. In the prior fiscal year, these correspondents were charged reduced introductory clearing rates.

Net interest revenue allocated to the clearing segment increased 4% in the six-months ended December 31, 2007 over the same period last fiscal year. Although balances in customer margin accounts and interest
rates decreased there was a slight increase in net interest due to three additional interest days in the first half of fiscal 2008 compared to the same period last fiscal year.

Operating expenses were up for the six-months ended December 31, 2007 by 41% when compared to the same period last fiscal year due primarily due to commission and employee compensation, information technology and
operating expenses allocated to our clearing segment. These increases are primarily related to the hiring of a new head of clearing and the increase in CSS maintenance as discussed above.

Retail:

Three-months Ended:

The following is a summary of the results for the retail segment for the three-months ended December 31, 2007 and December 29, 2006 (dollars in thousands):



|                                              |  |                    |         |                  |   |          |  |     |   
|--------------------------------------------- |  | ------------------ | ------- | ---------------- | - | -------- |  | --- | --
|                                              |  | Three Months Ended |         |                  |  
|                                              |  | December 31,2007   |         | December 29,2006 |   | % Change | 
|Private Client Group                          |  |                    |         |                  |   |          |  |     |   
|Commissions                                   |  | $                  | 7,222   |                  | $ | 6,572    |  | 10  | % 
|Advisory fees                                 |  |                    | 1,436   |                  |   | 1,170    |  | 23  |   
|Insurance products                            |  |                    | 1,066   |                  |   | 1,168    |  | (9  | ) 
|Other                                         |  |                    | 187     |                  |   | 202      |  | (8  | ) 
|Net interest revenue                          |  |                    | 757     |                  |   | 958      |  | (21 | ) 
|                                              |  |                    |         |                  |   |          |  |     |   
|                                              |  |                    | 10,668  |                  |   | 10,070   |  | 6   |   
|                                              |  |                    |         |                  |   |          |  |     |   
|Independent registered representatives (SWSF) |  |                    |         |                  |   |          |  |     |   
|Commissions                                   |  |                    | 6,376   |                  |   | 5,414    |  | 18  |   
|Advisory fees                                 |  |                    | 932     |                  |   | 811      |  | 15  |   
|Insurance products                            |  |                    | 1,890   |                  |   | 1,623    |  | 16  |   
|Other                                         |  |                    | 308     |                  |   | 232      |  | 33  |   
|Net interest revenue                          |  |                    | 750     |                  |   | 811      |  | (8  | ) 
|                                              |  |                    |         |                  |   |          |  |     |   
|                                              |  |                    | 10,256  |                  |   | 8,891    |  | 15  |   
|Other                                         |  |                    | 1,000   |                  |   | 739      |  | 35  |   
|                                              |  |                    |         |                  |   |          |  |     |   
|Total net revenues                            |  |                    | 21,924  |                  |   | 19,700   |  | 11  |   
|                                              |  |                    |         |                  |   |          |  |     |   
|Operating expenses                            |  |                    | 17,806  |                  |   | 16,062   |  | 11  |   
|                                              |  |                    |         |                  |   |          |  |     |   
|Pre-tax income                                |  | $                  | 4,118   |                  | $ | 3,638    |  | 13  | % 
|                                              |  |                    |         |                  |   |          |  |     |   
|Average customer margin balances              |  | $                  | 78,000  |                  | $ | 87,000   |  | (10 | )%
|                                              |  |                    |         |                  |   |          |  |     |   
|Average customer funds on deposit             |  | $                  | 133,000 |                  | $ | 141,000  |  | (6  | )%
|                                              |  |                    |         |                  |   |          |  |     |   
|Private Client Group representatives          |  |                    | 99      |                  |   | 94       |  | 5   | % 
|                                              |  |                    |         |                  |   |          |  |     |   
|SWSF representatives                          |  |                    | 336     |                  |   | 371      |  | (9  | )%
|                                              |  |                    |         |                  |   |          |  |     |   



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##### Table of Contents

Net revenues in the retail segment were up 11% for the three-months ended December 31, 2007 over the same period last fiscal year driven by an increase
in the number of registered representatives for our PCG group resulting in increased commission revenue as well as improved productivity from our independent contractors. Assets under management in the retail segment were $7.2 billion at
December 31, 2007 and $6.9 billion at December 29, 2006.

Net interest revenue allocated to the retail segment decreased 15% for the three-months
ended December 31, 2007 over the same period of last fiscal year. This decrease is primarily due to a reduced spread earned on customer balances.

Commission expense, the primary component of operating expenses in the retail segment, increased in line with the revenue which led to an 11% increase in operating expenses from the previous year.

Six-months Ended:

The following is a summary of the results for the
retail segment for the six-months ended December 31, 2007 and December 29, 2006 (dollars in thousands):



|                                              |  |                  |         |                  |   |          |  |     |   
|--------------------------------------------- |  | ---------------- | ------- | ---------------- | - | -------- |  | --- | --
|                                              |  | Six Months Ended |         |                  |  
|                                              |  | December 31,2007 |         | December 29,2006 |   | % Change | 
|Private Client Group                          |  |                  |         |                  |   |          |  |     |   
|Commissions                                   |  | $                | 13,022  |                  | $ | 11,959   |  | 9   | % 
|Advisory fees                                 |  |                  | 2,774   |                  |   | 2,253    |  | 23  |   
|Insurance products                            |  |                  | 1,780   |                  |   | 2,025    |  | (12 | ) 
|Other                                         |  |                  | 336     |                  |   | 361      |  | 7   |   
|Net interest revenue                          |  |                  | 1,532   |                  |   | 1,878    |  | (18 | ) 
|                                              |  |                  |         |                  |   |          |  |     |   
|                                              |  |                  | 19,444  |                  |   | 18,476   |  | 5   |   
|                                              |  |                  |         |                  |   |          |  |     |   
|Independent registered representatives (SWSF) |  |                  |         |                  |   |          |  |     |   
|Commissions                                   |  |                  | 12,222  |                  |   | 10,171   |  | 20  |   
|Advisory fees                                 |  |                  | 1,776   |                  |   | 1,519    |  | 17  |   
|Insurance products                            |  |                  | 4,021   |                  |   | 3,627    |  | 11  |   
|Other                                         |  |                  | 582     |                  |   | 447      |  | 30  |   
|Net interest revenue                          |  |                  | 1,659   |                  |   | 1,509    |  | 10  |   
|                                              |  |                  |         |                  |   |          |  |     |   
|                                              |  |                  | 20,260  |                  |   | 17,273   |  | 17  |   
|Other                                         |  |                  | 1,859   |                  |   | 1,496    |  | 24  |   
|                                              |  |                  |         |                  |   |          |  |     |   
|Total net revenues                            |  |                  | 41,563  |                  |   | 37,245   |  | 12  |   
|                                              |  |                  |         |                  |   |          |  |     |   
|Operating expenses                            |  |                  | 34,261  |                  |   | 30,687   |  | 12  |   
|                                              |  |                  |         |                  |   |          |  |     |   
|Pre-tax income                                |  | $                | 7,302   |                  | $ | 6,558    |  | 11  | % 
|                                              |  |                  |         |                  |   |          |  |     |   
|Average customer margin balances              |  | $                | 77,000  |                  | $ | 95,000   |  | (19 | )%
|                                              |  |                  |         |                  |   |          |  |     |   
|Average customer funds on deposit             |  | $                | 132,000 |                  | $ | 148,000  |  | (11 | )%
|                                              |  |                  |         |                  |   |          |  |     |   

Net revenues in the retail segment were up 12% for the six-months ended December 31, 2007 over the same
period last fiscal year driven by increased commission revenue and investment banking and advisory fees offset by a decrease in insurance products and net interest revenue. The increases in commission revenue and advisory fees are due to an increase
in the number of registered representatives for our PCG group and increased productivity for SWSF.

Net interest revenue allocated to the retail segment
decreased 6% in the six-months ended December 31, 2007 over the same period of last fiscal year. This decrease is primarily due to a reduced spread earned on customer assets as well as reduced margin balances.



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##### Table of Contents

Commission expense, the primary component of operating expenses in the retail segment, increased in line with the revenue
which led to a 12% increase in operating expenses from the previous year.

Institutional:

Three-months Ended:

The following is a summary of the results for the
institutional segment for the three-months ended December 31, 2007 and December 29, 2006 (dollars in thousands):



|                                       |  |                    |        |                  |   |          |  |     |  
|-------------------------------------- |  | ------------------ | ------ | ---------------- | - | -------- |  | --- | -
|                                       |  | Three Months Ended |        |                  |  
|                                       |  | December 31,2007   |        | December 29,2006 |   | % Change | 
|Commissions                            |  |                    |        |                  |   |          |  |     |  
|Taxable fixed income                   |  | $                  | 6,446  |                  | $ | 4,680    |  | 38  | %
|Municipal distribution                 |  |                    | 1,916  |                  |   | 1,307    |  | 47  |  
|Portfolio Trading                      |  |                    | 4,047  |                  |   | 6,288    |  | (36 | )
|Other                                  |  |                    | 4      |                  |   | 3        |  | 33  |  
|                                       |  |                    |        |                  |   |          |  |     |  
|                                       |  |                    | 12,413 |                  |   | 12,278   |  | 1   |  
|                                       |  |                    |        |                  |   |          |  |     |  
|Investment banking fees                |  |                    | 5,275  |                  |   | 5,058    |  | 4   |  
|Net gains on principal transactions    |  |                    | 2,085  |                  |   | 3,875    |  | (46 | )
|Other                                  |  |                    | 288    |                  |   | 292      |  | (1  | )
|Net interest revenue                   |  |                    | 8,198  |                  |   | 5,263    |  | 56  |  
|                                       |  |                    |        |                  |   |          |  |     |  
|Total net revenues                     |  |                    | 28,259 |                  |   | 26,766   |  | 6   |  
|                                       |  |                    |        |                  |   |          |  |     |  
|Operating expenses                     |  |                    | 17,937 |                  |   | 18,638   |  | (4  | )
|                                       |  |                    |        |                  |   |          |  |     |  
|Pre-tax income                         |  | $                  | 10,322 |                  | $ | 8,128    |  | 27  | %
|                                       |  |                    |        |                  |   |          |  |     |  
|Taxable fixed income representatives   |  |                    | 28     |                  |   | 17       |  | 65  | %
|                                       |  |                    |        |                  |   |          |  |     |  
|Municipal distribution representatives |  |                    | 21     |                  |   | 17       |  | 24  | %
|                                       |  |                    |        |                  |   |          |  |     |  

Net revenues from the institutional segment increased 6% while pre-tax income was up 27% in the three-months ended
December 31, 2007. Commissions in the institutional segment were up 1% for the three-months ended December 31, 2007 over the same period last fiscal year as volumes in both the taxable and municipal areas improved. These increases were
offset by a decrease in the Portfolio Trading area due to a 35% decline in the number of shares processed. Investment banking fees were up 4% for the three-months ended December 31, 2007 driven by an increase in Public Finance advisory fees.

