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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 September 26, 2008

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 000-19483





SWS GROUP, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 75-2040825                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification 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, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act.



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

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 October 31, 2008, there were 27,449,744 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                                                                  |  | 1 
|                                                                                                                                                       | 
|Consolidated Statements of Financial ConditionSeptember 26, 2008 (unaudited)and June 
27, 2008                                                         |  | 1                                                                                    
|                                                                                                                                                       | 
|Consolidated Statements of Income and Comprehensive IncomeFor the three-months ended September 
26, 2008 (unaudited)and September 28, 2007 (unaudited) |  | 2                                                                                    
|                                                                                                                                                       | 
|Consolidated Statements of Cash FlowsFor the three-months ended September 
26, 2008 (unaudited)and September 28, 2007 (unaudited)                      |  | 3                                                                                    
|                                                                                                                                                       | 
|Notes to Consolidated Financial Statements (unaudited)                                                                                                 |  | 5                                                                                    
|                                                                                                                                                       |  |                                                                                      
|Item 2.                                                                                                                                                |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 26
|                                                                                                                                                       |  |                                                                                      
|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                           |  | 53
|                                                                                                                                                       |  |                                                                                      
|Item 3.                                                                                                                                                |  | Defaults Upon Senior Securities                                                       |  | 53
|                                                                                                                                                       |  |                                                                                      
|Item 4.                                                                                                                                                |  | Submission of Matters to a Vote of Security Holders                                   |  | 53
|                                                                                                                                                       |  |                                                                                      
|Item 5.                                                                                                                                                |  | Other Information                                                                     |  | 53
|                                                                                                                                                       |  |                                                                                      
|Item 6.                                                                                                                                                |  | Exhibits                                                                              |  | 53
|                                                                                                                                                       | 
|SIGNATURES                                                                                                                                             |  | 54                                                                                   
|                                                                                                                                                       | 
|EXHIBIT INDEX                                                                                                                                          |  | 55                                                                                   



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

SWS Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

September 26, 2008 and June 27, 2008

(In thousands, except par values and share amounts)



|                                                                                                                                                                                                              |  |             |           |   |      |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | --------- | - | ---- | - | --------- | -
|                                                                                                                                                                                                              |  | September   |           |   | June |  
|                                                                                                                                                                                                              |  | (Unaudited) |           |   |      |  
|Assets                                                                                                                                                                                                        |  |             |           |   |      |   |           |  
|Cash and cash equivalents                                                                                                                                                                                     |  | $           | 52,345    |   |      | $ | 39,628    |  
|Assets segregated for regulatory purposes                                                                                                                                                                     |  |             | 347,375   |   |      |   | 322,575   |  
|Receivable from brokers, dealers and clearing organizations                                                                                                                                                   |  |             | 2,414,530 |   |      |   | 2,849,982 |  
|Receivable from clients, net                                                                                                                                                                                  |  |             | 263,529   |   |      |   | 286,945   |  
|Loans held for sale                                                                                                                                                                                           |  |             | 295,896   |   |      |   | 359,945   |  
|Loans, net                                                                                                                                                                                                    |  |             | 981,069   |   |      |   | 925,758   |  
|Securities owned, at market value                                                                                                                                                                             |  |             | 181,397   |   |      |   | 198,573   |  
|Securities purchased under agreements to resell                                                                                                                                                               |  |             | 13,797    |   |      |   | 9,862     |  
|Goodwill                                                                                                                                                                                                      |  |             | 7,552     |   |      |   | 7,552     |  
|Marketable equity securities available for sale                                                                                                                                                               |  |             | 5,597     |   |      |   | 6,964     |  
|Other assets                                                                                                                                                                                                  |  |             | 109,150   |   |      |   | 110,467   |  
|                                                                                                                                                                                                              |  |             |           |   |      |   |           |  
|                                                                                                                                                                                                              |  | $           | 4,672,237 |   |      | $ | 5,118,251 |  
|                                                                                                                                                                                                              |  |             |           |   |      |   |           |  
|                                                                                                                                                                                                              |  |            
|Liabilities and Stockholders Equity                                                                                                                                                                          |  |             |           |   |      |   |           |  
|Short-term borrowings                                                                                                                                                                                         |  | $           | 114,500   |   |      | $ | 86,800    |  
|Payable to brokers, dealers and clearing organizations                                                                                                                                                        |  |             | 2,300,893 |   |      |   | 2,794,377 |  
|Payable to clients                                                                                                                                                                                            |  |             | 552,798   |   |      |   | 556,029   |  
|Deposits                                                                                                                                                                                                      |  |             | 1,134,807 |   |      |   | 1,071,973 |  
|Securities sold under agreements to repurchase                                                                                                                                                                |  |             | 10,007    |   |      |   | 6,342     |  
|Securities sold, not yet purchased, at market value                                                                                                                                                           |  |             | 30,067    |   |      |   | 26,511    |  
|Drafts payable                                                                                                                                                                                                |  |             | 25,292    |   |      |   | 19,657    |  
|Advances from Federal Home Loan Bank                                                                                                                                                                          |  |             | 106,701   |   |      |   | 166,250   |  
|Other liabilities                                                                                                                                                                                             |  |             | 70,058    |   |      |   | 67,306    |  
|                                                                                                                                                                                                              |  |             |           |   |      |   |           |  
|                                                                                                                                                                                                              |  |             | 4,345,123 |   |      |   | 4,795,245 |  
|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 28,296,219 and outstanding 27,294,654 shares at September 26, 2008;
issued 28,269,134 and outstanding 27,195,609 shares at June 27, 2008 |  |             | 2,829     |   |      |   | 2,827     |  
|Additional paid-in capital                                                                                                                                                                                    |  |             | 269,326   |   |      |   | 269,360   |  
|Retained earnings                                                                                                                                                                                             |  |             | 66,669    |   |      |   | 62,100    |  
|Accumulated other comprehensive income  unrealized holding loss net of tax of $1,237 at September 26, 2008 and $739 at
June 27, 2008                                                                         |  |             | (2,062    | ) |      |   | (1,194    | )
|Deferred compensation, net                                                                                                                                                                                    |  |             | 2,177     |   |      |   | 1,994     |  
|Treasury stock (1,001,565 shares at September 26, 2008 and 1,073,525 shares at June 27, 2008, at cost)                                                                                                        |  |             | (11,825   | ) |      |   | (12,081   | )
|                                                                                                                                                                                                              |  |             |           |   |      |   |           |  
|Total stockholders equity                                                                                                                                                                                    |  |             | 327,114   |   |      |   | 323,006   |  
|Commitments and contingencies                                                                                                                                                                                 |  |             |           |   |      |   |           |  
|                                                                                                                                                                                                              |  |             |           |   |      |   |           |  
|Total liabilities and stockholders equity                                                                                                                                                                    |  | $           | 4,672,237 |   |      | $ | 5,118,251 |  
|                                                                                                                                                                                                              |  |             |           |   |      |   |           |  

See accompanying Notes to Consolidated Financial Statements.



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SWS Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

For the three-months ended September 26, 2008 and September 28, 2007

(In thousands, except per
share and share amounts)

(Unaudited)



|                                                                                                                                                                  |  |                    |            |   |                   |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ----------------- | - | ---------- | -
|                                                                                                                                                                  |  | Three-Months Ended |           
|                                                                                                                                                                  |  | September 26,2008  |            |   | September 28,2007 |  
|Revenues:                                                                                                                                                         |  |                    |            |   |                   |   |            |  
|Net revenues from clearing operations                                                                                                                             |  | $                  | 3,296      |   |                   | $ | 3,351      |  
|Commissions                                                                                                                                                       |  |                    | 35,745     |   |                   |   | 22,172     |  
|Interest                                                                                                                                                          |  |                    | 66,780     |   |                   |   | 69,205     |  
|Investment banking, advisory and administrative fees                                                                                                              |  |                    | 10,924     |   |                   |   | 10,041     |  
|Net gains on principal transactions                                                                                                                               |  |                    | 2,704      |   |                   |   | 1,343      |  
|Other                                                                                                                                                             |  |                    | 2,899      |   |                   |   | 6,428      |  
|                                                                                                                                                                  |  |                    |            |   |                   |   |            |  
|Total revenue                                                                                                                                                     |  |                    | 122,348    |   |                   |   | 112,540    |  
|                                                                                                                                                                  |  |                   
|Interest expense                                                                                                                                                  |  |                    | 34,580     |   |                   |   | 45,594     |  
|                                                                                                                                                                  |  |                    |            |   |                   |   |            |  
|Net revenues                                                                                                                                                      |  |                    | 87,768     |   |                   |   | 66,946     |  
|                                                                                                                                                                  |  |                    |            |   |                   |   |            |  
|Non-Interest Expenses:                                                                                                                                            |  |                    |            |   |                   |   |            |  
|Commissions and other employee compensation                                                                                                                       |  |                    | 52,411     |   |                   |   | 40,224     |  
|Occupancy, equipment and computer service costs                                                                                                                   |  |                    | 7,740      |   |                   |   | 6,523      |  
|Communications                                                                                                                                                    |  |                    | 3,161      |   |                   |   | 2,226      |  
|Floor brokerage and clearing organization charges                                                                                                                 |  |                    | 917        |   |                   |   | 1,127      |  
|Advertising and promotional                                                                                                                                       |  |                    | 799        |   |                   |   | 593        |  
|Other                                                                                                                                                             |  |                    | 11,947     |   |                   |   | 4,307      |  
|                                                                                                                                                                  |  |                    |            |   |                   |   |            |  
|Total non-interest expenses                                                                                                                                       |  |                    | 76,975     |   |                   |   | 55,000     |  
|                                                                                                                                                                  |  |                    |            |   |                   |   |            |  
|Income from continuing operations before income tax expense                                                                                                       |  |                    | 10,793     |   |                   |   | 11,946     |  
|Income tax expense                                                                                                                                                |  |                    | 3,770      |   |                   |   | 4,242      |  
|                                                                                                                                                                  |  |                    |            |   |                   |   |            |  
|Income from continuing operations                                                                                                                                 |  |                    | 7,023      |   |                   |   | 7,704      |  
|Discontinued operations:                                                                                                                                          |  |                    |            |   |                   |   |            |  
|Income from discontinued operation                                                                                                                                |  |                    |           |   |                   |   | 29         |  
|Income tax expense                                                                                                                                                |  |                    |           |   |                   |   | (9         | )
|Minority interest                                                                                                                                                 |  |                    |           |   |                   |   | (3         | )
|                                                                                                                                                                  |  |                    |            |   |                   |   |            |  
|Income from discontinued operations                                                                                                                               |  |                    |           |   |                   |   | 17         |  
|                                                                                                                                                                  |  |                    |            |   |                   |   |            |  
|Net income                                                                                                                                                        |  |                    | 7,023      |   |                   |   | 7,721      |  
|Net loss recognized in other comprehensive income, net of tax of $498 and $122 for the three-months ended September 26, 2008 and
September 28, 2007, respectively |  |                    | (868       | ) |                   |   | (225       | )
|                                                                                                                                                                  |  |                    |            |   |                   |   |            |  
|Comprehensive income                                                                                                                                              |  | $                  | 6,155      |   |                   | $ | 7,496      |  
|                                                                                                                                                                  |  |                    |            |   |                   |   |            |  
|Earnings per share  basic                                                                                                                                        |  |                    |            |   |                   |   |            |  
|Income from continuing operations                                                                                                                                 |  | $                  | 0.26       |   |                   | $ | 0.28       |  
|Income from discontinued operations                                                                                                                               |  |                    |           |   |                   |   |           |  
|                                                                                                                                                                  |  |                    |            |   |                   |   |            |  
|Net income                                                                                                                                                        |  | $                  | 0.26       |   |                   | $ | 0.28       |  
|                                                                                                                                                                  |  |                    |            |   |                   |   |            |  
|Weighted average shares outstanding  basic                                                                                                                       |  |                    | 27,022,556 |   |                   |   | 27,405,943 |  
|                                                                                                                                                                  |  |                    |            |   |                   |   |            |  
|Earnings per share  diluted                                                                                                                                      |  |                    |            |   |                   |   |            |  
|Income from continuing operations                                                                                                                                 |  | $                  | 0.26       |   |                   | $ | 0.28       |  
|Income from discontinued operations                                                                                                                               |  |                    |           |   |                   |   |           |  
|                                                                                                                                                                  |  |                    |            |   |                   |   |            |  
|Net income                                                                                                                                                        |  | $                  | 0.26       |   |                   | $ | 0.28       |  
|                                                                                                                                                                  |  |                    |            |   |                   |   |            |  
|Weighted average shares outstanding  diluted                                                                                                                     |  |                    | 27,198,585 |   |                   |   | 27,613,315 |  
|                                                                                                                                                                  |  |                    |            |   |                   |   |            |  

See accompanying Notes to Consolidated Financial Statements.



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SWS Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three-months ended September 26, 2008 and September 28, 2007

(In thousands)

(Unaudited)



|                                                                                  |  |                            |          |   |                   |   |          |  
|--------------------------------------------------------------------------------- |  | -------------------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                  |  | For the Three-Months Ended |         
|                                                                                  |  | September 26,2008          |          |   | September 28,2007 |  
|Cash flows from operating activities:                                             |  |                            |          |   |                   |   |          |  
|Net income                                                                        |  | $                          | 7,023    |   |                   | $ | 7,721    |  
|Income from discontinued operations                                               |  |                            |         |   |                   |   | (17      | )
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                            |          |   |                   |   |          |  
|Depreciation and amortization                                                     |  |                            | 1,301    |   |                   |   | 1,238    |  
|Amortization of premiums on loans purchased                                       |  |                            | (241     | ) |                   |   | (110     | )
|Provision for doubtful accounts and write downs on REO properties                 |  |                            | 1,277    |   |                   |   | 316      |  
|Deferred income tax benefit                                                       |  |                            | (298     | ) |                   |   | (93      | )
|Deferred compensation                                                             |  |                            | (45      | ) |                   |   | 814      |  
|Gain on sale of loans                                                             |  |                            | (292     | ) |                   |   | (246     | )
|Loss (gain) on sale of fixed assets                                               |  |                            | (2       | ) |                   |   | 185      |  
|Loss on sale of real estate                                                       |  |                            | 415      |   |                   |   | 32       |  
|Gain on sale of factored receivables                                              |  |                            | (260     | ) |                   |   |         |  
|Equity in losses (earnings) of unconsolidated ventures                            |  |                            | 950      |   |                   |   | (578     | )
|Dividend received on investment in Federal Home Loan Bank stock                   |  |                            | (44      | ) |                   |   | (43      | )
|Windfall tax benefits                                                             |  |                            | (65      | ) |                   |   | (221     | )
|Cash flow from operating activities of discontinued operations                    |  |                            |         |   |                   |   | 4        |  
|Change in operating assets and liabilities:                                       |  |                            |          |   |                   |   |          |  
|Increase in assets segregated for regulatory purposes                             |  |                            | (24,800  | ) |                   |   | (11,900  | )
|Net change in broker, dealer and clearing organization accounts                   |  |                            | (58,032  | ) |                   |   | 7,463    |  
|Net change in client accounts                                                     |  |                            | 19,945   |   |                   |   | 40,451   |  
|Net change in loans held for sale                                                 |  |                            | 64,049   |   |                   |   | (1,969   | )
|Decrease in securities owned                                                      |  |                            | 17,176   |   |                   |   | 2,947    |  
|Decrease (increase) in securities purchased under agreements to resell            |  |                            | (3,935   | ) |                   |   | 26,877   |  
|Decrease (increase) decrease in other assets                                      |  |                            | (974     | ) |                   |   | 6,339    |  
|Increase (decrease) in drafts payable                                             |  |                            | 5,635    |   |                   |   | (1,703   | )
|Increase (decrease) in securities sold, not yet purchased                         |  |                            | 3,556    |   |                   |   | (27,470  | )
|Increase (decrease) in other liabilities                                          |  |                            | 3,224    |   |                   |   | (14,141  | )
|                                                                                  |  |                            |          |   |                   |   |          |  
|Net cash provided by operating activities                                         |  |                            | 35,563   |   |                   |   | 35,896   |  
|                                                                                  |  |                            |          |   |                   |   |          |  
|Cash flows from investing activities:                                             |  |                            |          |   |                   |   |          |  
|Purchase of fixed assets and capitalized improvements on REO properties           |  |                            | (3,761   | ) |                   |   | (1,529   | )
|Proceeds from the sale of fixed assets                                            |  |                            | 4        |   |                   |   |         |  
|Proceeds from the sale of real estate                                             |  |                            | 4,542    |   |                   |   | 495      |  
|Loan originations and purchases                                                   |  |                            | (179,947 | ) |                   |   | (142,284 | )
|Loan repayments                                                                   |  |                            | 120,353  |   |                   |   | 136,065  |  
|Proceeds from the sale of factored receivables                                    |  |                            | 260      |   |                   |   |         |  
|Cash paid for purchase of correspondent clients of Ameritrade                     |  |                            |         |   |                   |   | (2,677   | )
|Cash paid on investments                                                          |  |                            |         |   |                   |   | (1,500   | )
|Cash received on investments                                                      |  |                            |         |   |                   |   | 289      |  
|Cash flow from investing activities of discontinued operations                    |  |                            |         |   |                   |   | 3,818    |  
|Cash paid for purchase of M.L. Stern                                              |  |                            | (25      | ) |                   |   |         |  
|Proceeds from sale of Federal Home Loan Bank stock                                |  |                            | 3,462    |   |                   |   |         |  
|Purchases of Federal Home Loan Bank stock                                         |  |                            |         |   |                   |   | (75      | )
|                                                                                  |  |                            |          |   |                   |   |          |  
|Net cash used in investing activities                                             |  |                            | (55,112  | ) |                   |   | (7,398   | )
|                                                                                  |  |                            |          |   |                   |   |          |  
|Cash flows from financing activities:                                             |  |                            |          |   |                   |   |          |  
|Payments on short-term borrowings                                                 |  |                            | (621,650 | ) |                   |   | (142,600 | )
|Cash proceeds from short-term borrowings                                          |  |                            | 649,350  |   |                   |   | 138,600  |  
|Increase in deposits                                                              |  |                            | 62,834   |   |                   |   | 53,284   |  
|Advances from the Federal Home Loan Bank                                          |  |                            | 383,880  |   |                   |   | 3,614    |  