Net gains on principal transactions were down 46% mainly due to lower inventories in fiscal 2008 which have reduced trading profits in both the taxable
and municipal business units.

In the three-months ended December 31, 2007, net interest revenue allocated to the institutional segment increased 56%
over the same period of last fiscal year. The institutional segments net interest is primarily generated from the companys securities lending activities as well as by trading activity in the fixed income businesses. This increase is
primarily due to a 30 basis point increase in the spread earned on stock borrow balances.



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##### Table of Contents

The following table sets forth the number and dollar amounts of municipal bond transactions conducted by Southwest
Securities, as reported to the Municipal Securities Rulemaking Board, for the three-month periods ended December 31, 2007 and December 29, 2006:



|                              |  |                    |                |                  |   |               
|----------------------------- |  | ------------------ | -------------- | ---------------- | - | --------------
|                              |  | Three-Months Ended
|                              |  | December 31,2007   |                | December 29,2006
|Number of Issues              |  |                    | 92             |                  |   | 136           
|Aggregate Amount of Offerings |  | $                  | 12,134,042,000 |                  | $ | 12,283,521,000

Average balances of interest-earning assets and interest-bearing liabilities for the institutional segment are as
follows (in thousands):



|                                      |  |                  |           |                  |   |          
|------------------------------------- |  | ---------------- | --------- | ---------------- | - | ---------
|                                      |  | December 31,2007 |           | December 29,2006
|Average interest-earning assets:      |  |                  |           |                  |   |          
|Stock borrowed                        |  | $                | 3,077,000 |                  | $ | 3,072,000
|                                      |  |                 
|Average interest-bearing liabilities: |  |                  |           |                  |   |          
|Stock loaned                          |  |                  | 3,042,000 |                  |   | 3,003,000

Operating expenses were down 4% for the three-months ended December 31, 2007 versus the same period last
fiscal year primarily due to a decrease in taxes and legal expenses.

Six-months Ended:

The following is a summary of the results for the institutional segment for the six-months ended December 31, 2007 and December 29, 2006 (dollars in thousands):



|                                    |  |                  |        |                  |   |          |  |     |   
|----------------------------------- |  | ---------------- | ------ | ---------------- | - | -------- |  | --- | --
|                                    |  | Six Months Ended |        |                  |  
|                                    |  | December 31,2007 |        | December 29,2006 |   | % Change | 
|Commissions                         |  |                  |        |                  |   |          |  |     |   
|Taxable fixed income                |  | $                | 11,268 |                  | $ | 8,190    |  | 38  | % 
|Municipal distribution              |  |                  | 3,993  |                  |   | 2,643    |  | 51  |   
|Portfolio Trading                   |  |                  | 7,567  |                  |   | 10,129   |  | (25 | ) 
|Other                               |  |                  | 10     |                  |   | 6        |  | 67  |   
|                                    |  |                  |        |                  |   |          |  |     |   
|                                    |  |                  | 22,838 |                  |   | 20,968   |  | 9   |   
|                                    |  |                  |        |                  |   |          |  |     |   
|Investment banking fees             |  |                  | 11,978 |                  |   | 12,564   |  | (5  | ) 
|Net gains on principal transactions |  |                  | 3,203  |                  |   | 10,052   |  | (68 | ) 
|Other                               |  |                  | 496    |                  |   | 580      |  | (15 | ) 
|Net interest revenue                |  |                  | 13,697 |                  |   | 11,842   |  | 16  |   
|                                    |  |                  |        |                  |   |          |  |     |   
|Total net revenues                  |  |                  | 52,212 |                  |   | 56,006   |  | (7  | ) 
|                                    |  |                  |        |                  |   |          |  |     |   
|Operating expenses                  |  |                  | 34,853 |                  |   | 37,786   |  | (8  | ) 
|                                    |  |                  |        |                  |   |          |  |     |   
|Pre-tax income                      |  | $                | 17,359 |                  | $ | 18,220   |  | (5  | )%
|                                    |  |                  |        |                  |   |          |  |     |   

Net revenues from the institutional segment decreased 7% while pre-tax income was down 5% in the six-months ended
December 31, 2007 versus the same period last fiscal year. Commissions in the institutional segment were up 9% for the six-months ended December 31, 2007 over the same period last fiscal year as volumes in both the taxable and municipal
areas improved. Additionally, there was an increase in sales personnel and an increase in new issue products which contributed to the increase in commissions over the prior fiscal year. Commissions for Portfolio Trading were down due to a decrease
in the number of shares processed, as discussed above. Investment banking fees were down 5% for the six-months ended December 31, 2007 over the same period last fiscal year primarily due to reduced fees from Corporate Finance transactions



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##### Table of Contents

Net gains on principal transactions, the primary driver of the reduced net revenue in the Institutional segment was down
68% mainly due to lower inventories in fiscal 2008 which have reduced trading profits in both the taxable and municipal business units as well as a $2,700,000 fee for a commercial mortgage backed restructuring transaction in the prior fiscal year
period. We have lowered our inventory balances in order to manage our exposure to the credit markets and fluctuations in U.S. interest rates.

In the
six-months ended December 31, 2007, net interest revenue allocated to the institutional segment increased 16% over the same period of last fiscal year. The institutional segments net interest is primarily generated from the companys
securities lending activities as well as by trading activity in the fixed income businesses. As discussed above, this increase is primarily due to an increase in the spread earned on stock borrow balances.

The following table sets forth the number and dollar amounts of municipal bond transactions conducted by Southwest Securities, as reported to the Municipal Securities
Rulemaking Board, for the six-month periods ended December 31, 2007 and December 29, 2006:



|                              |  |                  |                |                  |   |               
|----------------------------- |  | ---------------- | -------------- | ---------------- | - | --------------
|                              |  | Six Months Ended
|                              |  | December 31,2007 |                | December 29,2006
|Number of Issues              |  |                  | 292            |                  |   | 299           
|Aggregate Amount of Offerings |  | $                | 22,309,272,000 |                  | $ | 19,688,301,000

Average balances of interest-earning assets and interest-bearing liabilities for the institutional segment are as
follows (in thousands):



|                                      |  |                  |           |                  |   |          
|------------------------------------- |  | ---------------- | --------- | ---------------- | - | ---------
|                                      |  | December 31,2007 |           | December 29,2006
|Average interest-earning assets:      |  |                  |           |                  |   |          
|Stock borrowed                        |  | $                | 3,073,000 |                  | $ | 3,014,000
|                                      |  |                 
|Average interest-bearing liabilities: |  |                  |           |                  |   |          
|Stock loaned                          |  |                  | 3,036,000 |                  |   | 2,957,000

Operating expenses were down 8% for the six-months ended December 31, 2007 versus the same period last year
primarily due to a decrease in commissions offset by an increase in incentive compensation due to the restructuring of trading compensation.

Banking:

Three-months Ended:

The following is a summary of the results for the banking segment for the three-month periods ended December 31, 2007 and December 31, 2006 (dollars in thousands):



|                     |  |                    |        |                  |   |          |  |     |   
|-------------------- |  | ------------------ | ------ | ---------------- | - | -------- |  | --- | --
|                     |  | Three Months Ended |        |                  |  
|                     |  | December 31,2007   |        | December 31,2006 |   | % Change | 
|Net interest revenue |  | $                  | 12,194 |                  | $ | 12,265   |  | (1  | )%
|Other                |  |                    | 676    |                  |   | 708      |  | (5  | ) 
|                     |  |                    |        |                  |   |          |  |     |   
|Total net revenues   |  |                    | 12,870 |                  |   | 12,973   |  | (1  | ) 
|                     |  |                    |        |                  |   |          |  |     |   
|Operating expenses   |  |                    | 9,155  |                  |   | 6,221    |  | 47  |   
|                     |  |                    |        |                  |   |          |  |     |   
|Pre-Tax Income       |  | $                  | 3,715  |                  | $ | 6,752    |  | (45 | )%
|                     |  |                    |        |                  |   |          |  |     |   

The Banks net revenue decreased 1% for the three-months ended December 31, 2007 while pre-tax income
decreased 45% over the same period last fiscal year.



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##### Table of Contents

Net interest revenue generated by the Bank accounted for approximately 16.7% of consolidated net revenue for the
three-months ended December 31, 2007 and 16.5% for the three-month period ended December 31, 2006. The slight decrease in net interest revenue is due primarily to reduced spread as interest rates have declined.

The Banks operating expenses were up 47% for the three-month period ended December 31, 2007 over the same period last year. This increase is due primarily to
a $1,700,000 provision for loan losses as well as increased compensation and other expenses from additional headcount. See additional discussion on the allowance for loan losses at -Financial Condition-Loans and Allowance for Probable Loan
Losses.

The following table sets forth an analysis of the Banks net interest income by each major category of interest-earning assets and
interest-bearing liabilities for the three-month periods ended December 31, 2007 and December 31, 2006 (dollars in thousands):



|                                      |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|------------------------------------- |  | ------------------ | --------- | ---------------- | ----------------- | ------ |  | --- | ------- |  | ---------------- | ------- | ------ | - | ------ |  | --- | -
|                                      |  | Three Months Ended |          
|                                      |  | December 31, 2007  |           |                  | December 31, 2006 |       
|                                      |  | Average            |           | Interest Income/ |                   | Yield/ |  |     | Average |  | Interest Income/ |         | Yield/ |  
|                                      |  | Balance            |           | Expense          |                   | Rate   |  |     | Balance |  | Expense          |         | Rate   |  
|Assets:                               |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Interest-earning assets:              |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Real estate  mortgage                |  | $                  | 267,817   |                  | $                 | 6,125  |  | 9.1 | %       |  | $                | 155,353 |        | $ | 3,705  |  | 9.5 | %
|Real estate  construction            |  |                    | 223,364   |                  |                   | 4,276  |  | 7.6 |         |  |                  | 222,779 |        |   | 5,303  |  | 9.4 |  
|Commercial                            |  |                    | 358,153   |                  |                   | 8,006  |  | 8.9 |         |  |                  | 308,005 |        |   | 7,690  |  | 9.9 |  
|Individual                            |  |                    | 6,171     |                  |                   | 123    |  | 8.0 |         |  |                  | 6,887   |        |   | 135    |  | 7.8 |  
|Land                                  |  |                    | 148,245   |                  |                   | 3,390  |  | 9.1 |         |  |                  | 130,800 |        |   | 3,214  |  | 9.8 |  
|Federal Funds sold                    |  |                    | 57,503    |                  |                   | 661    |  | 4.6 |         |  |                  |        |        |   |       |  |    |  
|Interest bearing deposits in banks    |  |                    | 9,119     |                  |                   | 118    |  | 5.2 |         |  |                  | 96,674  |        |   | 1,222  |  | 5.0 |  
|Investments - other                   |  |                    | 3,953     |                  |                   | 46     |  | 4.7 |         |  |                  | 3,439   |        |   | 44     |  | 5.1 |  
|                                      |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|                                      |  |                    | 1,074,325 |                  | $                 | 22,745 |  | 8.4 | %       |  |                  | 923,937 |        | $ | 21,313 |  | 9.2 | %
|Non-interest-earning assets:          |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Cash and due from banks               |  |                    | 37,281    |                  |                   |        |  |     |         |  |                  | 9,164   |        |   |        |  |     |  
|Other assets                          |  |                    | 22,176    |                  |                   |        |  |     |         |  |                  | 22,225  |        |   |        |  |     |  
|                                      |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|                                      |  | $                  | 1,133,782 |                  |                   |        |  |     |         |  | $                | 955,326 |        |   |        |  |     |  
|                                      |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Liabilities and Stockholders Equity: |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Interest-bearing liabilities:         |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Certificates of deposit               |  | $                  | 82,445    |                  |                   | 963    |  | 4.7 | %       |  | $                | 81,915  |        |   | 869    |  | 4.2 | %
|Money market accounts                 |  |                    | 37,789    |                  |                   | 319    |  | 3.4 |         |  |                  | 29,070  |        |   | 243    |  | 3.3 |  
|Interest-bearing demand accounts      |  |                    | 62,710    |                  |                   | 612    |  | 3.9 |         |  |                  | 63,347  |        |   | 555    |  | 3.5 |  
|Savings accounts                      |  |                    | 729,294   |                  |                   | 7,654  |  | 4.2 |         |  |                  | 586,993 |        |   | 6,658  |  | 4.5 |  
|Federal Home Loan Bank advances       |  |                    | 76,085    |                  |                   | 1,002  |  | 5.2 |         |  |                  | 58,349  |        |   | 723    |  | 4.9 |  
|Federal Funds purchased               |  |                    | 66        |                  |                   | 1      |  | 5.5 |         |  |                  |        |        |   |       |  |    |  
|                                      |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|                                      |  |                    | 988,389   |                  |                   | 10,551 |  | 4.3 | %       |  |                  | 819,674 |        |   | 9,048  |  | 4.4 | %
|Non-interest-bearing liabilities:     |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Non interest-bearing demand accounts  |  |                    | 48,039    |                  |                   |        |  |     |         |  |                  | 51,312  |        |   |        |  |     |  
|Other liabilities                     |  |                    | 6,515     |                  |                   |        |  |     |         |  |                  | 7,209   |        |   |        |  |     |  
|                                      |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|                                      |  |                    | 1,042,943 |                  |                   |        |  |     |         |  |                  | 878,195 |        |   |        |  |     |  
|Stockholders equity                  |  |                    | 90,839    |                  |                   |        |  |     |         |  |                  | 77,131  |        |   |        |  |     |  
|                                      |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|                                      |  | $                  | 1,133,782 |                  |                   |        |  |     |         |  | $                | 955,326 |        |   |        |  |     |  
|                                      |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|                                      |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|                                      |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Net interest income                   |  |                    |           |                  | $                 | 12,194 |  |     |         |  |                  |         |        | $ | 12,265 |  |     |  
|                                      |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Net yield on interest-earning assets  |  |                    |           |                  |                   |        |  | 4.5 | %       |  |                  |         |        |   |        |  | 5.3 | %
|                                      |  |                    |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  



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##### Table of Contents

Interest rate trends, changes in the economy and competition and the scheduled maturities and interest rate sensitivity
of the loan portfolios and deposits affect the spreads earned by the Bank.

Net interest margin for the three-months ended December 31, 2007 is down
from the same period last year as reduced interest rates affect the Banks floating rate assets immediately while deposits from brokerage customers reprice more slowly.

The following table sets forth a summary of the changes in the Banks interest earned and interest paid resulting from changes in volume and rate (in thousands):



|                                   |  |                                                 |        |   |               |   |        |      |  |   |        |   |  |   |      |  
|---------------------------------- |  | ----------------------------------------------- | ------ | - | ------------- | - | ------ | ---- |  | - | ------ | - |  | - | ---- | -
|                                   |  | Three months ended                              |       
|                                   |  | December 31, 2007 compared to December 31, 2006 |       
|                                   |  | Total                                           |        |   | Attributed to |  
|                                   |  | Change                                          |        |   | Volume        |   |        | Rate |  |   | Mix    |  
|Interest income:                   |  |                                                 |        |   |               |   |        |      |  |   |        |   |  |   |      |  
|Real estatemortgage               |  | $                                               | 2,420  |   |               | $ | 2,682  |      |  | $ | (142   | ) |  | $ | (120 | )
|Real estateconstruction           |  |                                                 | (1,027 | ) |               |   | 14     |      |  |   | (1,027 | ) |  |   | (14  | )
|Commercial                         |  |                                                 | 316    |   |               |   | 1,252  |      |  |   | (786   | ) |  |   | (150 | )
|Individual                         |  |                                                 | (12    | ) |               |   | (14    | )    |  |   | 3      |   |  |   | (1   | )
|Land                               |  |                                                 | 176    |   |               |   | 429    |      |  |   | (215   | ) |  |   | (38  | )
|Federal Funds sold                 |  |                                                 | 661    |   |               |   |       |      |  |   |       |   |  |   | 661  |  
|Interest bearing deposits in banks |  |                                                 | (1,104 | ) |               |   | (1,107 | )    |  |   | 37     |   |  |   | (34  | )
|Investmentsother                  |  |                                                 | 2      |   |               |   | 7      |      |  |   | (4     | ) |  |   | (1   | )
|                                   |  |                                                 |        |   |               |   |        |      |  |   |        |   |  |   |      |  
|                                   |  | $                                               | 1,432  |   |               | $ | 3,263  |      |  | $ | (2,134 | ) |  | $ | 303  |  
|                                   |  |                                                 |        |   |               |   |        |      |  |   |        |   |  |   |      |  
|Interest expense:                  |  |                                                 |        |   |               |   |        |      |  |   |        |   |  |   |      |  
|Certificates of deposit            |  | $                                               | 94     |   |               | $ | 6      |      |  | $ | 90     |   |  | $ | (2   | )
|Money market accounts              |  |                                                 | 76     |   |               |   | 73     |      |  |   | 3      |   |  |   |     |  
|Interest-bearing demand accounts   |  |                                                 | 57     |   |               |   | (5     | )    |  |   | 64     |   |  |   | (2   | )
|Savings accounts                   |  |                                                 | 996    |   |               |   | 1,614  |      |  |   | (480   | ) |  |   | (138 | )
|Federal Home Loan Bank advances    |  |                                                 | 279    |   |               |   | 199    |      |  |   | 56     |   |  |   | 24   |  
|Federal Funds Purchased            |  |                                                 | 1      |   |               |   |       |      |  |   |       |   |  |   | 1    |  
|                                   |  |                                                 |        |   |               |   |        |      |  |   |        |   |  |   |      |  
|                                   |  |                                                 | 1,503  |   |               |   | 1,887  |      |  |   | (267   | ) |  |   | (117 | )
|                                   |  |                                                 |        |   |               |   |        |      |  |   |        |   |  |   |      |  
|Net interest income                |  | $                                               | (71    | ) |               | $ | 1,376  |      |  | $ | (1,867 | ) |  | $ | 420  |  
|                                   |  |                                                 |        |   |               |   |        |      |  |   |        |   |  |   |      |  

Six-months Ended:

The following is a summary of the results for the banking segment for the six-month periods ended December 31, 2007 and December 31, 2006 (dollars in thousands):



|                     |  |                  |        |                  |   |          |  |     |   
|-------------------- |  | ---------------- | ------ | ---------------- | - | -------- |  | --- | --
|                     |  | Six Months Ended |        |                  |  
|                     |  | December 31,2007 |        | December 31,2006 |   | % Change | 
|Net interest revenue |  | $                | 24,085 |                  | $ | 23,935   |  | 1   | % 
|Other                |  |                  | 1,276  |                  |   | 1,360    |  | (6  | ) 
|                     |  |                  |        |                  |   |          |  |     |   
|Total net revenues   |  |                  | 25,361 |                  |   | 25,295   |  |    |   
|                     |  |                  |        |                  |   |          |  |     |   
|Operating expenses   |  |                  | 16,194 |                  |   | 12,327   |  | 31  |   
|                     |  |                  |        |                  |   |          |  |     |   
|Pre-Tax Income       |  | $                | 9,167  |                  | $ | 12,968   |  | (29 | )%
|                     |  |                  |        |                  |   |          |  |     |   

The Banks net revenue was relatively flat for the six-months ended December 31, 2007 while pre-tax
income decreased 29% over the same period last year.

Net interest revenue generated by the Bank accounted for approximately 17.2% of consolidated net
revenue for the six-months ended December 31, 2007 and 16.6% for the six-month period ended December 31, 2006.



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The Banks operating expenses were up 31% for the six-month period ended December 31, 2007 over the same period
last year. This increase is due primarily to a provision for loan losses of $1,700,000. There was also an increase in employee compensation due to the addition of six new commercial lenders offset by a decrease in the Banks expenses for profit
sharing. See additional discussion on the allowance for loan losses at -Financial Condition-Loans and Allowance for Probable Loan Losses.