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##### Table of Contents

|                                                                           |  |                            |          |   |                   |   |         |  
|-------------------------------------------------------------------------- |  | -------------------------- | -------- | - | ----------------- | - | ------- | -
|                                                                           |  | For the Three-Months Ended |         
|                                                                           |  | September 26,2008          |          |   | September 28,2007 |  
|Payments on advances from Federal Home Loan Bank                           |  | $                          | (443,429 | ) |                   | $ | (757    | )
|Payment of cash dividends on common stock                                  |  |                            | (2,470   | ) |                   |   | (2,218  | )
|Windfall tax benefits                                                      |  |                            | 65       |   |                   |   | 221     |  
|Cash proceeds (payments) on securities sold under agreements to repurchase |  |                            | 3,665    |   |                   |   | (14,868 | )
|Net proceeds from exercise of stock options                                |  |                            | 265      |   |                   |   | 66      |  
|Cash flow from financing activities of discontinued operations             |  |                            |         |   |                   |   | (382    | )
|Proceeds related to the Deferred Compensation Plan                         |  |                            | 193      |   |                   |   | 240     |  
|Purchase of treasury stock related to Deferred Compensation Plan           |  |                            | (437     | ) |                   |   |        |  
|                                                                           |  |                            |          |   |                   |   |         |  
|Net cash provided by financing activities                                  |  |                            | 32,266   |   |                   |   | 35,200  |  
|                                                                           |  |                            |          |   |                   |   |         |  
|Net increase in cash and cash equivalents                                  |  |                            | 12,717   |   |                   |   | 63,698  |  
|Cash and cash equivalents at beginning of period                           |  |                            | 39,628   |   |                   |   | 128,760 |  
|                                                                           |  |                            |          |   |                   |   |         |  
|Cash and cash equivalents at end of period                                 |  | $                          | 52,345   |   |                   | $ | 192,458 |  
|                                                                           |  |                            |          |   |                   |   |         |  
|Supplemental schedule of non-cash investing and financing activities:      |  |                            |          |   |                   |   |         |  
|Granting of restricted stock                                               |  | $                          | 990      |   |                   | $ | 1,038   |  
|                                                                           |  |                            |          |   |                   |   |         |  
|Foreclosures on loans                                                      |  | $                          | 3,883    |   |                   | $ | 1,093   |  
|                                                                           |  |                            |          |   |                   |   |         |  
|Supplemental disclosure of cash flow information:                          |  |                            |          |   |                   |   |         |  
|                                                                           |  |                           
|Cash paid during the period for:                                           |  |                            |          |   |                   |   |         |  
|Interest from continuing operations                                        |  | $                          | 33,330   |   |                   | $ | 45,555  |  
|                                                                           |  |                            |          |   |                   |   |         |  
|Income taxes                                                               |  | $                          | 7,150    |   |                   | $ |        |  
|                                                                           |  |                            |          |   |                   |   |         |  

See accompanying Notes to Consolidated Financial Statements.



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SWS Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Three-Months Ended September 26, 2008 and September 28, 2007

(Unaudited)

GENERAL AND BASIS OF PRESENTATION

The interim consolidated financial
statements as of September 26, 2008, and for the three-months ended September 26, 2008 and September 28, 2007, 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 27, 2008 filed on Form 10-K. Amounts included for June 27, 2008 are derived from the audited consolidated financial statements as filed on Form 10-K. All significant inter-company 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):



|                                            |  |                              
|------------------------------------------- |  | -----------------------------
|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
|M.L. Stern & Co., LLC                       |  |                              
|Tower Asset Management, LLC                 |  | collectively, M.L. Stern   
|SWS Banc Holdings, Inc.                     |  | SWS Banc                   
|Southwest Securities, FSB                   |  | Bank                       
|FSB Development, LLC                        |  | FSB Development            

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 forty-two states for the purpose of facilitating the sale of insurance and annuities for Southwest Securities and its correspondents. The Company retains no underwriting risk related to the insurance and annuity products SWS Insurance sells.

The Company purchased M.L. Stern after the close of business on March 31, 2008. M.L. Stern is a registered broker/dealer with the SEC and a member of
FINRA. M.L. Stern purchases and sells municipal, federal and corporate bonds, mutual funds, unit trusts, closed end funds, insurance, equities and other various investment securities at wholesale and retail levels. Tower Asset Management, LLC is a
wholly owned subsidiary of M.L. Stern & Co., LLC and is a registered investment advisor providing investment advisory services to high net worth individuals or families who require investment expertise and personal service.

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.

FSB Development was formed to develop single-family residential lots. As of
September 30 and June 30, 2008, it had no investments.



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Consolidated Financial Statements. The quarterly consolidated financial statements of SWS for the first fiscal
quarter are prepared as of the close of business on the last Friday of September. It is customary for SWS to close on the last Friday of each month. The Banks and M.L. Sterns quarterly financial statements are prepared as of
September 30, 2008. Any individually material transactions are reviewed and recorded in the appropriate quarterly period. All significant inter-company balances and transactions have been eliminated.

Discontinued Operations.In March 2006, the Bank sold the assets of its subsidiary, FSB Financial, LTD (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. Net income for discontinued operations as of September 28, 2007 was $17,000. As of December 31,
2007, this entity was dissolved.

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. SWS adopted the provisions of FIN 48 beginning in fiscal 2008.

At September 26, 2008, the Company had approximately $693,000 of unrecognized tax benefits. The Companys net liability decreased $257,000 from June 27, 2008 to September 26, 2008 as the statute of limitations expired on
previously unrecognized tax benefits related to tax positions taken on previously filed returns. While the Company expects that the net liability for uncertain tax 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 $122,000, net of federal benefit as of September 26, 2008 and $181,000 as of June 27, 2008. The total amount of
unrecognized income tax benefits that, if recognized, would reduce income tax expense is approximately $571,000, net of federal benefit as of September 26, 2008 and $769,000 as of June 27, 2008.

With limited exception, the Company is no longer subject to U.S. Federal or state income tax examinations by taxing authorities for tax years preceding 2003. We have
been notified that the Internal Revenue Service expects to begin an examination of the Companys federal income tax return for the year ended December 31, 2006 in November 2008.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company adopted FASB
Statement of Financial Accounting Standards (SFAS) No. 157, effective June 28, 2008, with the exception of non-financial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), which was delayed by FASB Staff Position No. FAS 157-2. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

Under the standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants in the market in which the reporting entity transacts. The standard clarifies the principle that fair value should be based on the



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assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy
that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Under the standard, fair value measurements are
separately disclosed by level within the fair value hierarchy. The standard describes three levels of inputs that may be used to measure fair value:



| |  |  | Level 1 Quoted prices in an active market for identical assets or liabilities. Assets and liabilities utilizing Level 1 inputs include
the following: a) the Companys U.S. Home Systems, Inc. (USHS) stock; b) the Companys unrestricted NYSE Euronext, Inc. (NYX) stock; c) the Companys deferred compensation plans investment in Westwood
Holdings Group, Inc. (Westwood) stock; and d) certain inventories held in our securities owned and securities sold, not yet purchased portfolio. Valuation of these instruments does not require a high degree of judgment as the valuations
are based on quoted prices in active markets that are readily available.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Assets and liabilities utilizing Level 2 inputs include the following: a) the
Companys restricted NYX stock; b) certain real estate owned (REO) investments; and c) certain inventories held in our securities owned and securities sold, not yet purchased portfolio. These financial instruments are valued by
quoted prices that are less frequent than those in active markets or by models that use various assumptions that are derived from or supported by data that is generally observable in the marketplace. Valuations in this category are inherently less
reliable than quoted market prices due to the degree of subjectivity involved in determining appropriate methodologies and the applicable underlying assumptions.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and
liabilities. Assets and liabilities utilizing Level 3 inputs include the following: a) the Companys two equity method investments in investment partnerships (described under Other Assets below); b) certain REO investments; and c)
certain inventories held in our securities owed and securities sold, not yet purchased portfolio. These financial instruments have significant inputs that cannot be validated by readily determinable market data and generally involve considerable
judgment by management.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following is a description of the valuation methodologies used for instruments measured at fair value on a
recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Marketable Equity Securities Available for Sale. Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. These securities
include the Companys USHS stock, unrestricted NYX stock and the Companys deferred compensation plans investment in Westwood stock. If quoted market prices are not available, then fair values are estimated by using pricing models,
which utilize observable market inputs. These securities include the Companys restricted NYX stock. The pricing model used to value the NYX stock takes into consideration the length of time of the restriction, the expected rate of return of
the investment and the relative amount of restricted NYX stock versus the fully tradable stock.

Securities Owned and Securities Sold,
Not Yet Purchased Portfolio.Level 1 securities primarily consist of financial instruments whose value is based on quoted market prices such as corporate equity securities and U.S. government obligations.



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Level 2 includes financial instruments that are valued using models or other valuation methodologies.
These models are primarily industry standard models that consider various assumptions, including time value, yield curve, volatility factors, current market and contractual prices for the underlying financial instruments, as well as other relevant
economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Securities in this category
include corporate debt, certain U.S. government and government agency obligations and municipal obligations.

Level 3 is comprised of
securities whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are generally less readily observable. Included in this category are certain corporate equity securities and corporate
and municipal debt.

Other Assets.Other assets consist of the Companys investment in REO, an equity investment in a
limited partnership venture capital fund and an equity investment in a limited partnership equity fund. REO is valued at the lower of cost or market. For those investments where the REO is valued at market, the value is determined by third party
appraisals. As such, these REO investments, solely based on appraisals, are categorized as Level 2. In certain circumstances, the Company will adjust the appraisals to reflect more accurately the economic conditions of the area at the time of
valuation and, in these circumstances, these REO investments are categorized as Level 3. The Companys investments in the limited partnerships  the limited partnership venture capital fund and the limited partnership equity fund 
(the Equity Investments) are both categorized as Level 3 as the underlying investments in the funds are valued based on internally developed models utilizing inputs with little or no market activity. Most, if not all, of the investments
in these funds are in privately held growth companies.

The following table summarizes by level within the fair value hierarchy Marketable equity
securities available for sale, Securities owned, at market value, Securities sold, not yet purchased, at market value and Other assets as of September 26, 2008.



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|                                                    |  |         |        |         |   |         |  |       |        |  |   |        
|--------------------------------------------------- |  | ------- | ------ | ------- | - | ------- |  | ----- | ------ |  | - | -------
|(in thousands)                                      |  | Level 1 |        | Level 2 |   | Level 3 |  | Total
|Marketable equity securities available for sale     |  |         |        |         |   |         |  |       |        |  |   |        
|USHS stock                                          |  | $       | 1,246  |         | $ |        |  | $     |       |  | $ | 1,246  
|NYX stock                                           |  |         | 3,030  |         |   | 983     |  |       |       |  |   | 4,013  
|Westwood stock                                      |  |         | 338    |         |   |        |  |       |       |  |   | 338    
|                                                    |  |         |        |         |   |         |  |       |        |  |   |        
|                                                    |  | $       | 4,614  |         | $ | 983     |  | $     |       |  | $ | 5,597  
|                                                    |  |         |        |         |   |         |  |       |        |  |   |        
|Securities owned, at market value                   |  |         |        |         |   |         |  |       |        |  |   |        
|Corporate equity securities                         |  | $       | 5,045  |         | $ |        |  | $     | 925    |  | $ | 5,970  
|Municipal obligations                               |  |         |       |         |   | 72,672  |  |       | 63,800 |  |   | 136,472
|U.S. government and government agency obligations   |  |         | 3,466  |         |   | 12,310  |  |       |       |  |   | 15,776 
|Corporate obligations                               |  |         |       |         |   | 17,966  |  |       | 74     |  |   | 18,040 
|Other                                               |  |         | 3,486  |         |   | 1,653   |  |       |       |  |   | 5,139  
|                                                    |  |         |        |         |   |         |  |       |        |  |   |        
|                                                    |  | $       | 11,997 |         | $ | 104,601 |  | $     | 64,799 |  | $ | 181,397
|                                                    |  |         |        |         |   |         |  |       |        |  |   |        
|Other Assets                                        |  |         |        |         |   |         |  |       |        |  |   |        
|REO                                                 |  | $       |       |         | $ | 10,313  |  | $     | 3,097  |  | $ | 13,410 
|Equity investments                                  |  |         |       |         |   |        |  |       | 4,134  |  |   | 4,134  
|                                                    |  |         |        |         |   |         |  |       |        |  |   |        
|                                                    |  | $       |       |         | $ | 10,313  |  | $     | 7,231  |  | $ | 17,544 
|                                                    |  |         |        |         |   |         |  |       |        |  |   |        
|Securities sold, not yet purchased, at market value |  |         |        |         |   |         |  |       |        |  |   |        
|Corporate equity securities                         |  | $       | 374    |         | $ |        |  | $     |       |  | $ | 374    
|Municipal obligations                               |  |         |       |         |   | 255     |  |       |       |  |   | 255    
|U.S. government and government agency obligations   |  |         | 12,109 |         |   | 10,070  |  |       |       |  |   | 22,179 
|Corporate obligations                               |  |         |       |         |   | 6,817   |  |       |       |  |   | 6,817  
|Other                                               |  |         | 222    |         |   | 220     |  |       |       |  |   | 442    
|                                                    |  |         |        |         |   |         |  |       |        |  |   |        
|                                                    |  | $       | 12,705 |         | $ | 17,362  |  | $     |       |  | $ | 30,067 
|                                                    |  |         |        |         |   |         |  |       |        |  |   |        

The following table provides a reconciliation of the beginning and ending balances for the major classes of assets
and liabilities measured at fair value using significant unobservable inputs (Level 3):



|                                      |  |                           |       |   |                      |   |                      |  |   |        |   |                   |   |       |       |   |       |   |  |   |        |  
|------------------------------------- |  | ------------------------- | ----- | - | -------------------- | - | -------------------- |  | - | ------ | - | ----------------- | - | ----- | ----- | - | ----- | - |  | - | ------ | -
|(in thousands)                        |  | CorporateEquitySecurities |       |   | MunicipalObligations |   | CorporateObligations |  |   | REO    |   | EquityInvestments |   |       | Total |  
|Beginning balance at June 28, 2008    |  | $                         | 1,175 |   |                      | $ | 46,400               |  | $ | 3,424  |   |                   | $ | 3,097 |       | $ | 5,084 |   |  | $ | 59,180 |  
|Unrealized gains (losses)             |  |                           |      |   |                      |   |                     |  |   | (50    | ) |                   |   |      |       |   |      |   |  |   | (50    | )
|Realized gains (losses)               |  |                           |      |   |                      |   |                     |  |   | (1,010 | ) |                   |   |      |       |   | (950  | ) |  |   | (1,960 | )
|Purchases, issuances, and settlements |  |                           | (250  | ) |                      |   | 17,400               |  |   | (2,290 | ) |                   |   |      |       |   |      |   |  |   | 14,860 |  
|                                      |  |                           |       |   |                      |   |                      |  |   |        |   |                   |   |       |       |   |       |   |  |   |        |  
|Ending balance at September 26, 2008  |  | $                         | 925   |   |                      | $ | 63,800               |  | $ | 74     |   |                   | $ | 3,097 |       | $ | 4,134 |   |  | $ | 72,030 |  
|                                      |  |                           |       |   |                      |   |                      |  |   |        |   |                   |   |       |       |   |       |   |  |   |        |  

Changes in unrealized gains (losses) and realized gains (losses) for corporate and municipal obligations and
corporate equity securities are presented in Net gains on principal transactions on the Consolidated Statements of Income and Comprehensive Income. Realized gains (losses) for both of the Equity Investments are presented in Other
revenues on the Consolidated Statements of Income and Comprehensive Income.

The total unrealized losses for the period included in earnings that
relate to assets still held at the end of the period were $50,000. The total realized net losses for the period included in earnings that relate to assets still held at the end of the period were $950,000.



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STOCK OPTION AND RESTRICTED STOCK PLANS

Stock Option Plans. There were no active stock option plans at September 26, 2008. 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 Plan and 1997 Plan 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 (as amended to date, the 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 vests pro-rata over a three year period, 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 SFAS No. 123R,
Share-Based Payment.

In August 2008, the Board of Directors approved grants to various officers and employees totaling 108,873 shares
with a weighted average market value of $17.65 per share. In the first quarter of fiscal 2008, the Board of Directors approved grants to various officers and employees totaling 108,950 shares with a weighted average market value of $16.06 per share.
As a result of these grants, SWS recorded deferred compensation in Additional Paid-in Capital of approximately $1,730,000 in fiscal 2009 and $1,888,000 in fiscal 2008. For the three-months ended September 26, 2008 and
September 28, 2007, SWS recognized compensation expense related to restricted stock grants of approximately $506,000 and $409,000, respectively.

At
September 26, 2008, the total number of unvested shares outstanding under the Restricted Stock Plan was 349,330 and the total number of shares available for future grants was 517,453.

CASH AND CASH EQUIVALENTS

For the purpose of the consolidated
statements of cash flows, SWS considers cash to include cash on hand and in bank accounts. In addition, SWS considers funds due from banks and interest bearing deposits in other banks to be cash. Highly liquid debt instruments purchased with
original maturities of three months or less, when acquired, are considered to be cash equivalents.