The following table sets forth an analysis of the Banks net interest income by each major category of interest-earning assets and interest-bearing liabilities for the six-month periods ended December 31, 2007 and
December 31, 2006 (dollars in thousands):



|                                      |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|------------------------------------- |  | ----------------- | --------- | ---------------- | ----------------- | ------ |  | --- | ------- |  | ---------------- | ------- | ------ | - | ------ |  | --- | -
|                                      |  | Six Months Ended  |          
|                                      |  | December 31, 2007 |           |                  | December 31, 2006 |       
|                                      |  | Average           |           | Interest Income/ |                   | Yield/ |  |     | Average |  | Interest Income/ |         | Yield/ |  
|                                      |  | Balance           |           | Expense          |                   | Rate   |  |     | Balance |  | Expense          |         | Rate   |  
|Assets:                               |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Interest-earning assets:              |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Real estate  mortgage                |  | $                 | 224,590   |                  | $                 | 10,540 |  | 9.3 | %       |  | $                | 158,907 |        | $ | 7,490  |  | 9.4 | %
|Real estate  construction            |  |                   | 221,587   |                  |                   | 9,157  |  | 8.2 |         |  |                  | 215,899 |        |   | 10,505 |  | 9.7 |  
|Commercial                            |  |                   | 343,257   |                  |                   | 15,554 |  | 9.0 |         |  |                  | 292,929 |        |   | 14,351 |  | 9.7 |  
|Individual                            |  |                   | 6,295     |                  |                   | 253    |  | 8.0 |         |  |                  | 6,926   |        |   | 273    |  | 7.8 |  
|Land                                  |  |                   | 146,290   |                  |                   | 6,809  |  | 9.3 |         |  |                  | 130,663 |        |   | 6,450  |  | 9.8 |  
|Federal Funds sold                    |  |                   | 95,626    |                  |                   | 2,408  |  | 5.0 |         |  |                  |        |        |   |       |  |    |  
|Interest bearing deposits in banks    |  |                   | 13,121    |                  |                   | 333    |  | 5.1 |         |  |                  | 79,432  |        |   | 2,031  |  | 5.1 |  
|Investments - other                   |  |                   | 5,965     |                  |                   | 145    |  | 4.8 |         |  |                  | 3,418   |        |   | 85     |  | 5.0 |  
|                                      |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|                                      |  |                   | 1,056,731 |                  | $                 | 45,199 |  | 8.5 | %       |  |                  | 888,174 |        | $ | 41,185 |  | 9.2 | %
|Non-interest-earning assets:          |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Cash and due from banks               |  |                   | 34,737    |                  |                   |        |  |     |         |  |                  | 10,955  |        |   |        |  |     |  
|Other assets                          |  |                   | 21,606    |                  |                   |        |  |     |         |  |                  | 21,630  |        |   |        |  |     |  
|                                      |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|                                      |  | $                 | 1,113,074 |                  |                   |        |  |     |         |  | $                | 920,759 |        |   |        |  |     |  
|                                      |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Liabilities and Stockholders Equity: |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Interest-bearing liabilities:         |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Certificates of deposit               |  | $                 | 80,293    |                  |                   | 1,866  |  | 4.6 | %       |  | $                | 82,754  |        |   | 1,709  |  | 4.1 | %
|Money market accounts                 |  |                   | 34,713    |                  |                   | 587    |  | 3.4 |         |  |                  | 28,562  |        |   | 478    |  | 3.3 |  
|Interest-bearing demand accounts      |  |                   | 61,881    |                  |                   | 1,244  |  | 4.0 |         |  |                  | 66,507  |        |   | 979    |  | 2.9 |  
|Savings accounts                      |  |                   | 721,600   |                  |                   | 15,524 |  | 4.3 |         |  |                  | 555,098 |        |   | 12,748 |  | 4.6 |  
|Federal Home Loan Bank advances       |  |                   | 71,522    |                  |                   | 1,892  |  | 5.3 |         |  |                  | 54,828  |        |   | 1,336  |  | 4.8 |  
|Federal Funds purchased               |  |                   | 33        |                  |                   | 1      |  | 5.5 |         |  |                  |        |        |   |       |  |    |  
|                                      |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|                                      |  |                   | 970,042   |                  |                   | 21,114 |  | 4.3 | %       |  |                  | 787,749 |        |   | 17,250 |  | 4.3 | %
|Non-interest-bearing liabilities:     |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Non interest-bearing demand accounts  |  |                   | 46,154    |                  |                   |        |  |     |         |  |                  | 50,606  |        |   |        |  |     |  
|Other liabilities                     |  |                   | 7,408     |                  |                   |        |  |     |         |  |                  | 7,091   |        |   |        |  |     |  
|                                      |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|                                      |  |                   | 1,023,604 |                  |                   |        |  |     |         |  |                  | 845,446 |        |   |        |  |     |  
|Stockholders equity                  |  |                   | 89,470    |                  |                   |        |  |     |         |  |                  | 75,313  |        |   |        |  |     |  
|                                      |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|                                      |  | $                 | 1,113,074 |                  |                   |        |  |     |         |  | $                | 920,759 |        |   |        |  |     |  
|                                      |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|                                      |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|                                      |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Net interest income                   |  |                   |           |                  | $                 | 24,085 |  |     |         |  |                  |         |        | $ | 23,935 |  |     |  
|                                      |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  
|Net yield on interest-earning assets  |  |                   |           |                  |                   |        |  | 4.5 | %       |  |                  |         |        |   |        |  | 5.4 | %
|                                      |  |                   |           |                  |                   |        |  |     |         |  |                  |         |        |   |        |  |     |  

Interest rate trends, changes in the economy and competition and the scheduled maturities and interest rate
sensitivity of the loan portfolios and deposits affect the spreads earned by the Bank.



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##### Table of Contents

Net interest margin for the six-months ended December 31, 2007 is down from the same period last fiscal year as
reduced interest rates affect the Banks floating rate assets immediately while deposits from brokerage customers reprice more slowly.

The following
table sets forth a summary of the changes in the Banks interest earned and interest paid resulting from changes in volume and rate (in thousands):



|                                   |  |                                                 |        |   |               |   |        |      |  |   |        |   |  |   |       |  
|---------------------------------- |  | ----------------------------------------------- | ------ | - | ------------- | - | ------ | ---- |  | - | ------ | - |  | - | ----- | -
|                                   |  | Six months ended                                |       
|                                   |  | December 31, 2007 compared to December 31, 2006 |       
|                                   |  | Total                                           |        |   | Attributed to |  
|                                   |  | Change                                          |        |   | Volume        |   |        | Rate |  |   | Mix    |  
|Interest income:                   |  |                                                 |        |   |               |   |        |      |  |   |        |   |  |   |       |  
|Real estatemortgage               |  | $                                               | 3,050  |   |               | $ | 3,096  |      |  | $ | (12    | ) |  | $ | (34   | )
|Real estateconstruction           |  |                                                 | (1,348 | ) |               |   | 277    |      |  |   | (1,559 | ) |  |   | (66   | )
|Commercial                         |  |                                                 | 1,203  |   |               |   | 2,466  |      |  |   | (1,041 | ) |  |   | (222  | )
|Individual                         |  |                                                 | (20    | ) |               |   | (25    | )    |  |   | 6      |   |  |   | (1    | )
|Land                               |  |                                                 | 359    |   |               |   | 771    |      |  |   | (351   | ) |  |   | (61   | )
|Federal Funds sold                 |  |                                                 | 2,408  |   |               |   | __     |      |  |   | __     |   |  |   | 2,408 |  
|Interest bearing deposits in banks |  |                                                 | (1,698 | ) |               |   | (1,696 | )    |  |   | (8     | ) |  |   | 6     |  
|Investmentsother                  |  |                                                 | 60     |   |               |   | 10     |      |  |   | (3     | ) |  |   | 53    |  
|                                   |  |                                                 |        |   |               |   |        |      |  |   |        |   |  |   |       |  
|                                   |  | $                                               | 4,014  |   |               | $ | 4,899  |      |  | $ | (2,968 | ) |  | $ | 2,083 |  
|                                   |  |                                                 |        |   |               |   |        |      |  |   |        |   |  |   |       |  
|Interest expense:                  |  |                                                 |        |   |               |   |        |      |  |   |        |   |  |   |       |  
|Certificates of deposit            |  | $                                               | 157    |   |               | $ | (51    | )    |  | $ | 220    |   |  | $ | (12   | )
|Money market accounts              |  |                                                 | 109    |   |               |   | 103    |      |  |   | 7      |   |  |   | (1    | )
|Interest-bearing demand accounts   |  |                                                 | 265    |   |               |   | (68    | )    |  |   | 362    |   |  |   | (29   | )
|Savings accounts                   |  |                                                 | 2,776  |   |               |   | 3,824  |      |  |   | (774   | ) |  |   | (274  | )
|Federal Home Loan Bank advances    |  |                                                 | 556    |   |               |   | 410    |      |  |   | 126    |   |  |   | 20    |  
|Federal Funds purchased            |  |                                                 | 1      |   |               |   |       |      |  |   |       |   |  |   | 1     |  
|                                   |  |                                                 |        |   |               |   |        |      |  |   |        |   |  |   |       |  
|                                   |  |                                                 | 3,864  |   |               |   | 4,218  |      |  |   | (59    | ) |  |   | (295  | )
|                                   |  |                                                 |        |   |               |   |        |      |  |   |        |   |  |   |       |  
|Net interest income                |  | $                                               | 150    |   |               | $ | 681    |      |  | $ | (2,909 | ) |  | $ | 2,378 |  
|                                   |  |                                                 |        |   |               |   |        |      |  |   |        |   |  |   |       |  

Other:

Three-months Ended:

Pre-tax loss from the other category was $9.0 million for the three-months ended December 31, 2007 compared to
$4.4 million for the same period of last fiscal year. The December 2006 period included proceeds from a company-owned life insurance policy of $2,276,000 in addition to a $2,308,000 gain on the valuation of NYX stock not included in the current
quarter due to the transfer of ownership of the NYX stock from Southwest Securities to SWS Group.

Six-months Ended:

Pre-tax loss from the other category was $17.2 million for the six months ended December 31, 2007 compared to $13.3 million for the same period of last year. Fiscal
2007 included proceeds from a company-owned life insurance policy of $2,276,000 in addition to a $3,122,000 gain on the valuation of NYX stock not included in the current six-month period. This decrease in revenue is partially offset by a decrease
in employee compensation expenses (deferred compensation, health insurance, and incentive compensation) of $1,000,000 and a gain on our investments of $421,000 for fiscal 2008 when compared to a loss of $528,000 for fiscal 2007, a total change of
$949,000.

FINANCIAL CONDITION

Loans and
Allowance for Probable Loan Losses: The Bank grants loans to customers primarily within North Texas. The Bank also purchases loans, in the ordinary course of business, which have been originated in various other areas of the United States.
Although the Bank has a diversified loan portfolio, a substantial portion of its debtors ability to honor their contracts is dependent upon the general economic conditions of the North Texas area. Substantially all of the Banks loans are
collateralized with real estate.



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The allowance for probable loan losses is increased by charges to income and decreased by charge-offs (net of
recoveries). Managements periodic evaluation of the adequacy of the allowance is based on the Banks past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers ability to
repay, the estimated value of any underlying collateral, and current economic conditions.

Loans receivable at December 31, 2007 and June 30,
2007 are summarized as follows (in thousands):



|                           |  |                  |           |              |   |        
|-------------------------- |  | ---------------- | --------- | ------------ | - | -------
|                           |  | December 31,2007 |           | June 30,2007
|Real estate  mortgage     |  | $                | 385,588   |              | $ | 201,635
|Real estate  construction |  |                  | 252,420   |              |   | 284,969
|Commercial                 |  |                  | 317,055   |              |   | 262,233
|Individuals                |  |                  | 5,176     |              |   | 4,810  
|Land                       |  |                  | 165,393   |              |   | 150,403
|                           |  |                  |           |              |   |        
|                           |  | $                | 1,125,632 |              | $ | 904,050
|                           |  |                  |           |              |   |        

The following table shows the scheduled maturities of certain loans at December 31, 2007, and segregates
those loans with fixed interest rates from those with floating or adjustable rates (in thousands):



|                                      |  |               |         |          |   |             |  |       |         |  |   |        
|------------------------------------- |  | ------------- | ------- | -------- | - | ----------- |  | ----- | ------- |  | - | -------
|                                      |  | 1 yearor less |         | 1-5years |   | Over 5years |  | Total
|Real estate  construction            |  | $             | 208,317 |          | $ | 20,400      |  | $     | 23,703  |  | $ | 252,420
|Commercial                            |  |               | 74,713  |          |   | 133,605     |  |       | 108,737 |  |   | 317,055
|                                      |  |               |         |          |   |             |  |       |         |  |   |        
|Total                                 |  | $             | 283,030 |          | $ | 154,005     |  | $     | 132,440 |  | $ | 569,475
|                                      |  |               |         |          |   |             |  |       |         |  |   |        
|Amount of loans based upon:           |  |               |         |          |   |             |  |       |         |  |   |        
|Floating or adjustable interest rates |  | $             | 258,981 |          | $ | 104,945     |  | $     | 93,982  |  | $ | 457,908
|Fixed interest rates                  |  |               | 24,049  |          |   | 49,060      |  |       | 38,458  |  |   | 111,567
|                                      |  |               |         |          |   |             |  |       |         |  |   |        
|Total                                 |  | $             | 283,030 |          | $ | 154,005     |  | $     | 132,440 |  | $ | 569,475
|                                      |  |               |         |          |   |             |  |       |         |  |   |        

Loans are classified as non-performing when they are 90 days or more past due as to principal or interest or when
reasonable doubt exists as to timely collectibility. The Bank uses a standardized review process to determine which non-performing loans should be placed on non-accrual status. At the time a loan is placed on non-accrual status, previously accrued
and uncollected interest is reversed against interest income. Interest income on non-accrual loans is subsequently recognized to the extent cash payments are received for loans with respect to which ultimate full collection is likely. For loans
where ultimate collection is not likely, interest payments are applied to the outstanding principal and income is only recognized if full payment is made.

Non-performing assets as of December 31, 2007 and June 30, 2007 are as follows (dollars in thousands):



|                                           |  |                  |       |              |   |      
|------------------------------------------ |  | ---------------- | ----- | ------------ | - | -----
|                                           |  | December 31,2007 |       | June 30,2007
|Loans accounted for on a non-accrual basis |  |                  |       |              |   |      
|1-4 family                                 |  | $                | 826   |              | $ | 1,064
|Lot and land development                   |  |                  | 2,753 |              |   | 1,714
|Multifamily                                |  |                  | __    |              |   | 4,758
|Interim construction                       |  |                  | 4,167 |              |   | 5,616
|Commercial real estate                     |  |                  | 3,041 |              |   | 5,012



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##### Table of Contents

|                                                            |  |                  |        |   |              |   |        |  
|----------------------------------------------------------- |  | ---------------- | ------ | - | ------------ | - | ------ | -
|                                                            |  | December 31,2007 |        |   | June 30,2007 |  
|Commercial loans                                            |  | $                | 316    |   |              | $ | 922    |  
|Consumer loans                                              |  |                  | 16     |   |              |   | 51     |  
|                                                            |  |                  |        |   |              |   |        |  
|                                                            |  | $                | 11,119 |   |              | $ | 19,137 |  
|                                                            |  |                  |        |   |              |   |        |  
|Loans past due 90 days or more, not included above          |  | $                | 1,751  |   |              | $ | 32     |  
|                                                            |  |                  |        |   |              |   |        |  
|Non-performing loans as a percentage of total gross loans   |  |                  | 1.1    | % |              |   | 2.1    | %
|                                                            |  |                  |        |   |              |   |        |  
|Troubled debt restructurings                                |  | $                | 10,658 |   |              | $ | 2,431  |  
|                                                            |  |                  |        |   |              |   |        |  
|Total non-performing assets                                 |  | $                | 23,528 |   |              | $ | 21,600 |  
|                                                            |  |                  |        |   |              |   |        |  
|Total non-performing assets as a percentage of total assets |  |                  | 2.0    | % |              |   | 2.0    | %
|                                                            |  |                  |        |   |              |   |        |  

An analysis of the allowance for probable loan losses for the three and six-month periods ended December 31,
2007 and December 31, 2006 is as follows (dollars in thousands):



|                                                                                          |  |                                |        |   |                              |   |       |      |  |   |        |   |  |   |       |  
|----------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                                                                          |  | Three Months EndedDecember 31, |        |   | Six Months EndedDecember 31, |  
|                                                                                          |  | 2007                           |        |   | 2006                         |   |       | 2007 |  |   | 2006   |  
|Balance at beginning of period                                                            |  | $                              | 5,547  |   |                              | $ | 5,347 |      |  | $ | 5,497  |   |  | $ | 5,047 |  
|Charge-offs:                                                                              |  |                                |        |   |                              |   |       |      |  |   |        |   |  |   |       |  
|Commercial, financial and agricultural                                                    |  |                                | (548   | ) |                              |   | (86   | )    |  |   | (548   | ) |  |   | (110  | )
|Real estate-construction                                                                  |  |                                | (693   | ) |                              |   |      |      |  |   | (693   | ) |  |   |      |  
|Real estate-mortgage                                                                      |  |                                |       |   |                              |   | (224  | )    |  |   |       |   |  |   | (224  | )
|Individuals                                                                               |  |                                | (5     | ) |                              |   | (9    | )    |  |   | (17    | ) |  |   | (9    | )
|                                                                                          |  |                                |        |   |                              |   |       |      |  |   |        |   |  |   |       |  
|                                                                                          |  |                                | (1,246 | ) |                              |   | (319  | )    |  |   | (1,258 | ) |  |   | (343  | )
|                                                                                          |  |                                |        |   |                              |   |       |      |  |   |        |   |  |   |       |  
|Recoveries:                                                                               |  |                                |        |   |                              |   |       |      |  |   |        |   |  |   |       |  
|Construction                                                                              |  |                                |       |   |                              |   | 10    |      |  |   |       |   |  |   | 12    |  
|Mortgage                                                                                  |  |                                |       |   |                              |   |      |      |  |   |       |   |  |   | 2     |  
|Commercial, financial and agricultural                                                    |  |                                | 24     |   |                              |   | 38    |      |  |   | 35     |   |  |   | 64    |  
|                                                                                          |  |                                |        |   |                              |   |       |      |  |   |        |   |  |   |       |  
|                                                                                          |  |                                | 24     |   |                              |   | 48    |      |  |   | 35     |   |  |   | 78    |  
|                                                                                          |  |                                |        |   |                              |   |       |      |  |   |        |   |  |   |       |  
|Net (charge-offs) recoveries                                                              |  |                                | (1,222 | ) |                              |   | (271  | )    |  |   | (1,223 | ) |  |   | (265  | )
|Additions charged to operations                                                           |  |                                | 1,687  |   |                              |   | 421   |      |  |   | 1,738  |   |  |   | 715   |  
|                                                                                          |  |                                |        |   |                              |   |       |      |  |   |        |   |  |   |       |  
|Balance at end of period                                                                  |  | $                              | 6,012  |   |                              | $ | 5,497 |      |  | $ | 6,012  |   |  | $ | 5,497 |  
|                                                                                          |  |                                |        |   |                              |   |       |      |  |   |        |   |  |   |       |  
|Ratio of net charge-offs during the period to average loans outstanding during the period |  |                                | 0.12   | % |                              |   | 0.03  | %    |  |   | 0.13   | % |  |   | 0.03  | %
|                                                                                          |  |                                |        |   |                              |   |       |      |  |   |        |   |  |   |       |  



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The allowance for probable loan losses is applicable to the following types of loans as of December 31, 2007 and
June 30, 2007 (dollars in thousands):



|                              |  |                   |       |                              |               |   |        |   |                              |  |       |  
|----------------------------- |  | ----------------- | ----- | ---------------------------- | ------------- | - | ------ | - | ---------------------------- |  | ----- | -
|                              |  | December 31, 2007 |       |                              | June 30, 2007 |  
|                              |  | Amount            |       | Percentof loansto totalloans |               |   | Amount |   | Percentof loansto totalloans | 
|Commercial                    |  | $                 | 3,346 |                              | 28.3          | % |        | $ | 2,795                        |  | 29.1  | %
|Real estate  construction    |  |                   | 1,196 |                              | 22.4          |   |        |   | 1,087                        |  | 31.5  |  
|Real estate  mortgage & land |  |                   | 1,424 |                              | 48.8          |   |        |   | 1,588                        |  | 38.9  |  
|Individuals                   |  |                   | 46    |                              | 0.5           |   |        |   | 27                           |  | 0.5   |  
|                              |  |                   |       |                              |               |   |        |   |                              |  |       |  
|                              |  | $                 | 6,012 |                              | 100.0         | % |        | $ | 5,497                        |  | 100.0 | %
|                              |  |                   |       |                              |               |   |        |   |                              |  |       |  

Deposits:Average deposits and the average interest rate paid on the deposits for the three and
six-month periods ended December 31, 2007 and December 31, 2006 can be found in the discussion of the Banking Groups net interest income under the caption Results of Operations-Segment-Banking.