The Bank is required to maintain balances on hand or
with the Federal Reserve Bank. At September 30, 2008 and June 30, 2008, these reserve balances amounted to $6,211,000 and $3,176,000, respectively.

INVESTMENTS

SWS has two 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 September 26, 2008, SWS had contributed $4,000,000 of this commitment. During the three-months ended September 26, 2008 and September 28, 2007, SWS reported losses of $1,074,000 and
gains of $575,000, respectively, related to this investment. In August 2007, SWS received a cash distribution of $289,000 from this investment.



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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 of 1977. As of September 26, 2008, the Bank has invested $2,400,000 of its commitment. During the three-months ended September 26, 2008 and September 28, 2007, the Bank recorded gains
of $124,000 and $3,000, respectively, related to this investment.

ASSETS SEGREGATED FOR REGULATORY PURPOSES

At September 26, 2008, SWS had cash of approximately $347,375,000 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 September 26, 2008.

At June 27, 2008, SWS had cash of approximately $322,575,000 segregated in special reserve bank accounts for the exclusive benefit of customers under Rule 15c3-3
pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act). SWS had no positions in special reserve bank accounts for the PAIB at June 27, 2008.

MARKETABLE EQUITY SECURITIES

SWS Group owns shares of common stock in USHS, Westwood and 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 September 26, 2008 and June 27, 2008, SWS Group held 357,154 shares of USHS with a cost basis of $1,576,000. The market value of the USHS shares was
$1,246,000 at September 26, 2008 and $1,393,000 at June 27, 2008.

At September 26, 2008 and June 27, 2008, SWS Group held 6,877 shares
of Westwood, within its deferred compensation plan with a cost basis of $103,000. The market value of the Westwood shares was $338,000 at September 26, 2008 and $281,000 at June 27, 2008.

At September 26, 2008 and June 27, 2008, Southwest Securities had 103,898 shares of NYX stock with a cost basis of $7,218,000. The market value of the NYX
shares was $4,013,000 at September 26, 2008 and $5,290,000 at June 27, 2008. At September 26, 2008, 26,725 of the NYX shares were restricted with the restriction set to lapse in March 2009; however, the restriction was lifted early by
NYX on October 1, 2008. These restricted shares have been discounted at a rate of 6.28% of the market price of NYX stock at September 26, 2008. The discount rate was determined based on the length of time of the restrictions, expected rate
of return for this type of investment and the relative amount of restricted NYX stock versus the fully tradable stock.



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RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS

At September 26, 2008 and June 27, 2008, SWS had receivable from and payable to brokers, dealers and clearing organizations related to the following (in
thousands):



|                             |  |           |           |      |   |          
|---------------------------- |  | --------- | --------- | ---- | - | ---------
|                             |  | September |           | June
|Receivable                   |  |           |           |      |   |          
|Securities failed to deliver |  | $         | 34,012    |      | $ | 46,785   
|Securities borrowed          |  |           | 2,275,132 |      |   | 2,737,279
|Correspondent broker/dealers |  |           | 40,133    |      |   | 29,434   
|Clearing organizations       |  |           | 17,249    |      |   | 15,086   
|Other                        |  |           | 48,004    |      |   | 21,398   
|                             |  |           |           |      |   |          
|                             |  | $         | 2,414,530 |      | $ | 2,849,982
|                             |  |           |           |      |   |          
|Payable                      |  |           |           |      |   |          
|Securities failed to receive |  | $         | 30,892    |      | $ | 57,707   
|Securities loaned            |  |           | 2,244,236 |      |   | 2,702,605
|Correspondent broker/dealers |  |           | 11,675    |      |   | 12,216   
|Other                        |  |           | 14,090    |      |   | 21,849   
|                             |  |           |           |      |   |          
|                             |  | $         | 2,300,893 |      | $ | 2,794,377
|                             |  |           |           |      |   |          

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 September 26, 2008, SWS had collateral of $2,271,042,000 under securities lending agreements, of which SWS had repledged
$2,226,874,000. SWS had received collateral of $2,737,263,000 under securities lending agreements, of which SWS had repledged $2,686,694,000 at June 27, 2008.

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. 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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Loans receivable at September 30, 2008 and June 30, 2008 are summarized as follows (in thousands):



|                                                 |  |           |         |   |      |   |         |  
|------------------------------------------------ |  | --------- | ------- | - | ---- | - | ------- | -
|                                                 |  | September |         |   | June |  
|First mortgage loans (principally conventional): |  |           |         |   |      |   |         |  
|Real estate                                      |  | $         | 695,005 |   |      | $ | 637,289 |  
|Construction                                     |  |           | 181,565 |   |      |   | 189,379 |  
|                                                 |  |           |         |   |      |   |         |  
|                                                 |  |           | 876,570 |   |      |   | 826,668 |  
|                                                 |  |           |         |   |      |   |         |  
|Consumer and other loans:                        |  |           |         |   |      |   |         |  
|Commercial                                       |  |           | 106,670 |   |      |   | 101,334 |  
|Other                                            |  |           | 6,866   |   |      |   | 6,433   |  
|                                                 |  |           |         |   |      |   |         |  
|                                                 |  |           | 113,536 |   |      |   | 107,767 |  
|                                                 |  |           |         |   |      |   |         |  
|                                                 |  |           | 990,106 |   |      |   | 934,435 |  
|Unearned income                                  |  |           | (1,471  | ) |      |   | (1,741  | )
|Allowance for probable loan losses               |  |           | (7,566  | ) |      |   | (6,936  | )
|                                                 |  |           |         |   |      |   |         |  
|                                                 |  | $         | 981,069 |   |      | $ | 925,758 |  
|                                                 |  |           |         |   |      |   |         |  

Impairment of loans with a recorded investment of approximately $2,774,000 and $2,705,000 at September 30,
2008 and June 30, 2008, 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 average recorded investment in impaired loans was approximately $2,151,000 for the period
ending September 30, 2008 and $3,617,000 for the period ending September 30, 2007. 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 $645,000 and $357,000 at September 30, 2008 and June 30, 2008, respectively. No material amount of interest income on impaired loans was recognized for cash payments received in the first quarter of either fiscal
2009 or fiscal 2008.

An analysis of the allowance for probable loan losses for the three-month periods ended September 30, 2008 and 2007 is as
follows (in thousands):



|                               |  |                                 |       |   |      |   |       |  
|------------------------------ |  | ------------------------------- | ----- | - | ---- | - | ----- | -
|                               |  | Three-Months EndedSeptember 30, |      
|                               |  | 2008                            |       |   | 2007 |  
|Balance at beginning of period |  | $                               | 6,936 |   |      | $ | 5,497 |  
|Provision for loan losses      |  |                                 | 934   |   |      |   | 51    |  
|Net charge-offs                |  |                                 | (304  | ) |      |   | (1    | )
|                               |  |                                 |       |   |      |   |       |  
|                               |  |                                 | 630   |   |      |   | 50    |  
|                               |  |                                 |       |   |      |   |       |  
|Balance at end of period       |  | $                               | 7,566 |   |      | $ | 5,547 |  
|                               |  |                                 |       |   |      |   |       |  

The allowance to loan ratio at September 30, 2008 and 2007 was 0.77% and 0.72%, respectively.



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SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED

Securities owned and securities sold, not yet purchased at September 26, 2008 and June 27, 2008, which are carried at market value, include the following (in
thousands):



|                                                  |  |           |         |      |   |        
|------------------------------------------------- |  | --------- | ------- | ---- | - | -------
|                                                  |  | September |         | June
|Securities owned                                  |  |           |         |      |   |        
|Corporate equity securities                       |  | $         | 5,970   |      | $ | 9,393  
|Municipal obligations                             |  |           | 136,472 |      |   | 145,948
|U.S. government and government agency obligations |  |           | 15,776  |      |   | 13,887 
|Corporate obligations                             |  |           | 18,040  |      |   | 23,461 
|Other                                             |  |           | 5,139   |      |   | 5,884  
|                                                  |  |           |         |      |   |        
|                                                  |  | $         | 181,397 |      | $ | 198,573
|                                                  |  |           |         |      |   |        
|Securities sold, not yet purchased                |  |           |         |      |   |        
|Corporate equity securities                       |  | $         | 374     |      | $ | 2,197  
|Municipal obligations                             |  |           | 255     |      |   |       
|U.S. government and government agency obligations |  |           | 22,179  |      |   | 14,205 
|Corporate obligations                             |  |           | 6,817   |      |   | 9,558  
|Other                                             |  |           | 442     |      |   | 551    
|                                                  |  |           |         |      |   |        
|                                                  |  | $         | 30,067  |      | $ | 26,511 
|                                                  |  |           |         |      |   |        

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. See additional discussion in Short-Term Borrowings. Securities pledged as security deposits at clearing organizations were $3,095,000 and $3,782,000 at
September 26, 2008 and June 27, 2008, respectively. Additionally, at September 26, 2008 and June 27, 2008, SWS had pledged firm securities valued at $118,000 and $161,000, 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 September 26, 2008, SWS held reverse repurchase agreements totaling $13,797,000, collateralized by U.S. government and government agency obligations with a
market value of approximately $13,648,000. At June 27, 2008, SWS held reverse repurchase agreements totaling $9,862,000, collateralized by U.S. government and government agency obligations with a market value of approximately $9,910,000.

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 2008 in June 2008, 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 three-months that would trigger an interim assessment of 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 three-month period ended
September 26, 2008.

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.



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$2,382,000 of the maximum agreed upon purchase price of $5,800,000 was paid upon closing 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 September 26, 2008 and June 27, 2008, respectively. The amount of the intangible, net of accumulated amortization at
September 26, 2008 and June 27, 2008 was $2,582,000 and $2,864,000, respectively. 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 has
recognized approximately $282,000 and $337,000, respectively of amortization expense for the three-months ended September 26, 2008 and September 28, 2007, respectively. The intangible is included in Other assets on the
Consolidated Statements 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
September 26, 2008, the amount outstanding under these secured arrangements was $88,500,000, which was collateralized by securities held in firm accounts valued at $121,218,000. At June 27, 2008, the amount outstanding under these secured
arrangements was $75,500,000, which was collateralized by securities held for firm accounts valued at $121,496,000.

SWS had $250,000 outstanding under
unsecured letters of credit at both September 26, 2008 and June 27, 2008, pledged to support its open positions with securities clearing organizations, which bear a 1% commitment fee and are renewable semi-annually.

At September 26, 2008 and June 27, 2008, 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 $286,000 and $429,000, respectively. The letter of credit bears a 1% commitment fee and is renewable annually.

In addition to the broker loan lines, at September 26, 2008 and June 27, 2008, 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. This credit arrangement is provided on an as offered basis and is not a committed line of credit. The total amount of borrowings available under this line of credit is reduced by the
amount outstanding on the line and under any unsecured letters of credit at the time of borrowing. At September 26, 2008, there were no amounts outstanding on this line, other than the $536,000 under unsecured letters of credit, reference
above. At June 27, 2008, there were no amounts outstanding on this line, other than the $679,000 in unsecured letters of credit referenced above. At September 26, 2008 and June 27, 2008, the total amount available for borrowings was
$19,464,000 and $19,321,000, respectively.

At September 26, 2008 and June 27, 2008, SWS had an irrevocable letter of credit agreement
aggregating $65,000,000 and $58,000,000, 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 $90,697,000 and $73,528,000 at September 26, 2008 and June 27, 2008, respectively.

In addition to using customer securities to collateralize bank loans and letters of credit, SWS also loans client securities as collateral in conjunction
with SWS securities lending activities. At



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September 26, 2008, approximately $308,779,000 of client securities under customer margin loans was available to be pledged, of which SWS had pledged
$16,853,000 under securities loan agreements. At June 27, 2008, approximately $357,384,000 of client securities under customer margin loans was available to be pledged, of which SWS had pledged $15,730,000 under securities loan agreements.

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 monies from the line of credit are used by the Bank to support short-term liquidity needs. At September 30, 2008 and June 30, 2008, there
were no amounts outstanding on this line of credit.

M.L. Stern has a broker lending agreement with a bank for a $26,000,000 line of credit, on which
$26,000,000 was drawn at September 30, 2008, and was collateralized by securities held for firm accounts valued at $26,349,000. This line of credit is used primarily to finance securities owned and bears interest at rates indexed to the federal
funds rate. The rate resets daily and was 3.0% at September 30, 2008.

DEPOSITS

Deposits at September 30, 2008 and June 30, 2008 are summarized as follows (dollars in thousands):



|                                              |  |           |           |         |       |   |        |   |           |  |       |  
|--------------------------------------------- |  | --------- | --------- | ------- | ----- | - | ------ | - | --------- |  | ----- | -
|                                              |  | September |           |         | June  |  
|                                              |  | Amount    |           | Percent |       |   | Amount |   | Percent   | 
|Non-interest bearing demand accounts          |  | $         | 54,266    |         | 4.8   | % |        | $ | 52,349    |  | 4.9   | %
|Interest bearing demand accounts              |  |           | 103,632   |         | 9.1   |   |        |   | 58,761    |  | 5.5   |  
|Savings accounts                              |  |           | 841,022   |         | 74.1  |   |        |   | 824,596   |  | 76.9  |  
|Limited access money market accounts          |  |           | 46,800    |         | 4.1   |   |        |   | 43,865    |  | 4.1   |  
|Certificates of deposit, less than $100,000   |  |           | 51,727    |         | 4.6   |   |        |   | 55,173    |  | 5.1   |  
|Certificates of deposit, $100,000 and greater |  |           | 37,360    |         | 3.3   |   |        |   | 37,229    |  | 3.5   |  
|                                              |  |           |           |         |       |   |        |   |           |  |       |  
|                                              |  | $         | 1,134,807 |         | 100.0 | % |        | $ | 1,071,973 |  | 100.0 | %
|                                              |  |           |           |         |       |   |        |   |           |  |       |  

The weighted average interest rate on deposits was approximately 1.9% at September 30, 2008 and 2.37% at
June 30, 2008.

At September 30, 2008, scheduled maturities of certificates of deposit were as follows (in thousands):



|                                              |  |               |        |                       |   |                        |  |                        |       |            |   |       |  |   |       |  |   |       
|--------------------------------------------- |  | ------------- | ------ | --------------------- | - | ---------------------- |  | ---------------------- | ----- | ---------- | - | ----- |  | - | ----- |  | - | ------
|                                              |  | 1 Year orLess |        | >1 YearThrough2 Years |   | >2 YearsThrough3 Years |  | >3 YearsThrough4 Years |       | Thereafter |   | Total
|Certificates of deposit, less than $100,000   |  | $             | 42,281 |                       | $ | 6,350                  |  | $                      | 1,524 |            | $ | 951   |  | $ | 621   |  | $ | 51,727
|Certificates of deposit, $100,000 and greater |  |               | 30,986 |                       |   | 4,150                  |  |                        | 616   |            |   | 751   |  |   | 857   |  |   | 37,360
|                                              |  |               |        |                       |   |                        |  |                        |       |            |   |       |  |   |       |  |   |       
|                                              |  | $             | 73,267 |                       | $ | 10,500                 |  | $                      | 2,140 |            | $ | 1,702 |  | $ | 1,478 |  | $ | 89,087
|                                              |  |               |        |                       |   |                        |  |                        |       |            |   |       |  |   |       |  |   |       

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 September 26, 2008 and June 27, 2008 were $10,007,000 and $6,342,000, respectively.



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

At September 30, 2008 and June 30, 2008, advances from the FHLB were due as follows (in thousands):



|                        |  |           |         |      |   |        
|----------------------- |  | --------- | ------- | ---- | - | -------
|                        |  | September |         | June
|Maturity:               |  |           |         |      |   |        
|Due within one year     |  | $         | 743     |      | $ | 71,056 
|Due within two years    |  |           | 5,616   |      |   | 5,946  
|Due within five years   |  |           | 48,492  |      |   | 39,736 
|Due within seven years  |  |           | 12,137  |      |   | 13,835 
|Due within ten years    |  |           | 9,187   |      |   | 11,512 
|Due within twenty years |  |           | 30,103  |      |   | 23,405 
|Due beyond twenty years |  |           | 423     |      |   | 760    
|                        |  |           |         |      |   |        
|                        |  | $         | 106,701 |      | $ | 166,250
|                        |  |           |         |      |   |        

Pursuant to collateral agreements, the advances from the FHLB, with interest rates ranging from 3% to 8%, are
collateralized by approximately $520,000,000 of collateral value (as defined) in qualifying first mortgage loans at September 30, 2008 (calculated at June 30, 2008). At June 27, 2008 (calculated at March 31, 2008), advances with
interest rates from 2% to 8% were collateralized by approximately $516,000,000 of collateral value in qualifying first mortgage loans.

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 September 26, 2008, Southwest Securities had net capital of $119,241,000, or approximately 31.7% of aggregate
debit balances, which was $111,849,000 in excess of its minimum net capital requirement of $7,392,000 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 September 26, 2008, Southwest Securities had net capital of $100,761,000 in excess of 5% of aggregate debit items.

SWS Financial follows the primary (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
September 26, 2008, the net capital and excess net capital of SWS Financial was $1,066,000 and $816,000, respectively.

M.L. Stern is required to
maintain minimum net capital, as defined, of the greater of $250,000 or 1/15 of aggregate indebtedness and a maximum ratio of aggregate indebtedness to net capital of 15 to 1, as defined under such provisions. M.L. Sterns ratio of aggregate
indebtedness to net capital was 2.11 to 1. M.L. Stern also had net capital, as defined, of $7,108,000 which exceeded the minimum requirements by $6,110,000.

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
September 30, 2008 and June 30, 2008, that the Bank met all capital adequacy requirements to which it is subject.