Certificates of deposit of $100,000 or greater were $30,066,000 and $24,427,000 at December 31, 2007 and June 30, 2007, respectively. The Bank funds its loans
primarily through funds on deposit in interest bearing checking account from Southwest Securities brokerage customers and internally generated deposits. The Bank also utilizes short and long term Federal Home Loan bank (FHLB)
borrowings to match long term fixed rate loan fundings. The Bank has $789,000,000 in funds on deposit from customers of Southwest Securities at December 31, 2007. This funding source has reduced the Banks reliance on short-term borrowings
from the FHLB and brokered certificates of deposit.

Advances from Federal Home Loan Bank: This table represents advances from the FHLB which
were due within one year during the three and six-month periods ended December 31, 2007 and December 31, 2006 (dollars in thousands):



|                              |  |                                 |        |              |                               |   |        |      |              |  |      |        |  |              |        |  |        |   |              |   |        |  |     |  
|----------------------------- |  | ------------------------------- | ------ | ------------ | ----------------------------- | - | ------ | ---- | ------------ |  | ---- | ------ |  | ------------ | ------ |  | ------ | - | ------------ | - | ------ |  | --- | -
|                              |  | Three Months Ended December 31, |        |              | Six Months Ended December 31, |  
|                              |  | 2007                            |        |              | 2006                          |   |        | 2007 |              |  | 2006 |       
|                              |  | Amount                          |        | InterestRate |                               |   | Amount |      | InterestRate |  |      | Amount |  | InterestRate |        |  | Amount |   | InterestRate |  
|At end of period              |  | $                               | 53,800 |              | 2.2                           | % |        | $    | 6,076        |  | 3.2  | %      |  | $            | 53,800 |  | 2.2    | % |              | $ | 6,076  |  | 3.2 | %
|Average during period         |  |                                 | 2,357  |              | 3.5                           | % |        |      | 7,480        |  | 3.2  | %      |  |              | 1,392  |  | 3.5    | % |              |   | 8,367  |  | 3.1 | %
|Maximum balance during period |  |                                 | 53,800 |              |                              |   |        |      | 8,865        |  |     |        |  |              | 53,800 |  |       |   |              |   | 18,127 |  |    |  

LIQUIDITY AND CAPITAL RESOURCES

Brokerage

A substantial portion of our assets are highly liquid in nature and consist mainly of cash or assets
readily convertible into cash. Our equity capital, short-term bank borrowings, interest bearing and non-interest bearing client credit balances, correspondent deposits and other payables finance these assets. We maintain an allowance for doubtful
accounts which represents amounts that are necessary, in the judgment of management, to adequately absorb losses from known and inherent risks in receivables from clients, clients of correspondents and correspondents. The highly liquid nature of our
assets provides us with flexibility in financing and managing our anticipated operating needs. Management believes that the brokerage business present liquidity position is adequate to meet its needs over the next twelve months.



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Short-Term Borrowings:We have credit arrangements with commercial banks, which include
broker loan lines up to $275,000,000. These lines of credit are used primarily to finance securities owned, securities held for correspondent broker/dealer accounts and receivables in customers margin accounts. These credit arrangements are
provided on an as offered basis and are not committed lines of credit. Outstanding balances under these credit arrangements are due on demand, bear interest at rates indexed to the federal funds rate and are collateralized by securities
of Southwest Securities and its clients. There were no amounts outstanding under these secured arrangements at December 31, 2007.

We had $250,000
outstanding under unsecured letters of credit at December 31, 2007, pledged to support our open positions with securities clearing organizations, which bear a 1% commitment fee and are renewable semi-annually.

At December 31, 2007, we had an additional unsecured letter of credit issued for a sub-lease of space preciously occupied by a former subsidiary in the amount of
$429,000. This letter of credit bears a 1% commitment fee and is renewable annually.

In addition to the broker loan lines, we have a $20,000,000 unsecured
line of credit that is due on demand and bears interest at rates indexed to the federal funds rate. The total amount of borrowings available under this line of credit is reduced by the amount outstanding under the unsecured letters of credit at the
time of borrowing. At December 31, 2007, the total amount available for borrowings was $19,321,000. There were no amounts outstanding on this line other than the $679,000 for unsecured letters of credit at December 31, 2007.

We have an irrevocable letter of credit agreement aggregating $46,000,000 at December 31, 2007 pledged to support our open options positions with an options
clearing organization. The letter of credit bears interest at the brokers call rate, (0.5% at December 31, 2007), if drawn, and is renewable semi-annually. This letter of credit is fully collateralized by marketable securities held in
client and non-client margin accounts with a value of $80,095,000 at December 31, 2007.

Net Capital Requirements:Our broker/dealer
subsidiaries are subject to the requirements of the SEC relating to liquidity, capital standards and the use of client funds and securities. The amount of broker/dealer subsidiaries net assets that may be distributed is subject to restrictions
under applicable net capital rules. Historically, we have operated in excess of the minimum net capital requirements. See Net Capital Requirements in the Notes to the Consolidated Financial Statements contained in this report.

Banking

Liquidity is monitored daily to ensure the
Banks ability to support asset growth, meet deposit withdrawals, maintain reserve requirements and otherwise sustain operations. The Banks liquidity is maintained in the form of readily marketable loans, federal funds sold, balances in
due from bank accounts and cash on hand. In addition, the Bank has borrowing capacity with the FHLB and a $30,000,000 federal funds agreement for the purpose of purchasing short-term funds should additional liquidity be needed. Current net available
borrowing capacity at FHLB is $233,172,000. Management believes that the Banks present liquidity position is adequate to meet its needs over the next twelve months.

The Banks asset and liability management policy is intended to manage interest rate risk. The Bank accomplishes this through management of the repricing of its interest-earning assets and its interest-bearing
liabilities. Overall interest rate risk is monitored through reports showing both sensitivity ratios, a simulation model and existing GAP data. (See the Banks GAP analysis in Risk Management-Market Risk-Interest Rate
Risk/Banking.) At December 31, 2007, $789,456,000 of the Banks deposits were from broker customers of Southwest Securities. Events in the securities markets could impact the amount of these funds available to the Bank.



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The Bank is subject to capital standards imposed by regulatory bodies, including the Office of Thrift Supervision
(OTS) and the Federal Deposit Insurance Corporation (FDIC). The Bank has historically met all the capital adequacy requirements to which it is subject.

Borrowings: The Bank has an agreement with an unaffiliated bank for a $30,000,000 unsecured line of credit for the purchase of federal funds with a floating interest rate. The unaffiliated bank is not obligated
by this agreement to sell federal funds to the Bank. The agreement is being used by the Bank to support short-term liquidity needs. At December 31, 2007, there were no amounts outstanding on this line of credit.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements, as
defined by the SEC, include certain contractual arrangements pursuant to which a company has a binding obligation which is not reflected on the balance sheet. Included are contingent obligations, certain guaranteed contracts, retained or contingent
interest in assets transferred to an unconsolidated entity, certain derivative investments classified as equity or material variable interests in unconsolidated entities that provide financing, liquidity, market risk or credit risk support. We
generally do not enter into off-balance sheet arrangements, as defined, other than those described in the Contractual Obligations and Contingent Payments section of our annual report on Form 10-K for the fiscal year ended June 29, 2007. In
addition, our broker/dealer subsidiaries enter into transactions in the normal course of business that expose us to off-balance sheet risk. See Note 24 of the Notes to Consolidated Financial Statements contained in our Form 10-K for the fiscal year
ended June 29, 2007.

Cash Flow

Net cash used in
operating activities was $112,531,000 for the six months ended December 31, 2007 and net cash provided by operating activities was $16,123,000 for the six months ended December 29, 2006. The primary reasons for the decrease in cash from
operating activities from fiscal 2007 to fiscal 2008 were:



| |  |  | an increase in the Banks investments in loans held for sale; and
| | - |  | -----------------------------------------------------------------



| |  |  | offset by the decrease in securities owned of $21,505,000 versus a decrease in the prior year of $951,000.
| | - |  | ----------------------------------------------------------------------------------------------------------

Net cash used in investing activities for the six-month periods ended December 31, 2007 and December 29, 2006 was $65,894,000 and $74,299,000, respectively.
The primary reason for the decrease in cash used for investing activities was the receipt of the escrow funds from the sale of FSB Financial of $3,818,000.

Net cash flows provided by financing activities totaled $118,563,000 for the six-month period ended December 31, 2007 compared to $96,927,000 for the six-month period ended December 29, 2006. The primary reasons for the increase
in cash from financing activities is from reduced securities sold under agreements to repurchase, a smaller increase in deposits at the Bank and a decrease in the proceeds received on the exercise of stock options. This is offset by an increase in
advances from the FHLB and reduced net payments on short-term borrowings.

We expect that cash flows provided by operating activities as well as short-term
borrowings will be the primary source of working capital for fiscal 2008.



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Treasury Stock

On
January 15, 2008, the board of directors of SWS Group approved a plan authorizing the Company to purchase up to 750,000 shares of its common stock from time to time in the open market for an 18-month time period beginning January 14, 2008
and ending on June 30, 2009. The 750,000 shares authorized for purchase are in addition to the Companys current stock repurchase program, beginning on January 1, 2007 and expiring on June 30, 2008, which authorizes the
purchase of 500,000 shares of SWS common stock in the open market. During the second quarter of fiscal 2008, we did not repurchase any shares. See additional discussion in Subsequent Events in the Notes to the Consolidated
Financial Statements contained in this report.

Additionally, the trustee under our deferred compensation plan periodically purchases stock in the open
market in accordance with the terms of the plan. This stock is classified as treasury stock in our consolidated financial statements, but participates in future dividends declared by us. In the six-month period ended December 31, 2007, the plan
did not purchase shares and no shares were distributed pursuant to the plan.

As restricted stock grants vest, some of the grantees choose to sell a
portion of their vested shares to cover the tax liabilities arising from such vesting. As a result, in the six-month period ended December 31, 2007, 17,142 shares were repurchased by the company with a market value of $335,784 or an average of
$19.59 per share to cover tax liabilities.

RISK MANAGEMENT

We manage risk exposure through the involvement of various levels of management. We establish, maintain and regularly monitor maximum positions by trader and product in inventory accounts. Current and proposed underwriting, banking and
other commitments are subject to due diligence reviews by senior management, as well as professionals in the appropriate business and support units involved. The Bank seeks to reduce the risk of significant adverse effects of market rate
fluctuations by minimizing the difference between rate-sensitive assets and liabilities, referred to as GAP, by maintaining an interest rate sensitivity position within a particular timeframe. Credit risk related to various financing
activities is reduced by obtaining and maintaining collateral. We monitor our exposure to counterparty risk through the use of credit exposure information, the monitoring of collateral values and the establishment of credit limits. We have
established various risk management committees that are responsible for reviewing and managing risk related to interest rates, trading positions, margin and other credit risk and risks from capital market transactions.