As of September 30, 2008
and June 30, 2008, 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. Should the Bank not meet these minimums, certain mandatory and discretionary supervisory actions (as defined in 12CFR 565.6) would be applicable.



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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 |        
|September 30, 2008:                     |  |        |         |       |                             |   |        |                                                               |        |  |     |        |  |       |         |  |      |  
|Total capital to risk weighted assets   |  | $      | 122,198 |       | 10.6                        | % |        | $                                                             | 91,931 |  | 8.0 | %      |  | $     | 114,913 |  | 10.0 | %
|Tier I capital to risk weighted assets  |  |        | 114,632 |       | 10.0                        |   |        |                                                               | 45,965 |  | 4.0 |        |  |       | 68,948  |  | 6.0  |  
|Tier I capital to adjusted total assets |  |        | 114,632 |       | 8.4                         |   |        |                                                               | 54,397 |  | 4.0 |        |  |       | 67,996  |  | 5.0  |  
|                                        |  |        |         |       |                             |  
|June 30, 2008:                          |  |        |         |       |                             |   |        |                                                               |        |  |     |        |  |       |         |  |      |  
|Total capital to risk weighted assets   |  | $      | 120,098 |       | 10.7                        | % |        | $                                                             | 89,684 |  | 8.0 | %      |  | $     | 112,105 |  | 10.0 | %
|Tier I capital to risk weighted assets  |  |        | 113,162 |       | 10.1                        |   |        |                                                               | 44,842 |  | 4.0 |        |  |       | 67,263  |  | 6.0  |  
|Tier I capital to adjusted total assets |  |        | 113,162 |       | 8.3                         |   |        |                                                               | 54,303 |  | 4.0 |        |  |       | 67,879  |  | 5.0  |  

EARNINGS PER SHARE (EPS)

A reconciliation between the weighted average shares outstanding used in the basic and diluted EPS computations is as follows for the three-month periods ended September 26, 2008 and September 28, 2007 (in
thousands, except share and per share amounts):



|                                              |  |                    |            |                   |   |           
|--------------------------------------------- |  | ------------------ | ---------- | ----------------- | - | ----------
|                                              |  | Three-Months Ended
|                                              |  | September 26,2008  |            | September 28,2007
|Income from continuing operations             |  | $                  | 7,023      |                   | $ | 7,704     
|Income from discontinued operations           |  |                    |           |                   |   | 17        
|                                              |  |                    |            |                   |   |           
|Net income                                    |  | $                  | 7,023      |                   | $ | 7,721     
|                                              |  |                    |            |                   |   |           
|Weighted average shares outstanding  basic   |  |                    | 27,022,556 |                   |   | 27,405,943
|Effect of dilutive securities:                |  |                    |            |                   |   |           
|Assumed exercise of stock options             |  |                    | 109,866    |                   |   | 151,310   
|Restricted stock                              |  |                    | 66,163     |                   |   | 56,062    
|                                              |  |                    |            |                   |   |           
|Weighted average shares outstanding  diluted |  |                    | 27,198,585 |                   |   | 27,613,315
|                                              |  |                    |            |                   |   |           
|Earnings per share  basic                    |  |                    |            |                   |   |           
|Income from continuing operations             |  | $                  | 0.26       |                   | $ | 0.28      
|Income from discontinued operations           |  |                    |           |                   |   |          
|                                              |  |                    |            |                   |   |           
|Net income                                    |  | $                  | 0.26       |                   | $ | 0.28      
|                                              |  |                    |            |                   |   |           
|Earnings per share  diluted                  |  |                    |            |                   |   |           
|Income from continuing operations             |  | $                  | 0.26       |                   | $ | 0.28      
|Income from discontinued operations           |  |                    |           |                   |   |          
|                                              |  |                    |            |                   |   |           
|Net income                                    |  | $                  | 0.26       |                   | $ | 0.28      
|                                              |  |                    |            |                   |   |           

At September 26, 2008 and September 28, 2007, there were options to acquire approximately 593,000 and
632,000 shares of common stock outstanding under the two stock option plans, respectively. See Stock Options and Restricted Stock Plans. As of September 26, 2008 and September 28, 2007, respectively, there were no
anti-dilutive options outstanding.



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REPURCHASE OF TREASURY STOCK

Periodically, SWS repurchases SWS Group common stock under a plan approved by our Board of Directors. Currently, SWS has authorization, which expires on June 30, 2009, to repurchase 698,944 shares of its common stock from time to time
in the open market. No shares were repurchased by SWS under this program for the three-months ended September 26, 2008 or the previous plan which expired June 30, 2008 for the three-months ended September 28, 2007, respectively.

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 the consolidated financial statements, but participates in future dividends declared by SWS. The plan purchased 20,000 shares in the three-months ended September 26, 2008 at a cost of
approximately $437,000 or $21.83 per share. No shares were purchased by the plan in the three-month period ended September 28, 2007. The plan distributed 98 shares in the three-months ended September 26, 2008.

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, 16,789 shares were repurchased with a market value of approximately $299,358 or an average of $17.83 per share in the three-months ended September 26, 2008. In the three-months ended
September 28, 2007, 17,142 shares were repurchased with a market value of $335,784 or an average of $19.59 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. The operations of M.L. Stern are included in this business segment.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Institutional: The institutional brokerage 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 banking segment. Retail brokerage services are offered through Southwest Securities (the Private Client Group and the Managed Advisors Accounts department), the SWS Insurance, M.L. Stern, 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 27, 2008;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | 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-months ended
September 26, 2008 and September 28, 2007:



|                                                      |  |          |         |   |        |   |               |  |         |           |       |   |           |                             |   |        |   |  |   |          
|----------------------------------------------------- |  | -------- | ------- | - | ------ | - | ------------- |  | ------- | --------- | ----- | - | --------- | --------------------------- | - | ------ | - |  | - | ---------
|UNAUDITED QUARTERLY FINANCIAL INFORMATION            
|(in thousands)                                        |  | Clearing |         |   | Retail |   | Institutional |  | Banking |           | Other |   |           | ConsolidatedSWS Group, Inc.
|Three-months ended September 26, 2008                 |  |          |         |   |        |   |               |  |         |           |       |   |           |                             |   |        |   |  |   |          
|                                                      |  |          |         |   |        |  
|Operating revenue                                     |  | $        | 5,916   |   |        | $ | 28,594        |  | $       | 22,939    |       | $ | 663       |                             | $ | (2,544 | ) |  | $ | 55,568   
|Net intersegment revenues                             |  |          | (231    | ) |        |   | 251           |  |         | 148       |       |   | 2,023     |                             |   | (2,191 | ) |  |   |         
|Net interest revenue                                  |  |          | 2,260   |   |        |   | 1,403         |  |         | 13,873    |       |   | 14,664    |                             |   |       |   |  |   | 32,200   
|Net revenues                                          |  |          | 8,176   |   |        |   | 29,997        |  |         | 36,812    |       |   | 15,327    |                             |   | (2,544 | ) |  |   | 87,768   
|Operating expenses                                    |  |          | 5,904   |   |        |   | 27,223        |  |         | 25,785    |       |   | 10,779    |                             |   | 7,284  |   |  |   | 76,975   
|Depreciation and amortization                         |  |          | 290     |   |        |   | 196           |  |         | 115       |       |   | 364       |                             |   | 336    |   |  |   | 1,301    
|Income (loss) from continuing operations before taxes |  |          | 2,272   |   |        |   | 2,774         |  |         | 11,027    |       |   | 4,548     |                             |   | (9,828 | ) |  |   | 10,793   
|Assets(*)                                             |  |          | 427,903 |   |        |   | 259,155       |  |         | 2,459,757 |       |   | 1,359,771 |                             |   | 31,505 |   |  |   | 4,538,091
|                                                      |  |          |         |   |        |  
|Three-months ended September 28, 2007                 |  |          |         |   |        |   |               |  |         |           |       |   |           |                             |   |        |   |  |   |          
|                                                      |  |          |         |   |        |  
|Operating revenue                                     |  | $        | 5,799   |   |        | $ | 17,908        |  | $       | 18,454    |       | $ | 600       |                             | $ | 574    |   |  | $ | 43,335   
|Net intersegment revenues                             |  |          | (243    | ) |        |   | 251           |  |         | 517       |       |   | 1,701     |                             |   | (2,226 | ) |  |   |         
|Net interest revenue (expense)                        |  |          | 4,479   |   |        |   | 1,731         |  |         | 5,499     |       |   | 11,891    |                             |   | 11     |   |  |   | 23,611   
|Net revenues                                          |  |          | 10,278  |   |        |   | 19,639        |  |         | 23,953    |       |   | 12,491    |                             |   | 585    |   |  |   | 66,946   
|Operating expenses                                    |  |          | 5,781   |   |        |   | 16,455        |  |         | 16,916    |       |   | 7,039     |                             |   | 8,809  |   |  |   | 55,000   
|Depreciation and amortization                         |  |          | 341     |   |        |   | 174           |  |         | 97        |       |   | 183       |                             |   | 443    |   |  |   | 1,238    
|Income (loss) from continuing operations before taxes |  |          | 4,497   |   |        |   | 3,184         |  |         | 7,037     |       |   | 5,452     |                             |   | (8,224 | ) |  |   | 11,946   
|Income from discontinued operations                   |  |          |        |   |        |   |              |  |         |          |       |   | 17        |                             |   |       |   |  |   | 17       
|Assets(*)                                             |  |          | 491,733 |   |        |   | 176,380       |  |         | 2,761,059 |       |   | 1,112,702 |                             |   | 36,398 |   |  |   | 4,578,272



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|(*) | Assets are reconciled to total assets as presented in the September 26, 2008 and September 28, 2007 Consolidated Statements of Financial Condition as follows (in
thousands):
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                             |  |                   |           |   |                   |   |           |  
|------------------------------------------------------------ |  | ----------------- | --------- | - | ----------------- | - | --------- | -
|                                                             |  | September 26,2008 |           |   | September 28,2007 |  
|Amount as presented above                                    |  | $                 | 4,538,091 |   |                   | $ | 4,578,272 |  
|Reconciling items:                                           |  |                   |           |   |                   |   |           |  
|Unallocated assets:                                          |  |                   |           |   |                   |   |           |  
|Cash                                                         |  |                   | 12,810    |   |                   |   | 17,730    |  
|Receivables from brokers, dealers and clearing organizations |  |                   | 81,903    |   |                   |   | 59,758    |  
|Receivable from clients, net of allowances                   |  |                   | 27,775    |   |                   |   | 20,050    |  
|Other assets                                                 |  |                   | 40,384    |   |                   |   | 15,406    |  
|Unallocated eliminations                                     |  |                   | (28,726   | ) |                   |   | (3,606    | )
|                                                             |  |                   |           |   |                   |   |           |  
|Total assets                                                 |  | $                 | 4,672,237 |   |                   | $ | 4,687,610 |  
|                                                             |  |                   |           |   |                   |   |           |  



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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 September 26, 2008, 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 September 26, 2008, the Bank had 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 commitments for underwriting at September 26, 2008.

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 $2,860,000. The recourse provision of the letters of credit allows the amount of the letters of credit to become part of the fully collateralized loans with total repayment. The
collateral on these letters of credit consists of real estate, certificates of deposit, equipment, accounts receivable or furniture and fixtures.

As a
normal course of business, the mortgage origination division of the Bank sells in the secondary market the majority of mortgage loans it originates. As a part of these sales, the Bank makes certain representations and warranties to the investor. If
these representations and warranties are breached, the Bank may be required to repurchase these loans at which time the Bank would be responsible for any subsequent credit losses. In addition, there are occasions where the warehouse lending division
of the Bank may have customers that cease to do business. When this occurs and loans are still outstanding and not sold related to that particular customer, the Bank will engage in a thorough review of the file documentation. If this documentation
proves to be adequate, the Bank will market the loans directly to permanent investors using agreements and relationships already established by the mortgage origination division. Any subsequent credit losses related to loans repurchased as a result
of a breach in representations and warranties to the investor would be recorded through the allowance for loan losses.

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 quantified.
However, the potential for SWS to be required to make payments under these arrangements is believed to be unlikely. Accordingly, no contingent liability is recorded in the consolidated financial statements for these arrangements.

SWS is a member of an exchange and various clearinghouses. Under the membership agreements, members are generally required to guarantee the performance of other members.
Additionally, if a



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member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls. To mitigate these performance
risks, the exchanges and clearinghouses often require members to post collateral. SWS maximum potential liability under these arrangements cannot be quantified. However, the potential for SWS to be required to make payments under these
arrangements is believed to be unlikely. 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. Any other new accounting pronouncements not specifically identified in our disclosures are not applicable to SWS or are not expected to have a material effect on our financial statements:

FASB Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. On October 10,
2008, FASB issued this staff position which clarifies the application of SFAS No. 157, Fair Value Measurement in an inactive market. This statement does not reinterpret or change SFAS No. 157s existing principles
but is intended to enhance comparability and consistency. This statement was effective upon issuance. SWS has used this standard in its evaluation of fair value under SFAS 157. See Fair Value of Financial Instruments.

Emerging Issues Task Force (EITF) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating
Securities. In June 2008, FASB issued this standard which states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings per share under the two-class method. This statement is effective for fiscal years beginning after December 15, 2008, which is our fiscal 2010. SWS is assessing the impact of this statement on
its financial statements and processes.

FASB Staff Position No. FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing
Transactions.In February 2008, FASB issued this staff position which presumes an initial transfer of a financial asset and repurchase financing are considered part of the same arrangement as described in SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities unless certain conditions are met. The conditions are 1) the initial transfer and repurchase financing are not contractually contingent
on one another; 2) the repurchase financing provides the initial transferor with recourse to the initial transferee upon default; 3) the financial asset subject to the initial transfer and repurchase financing is readily obtainable in the
marketplace and 4) the repurchase agreement matures before the asset. This standard is effective for fiscal years beginning after November 15, 2008, which is our fiscal 2010. SWS is assessing the impact of this statement on its financial
statements and processes.

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 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, which is 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



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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, which is our fiscal 2010. SWS is assessing the impact of
this statement on its financial statements and processes.

AFFILIATE TRANSACTIONS

Two directors own approximately 64% of the ownership interests of a local bank and one of SWS executive officers owns less than 1% of the ownership interests in this bank. The Bank has sold loan participations
with outstanding balances of $7,079,000 and $7,752,000 at September 30, 2008 and June 30, 2008, respectively, to this local bank. The terms of the participation agreements resulted in payments of interest and fees to the other bank of
$90,000 and $297,000 for the three-months ending September 30, 2008 and 2007, respectively. The interest rates on these participations were substantially the same as those participations sold by the Bank to unrelated banks.



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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 that 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 in our Form 10-K filed with the Securities and Exchange Commission on September 5, 2008 and in this Form 10-Q.

We operate through four segments grouped primarily by products, services and customer base: 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. The retail segment includes M.L. Stern & Co., LLC and its wholly-owned subsidiary,
Tower Asset Management, LLC, (collectively, M.L. Stern) which purchases and sells municipal, federal and corporate bonds, mutual funds, unit trusts, closed ended funds, insurance, equities and other various investment securities at the
retail level, as well as provides investment advisory services to high net worth individuals or families who require investment expertise and personal services.

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. 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 acquisition.



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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 common stock of U.S. Home Systems, Inc. (USHS) and NYSE Euronext, Inc. (NYX).

Business Environment

Our business is sensitive to financial market conditions which, were very volatile during the first quarter of fiscal
2009 and became even more volatile subsequent to the end of the quarter. Equity market indices declined from a year ago with the Dow Jones Industrial Average (the DJIA) decreasing 20%, the Standard & Poors 500 Index down
21% and the NASDAQ Composite Index down 19%. Since the end of the first quarter, all indices have continued to decline. The DJIA has closed below 9,000 for the first time in five years. Volume remained active with average daily volume on the New
York Stock Exchange increasing 20% over the same period last fiscal year.

The end of the first quarter of fiscal 2009 brought turmoil in the general
economy and upheaval in the credit markets. These disruptions and developments have resulted in a range of actions by the U.S. and foreign governments to attempt to bring liquidity and order to the financial markets and to prevent a long recession
in the world economy. The U.S. government has taken several actions to intervene in support of the credit markets, including the Troubled Asset Relief Program, through which the U.S. government is authorized to purchase up to $700 billion in whole
loans and mortgage-related securities as well as to invest directly in financial institutions and commercial paper. Additional actions include the guarantee of certain money market mutual fund and bank borrowings and increased Federal Deposit
Insurance Corporation (FDIC) insurance for certain customer bank deposit accounts. Additionally, the government stepped in to take over the operations of Fannie Mae, Freddie Mac and American International Group, Inc. (AIG)
while allowing Lehman Brothers (Lehman) to fail.

The Federal Reserve Board (FRB) lowered the federal funds rate by 275 basis
points from September 30, 2007 to September 30, 2008 and an additional 100 basis points since September 26, 2008. Additionally, the FRB lowered collateral requirements to increase liquidity in the financial markets.

Investors have responded to the volatile markets with a flight to quality which has, in turn, reduced yields on short-term treasury securities and has produced a
dramatic reduction in commercial paper issuance.

Securities and banking regulators have been active in establishing temporary rules and regulations to
respond to this crisis. Some of these actions have resulted in temporary or, in some cases, permanent, restrictions on certain types of securities transactions, most notably short sales of equity securities of certain financial institutions.

All of these factors have had an impact on our businesses. Additionally, any potential growth in the U.S. stock markets in the upcoming months will be
tempered by investor uncertainty resulting from the outcome of the November 2008 presidential election, volatility in the cost of energy and commodities, unemployment and recession concerns, as well as the general state of the U.S. and world
economies.

Impact of Credit Markets

Brokerage.On the brokerage side of the business, volatility in the credit and mortgage markets has had an impact on several aspects of our business primarily related to valuation of securities, liquidity and counterparty
risk.



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Valuation of Securities

While trading in sub-prime collateralized debt obligations, proprietary structured products, credit default swaps and other volatile investments are not primary activities for us, we do trade other debt and equity
securities and we have seen deterioration in the marketability and valuation of some of these products as the market for some types of securities are not functioning at normal levels.

In order to take advantage of attractive tax-free yields for the company, we began investing in certain auction rate municipal bonds in the spring of
2008. We had an average of $96.1 million invested in these securities during the first quarter of fiscal 2009 and the balance at quarter end was $95.0 million. Subsequent to the end of the quarter, we sold $31.2 million of these bonds reducing our
holdings to $63.8 million. These securities are investment grade credits, are valued at par and as of October 31, 2008 are yielding 7.19% per year. Auctions on the current holdings have substantially failed since shortly after quarter end.
While management does not expect any reduction in the cash flow from these bonds, prolonged failure of these auctions could indicate an impairment in their value due to lack of liquidity. The company currently has the ability to hold these
investments until the municipal market recovers.

These securities are currently financed through a combination of bank loans and our own
capital. Should our lender determine that these securities are no longer eligible collateral or should they decide to reduce the advance rate for these securities, we could be required to finance substantially all of this portfolio from our existing
capital. This could impact our ability to carry inventories of other securities to support our fixed income, equity and correspondent clearing businesses which, in turn, could reduce the volume and profitability of those businesses. Management
monitors these investments daily and ensures that we have limited concentrations in any one issuer.

Customers of Southwest Securities, Inc.
(Southwest Securities), SWS Financial Services, Inc. (SWS Financial) and M.L. Stern also hold investments in auction rate securities. Our customers hold approximately $23.6 million in auction rate preferred securities which
were generally purchased at other brokerage firms and transferred to Southwest Securities. We did not actively market these securities to our customers. Substantially all of these securities are subject to partial redemption and/or restructuring by
the sponsors. We also hold $925,000 in proprietary positions in auction rate preferred securities. Our customers also hold $16.8 million in auction rate bonds held at our M.L. Stern subsidiary. A number of our competitors who sold or underwrote
these securities have been required by regulators to repurchase these securities from their customers. Should we be required to take similar action, our liquidity could be negatively impacted.

We also 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 September 26, 2008, we held mortgage
and asset-backed securities of approximately $11.1 million included in Securities owned, at market value on the Consolidated Statements of Financial Condition.

Customer margin balances have also been negatively impacted by the declining stock market values, which will reduce the net interest we earn on customer accounts.

The company has one investment in a venture capital investment partnership which we account for on the equity method of accounting, which is reflective of
fair value. This venture capital fund invests in small businesses in various stages of development and operating in a variety of industries. During the first quarter of fiscal 2009, we recorded a $1.1 million loss



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on this joint venture. A prolonged downturn in the economy could lead to a continued decline in the fair value of this investment. At September 26,
2008, this investment was recorded at $1.6 million. Additionally, the company has commitment to invest an additional $1 million under certain circumstances.

Liquidity

Dislocation in the credit markets has led to increased liquidity risk. Substantially all of our borrowing
arrangements are uncommitted lines of credit and, as such, can be reduced or eliminated at any time by the banks extending the credit. While we have not experienced reductions in our borrowing capacity, our lenders have taken actions that indicate
their concerns regarding liquidity in the marketplace. These actions have included reduced advance rates for certain security types, more stringent requirements for collateral eligibility and higher interest rates. All of these actions have had a
negative impact on our liquidity. Should our lenders continue to take additional similar actions, the cost of conducting our business will increase and our volume of business could be limited.

The volatility in the U.S. stock markets is also impacting our liquidity through increased margin requirements at our clearing houses. These margin
requirements are determined through a combination of risk factors including volume of business and volatility in the U.S. stock markets. Consequently, our margin requirements at our clearinghouses have ranged as high as 37% greater than our highest
margin requirement in the first quarter of last fiscal year. To the extent we are required to post cash or other collateral to meet these requirements, we have less borrowing capacity to finance our other businesses.

Failure of Financial Institutions

On
September 19, 2008, Lehman filed for protection from its creditors with the Securities Investor Protection Corporation (SIPC). Lehman was one of our counterparties in our securities lending business. We had been working for several
weeks to reduce our exposure to Lehman prior to the bankruptcy filing. As of the bankruptcy filing date, we had $10.3 million of stock borrowed from Lehman with a value of $9.7 million. Subsequent sales and revaluation of the collateral since the
bankruptcy filing have led to an expected shortfall in collateral value of $5.4 million. The company recorded this loss in the first quarter of fiscal 2009. The Company had no exposure resulting from the U.S. intervention in Fannie Mae, Freddie Mac
or AIG.

In October 2008, the U.S. Congress passed and the U.S. President signed into law the Emergency Economic Stabilization Act of 2008
(EESA). This new law brought many changes to the economic landscape in the hope of helping the U.S. economy. We have seen some stabilization in the U.S. stock markets, but this law will take time to show its impact on the U.S. economy.

Bank. The dislocation of the credit and mortgage markets has also impacted the operating environment of our wholly-owned bank subsidiary,
Southwest Securities, FSB (the Bank), directly through loan portfolio exposure and indirectly primarily from the actions of the U.S. government and banking regulators.

The Bank continues to manage the deterioration of its residential construction loan portfolio. Average outstanding loans in this portfolio have decreased $39.4 million or 17.9% from the first quarter of fiscal 2008.
The market continues to work through the absorption of the oversupply of finished vacant housing. As published by Residential Strategies Inc., finished vacant inventory in North Texas represents a 3.13 month supply, where a 2.5 month supply is
considered equilibrium. Mortgage rates remain attractive and employment in North Texas remains strong which we believe should help mitigate any continued deterioration. A prolonged economic downturn could exacerbate the deterioration in this
portfolio.



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Passage of the EESA accelerated the Federal Reserves authority to pay interest on depository institutions
required and excess reserve balances. The Financial Services Regulatory Relief Act of 2006 originally authorized the Federal Reserve to begin paying interest on reserves beginning October 1, 2011. This acceleration became effective
October 9, 2008. The interest paid on required reserve balances will be the target Federal Funds rate less 10 basis points. The rate paid on excess reserves will initially be set at the target Federal Funds rate less 35 basis points.
Establishing this floor for Federal Funds should provide some stability to the Federal Funds market. This should have a positive impact for the Bank as it is an active participant in the Federal Funds market.

The EESA also temporarily increased deposit insurance coverage from $100,000 per insured account to $250,000 per insured account through December 31, 2009.

On October 14, 2008, the U.S. Treasury Department announced a capital purchase program which would inject up to $250 billion of capital into the
banking system. The Bank is actively reviewing this program and the growth opportunities it may support.

Also, on October 14, 2008, the U.S. Treasury
Department invoked the systemic risk exception of the FDIC Improvement Act of 1991 which provides the FDIC with flexibility to provide a 100 percent guarantee of newly issued senior unsecured debt and non interest bearing transaction accounts. The
Bank plans to participate in both components of this program. The additional FDIC coverage for our customers should provide greater confidence in our banking system and the debt guarantee should provide additional stability to our Federal Funds
transactions with other financial institutions.

Events and Transactions

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

Write-off of $5.4 million for stock loan.In the first quarter of fiscal 2009, we wrote-off $5.4 million related to a deficit in the
collateral securing a counterparty obligation of Lehman. We experienced the counterparty deficit as a result of Lehman declaring bankruptcy on September 19, 2008. Lehman had an obligation to us for stock borrowed of approximately $10.3 million
at the time of the bankruptcy filing, which was backed by approximately $9.7 million in collateral. Subsequent sales and revaluation of the remaining collateral is expected to result in a $5.4 million deficit. We plan to make a claim to SIPC and
negotiate with other counterparties to mitigate the deficit. However, the potential for a successful recovery is unknown at this time. This write-off was recorded in Other expenses on the Consolidated Statements of Income and
Comprehensive Income.

Acquisition of M.L. Stern.In February 2008, we entered into a definitive agreement to purchase M.L. Stern from a
subsidiary of Pacific Life Insurance Company. The acquisition was structured as a purchase of all of the outstanding membership interests of M.L. Stern. The assets and liabilities acquired as well as the financial results of M.L. Stern
were included in our consolidated financial statements after the close of business on March 31, 2008, the acquisition date. The transaction has doubled the size of our private client advisor network and re-established us in the asset management
business. The M.L. Stern business is included in our retail segment.

The aggregate acquisition price was approximately $8.7 million, which consisted of
cash in the amount of $5.5 million and direct expenses of $3.2 million in finders fees, legal fees, valuation fees, severance costs and contract cancellation costs. We accounted for the acquisition of M.L. Stern under the provisions of
Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 141 Business Combinations.



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RESULTS OF OPERATIONS

Consolidated

Net income for the three-month period ended September 26, 2008 was $7.0 million, a decrease of $698,000 from net income
for the comparable three-month period ended September 28, 2007. Net income for the three-month period ending September 28, 2007 includes income of $17,000 from discontinued operations. Both the three-month period ended September 26,
2008 and September 28, 2007 contained 63 trading days.

The following is a summary of increases (decreases) in categories of net revenues and
operating expenses for the three-month period ended September 26, 2008 compared to the three-month period ended September 28, 2007 (dollars in thousands):



|                                                     |  |        |        |   |   |     |   
|---------------------------------------------------- |  | ------ | ------ | - | - | --- | --
|                                                     |  | Change |       
|                                                     |  | Amount |        |   | % |    
|Net revenues:                                        |  |        |        |   |   |     |   
|Net revenues from clearing operations                |  | $      | (55    | ) |   | (2  | )%
|Commissions                                          |  |        | 13,573 |   |   | 61  |   
|Net interest                                         |  |        | 8,589  |   |   | 36  |   
|Investment banking, advisory and administrative fees |  |        | 883    |   |   | 9   |   
|Net gains on principal transactions                  |  |        | 1,361  |   |   | 101 |   
|Other                                                |  |        | (3,529 | ) |   | (55 | ) 
|                                                     |  |        |        |   |   |     |   
|                                                     |  |        | 20,822 |   |   | 31  |   
|                                                     |  |        |        |   |   |     |   
|Operating expenses:                                  |  |        |        |   |   |     |   
|Commissions and other employee compensation          |  | $      | 12,187 |   |   | 30  | % 
|Occupancy, equipment and computer service costs      |  |        | 1,217  |   |   | 19  |   
|Communications                                       |  |        | 935    |   |   | 42  |   
|Floor brokerage and clearing organization charges    |  |        | (210   | ) |   | (19 | ) 
|Advertising and promotional                          |  |        | 206    |   |   | 35  |   
|Other                                                |  |        | 7,640  |   |   | 177 |   
|                                                     |  |        |        |   |   |     |   
|                                                     |  |        | 21,975 |   |   | 40  |   
|                                                     |  |        |        |   |   |     |   
|Pretax income                                        |  | $      | (1,153 | ) |   | (10 | )%
|                                                     |  |        |        |   |   |     |   

Net revenues increased for the first quarter of fiscal 2009 by $20.8 million as compared to the same period of
fiscal 2008. The largest components of the increase were in commissions, $13.6 million and net interest, $8.6 million. The increase in commissions is due to the acquisition of M.L Stern, which is in our retail segment. M.L. Stern recorded commission
revenue of $9.7 million for the first quarter of fiscal 2009. Commission revenue also increased $4.5 million in the institutional segment primarily in the fixed income business as greater volatility and increased client activity led to wider spreads
and more transactions. These commission revenue increases were partially offset by a $453,000 decrease in commissions for SWS Financial. The increase in net interest is due primarily to a 107 basis point increase in the spread in the stock loan
business as well as an increase in the average loan balance at the Bank of 38%.

Operating expenses increased $22.0 million for the three-months ended
September 26, 2008 as compared to the same period of fiscal 2008. The largest increases were in commissions and other employee compensation, $12.2 million and other expenses, $7.6 million. The increase in commissions and other employee
compensation is due primarily to the addition of M.L. Stern. M.L. Sterns commission and other employee expenses were $8.3 million for the quarter ended September 26, 2008. The remainder of the increase is due to variable compensation in
the institutional segment, additional headcount at the Bank and an increase in incentive compensation of $1.3 million from fiscal 2008 to fiscal 2009. The increase in other expenses is primarily due to the $5.4 million write-off



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of the Lehman counterparty exposure, an increase in the provision for loan losses of $883,000, increases in licenses and legal fees of $628,000 and increases
in purchased mortgage loan losses, real estate expenses and Savings Association Insurance Fund (SAIF) assessments of $882,000.

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-month period ended September 26, 2008 and September 28, 2007 (in thousands):



|             |  |                    |        |                   |   |       
|------------ |  | ------------------ | ------ | ----------------- | - | ------
|             |  | Three-Months Ended
|             |  | September 26,2008  |        | September 28,2007
|Brokerage    |  | $                  | 17,536 |                   | $ | 11,720
|Bank         |  |                    | 14,664 |                   |   | 11,891
|             |  |                    |        |                   |   |       
|Net interest |  | $                  | 32,200 |                   | $ | 23,611
|             |  |                    |        |                   |   |       

For the three-months ended September 26, 2008, net interest income from our brokerage entities accounted for
approximately 20% of our net revenues. For the three-months ended September 28, 2007, net interest income generated by our brokerage entities accounted for approximately 18% of our net revenue. Net interest for the Bank is discussed in the
Banking segment discussion below.

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



|                                          |  |                    |           |                   |   |          
|----------------------------------------- |  | ------------------ | --------- | ----------------- | - | ---------
|                                          |  | Three-Months Ended
|                                          |  | September 26,2008  |           | September 28,2007
|Average interest-earning assets:          |  |                    |           |                   |   |          
|Customer margin balances                  |  | $                  | 231,000   |                   | $ | 292,000  
|Assets segregated for regulatory purposes |  |                    | 334,000   |                   |   | 312,000  
|Stock borrowed                            |  |                    | 2,825,000 |                   |   | 3,069,000
|                                          |  |                   
|Average interest-bearing liabilities:     |  |                    |           |                   |   |          
|Customer funds on deposit                 |  |                    | 483,000   |                   |   | 503,000  
|Stock loaned                              |  |                    | 2,784,000 |                   |   | 3,030,000

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

Income Tax Expense

For the three-months ended
September 26, 2008, income tax expense (effective rate of 34.9%) did not differ materially 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.



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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-month period ended September 26, 2008 compared to the three-month period ended September 28, 2007
(dollars in thousands):



|                |  |                    |        |   |                   |   |        |                     |  |   |          |   |  |      |   
|--------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | ------------------- |  | - | -------- | - |  | ---- | --
|                |  | Three-Months Ended |        |   |                   |   |        |                     | 
|                |  | September 26,2008  |        |   | September 28,2007 |   |        | Increase/(Decrease) |  |   | % Change |  
|Net revenues:   |  |                    |        |   |                   |   |        |                     |  |   |          |   |  |      |   
|Clearing        |  | $                  | 8,176  |   |                   | $ | 10,278 |                     |  | $ | (2,102   | ) |  | (20  | )%
|Retail          |  |                    | 29,997 |   |                   |   | 19,639 |                     |  |   | 10,358   |   |  | 53   |   
|Institutional   |  |                    | 36,812 |   |                   |   | 23,953 |                     |  |   | 12,859   |   |  | 54   |   
|Banking         |  |                    | 15,327 |   |                   |   | 12,491 |                     |  |   | 2,836    |   |  | 23   |   
|Other           |  |                    | (2,544 | ) |                   |   | 585    |                     |  |   | (3,129   | ) |  | (535 | ) 
|                |  |                    |        |   |                   |   |        |                     |  |   |          |   |  |      |   
|Total           |  | $                  | 87,768 |   |                   | $ | 66,946 |                     |  | $ | 20,822   |   |  | 31   | % 
|                |  |                    |        |   |                   |   |        |                     |  |   |          |   |  |      |   
|Pre-tax income: |  |                    |        |   |                   |   |        |                     |  |   |          |   |  |      |   
|Clearing        |  | $                  | 2,272  |   |                   | $ | 4,497  |                     |  | $ | (2,225   | ) |  | (49  | )%
|Retail          |  |                    | 2,774  |   |                   |   | 3,184  |                     |  |   | (410     | ) |  | (13  | ) 
|Institutional   |  |                    | 11,027 |   |                   |   | 7,037  |                     |  |   | 3,990    |   |  | 57   |   
|Banking         |  |                    | 4,548  |   |                   |   | 5,452  |                     |  |   | (904     | ) |  | (17  | ) 
|Other           |  |                    | (9,828 | ) |                   |   | (8,224 | )                   |  |   | (1,604   | ) |  | 20   |   
|                |  |                    |        |   |                   |   |        |                     |  |   |          |   |  |      |   
|Total           |  | $                  | 10,793 |   |                   | $ | 11,946 |                     |  | $ | (1,153   | ) |  | (10  | )%
|                |  |                    |        |   |                   |   |        |                     |  |   |          |   |  |      |   

Clearing.The following is a summary of the results for the clearing segment for the
three-months ended September 26, 2008 compared to the three-months ended September 28, 2007 (dollars in thousands):



|                                   |  |                    |         |                   |   |                     |  |   |          |   |  |     |   
|---------------------------------- |  | ------------------ | ------- | ----------------- | - | ------------------- |  | - | -------- | - |  | --- | --
|                                   |  | Three-Months Ended |         |                   |   |                     |  |  
|                                   |  | September 26,2008  |         | September 28,2007 |   | Increase/(Decrease) |  |   | % Change |  
|Net revenue from clearing services |  | $                  | 3,295   |                   | $ | 3,350               |  | $ | (55      | ) |  | (2  | )%
|Net interest                       |  |                    | 2,260   |                   |   | 4,479               |  |   | (2,219   | ) |  | (50 | ) 
|Other                              |  |                    | 2,621   |                   |   | 2,449               |  |   | 172      |   |  | 7   |   
|                                   |  |                    |         |                   |   |                     |  |   |          |   |  |     |   
|Net revenues                       |  |                    | 8,176   |                   |   | 10,278              |  |   | (2,102   | ) |  | (20 | ) 
|                                   |  |                    |         |                   |   |                     |  |   |          |   |  |     |   
|Operating expenses                 |  |                    | 5,904   |                   |   | 5,781               |  |   | 123      |   |  | 2   |   
|                                   |  |                    |         |                   |   |                     |  |   |          |   |  |     |   
|Pre-tax income                     |  | $                  | 2,272   |                   | $ | 4,497               |  | $ | (2,225   | ) |  | (49 | )%
|                                   |  |                    |         |                   |   |                     |  |   |          |   |  |     |   
|Average customer margin balance    |  | $                  | 131,000 |                   | $ | 198,000             |  | $ | (67,000  | ) |  | (34 | )%
|                                   |  |                    |         |                   |   |                     |  |   |          |   |  |     |   
|Average customer funds on deposit  |  | $                  | 312,000 |                   | $ | 319,000             |  | $ | (7,000   | ) |  | (2  | )%
|                                   |  |                    |         |                   |   |                     |  |   |          |   |  |     |   

The following table reflects the number of client transactions processed for the three-months ended
September 26, 2008 and September 28, 2007 and number of correspondents at the end of each three-month period.



|                                              |  |                                    |  |                                   
|--------------------------------------------- |  | ---------------------------------- |  | ----------------------------------
|                                              |  | Three-MonthsEndedSeptember 26,2008 |  | Three-MonthsEndedSeptember 28,2007
|Tickets for high-volume trading firms         |  | 5,384,026                          |  | 7,044,455                         
|Tickets for general securities broker/dealers |  | 205,850                            |  | 258,997                           
|                                              |  |                                    |  |                                   
|Total tickets                                 |  | 5,589,876                          |  | 7,303,452                         
|                                              |  |                                    |  |                                   
|Correspondents                                |  | 201                                |  | 209                               
|                                              |  |                                    |  |                                   



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The clearing segment posted a decrease in net revenue of 20% and a decrease in pretax income of 49%.