Credit Risk

Brokerage: Credit risk arises from
the potential nonperformance by counterparties, customers or debt security issuers. We are exposed to credit risk as a trading counterparty and as a stock loan counterparty to dealers and customers, as a holder of securities and as a member of
exchanges and clearing organizations. Credit exposure is also associated with customer margin accounts, which are monitored daily. We monitor exposure to individual securities and perform sensitivity analysis on a regular basis in connection with
our margin lending activities. We adjust our margin requirements if we believe our risk exposure is not appropriate based on market conditions.

Banking: Credit risk is the possibility that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms and is inherent in all types of lending. The Bank has developed and implemented
extensive policies and procedures to provide a robust process for proactively managing credit risk. These policies and procedures include underwriting guidelines, credit and collateral tracking, and detailed loan approval procedures which include
officer and director loan committees. The Bank also maintains a detailed loan review process to monitor the quality of the loan portfolio. The Bank grants loans to customers primarily within the Dallas-Fort



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Worth metropolitan area. The Bank also purchases loans which have been originated in other areas of the United States. Although the Bank has a diversified
loan portfolio, a substantial portion of its debtors ability to honor their contracts is dependent upon the general economic conditions of the North Texas area. Policies and procedures, which are in place to manage credit risk, are designed to
be responsive to changes in these economic conditions.

Operational Risk

Operational risk refers generally to risk of loss resulting from our operations, including but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our operating systems,
and inadequacies or breaches in our control processes. We operate in diverse markets and are reliant on the ability of our employees and systems to process large numbers of transactions. In order to mitigate and control operational risk, we have
developed and continue to enhance specific policies and procedures that are designed to identify and manage operational risk at appropriate levels. We also use periodic self-assessments and internal audit examinations as further review of the
effectiveness of our controls and procedures in mitigating our operational risk.

Legal Risk

Legal risk includes the risk of non-compliance with applicable legal and regulatory requirements. We are subject to extensive regulation in the different jurisdictions in
which we conduct business. We have established procedures based on legal and regulatory requirements that are designed to reasonably ensure compliance with all applicable statutory and regulatory requirements. We also have established procedures
that are designed to ensure that executive managements policies relating to conduct, ethics and business practices are followed. In connection with our business, we have various procedures addressing significant issues such as regulatory
capital requirements, sales and trading practices, new products, use and safekeeping of customer funds and securities, granting credit, collection activities, money laundering, privacy and record keeping.

Market Risk

Market risk generally represents the risk of loss that
may result from the potential change in value of a financial instrument as a result of fluctuations in interest rates, equity prices, investor expectations and changes in credit ratings of the issuer. Our exposure to market risk is directly related
to our role as a financial intermediary in customer-related transactions and to our proprietary trading activities.

Interest Rate Risk:
Brokerage. Interest rate risk is a consequence of maintaining inventory positions and trading in interest rate sensitive financial instruments. Our fixed income activities also expose us to the risk of loss related to changes in credit spreads.
Credit spread risk arises from the potential that changes in an issuers credit rating or credit perception could affect the value of financial instruments.

Banking. Our primary emphasis in interest rate risk management for the Bank is the matching of assets and liabilities of similar cash flow and re-pricing time frames. This matching of assets and liabilities reduces exposure to rate
movements and aids in stabilizing positive interest spreads. We strive to structure our balance sheet as a natural hedge by matching floating rate assets with variable short term funding and by matching fixed rate liabilities with similar longer
term fixed rate assets. The Bank has established percentage change limits in both interest margin and net portfolio value. To verify that the Bank is within the limits established for interest margin, the Bank prepares an analysis of net
interest margin based on various shifts in interest rates. To verify that the Bank is within the limits established for net portfolio value, the Bank analyzes data prepared by the OTS for interest rate sensitivity of the Banks net
portfolio. These analyses are conducted on a monthly basis for the Banks Board of Directors.



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The following table illustrates the estimated change in net interest margin based on shifts in interest rates of positive
300 basis points and negative 200 basis points:



|                                      |  |                                        
|------------------------------------- |  | ---------------------------------------
|Hypothetical Change in Interest Rates |  | Projected Change in Net Interest Margin
|+300                                  |  | 0.58%                                  
|+200                                  |  | 0.39%                                  
|+100                                  |  | 0.21%                                  
|0                                     |  | 0%                                     
|-100                                  |  | -0.23%                                 
|-200                                  |  | -0.49%                                 

The following GAP Analysis table indicates the Banks interest rate sensitivity position at December 31,
2007 (in thousands):



|                                   |  |                         |         |   |             |   |         |           |  |   |          |   |  |   |        
|---------------------------------- |  | ----------------------- | ------- | - | ----------- | - | ------- | --------- |  | - | -------- | - |  | - | -------
|                                   |  | Repricing Opportunities
|                                   |  | 0-6 months              |         |   | 7-12 months |   |         | 1-3 years |  |   | 3+ years
|Earning Assets:                    |  |                         |         |   |             |   |         |           |  |   |          |   |  |   |        
|Loans                              |  | $                       | 912,182 |   |             | $ | 16,862  |           |  | $ | 41,818   |   |  | $ | 160,783
|Securities and FHLB Stock          |  |                         | 5,897   |   |             |   |        |           |  |   |         |   |  |   | 267    
|Interest Bearing Deposits          |  |                         | 6,353   |   |             |   |        |           |  |   |         |   |  |   |       
|                                   |  |                         |         |   |             |   |         |           |  |   |          |   |  |   |        
|Total Earning Assets               |  |                         | 924,432 |   |             |   | 16,862  |           |  |   | 41,818   |   |  |   | 161,050
|                                   |  |                         |         |   |             |   |         |           |  |   |          |   |  |   |        
|Interest Bearing Liabilities:      |  |                         |         |   |             |   |         |           |  |   |          |   |  |   |        
|Transaction Accounts and Savings   |  |                         | 840,792 |   |             |   |        |           |  |   |         |   |  |   |       
|Certificates of Deposit            |  |                         | 33,468  |   |             |   | 35,188  |           |  |   | 14,011   |   |  |   | 2,339  
|Borrowings                         |  |                         | 53,130  |   |             |   | 670     |           |  |   | 6,577    |   |  |   | 68,504 
|                                   |  |                         |         |   |             |   |         |           |  |   |          |   |  |   |        
|Total Interest Bearing Liabilities |  |                         | 927,390 |   |             |   | 35,858  |           |  |   | 20,588   |   |  |   | 70,843 
|                                   |  |                         |         |   |             |   |         |           |  |   |          |   |  |   |        
|GAP                                |  | $                       | (2,958  | ) |             | $ | (18,996 | )         |  | $ | 21,230   |   |  | $ | 90,207 
|                                   |  |                         |         |  
|Cumulative GAP                     |  | $                       | (2,958  | ) |             | $ | (21,954 | )         |  | $ | (724     | ) |  | $ | 89,483 

Equity Price Risk: We are exposed to equity price risk as a result of making markets and
taking proprietary positions in equity securities. Equity price risk results from changes in the level or volatility of equity prices, which affect the value of equity securities or instruments that derive their value from a particular stock, a
basket of stocks or a stock index.

The following table categorizes securities owned, net of securities sold, not yet purchased, which are in our
securities owned and securities sold, not yet purchased, portfolios and marketable equity securities in our available-for-sale portfolio, which are subject to interest rate and equity price risk (dollars in thousands):



|                                                  |  |                   |        |        |   |        |         |  |   |         |   |  |       |         |   |  |   |         |  
|------------------------------------------------- |  | ----------------- | ------ | ------ | - | ------ | ------- |  | - | ------- | - |  | ----- | ------- | - |  | - | ------- | -
|                                                  |  | Years to Maturity |       
|                                                  |  | 1 or less         |        | 1 to 5 |   |        | 5 to 10 |  |   | Over 10 |   |  | Total |        
|Trading securities, at fair value                 |  |                   |        |        |   |        |         |  |   |         |   |  |       |         |   |  |   |         |  
|Municipal obligations                             |  | $                 | 1,543  |        | $ | 2,620  |         |  | $ | 7,002   |   |  | $     | 10,467  |   |  | $ | 21,632  |  
|U.S. Government and Government agency obligations |  |                   | 7,071  |        |   | (5,062 | )       |  |   | (2,909  | ) |  |       | (12,444 | ) |  |   | (13,344 | )
|Corporate obligations                             |  |                   | 1,002  |        |   | 4,444  |         |  |   | 2,583   |   |  |       | 22,591  |   |  |   | 30,620  |  
|                                                  |  |                   |        |        |   |        |         |  |   |         |   |  |       |         |   |  |   |         |  
|Total debt securities                             |  |                   | 9,616  |        |   | 2,002  |         |  |   | 6,676   |   |  |       | 20,614  |   |  |   | 38,908  |  
|Corporate equity                                  |  |                   |       |        |   |       |         |  |   |        |   |  |       | 6,650   |   |  |   | 6,650   |  
|Other                                             |  |                   | 3,786  |        |   |       |         |  |   |        |   |  |       |        |   |  |   | 3,786   |  
|                                                  |  |                   |        |        |   |        |         |  |   |         |   |  |       |         |   |  |   |         |  
|                                                  |  | $                 | 13,402 |        | $ | 2,002  |         |  | $ | 6,676   |   |  | $     | 27,264  |   |  | $ | 49,344  |  
|                                                  |  |                   |        |        |   |        |         |  |   |         |   |  |       |         |   |  |   |         |  



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|                                                  |  |                   |     |   |        |   |     |         |  |   |         |   |  |       |        |   |  |   |        |  
|------------------------------------------------- |  | ----------------- | --- | - | ------ | - | --- | ------- |  | - | ------- | - |  | ----- | ------ | - |  | - | ------ | -
|                                                  |  | Years to Maturity |    
|                                                  |  | 1 or less         |     |   | 1 to 5 |   |     | 5 to 10 |  |   | Over 10 |   |  | Total |       
|Weighted average yield                            |  |                   |     |   |        |   |     |         |  |   |         |   |  |       |        |   |  |   |        |  
|Municipal obligations                             |  |                   | 3.3 | % |        |   | 3.4 | %       |  |   | 3.9     | % |  |       | 5.0    | % |  |   | 4.4    | %
|U.S. Government and Government agency obligations |  |                   | 3.1 | % |        |   | 3.8 | %       |  |   | 4.5     | % |  |       | 5.5    | % |  |   | 4.4    | %
|Corporate obligations                             |  |                   | 4.1 | % |        |   | 4.6 | %       |  |   | 5.6     | % |  |       | 5.6    | % |  |   | 5.2    | %
|Available-for-sale securities, at fair value      |  |                   |     |   |        |   |     |         |  |   |         |   |  |       |        |   |  |   |        |  
|Marketable equity securities                      |  | $                 |    |   |        | $ |    |         |  | $ |        |   |  | $     | 10,488 |   |  | $ | 10,488 |  
|                                                  |  |                   |     |   |        |   |     |         |  |   |         |   |  |       |        |   |  |   |        |  

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts and
disclosures. Actual results may differ from these estimates under different assumptions or conditions. Our accounting policies and methodology used in establishing estimates (primarily related to loan loss reserves and other contingency estimates)
have not changed materially since June 29, 2007. See our annual report on Form 10-K for the fiscal year then ended.