Tickets processed decreased substantially over the prior fiscal year while clearing fee revenue decreased only 2%. Decreased volume from day trading customers was the
primary driver of this change. Revenue per ticket for both the day traders and general securities brokers increased. Revenue per ticket was $0.59 for the first quarter of fiscal 2009 versus $0.46 for the first quarter of fiscal 2008.

Net interest revenue allocated to the clearing segment decreased 50% in the three-months ended September 26, 2008 over the same period last fiscal year. Net
interest decreased primarily due to the decrease in the spread we earned on correspondent customer margin and credit balances due to the 34% decline in margin balances in the clearing segment as well as an 18 basis point drop in the spread we earn
on customer deposits.

Operating expenses were up slightly for the three-months ended September 26, 2008 compared to the same period last fiscal year
due primarily to increased commission and employee compensation, related to the hiring of a new head of clearing in October of 2007 as well as additional sales and marketing staff.

Correspondent count was down for the three-months ended September 26, 2008 versus the same period last fiscal year primarily due to correspondents we terminated as well as from correspondents leaving the
brokerage business.

Retail. The following is a summary of the results for the retail segment for the three-months ended September 26,
2008 and September 28, 2007 (dollars in thousands):



|                                                         |  |                    |       |                   |   |          |  |     |   
|-------------------------------------------------------- |  | ------------------ | ----- | ----------------- | - | -------- |  | --- | --
|                                                         |  | Three-Months Ended |       |                   |  
|                                                         |  | September 26,2008  |       | September 28,2007 |   | % Change | 
|Private Client Group (PCG)                             |  |                    |       |                   |   |          |  |     |   
|Commissions                                              |  | $                  | 5,628 |                   | $ | 5,800    |  | (3  | )%
|Advisory fees                                            |  |                    | 1,356 |                   |   | 1,338    |  | 1   |   
|Insurance products                                       |  |                    | 1,010 |                   |   | 714      |  | 41  |   
|Other                                                    |  |                    | 117   |                   |   | 149      |  | (21 | ) 
|Net interest revenue                                     |  |                    | 696   |                   |   | 776      |  | (10 | ) 
|                                                         |  |                    |       |                   |   |          |  |     |   
|                                                         |  |                    | 8,807 |                   |   | 8,777    |  |    |   
|                                                         |  |                    |       |                   |   |          |  |     |   
|Independent registered representatives (SWS Financial) |  |                    |       |                   |   |          |  |     |   
|Commissions                                              |  |                    | 5,393 |                   |   | 5,846    |  | (8  | ) 
|Advisory fees                                            |  |                    | 915   |                   |   | 844      |  | 8   |   
|Insurance products                                       |  |                    | 1,156 |                   |   | 2,131    |  | (46 | ) 
|Other                                                    |  |                    | 223   |                   |   | 273      |  | (18 | ) 
|Net interest revenue                                     |  |                    | 410   |                   |   | 909      |  | (55 | ) 
|                                                         |  |                    |       |                   |   |          |  |     |   
|                                                         |  |                    | 8,097 |                   |   | 10,003   |  | (19 | ) 
|                                                         |  |                    |       |                   |   |          |  |     |   



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|                                  |  |                    |         |                   |   |          |  |     |   
|--------------------------------- |  | ------------------ | ------- | ----------------- | - | -------- |  | --- | --
|                                  |  | Three-Months Ended |         |                   |  
|                                  |  | September 26,2008  |         | September 28,2007 |   | % Change | 
|M.L. Stern                        |  |                    |         |                   |   |          |  |     |   
|Commissions                       |  | $                  | 9,669   |                   | $ |         |  |    | % 
|Advisory fees                     |  |                    | 1,458   |                   |   |         |  |    |   
|Insurance products                |  |                    | 17      |                   |   |         |  |    |   
|Other                             |  |                    | 790     |                   |   |         |  |    |   
|Net interest revenue              |  |                    | 258     |                   |   |         |  |    |   
|                                  |  |                    |         |                   |   |          |  |     |   
|                                  |  |                    | 12,192  |                   |   |         |  |    |   
|                                  |  |                    |         |                   |   |          |  |     |   
|Other                             |  |                    | 901     |                   |   | 859      |  | 5   |   
|                                  |  |                    |         |                   |   |          |  |     |   
|Total                             |  |                    | 29,997  |                   |   | 19,639   |  | 53  |   
|                                  |  |                    |         |                   |   |          |  |     |   
|Operating expenses                |  |                    | 27,223  |                   |   | 16,455   |  | 65  |   
|                                  |  |                    |         |                   |   |          |  |     |   
|Pre-tax income                    |  | $                  | 2,774   |                   | $ | 3,184    |  | (13 | )%
|                                  |  |                    |         |                   |   |          |  |     |   
|Average customer margin balances  |  | $                  | 84,000  |                   | $ | 76,000   |  | 11  | % 
|                                  |  |                    |         |                   |   |          |  |     |   
|Average customer funds on deposit |  | $                  | 121,000 |                   | $ | 132,000  |  | (8  | )%
|                                  |  |                    |         |                   |   |          |  |     |   
|Customer deposits at the Bank     |  | $                  | 386,986 |                   | $ | 300,505  |  | 29  | % 
|                                  |  |                    |         |                   |   |          |  |     |   
|PCG representatives               |  |                    | 106     |                   |   | 94       |  | 13  | % 
|                                  |  |                    |         |                   |   |          |  |     |   
|SWS Financial representatives     |  |                    | 311     |                   |   | 356      |  | (13 | )%
|                                  |  |                    |         |                   |   |          |  |     |   
|M.L. Stern representatives        |  |                    | 105     |                   |   |         |  |    |   
|                                  |  |                    |         |                   |   |          |  |     |   

Net revenues in the retail segment increased 53% for the three-months ended September 26, 2008 over the same
period last fiscal year driven by the commissions, fees and other revenues from the acquisition of M.L. Stern of $12.2 million. Total customer assets were $10.8 billion at September 26, 2008 and $7.3 billion at September 28, 2007. Total
customer assets for the three-month period ending September 26, 2008 include $4.4 billion at M.L. Stern. Assets under management were $829 million, including $442 million from Tower Asset Management, LLC, at September 26, 2008 versus $412
million at September 28, 2007.

Net interest revenue allocated to the retail segment decreased 32% for the three-months ended September 26, 2008
over the same period of last fiscal year. This decrease is primarily due to a reduced spread earned on customer deposits.

Operating expenses increased 65%
for the three-months ended September 26, 2008 over the same period last fiscal year. This increase is primarily due to a 55% increase in commission expense, the primary component of operating expenses in the retail segment, driven by M.L. Stern
commission expense of $8.3 million. In addition, other operating expenses increased due to increased rent expense from the addition of new branches, computer service expense, license and fees, professional services and legal expense and information
technology expenses allocated to the segment. M.L. Stern contributed $2.7 million to the increase in other operating expenses.



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Institutional. The following is a summary of the results for the institutional segment for
the three-months ended September 26, 2008 and September 28, 2007 (dollars in thousands):



|                                       |  |                    |        |                   |   |          |  |     |   
|-------------------------------------- |  | ------------------ | ------ | ----------------- | - | -------- |  | --- | --
|                                       |  | Three-Months Ended |        |                   |  
|                                       |  | September 26,2008  |        | September 28,2007 |   | % Change | 
|Commissions                            |  |                    |        |                   |   |          |  |     |   
|Taxable fixed income                   |  | $                  | 8,095  |                   | $ | 4,822    |  | 68  | % 
|Municipal distribution                 |  |                    | 4,131  |                   |   | 2,077    |  | 99  |   
|Portfolio trading                      |  |                    | 2,732  |                   |   | 3,521    |  | (22 | ) 
|Other                                  |  |                    | 4      |                   |   | 5        |  | (20 | ) 
|                                       |  |                    |        |                   |   |          |  |     |   
|                                       |  |                    | 14,962 |                   |   | 10,425   |  | 44  |   
|                                       |  |                    |        |                   |   |          |  |     |   
|Investment banking fees                |  |                    | 6,280  |                   |   | 6,703    |  | (6  | ) 
|Net gains on principal transactions    |  |                    | 1,431  |                   |   | 1,118    |  | 28  |   
|Other                                  |  |                    | 266    |                   |   | 208      |  | 28  |   
|Net interest revenue                   |  |                    | 13,873 |                   |   | 5,499    |  | 152 |   
|                                       |  |                    |        |                   |   |          |  |     |   
|Total net revenues                     |  |                    | 36,812 |                   |   | 23,953   |  | 54  |   
|                                       |  |                    |        |                   |   |          |  |     |   
|Operating expenses                     |  |                    | 25,785 |                   |   | 16,916   |  | 52  |   
|                                       |  |                    |        |                   |   |          |  |     |   
|Pre-tax income                         |  | $                  | 11,027 |                   | $ | 7,037    |  | 57  | % 
|                                       |  |                    |        |                   |   |          |  |     |   
|Taxable fixed income representatives   |  |                    | 27     |                   |   | 28       |  | (4  | )%
|                                       |  |                    |        |                   |   |          |  |     |   
|Municipal distribution representatives |  |                    | 20     |                   |   | 20       |  |    |   
|                                       |  |                    |        |                   |   |          |  |     |   

Net revenues from the institutional segment increased 54% while pre-tax income was up 57% in the three-months
ended September 26, 2008. Commissions in the institutional segment were up 44% for the three-months ended September 26, 2008 over the same period last fiscal year as volumes in both the taxable fixed income and municipal areas improved.
These increases were partially offset by a decrease in the portfolio trading area due to a 49% decline in the number of trades processed. Investment banking fees were down 6% for the three-months ended September 26, 2008 driven by a decrease in
corporate finance advisory fees of $514,000. The decrease is due to a large M&A transaction that generated advisory fees in the first quarter of fiscal 2008.

Net gains on principal transactions were up 28% due to an increase in market volatility and wider spreads in the secondary market in the municipal business unit. The increase in the municipal business unit was offset by a decrease in the
taxable fixed income business unit due to increased market volatility resulting in decreases across all fixed income offices as well a loss of $970,000 on a mortgage backed security sold in the first quarter of fiscal 2009.

In the three-months ended September 26, 2008, net interest revenue in the institutional segment increased 152% over the same period of last fiscal year. The
institutional segments net interest is primarily generated from the companys securities lending activities. This increase is primarily due to a 107 basis point increase in the spread earned on securities lending balances despite an 8%
drop in the average balance. The disruption in the markets, as well as the regulators limits on short sales, caused average balances in our stock loan business to fall, subsequent to quarter end, to $1.7 billion in October 2008. Net interest
revenue also increased in the municipal business unit due to investments in tax-exempt municipal auction rate bonds, which were not included in the prior year quarter.



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The following table sets forth the number and aggregate dollar amount of municipal bond transactions conducted by
Southwest Securities, as reported to the Municipal Securities Rulemaking Board, for the three-month periods ended September 26, 2008 and September 28, 2007:



|                              |  |                    |                |                   |   |               
|----------------------------- |  | ------------------ | -------------- | ----------------- | - | --------------
|                              |  | Three-Months Ended
|                              |  | September 26,2008  |                | September 28,2007
|Number of Issues              |  |                    | 171            |                   |   | 200           
|Aggregate Amount of Offerings |  | $                  | 10,467,597,000 |                   | $ | 10,175,230,000

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



|                                      |  |                   |           |                   |   |          
|------------------------------------- |  | ----------------- | --------- | ----------------- | - | ---------
|                                      |  | September 26,2008 |           | September 28,2007
|Average interest-earning assets:      |  |                   |           |                   |   |          
|Stock borrowed                        |  | $                 | 2,825,000 |                   | $ | 3,069,000
|                                      |  |                  
|Average interest-bearing liabilities: |  |                   |           |                   |   |          
|Stock loaned                          |  |                   | 2,784,000 |                   |   | 3,030,000

Operating expenses were up 52% for the three-months ended September 26, 2008 versus the same period last
fiscal year primarily due to increases in commission expense, incentive compensation and other operating expense. The increase in commission and incentive compensation is due to the increase in revenue produced by the institutional segment. The
increase in other operating expense is due to the $5.4 million write-off for the Lehman counterparty exposure.

Banking.The following is a
summary of the results for the banking segment for the three-month periods ended September 30, 2008 and September 30, 2007 (dollars in thousands):



|                     |  |                    |        |                   |   |          |  |     |   
|-------------------- |  | ------------------ | ------ | ----------------- | - | -------- |  | --- | --
|                     |  | Three Months Ended |        |                   |  
|                     |  | September 30,2008  |        | September 30,2007 |   | % Change | 
|Net interest revenue |  | $                  | 14,664 |                   | $ | 11,891   |  | 23  | % 
|Other                |  |                    | 663    |                   |   | 600      |  | 11  |   
|                     |  |                    |        |                   |   |          |  |     |   
|Total net revenues   |  |                    | 15,327 |                   |   | 12,491   |  | 23  |   
|                     |  |                    |        |                   |   |          |  |     |   
|Operating expenses   |  |                    | 10,779 |                   |   | 7,039    |  | 53  |   
|                     |  |                    |        |                   |   |          |  |     |   
|Pre-Tax Income       |  | $                  | 4,548  |                   | $ | 5,452    |  | (17 | )%
|                     |  |                    |        |                   |   |          |  |     |   

The Banks net revenues increased 23% for the three-months ended September 30, 2008 while pre-tax income
decreased 17% over the same period last fiscal year.

Net interest revenue generated by the Bank accounted for approximately 16.7% of consolidated net
revenue for the three-months ended September 30, 2008 and 17.8% for the three-month period ended September 30, 2007. The increase in net interest revenue at the Bank is due primarily to an increase in loan volume as the yield on interest
earning assets was about flat with the same quarter last fiscal year.

The Banks operating expenses were up 53% for the three-month period ended
September 30, 2008 over the same period last fiscal year. This increase is due to an increase of $883,000 in the provision for loan losses as well as increased compensation of $1.4 million, from additional headcount, real-estate fees and other
expenses of $882,000. See additional discussion on the allowance for loan losses at Financial Condition-Loans and Allowance for Probable Loan Losses.