FORWARD-LOOKING STATEMENTS

From time to time, we make statements (including some contained in this report) that predict or forecast future events, depend on future events for
their accuracy, or otherwise contain forward-looking information. These statements may relate to anticipated changes in revenues or earnings per share, anticipated changes in our businesses or in anticipated expense levels, or in
expectations regarding financial market conditions.

Actual results may differ materially as a result of various factors, some of which are outside of our
control, including:



| |  |  | the interest rate environment;
| | - |  | ------------------------------



| |  |  | the volume of trading in securities;
| | - |  | ------------------------------------



| |  |  | the volatility and general level of securities prices and interest rates;
| | - |  | -------------------------------------------------------------------------



| |  |  | the level of customer margin loan activity and the size of customer account balances;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | the demand for housing in the North Texas area and the national market;
| | - |  | -----------------------------------------------------------------------



| |  |  | the credit-worthiness of our correspondents, counterparties in securities lending transactions and of our banking and margin customers;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the demand for investment banking services;
| | - |  | -------------------------------------------



| |  |  | general economic conditions and investor sentiment and confidence;
| | - |  | ------------------------------------------------------------------



| |  |  | competitive conditions in each of our business segments;
| | - |  | --------------------------------------------------------



| |  |  | changes in accounting, tax and regulatory compliance requirements; and
| | - |  | ----------------------------------------------------------------------



| |  |  | the ability to attract and retain key personnel.
| | - |  | ------------------------------------------------

Our future operating results also depend on our operating expenses, which are subject to fluctuation due to:



| |  |  | variations in the level of compensation expense incurred as a result of changes in the number of total employees, competitive factors, or other market variables;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | variations in expenses and capital costs, including depreciation, amortization and other non-cash charges incurred to maintain our infrastructure; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unanticipated costs which may be incurred from time to time in connection with litigation or other contingencies.
| | - |  | -----------------------------------------------------------------------------------------------------------------

Additionally, factors which may cause actual results to differ materially from our forward-looking statements include those factors discussed in this report in
Managements Discussion and Analysis of Financial Condition and Results of Operations  Overview, -Risk Management and -Critical Accounting Policies and Estimates and those discussed
in Risk Factors in our annual report on Form 10-K filed with the SEC and our other reports filed with and available from the SEC. All forward-looking statements we make speak only as of the date on which they are made, and we
undertake no obligation to update them to reflect events or circumstances occurring after the date on which they were made or to reflect the occurrence of unanticipated events.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

The information required by this item is incorporated in Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations under the caption -Risk Management.



|Item 4. | Controls and Procedures
|------- | -----------------------

The management of SWS, including
the principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) pursuant to the Securities Exchange Act of 1934) as of December 31, 2007.
Based on such evaluation, the principal executive officer and principal financial officer have concluded that, as of December 31, 2007, such disclosure controls and procedures were effective for the purpose of ensuring that material information
required to be in the reports SWS submits, files, furnishes or otherwise provides to the SEC is made known to them by others on a timely basis and is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms. There have not been any changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) pursuant to the Securities Exchange Act of 1934) during the three-month period ended December 31, 2007
that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

In the general course of our brokerage
business and the business of clearing for other brokerage firms, we have been named as defendants in various pending lawsuits and arbitration proceedings. These claims allege violations of various federal and state securities laws. The Bank is also
involved in certain claims and legal actions arising in the ordinary course of business. We believe that resolution of these claims will not result in any material adverse effect on our business, consolidated financial condition, results of
operations or cash flows.



|Item 1A. | Risk Factors
|-------- | ------------

There have been no material changes from the
risk factors disclosed in our Form 10-K for the year ended June 29, 2007.



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|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

The following table provides information about our purchases during the quarter ended December 31, 2007 of our equity securities registered pursuant to Section 12 of the Exchange Act:

ISSUER PURCHASES OF EQUITY SECURITIES



|                     |  |                               |  |                           |   |                                                               |   |                                                                |        
|-------------------- |  | ----------------------------- |  | ------------------------- | - | ------------------------------------------------------------- | - | -------------------------------------------------------------- | -------
|Period               |  | TotalNumber ofSharesPurchased |  | AveragePricePaid perShare |   | Total Numberof SharesPurchased asPart ofPubliclyAnnouncedPlan |   | MaximumNumberof Sharesthat MayYet bePurchasedUnder thePlans(1)
|9/29/07 to 10/26/07  |  |                              |  | $                         |  |                                                               |  |                                                                | 500,000
|10/27/07 to 11/30/07 |  |                              |  |                           |  |                                                               |  |                                                                | 500,000
|12/01/07 to 12/31/07 |  |                              |  |                           |  |                                                               |  |                                                                | 500,000
|                     |  |                               |  |                           |   |                                                               |   |                                                                |        
|                     |  |                              |  | $                         |  |                                                               |  |                                                                |        
|                     |  |                               |  |                           |   |                                                               |   |                                                                |        



|(1) | On January 15, 2008, the board of directors of SWS Group approved a plan authorizing the Company to
purchase up to 750,000 shares of its common stock from time to time in the open market for an 18-month time period beginning January 14, 2008 and ending on June 30, 2009. The 750,000 shares authorized for purchase are in addition to
the Companys current stock repurchase program, beginning on January 1, 2007 and expiring on June 30, 2008, which authorizes the purchase of 500,000 shares of SWS common stock in the open market.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 3. | Defaults upon Senior Securities
|------- | -------------------------------

None.



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

The
annual meeting of shareholders was held on November 29, 2007. The following directors were elected at the meeting:



|                   |  |            |  |           |  |        
|------------------ |  | ---------- |  | --------- |  | -------
|Nominees           |  | For        |  | Withheld  |  | Abstain
|Don A. Buchholz    |  | 24,273,706 |  | 472,234   |  |       
|Donald W. Hultgren |  | 24,291,452 |  | 454,488   |  |       
|Brodie L. Cobb     |  | 24,415,820 |  | 330,120   |  |       
|I.D. Flores III    |  | 24,399,218 |  | 346,722   |  |       
|Larry A. Jobe      |  | 21,720,631 |  | 3,025,309 |  |       
|Dr. R. Jan LeCroy  |  | 24,156,826 |  | 589,114   |  |       
|Frederick R. Meyer |  | 23,096,544 |  | 1,649,396 |  |       
|Dr. Mike Moses     |  | 23,052,466 |  | 1,693,474 |  |       
|Jon L. Mosle, Jr.  |  | 24,158,831 |  | 587,109   |  |       

There was one other matter on which the shareholders voted. The results were as follows:



|                                                                            |  |            |  |         |  |         |  |          
|--------------------------------------------------------------------------- |  | ---------- |  | ------- |  | ------- |  | ---------
|                                                                            |  | For        |  | Against |  | Abstain |  | Not Voted
|Approval of the Amendment to the SWS Group, Inc. 2003 Restricted Stock Plan |  | 21,425,327 |  | 757,775 |  | 37,722  |  | 2,525,116



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|Item 5. | Other Information
|------- | -----------------

None.



|Item 6. | Exhibits
|------- | --------

The exhibits required to be furnished pursuant to
Item 6 are listed in the Exhibit Index filed herewith, which Exhibit Index is incorporated herein by reference.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.



|                 |  |  |  |  |  |  |  |                                                    
|---------------- |  |  |  |  |  |  |  | ---------------------------------------------------
|                 |  |  |  |  |  |  |  | SWS Group, Inc.                                    
|                 |  |  |  |  |  |  |  | (Registrant)                                       
|                 |  |  |  | 
|February 6, 2008 |  |  |  |  |  |  |  | /S/ Donald W. Hultgren                             
|Date             |  |  |  |  |  |  |  | (Signature)                                        
|                 |  |  |  |  |  |  |  | Donald W. Hultgren                                 
|                 |  |  |  |  |  |  |  | Chief Executive Officer and Duly Authorized Officer
|                 |  |  |  |  |  |  |  | (Principal Executive Officer)                      
|                 |  |  |  | 
|February 6, 2008 |  |  |  |  |  |  |  | /S/ Kenneth R. Hanks                               
|Date             |  |  |  |  |  |  |  | (Signature)                                        
|                 |  |  |  |  |  |  |  | Kenneth R. Hanks                                   
|                 |  |  |  |  |  |  |  | Treasurer and Chief Financial Officer              
|                 |  |  |  |  |  |  |  | (Principal Financial Officer)                      
|                 |  |  |  | 
|February 6, 2008 |  |  |  |  |  |  |  | /S/ Stacy Hodges                                   
|Date             |  |  |  |  |  |  |  | (Signature)                                        
|                 |  |  |  |  |  |  |  | Stacy Hodges                                       
|                 |  |  |  |  |  |  |  | Executive Vice President                           
|                 |  |  |  |  |  |  |  | (Principal Accounting Officer)                     



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SWS GROUP, INC. AND SUBSIDIARIES

INDEX TO EXHIBITS



|              |  |                                                                                                                                                       
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                           
|3.1           |  | Restated Certificate of Incorporation of the Registrant incorporated by reference to Exhibit 3.1 to the Registrants Form 10-K filed September 8, 2004
|              | 
|3.2           |  | Restated By-laws of the Registrant incorporated by reference to Exhibit 3.2 to the Registrants Current Report on Form 8-K filed August 27, 2007      
|              | 
|31.1*         |  | Chief Executive Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                 
|              | 
|31.2*         |  | Chief Financial Officer Certification filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                 
|              | 
|32.1*         |  | Chief Executive Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                             
|              | 
|32.2*         |  | Chief Financial Officer Certification furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                             



|* | Filed herewith
|- | --------------



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