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The following table sets forth an analysis of the Banks net interest income by the major categories of
interest-earning assets and interest-bearing liabilities for the three-month periods ended September 30, 2008 and September 30, 2007 (dollars in thousands):



|                                      |  |                    |           |                        |                    |            |  |     |                |  |                        |           |            |   |        |  |     |  
|------------------------------------- |  | ------------------ | --------- | ---------------------- | ------------------ | ---------- |  | --- | -------------- |  | ---------------------- | --------- | ---------- | - | ------ |  | --- | -
|                                      |  | Three-Months Ended |          
|                                      |  | September 30, 2008 |           |                        | September 30, 2007 |           
|                                      |  | AverageBalance     |           | InterestIncome/Expense |                    | Yield/Rate |  |     | AverageBalance |  | InterestIncome/Expense |           | Yield/Rate |  
|Assets:                               |  |                    |           |                        |                    |            |  |     |                |  |                        |           |            |   |        |  |     |  
|                                      |  |                    |           |                        |                    |           
|Interest-earning assets:              |  |                    |           |                        |                    |            |  |     |                |  |                        |           |            |   |        |  |     |  
|Real estate  mortgage                |  | $                  | 347,896   |                        | $                  | 6,449      |  | 7.4 | %              |  | $                      | 181,363   |            | $ | 4,415  |  | 9.7 | %
|Real estate  construction            |  |                    | 180,357   |                        |                    | 2,746      |  | 6.0 |                |  |                        | 219,810   |            |   | 4,882  |  | 8.8 |  
|Commercial                            |  |                    | 505,931   |                        |                    | 8,824      |  | 6.9 |                |  |                        | 329,413   |            |   | 7,548  |  | 9.1 |  
|Individual                            |  |                    | 6,479     |                        |                    | 125        |  | 7.6 |                |  |                        | 6,419     |            |   | 129    |  | 8.0 |  
|Land                                  |  |                    | 172,614   |                        |                    | 2,776      |  | 6.4 |                |  |                        | 144,336   |            |   | 3,419  |  | 9.4 |  
|Federal funds sold                    |  |                    | 20,239    |                        |                    | 94         |  | 1.8 |                |  |                        | 133,748   |            |   | 1,747  |  | 5.2 |  
|Interest bearing deposits in banks    |  |                    | 47,361    |                        |                    | 210        |  | 1.8 |                |  |                        | 17,123    |            |   | 215    |  | 5.0 |  
|Investments  other                   |  |                    | 6,615     |                        |                    | 47         |  | 2.8 |                |  |                        | 7,978     |            |   | 99     |  | 4.9 |  
|                                      |  |                    |           |                        |                    |            |  |     |                |  |                        |           |            |   |        |  |     |  
|                                      |  |                    | 1,287,492 |                        | $                  | 21,271     |  | 6.6 | %              |  |                        | 1,040,190 |            | $ | 22,454 |  | 8.6 | %
|                                      |  |                    |           |                        |                    |           
|Non-interest-earning assets:          |  |                    |           |                        |                    |            |  |     |                |  |                        |           |            |   |        |  |     |  
|Cash and due from banks               |  |                    | 12,021    |                        |                    |            |  |     |                |  |                        | 33,591    |            |   |        |  |     |  
|Other assets                          |  |                    | 34,808    |                        |                    |            |  |     |                |  |                        | 18,584    |            |   |        |  |     |  
|                                      |  |                    |           |                        |                    |            |  |     |                |  |                        |           |            |   |        |  |     |  
|                                      |  | $                  | 1,334,321 |                        |                    |            |  |     |                |  | $                      | 1,092,365 |            |   |        |  |     |  
|                                      |  |                    |           |                        |                    |            |  |     |                |  |                        |           |            |   |        |  |     |  
|                                      |  |                    |           |                        |                    |           
|Liabilities and Stockholders Equity: |  |                    |           |                        |                    |            |  |     |                |  |                        |           |            |   |        |  |     |  
|                                      |  |                    |           |                        |                    |           
|Interest-bearing liabilities:         |  |                    |           |                        |                    |            |  |     |                |  |                        |           |            |   |        |  |     |  
|Certificates of deposit               |  | $                  | 91,399    |                        |                    | 851        |  | 3.7 | %              |  | $                      | 78,141    |            |   | 903    |  | 4.6 | %
|Money market accounts                 |  |                    | 44,564    |                        |                    | 170        |  | 1.5 |                |  |                        | 31,636    |            |   | 268    |  | 3.4 |  
|Interest-bearing demand accounts      |  |                    | 72,034    |                        |                    | 306        |  | 1.7 |                |  |                        | 61,051    |            |   | 633    |  | 4.1 |  
|Savings accounts                      |  |                    | 843,352   |                        |                    | 3,974      |  | 1.9 |                |  |                        | 713,908   |            |   | 7,869  |  | 4.4 |  
|Federal Home Loan Bank advances       |  |                    | 107,565   |                        |                    | 1,306      |  | 4.8 |                |  |                        | 66,958    |            |   | 890    |  | 5.3 |  
|                                      |  |                    |           |                        |                    |            |  |     |                |  |                        |           |            |   |        |  |     |  
|                                      |  |                    | 1,158,914 |                        |                    | 6,607      |  | 2.3 | %              |  |                        | 951,694   |            |   | 10,563 |  | 4.4 | %
|                                      |  |                    |           |                        |                    |           
|Non-interest-bearing liabilities:     |  |                    |           |                        |                    |            |  |     |                |  |                        |           |            |   |        |  |     |  
|Non interest-bearing demand accounts  |  |                    | 53,103    |                        |                    |            |  |     |                |  |                        | 44,269    |            |   |        |  |     |  
|Other liabilities                     |  |                    | 7,891     |                        |                    |            |  |     |                |  |                        | 8,301     |            |   |        |  |     |  
|                                      |  |                    |           |                        |                    |            |  |     |                |  |                        |           |            |   |        |  |     |  
|                                      |  |                    | 1,219,908 |                        |                    |            |  |     |                |  |                        | 1,004,264 |            |   |        |  |     |  
|Stockholders equity                  |  |                    | 114,413   |                        |                    |            |  |     |                |  |                        | 88,101    |            |   |        |  |     |  
|                                      |  |                    |           |                        |                    |            |  |     |                |  |                        |           |            |   |        |  |     |  
|                                      |  | $                  | 1,334,321 |                        |                    |            |  |     |                |  | $                      | 1,092,365 |            |   |        |  |     |  
|                                      |  |                    |           |                        |                    |            |  |     |                |  |                        |           |            |   |        |  |     |  
|Net interest income                   |  |                    |           |                        | $                  | 14,664     |  |     |                |  |                        |           |            | $ | 11,891 |  |     |  
|                                      |  |                    |           |                        |                    |            |  |     |                |  |                        |           |            |   |        |  |     |  
|Net yield on interest-earning assets  |  |                    |           |                        |                    |            |  | 4.5 | %              |  |                        |           |            |   |        |  | 4.6 | %
|                                      |  |                    |           |                        |                    |            |  |     |                |  |                        |           |            |   |        |  |     |  

Interest rate trends, changes in the U.S. 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 September 30,
2008 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.



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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
endedSeptember 30, 2008 compared to September 30, 2007 |       
|                                   |  | TotalChange                                                         |        |   | Attributed to |     
|                                   |  |                                                                     | Volume |   |               | Rate |        |   | Mix |  
|Interest income:                   |  |                                                                     |        |   |               |      |        |   |     |   |        |   |  |   |        |  
|                                   |  |                                                                     |        |  
|Real estate  mortgage             |  | $                                                                   | 2,034  |   |               | $    | 4,065  |   |     | $ | (1,065 | ) |  | $ | (966   | )
|Real estate  construction         |  |                                                                     | (2,136 | ) |               |      | (879   | ) |     |   | (1,548 | ) |  |   | 291    |  
|Commercial                         |  |                                                                     | 1,276  |   |               |      | 4,056  |   |     |   | (1,824 | ) |  |   | (956   | )
|Individual                         |  |                                                                     | (4     | ) |               |      | 1      |   |     |   | (6     | ) |  |   | 1      |  
|Land                               |  |                                                                     | (643   | ) |               |      | 672    |   |     |   | (1,107 | ) |  |   | (208   | )
|Federal funds sold                 |  |                                                                     | (1,653 | ) |               |      | (1,487 | ) |     |   | (1,132 | ) |  |   | 966    |  
|Interest bearing deposits in banks |  |                                                                     | (5     | ) |               |      | 380    |   |     |   | (139   | ) |  |   | (246   | )
|Investments  other                |  |                                                                     | (52    | ) |               |      | (15    | ) |     |   | (73    | ) |  |   | 36     |  
|                                   |  |                                                                     |        |   |               |      |        |   |     |   |        |   |  |   |        |  
|                                   |  | $                                                                   | (1,183 | ) |               | $    | 6,793  |   |     | $ | (6,894 | ) |  | $ | (1,082 | )
|                                   |  |                                                                     |        |   |               |      |        |   |     |   |        |   |  |   |        |  
|Interest expense:                  |  |                                                                     |        |   |               |      |        |   |     |   |        |   |  |   |        |  
|                                   |  |                                                                     |        |  
|Certificates of deposit            |  | $                                                                   | (52    | ) |               | $    | 153    |   |     | $ | (178   | ) |  | $ | (27    | )
|Money market accounts              |  |                                                                     | (98    | ) |               |      | 110    |   |     |   | (148   | ) |  |   | (60    | )
|Interest-bearing demand accounts   |  |                                                                     | (327   | ) |               |      | 114    |   |     |   | (375   | ) |  |   | (66    | )
|Savings accounts                   |  |                                                                     | (3,895 | ) |               |      | 1,431  |   |     |   | (4,527 | ) |  |   | (799   | )
|Federal Home Loan Bank advances    |  |                                                                     | 416    |   |               |      | 463    |   |     |   | (57    | ) |  |   | 10     |  
|                                   |  |                                                                     |        |   |               |      |        |   |     |   |        |   |  |   |        |  
|                                   |  |                                                                     | (3,956 | ) |               |      | 2,271  |   |     |   | (5,285 | ) |  |   | (942   | )
|                                   |  |                                                                     |        |   |               |      |        |   |     |   |        |   |  |   |        |  
|Net interest income                |  | $                                                                   | 2,773  |   |               | $    | 4,522  |   |     | $ | (1,609 | ) |  | $ | (140   | )
|                                   |  |                                                                     |        |   |               |      |        |   |     |   |        |   |  |   |        |  

Other:

Pre-tax loss from the other category was $9.8 million for the three-months ended September 26, 2008 compared to $8.2 million for the same period last fiscal year. The change is primarily due to a decrease in income from a deferred
compensation investment of $629,000 and a decrease in investment income of $1.6 million related to our limited partnership venture capital fund in which we are an investor.

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 U.S. 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.

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.



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Loans receivable at September 30, 2008 and June 30, 2008 are summarized as follows (in thousands):



|                           |  |                    |           |               |   |          
|-------------------------- |  | ------------------ | --------- | ------------- | - | ---------
|                           |  | September 30, 2008 |           | June 30, 2008
|Real estate  mortgage     |  | $                  | 398,875   |               | $ | 445,053  
|Real estate  construction |  |                    | 246,767   |               |   | 246,171  
|Commercial                 |  |                    | 454,082   |               |   | 419,777  
|Individuals                |  |                    | 4,871     |               |   | 4,507    
|Land                       |  |                    | 172,370   |               |   | 170,195  
|                           |  |                    |           |               |   |          
|                           |  | $                  | 1,276,965 |               | $ | 1,285,703
|                           |  |                    |           |               |   |          

The following table shows the scheduled maturities of certain loans at September 30, 2008 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            |  | $             | 192,263 |          | $ | 31,998      |  | $     | 22,506  |  | $ | 246,767
|Commercial                            |  |               | 114,208 |          |   | 177,176     |  |       | 162,698 |  |   | 454,082
|                                      |  |               |         |          |   |             |  |       |         |  |   |        
|Total                                 |  | $             | 306,471 |          | $ | 209,174     |  | $     | 185,204 |  | $ | 700,849
|                                      |  |               |         |          |   |             |  |       |         |  |   |        
|Amount of loans based upon:           |  |               |         |          |   |             |  |       |         |  |   |        
|Floating or adjustable interest rates |  | $             | 273,800 |          | $ | 151,118     |  | $     | 135,115 |  | $ | 560,033
|Fixed interest rates                  |  |               | 32,671  |          |   | 58,056      |  |       | 50,089  |  |   | 140,816
|                                      |  |               |         |          |   |             |  |       |         |  |   |        
|Total                                 |  | $             | 306,471 |          | $ | 209,174     |  | $     | 185,204 |  | $ | 700,849
|                                      |  |               |         |          |   |             |  |       |         |  |   |        

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 September 30, 2008 and June 30, 2008 are as follows (dollars in thousands):



|                                           |  |                   |        |              |   |       
|------------------------------------------ |  | ----------------- | ------ | ------------ | - | ------
|                                           |  | September 30,2008 |        | June 30,2008
|Loans accounted for on a non-accrual basis |  |                   |        |              |   |       
|1-4 family                                 |  | $                 | 1,803  |              | $ | 1,797 
|Lot and land development                   |  |                   | 6,026  |              |   | 8,741 
|Interim construction                       |  |                   | 1,856  |              |   | 5,098 
|Commercial real estate                     |  |                   | 1,948  |              |   | 2,340 
|Commercial loans                           |  |                   | 630    |              |   | 674   
|Consumer loans                             |  |                   | 9      |              |   | 12    
|                                           |  |                   |        |              |   |       
|                                           |  | $                 | 12,272 |              | $ | 18,662
|                                           |  |                   |        |              |   |       



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|                                                             |  |                   |        |   |              |   |        |  
|------------------------------------------------------------ |  | ----------------- | ------ | - | ------------ | - | ------ | -
|                                                             |  | September 30,2008 |        |   | June 30,2008 |  
|Loans past due 90 days or more, not included above           |  | $                 | 8,342  |   |              | $ | 335    |  
|                                                             |  |                   |        |   |              |   |        |  
|Non-performing loans as a percentage of total loans          |  |                   | 1.6    | % |              |   | 1.5    | %
|                                                             |  |                   |        |   |              |   |        |  
|Troubled debt restructurings (all Real Estate Owned (REO)) |  | $                 | 13,409 |   |              | $ | 14,219 |  
|                                                             |  |                   |        |   |              |   |        |  
|Non-performing assets                                        |  | $                 | 34,023 |   |              | $ | 33,216 |  
|                                                             |  |                   |        |   |              |   |        |  
|Total non-performing assets as a percentage of total assets  |  |                   | 2.5    | % |              |   | 2.5    | %
|                                                             |  |                   |        |   |              |   |        |  

An analysis of the allowance for probable loan losses for the three-month periods ended September 30, 2008
and September 30, 2007 is as follows (dollars in thousands):



|                                                                                                       |  |                              |       |    |      |   |       |  
|------------------------------------------------------------------------------------------------------ |  | ---------------------------- | ----- | -- | ---- | - | ----- | -
|                                                                                                       |  | Three-Months EndedSeptember, |      
|                                                                                                       |  | 2008                         |       |    | 2007 |  
|Balance at beginning of period                                                                         |  | $                            | 6,936 |    |      | $ | 5,497 |  
|Charge-offs:                                                                                           |  |                              |       |    |      |   |       |  
|Real estate-construction                                                                               |  |                              | (310  | )  |      |   |      |  
|Individuals                                                                                            |  |                              |      |    |      |   | (12   | )
|                                                                                                       |  |                              |       |    |      |   |       |  
|                                                                                                       |  |                              | (310  | )  |      |   | (12   | )
|                                                                                                       |  |                              |       |    |      |   |       |  
|Recoveries:                                                                                            |  |                              |       |    |      |   |       |  
|Commercial, financial and agricultural                                                                 |  |                              | 6     |    |      |   | 11    |  
|                                                                                                       |  |                              |       |    |      |   |       |  
|                                                                                                       |  |                              | 6     |    |      |   | 11    |  
|                                                                                                       |  |                              |       |    |      |   |       |  
|Net (charge-offs) recoveries                                                                           |  |                              | (304  | )  |      |   | (1    | )
|Additions charged to operations                                                                        |  |                              | 934   |    |      |   | 51    |  
|                                                                                                       |  |                              |       |    |      |   |       |  
|                                                                                                       |  |                              | 630   |    |      |   | 50    |  
|                                                                                                       |  |                              |       |    |      |   |       |  
|Balance at end of period                                                                               |  | $                            | 7,566 |    |      | $ | 5,547 |  
|                                                                                                       |  |                              |       |    |      |   |       |  
|Ratio of net (charge-offs) recoveries during the period to average loans outstanding during the period |  |                              | (0.03 | )% |      |   | *     |  
|                                                                                                       |  |                              |       |    |      |   |       |  



|* | Denotes less than .01%
|- | ----------------------



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The allowance for probable loan losses is applicable to the following types of loans as of September 30, 2008 and
June 30, 2008 (dollars in thousands):



|                              |  |                    |       |                              |               |   |        |   |                              |  |       |  
|----------------------------- |  | ------------------ | ----- | ---------------------------- | ------------- | - | ------ | - | ---------------------------- |  | ----- | -
|                              |  | September 30, 2008 |       |                              | June 30, 2008 |  
|                              |  | Amount             |       | Percentof loansto totalloans |               |   | Amount |   | Percentof loansto totalloans | 
|Commercial                    |  | $                  | 4,362 |                              | 35.7          | % |        | $ | 4,089                        |  | 32.8  | %
|Real estate  construction    |  |                    | 833   |                              | 19.3          |   |        |   | 1,012                        |  | 19.1  |  
|Real estate  mortgage & land |  |                    | 2,323 |                              | 44.6          |   |        |   | 1,793                        |  | 47.7  |  
|Individuals                   |  |                    | 48    |                              | 0.4           |   |        |   | 42                           |  | 0.4   |  
|                              |  |                    |       |                              |               |   |        |   |                              |  |       |  
|                              |  | $                  | 7,566 |                              | 100.0         | % |        | $ | 6,936                        |  | 100.0 | %
|                              |  |                    |       |                              |               |   |        |   |                              |  |       |  

Deposits

Average deposits and the average interest rate paid on the deposits for the three-month periods ended September 30, 2008 and September 30, 2007 can be found in the discussion of the banking segments net interest income under
the caption Results of Operations-Segment-Banking.

Certificates of deposit of $100,000 or greater were $37.4 million and $37.2 million
at September 30, 2008 and June 30, 2008, respectively. The Bank funds its loans primarily through funds on deposit in interest bearing checking accounts 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 $933.0 million in funds on deposit from customers of Southwest Securities at
September 30, 2008. This funding source has reduced the Banks reliance on short-term borrowings from the FHLB and brokered certificates of deposit.

Short Term Borrowings and Advances from Federal Home Loan Bank

This table represents short term borrowings and advances from the FHLB which
were due within one year during the three-month periods ended September 30, 2008 and September 30, 2007 (dollars in thousands):



|                              |  |                                  |        |              |      |   |        |   |              |  |     |  
|----------------------------- |  | -------------------------------- | ------ | ------------ | ---- | - | ------ | - | ------------ |  | --- | -
|                              |  | Three-Months Ended September 30, |       
|                              |  | 2008                             |        |              | 2007 |  
|                              |  | Amount                           |        | InterestRate |      |   | Amount |   | InterestRate | 
|At end of period              |  | $                                | 743    |              | 4.6  | % |        | $ | 643          |  | 3.7 | %
|Average during period         |  |                                  | 6,630  |              | 2.7  | % |        |   | 427          |  | 3.7 | %
|Maximum balance during period |  |                                  | 71,050 |              |     |   |        |   | 643          |  |    |  

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



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risks in receivables from clients, clients of correspondents and correspondents. Even with the tight capital market, 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.

Short-Term Borrowings.We have credit arrangements with commercial banks, which include broker loan lines up to $275 million. 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 balances under these credit arrangements are due on demand and bear
interest at rates indexed to the Federal Funds rate. At September 26, 2008, the amount outstanding under these secured arrangements was $88.5 million, which was collateralized by securities held for firm accounts valued at $121.2 million.

We had $250,000 outstanding under unsecured letters of credit at September 26, 2008, pledged to support our open positions with securities clearing
organizations, which bear a 1% commitment fee and are renewable semi-annually.

At September 26, 2008, we had an additional unsecured letter of credit
issued for a sub-lease to the sub-lessee of space previously occupied by a former subsidiary in the amount of $286,000. This letter of credit bears a 1% commitment fee and is renewable annually.

In addition to the broker loan lines, we have a $20.0 million unsecured line of credit that is due on demand and bears interest at rates indexed to the Federal Funds
rate. This credit arrangement is provided on an as offered basis and is not a committed line of credit. The total amount of borrowings available under this line of credit is reduced by the amount outstanding under any unsecured letters
of credit at the time of borrowing. There were no amounts outstanding on this line, other than the $536,000 under unsecured letters of credit at September 26, 2008. At September 26, 2008, the total amount available for borrowings was $19.5
million.

We have an irrevocable letter of credit agreement aggregating $65.0 million at September 26, 2008 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 September 26, 2008), 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 $90.7 million at September 26, 2008.

M.L. Stern has a broker
lending agreement with a bank for a $26.0 million line of credit, on which $26.0 million was drawn at September 30, 2008, and was collateralized by securities held in firm accounts valued at $26.3 million. This line of credit is used primarily
to finance securities owned and bears interest at rates indexed to the Federal Funds rate. The rate resets daily and was 3.0% at September 30, 2008.

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 Regulatory 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, balances with the FHLB and vault cash. In addition, at September 30, 2008, the Bank has borrowing capacity with the FHLB of $413.1 million and a $30.0
million Federal Funds agreement for the purpose of purchasing short-term funds should additional liquidity be needed.



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The Bank has an agreement with an unaffiliated bank for a $30.0 million 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 used by the Bank to support short-term liquidity needs. At September 30, 2008, there were
no amounts outstanding under this line of credit.

Management believes that the Banks present position with the FHLB and the availability of the
Federal Funds loan is adequate to meet its current and future liquidity needs.

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 September 30, 2008, $933.8 million of the Banks deposits were from
brokerage customers of Southwest Securities. Current events in the securities markets could impact the amount of these funds available to the Bank.

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.

Off-Balance Sheet Arrangements

We generally do not enter into off-balance sheet arrangements, as defined by the SEC. However, our broker/dealer subsidiaries enter into transactions in the normal course of business that expose us to off-balance
sheet risk. See Note 21 of the Notes to Consolidated Financial Statements in our Form 10-K for the fiscal year ended June 27, 2008.

Cash Flow

Net cash provided by operating activities was $35.6 million and $35.9 million for the three-months ended September 26, 2008 and September 28,
2007, respectively. Cash flow from operations was primarily provided by reduced investment in loans held for sale at the Bank, reduced customer margin balances at the brokerage and reduced inventory of securities owned offset by increased
receivables from other broker-dealers.

Net cash used in investing activities for the three-month periods ended September 26, 2008 and
September 28, 2007 was $55.1 million and $7.4 million, respectively. The primary reason for the increase in cash used for investing activities was an increase in the net amount invested in loans at the Bank of $53.3 million.

Net cash provided by financing activities totaled $32.3 million for the three-month period ended September 26, 2008 compared to $35.2 million for the three-month
period ended September 28, 2007. The primary reasons for the increase in cash from financing activities were from increased short-term borrowings and an increase in deposits. This was partially offset by an increase in the net payments made on
advances from the FHLB.

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 2009.



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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. Currently, there are 698,944 shares authorized to be purchased under this plan. During the first quarter of fiscal 2009, no shares were purchased under this program.

Additionally, the trustee under our deferred compensation plan periodically purchases shares of our common 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 first quarter of fiscal 2009, 20,000 shares were purchased at a cost of $437,000, or $21.83 per
share, and 98 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 us to cover the tax liabilities arising from such vesting. As a result, in the three-month period ended September 26, 2008, 16,789 shares were repurchased by us with a market value of $299,358, or an average of $17.83 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 industry and issuer in both trading and 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 the industry practice of obtaining and maintaining collateral. We monitor our exposure to counterparty risk through the use of credit 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. We have established credit risk committees to review our credit exposure in our various business units. These committees are composed of senior management of the company. 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 Worth metropolitan area. The Bank also purchases loans which have been originated in other areas



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of the U. S. 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, market 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 and
securities lending activities.

Interest Rate Risk.

Brokerage.Interest rate risk is a consequence of maintaining inventory positions, trading in interest rate sensitive financial instruments and maintaining a matched stock loan book. 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 quarterly 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 |                                       | 5.62%   |                                        
| | +200 |                                       | 3.72%   |                                        
| | +100 |                                       | 1.91%   |                                        
| | 0    |                                       | 0%      |                                        
| | -100 |                                       | -2.15%  |                                        
| | -200 |                                       | -12.23% |                                        

The following GAP Analysis table indicates the Banks interest rate sensitivity position at
September 30, 2008 (in thousands):



|                                   |  |                         |           |   |             |   |         |           |  |   |          |   |  |   |        
|---------------------------------- |  | ----------------------- | --------- | - | ----------- | - | ------- | --------- |  | - | -------- | - |  | - | -------
|                                   |  | Repricing Opportunities
|                                   |  | 0-6 months              |           |   | 7-12 months |   |         | 1-3 years |  |   | 3+ years
|Earning assets:                    |  |                         |           |   |             |   |         |           |  |   |          |   |  |   |        
|Loans                              |  | $                       | 955,295   |   |             | $ | 27,107  |           |  | $ | 40,202   |   |  | $ | 261,927
|Securities and FHLB stock          |  |                         | 5,300     |   |             |   |        |           |  |   |         |   |  |   | 266    
|Interest bearing deposits          |  |                         | 13,513    |   |             |   |        |           |  |   |         |   |  |   |       
|                                   |  |                         |           |   |             |   |         |           |  |   |          |   |  |   |        
|Total earning assets               |  |                         | 974,108   |   |             |   | 27,107  |           |  |   | 40,202   |   |  |   | 262,193
|                                   |  |                         |           |   |             |   |         |           |  |   |          |   |  |   |        
|Interest bearing liabilities:      |  |                         |           |   |             |   |         |           |  |   |          |   |  |   |        
|Transaction accounts and savings   |  |                         | 991,454   |   |             |   |        |           |  |   |         |   |  |   |       
|Certificates of deposit            |  |                         | 48,227    |   |             |   | 25,041  |           |  |   | 12,640   |   |  |   | 3,179  
|Borrowings                         |  |                         | 310       |   |             |   | 433     |           |  |   | 17,466   |   |  |   | 88,492 
|                                   |  |                         |           |   |             |   |         |           |  |   |          |   |  |   |        
|Total interest bearing liabilities |  |                         | 1,039,991 |   |             |   | 25,474  |           |  |   | 30,106   |   |  |   | 91,671 
|                                   |  |                         |           |   |             |   |         |           |  |   |          |   |  |   |        
|GAP                                |  | $                       | (65,883   | ) |             | $ | 1,633   |           |  | $ | 10,096   |   |  | $ | 170,522
|                                   |  |                         |           |  
|Cumulative GAP                     |  | $                       | (65,883   | ) |             | $ | (64,250 | )         |  | $ | (54,154  | ) |  | $ | 116,368

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

The following table categorizes Securities owned, at market value net of Securities sold, not yet purchased, at
market value, 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 market 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                             |  | $                 | 800     |        | $ | 8,247  |         |  | $       | 6,397 |  | $     | 25,748 |   |  | $ | 41,192  |  
|Auction rate municipal bonds                      |  |                   | 95,025  |        |   |       |         |  |         |      |  |       |       |   |  |   | 95,025  |  
|U.S. government and government agency obligations |  |                   | 3,194   |        |   | (2,237 | )       |  |         | 124   |  |       | (7,484 | ) |  |   | (6,403  | )
|Corporate obligations                             |  |                   | 134     |        |   | 1,343  |         |  |         | 1,464 |  |       | 8,282  |   |  |   | 11,223  |  
|                                                  |  |                   |         |        |   |        |         |  |         |       |  |       |        |   |  |   |         |  
|Total debt securities                             |  |                   | 99,153  |        |   | 7,353  |         |  |         | 7,985 |  |       | 26,546 |   |  |   | 141,037 |  
|Corporate equity                                  |  |                   |        |        |   |       |         |  |         |      |  |       | 5,596  |   |  |   | 5,596   |  
|Other                                             |  |                   | 4,697   |        |   |       |         |  |         |      |  |       |       |   |  |   | 4,697   |  
|                                                  |  |                   |         |        |   |        |         |  |         |       |  |       |        |   |  |   |         |  
|                                                  |  | $                 | 103,850 |        | $ | 7,353  |         |  | $       | 7,985 |  | $     | 32,142 |   |  | $ | 151,330 |  
|                                                  |  |                   |         |        |   |        |         |  |         |       |  |       |        |   |  |   |         |  



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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  | % |        |   | 4.2 | %       |  |   | 4.6     | % |  |       | 6.0   | % |  |   | 5.4   | %
|Auction rate municipal bonds                      |  |                   | 7.2  | % |        |   |    |         |  |   |        |   |  |       |      |   |  |   | 7.2   | %
|U.S. government and government agency obligations |  |                   | 0.8  | % |        |   | 3.1 | %       |  |   | 4.5     | % |  |       | 5.2   | % |  |   | 4.1   | %
|Corporate obligations                             |  |                   | 10.2 | % |        |   | 6.1 | %       |  |   | 7.1     | % |  |       | 7.2   | % |  |   | 7.0   | %
|                                                  |  |                   |      |   |       
|Available-for-sale securities, at fair value      |  |                   |      |   |        |   |     |         |  |   |         |   |  |       |       |   |  |   |       |  
|Marketable equity securities                      |  | $                 |     |   |        | $ |    |         |  | $ |        |   |  | $     | 5,597 |   |  | $ | 5,597 |  
|                                                  |  |                   |      |   |        |   |     |         |  |   |         |   |  |       |       |   |  |   |       |  

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. 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 27, 2008. See our annual report on Form 10-K for the fiscal year then ended.

Fair Value

We adopted SFAS No. 157, effective June 28, 2008, with the exception of non-financial assets and liabilities that are not recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually), which was delayed by FASB Staff Position No. FAS 157-2. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements.

Under the standard, fair value refers to the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. The standard clarifies the principle that fair value should be based on the assumptions market participants would use when
pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in
active markets and the lowest priority to unobservable data. Under the standard, fair value measurements are separately disclosed by level within the fair value hierarchy. The standard describes three levels of inputs that may be used to measure
fair value:



| |  |  | Level 1  Assets and liabilities utilizing Level 1 inputs include the following: a) our USHS stock; b) our unrestricted NYX stock; c) our
deferred compensation plans investment in Westwood Holdings Group, Inc. (Westwood) stock; and d) certain inventories held in our securities owned and securities sold, not yet purchased portfolio. Valuation of these instruments does
not require a high degree of judgment as the valuations are based on quoted prices in active markets that are readily available.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2  Assets and liabilities utilizing Level 2 inputs include the following: a) our restricted NYX stock; b) the REO investments; and c)
certain inventories held in our securities owned and securities sold, not yet purchased portfolio. These financial instruments are valued by quoted prices that are less frequent than those in active markets or by models that use various assumptions
that are derived from or supported by data that is generally observable in the marketplace. Valuations in this category are inherently less reliable than quoted market prices due to the degree of subjectivity involved in determining appropriate
methodologies and the applicable underlying assumptions.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Level 3  Assets and liabilities utilizing Level 3 inputs include the following: a) our two equity method investments in investment
partnerships (described under Other Assets below); b) certain REO investments; and c) certain inventories held in our securities owed and securities sold, not yet purchased portfolio. These financial instruments have significant inputs
that cannot be validated by readily determinable market data and generally involve considerable judgment by management. Our Level 3 assets represented less than 4% of the total assets measured at fair value for the three-month period ended
September 26, 2008. No liabilities were categorized as Level 3 in the three-month period ended September 26, 2008.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Marketable Equity Securities Available for Sale. Where quoted market prices are available in an active market, securities are classified
within Level 1 of the valuation hierarchy. These securities include our USHS stock, unrestricted NYX stock and our deferred compensation plans investment in Westwood stock. If quoted market prices are not available, then fair values are
estimated by using pricing models, which utilize observable market inputs. These securities include our restricted NYX stock. The pricing model used to value the NYX stock takes into consideration the length of time of the restriction, the expected
rate of return of the investment and the relative amount of restricted NYX stock versus the fully tradable stock.

Securities Owned
and Securities Sold, Not Yet Purchased Portfolio. Level 1 securities primarily consist of financial instruments whose value is based on quoted market prices such as corporate equity securities and U.S. government obligations.

Level 2 includes financial instruments that are valued using models or other valuation methodologies. These models are primarily industry standard models
that consider various assumptions, including time value, yield curve, volatility factors, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these
assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Securities in this category include corporate debt, certain U.S.
government and government agency obligations and municipal obligations.

Level 3 is comprised of securities whose fair value is estimated
based on internally developed models or methodologies utilizing significant inputs that are generally less readily observable. Included in this category are certain corporate equity securities and corporate and municipal debt.

We had realized losses for these Level 3 securities of $1.0 million and unrealized losses of $50,000 for these securities for the three-month period ended
September 26, 2008. We have one corporate obligation position valued at $74,000 categorized as Level 3. The corporate equity securities, valued at $925,000, are categorized as Level 3 as these securities are valued based on an inactive market
for which there are no observable inputs. These positions are not material to our total portfolio. The municipal debt obligations represent auction rate securities for which there is not an active trading market. Subsequent to June 27, 2008, we
sold one position of $31.2 million leaving a portfolio balance of $63.8 million. These positions are valued at par as of September 26, 2008.



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Other Assets.Other assets consist of our investment in REO, an equity investment in a
limited partnership venture capital fund and an equity investment in a limited partnership equity fund. REO is valued at the lower of cost or market. For those investments where the REO is valued at market, the value is determined by third party
appraisals. As such, these REO investments, solely based on appraisals, are categorized as Level 2. In certain circumstances, we will adjust the appraisals to reflect more accurately the economic conditions of the area at the time of valuation and,
in these circumstances, these REO investments are categorized as Level 3. Our investments in the limited partnership venture capital fund and the limited partnership equity fund are both categorized as Level 3 as the underlying investments in the
funds are valued based on internally developed models utilizing inputs with little or no market activity. Most, if not all, of the investments in these funds are in privately held growth companies.

We had realized losses for these Level 3 securities of $950,000 for the three-month period ended September 26, 2008. As of September 26, 2008,
we have a $1.7 million balance for the venture capital fund investment and a $2.5 million balance for the Banks equity fund investment. As of September 26, 2008, there was $3.1 million of REO valued at an adjusted appraisal value.

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 liquidity in capital markets;
| | - |  | ---------------------------------



| |  |  | 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;
| | - |  | ------------------------------------------------------------------



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



| |  |  | the availability of credit lines.
| | - |  | ---------------------------------

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.
| | - |  | -----------------------------------------------------------------------------------------------------------------

Factors which may cause actual results to differ materially from our forward-looking statements include those factors discussed in this report in
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, this quarterly report on Form 10-Q 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 except as required by law 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 from 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 Exchange Act) as of September 26, 2008. Based on such
evaluation, the principal executive officer and principal financial officer have concluded that, as of September 26, 2008, such disclosure controls and procedures were effective for the purpose of ensuring that information required to be
disclosed by SWS in the reports that it files or submits under the Securities Exchange Act of 1934 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 Rule 13a-15(f) pursuant to the Exchange Act) during the three-month
period ended September 26, 2008 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
|-------- | ------------

Except for the addition of the risk factors
below, there have been no material changes from the risk factors disclosed in our Form 10-K, for the fiscal year ended June 27, 2008.



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There can be no assurance the recently enacted legislation authorizing the U.S. government to purchase large amounts
of illiquid mortgages or invest directly in U.S. financial institutions will help stabilize the U.S. financial system.

On October 3, 2008,
President Bush signed into law the EESA. The legislation was the result of a proposal by Treasury Secretary Henry Paulson to the U.S. Congress on September 20, 2008 in response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial institutions. Pursuant to the EESA, the U.S. Department of the Treasury will have the authority to, among other things, purchase up to $700 billion of mortgages,
mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. There can be no assurance, however, as to the actual impact that the
EESA will have on the financial markets, including the extreme levels of volatility and limited credit availability currently being experienced. The failure of EESA to help stabilize the financial markets and a continuation or worsening of current
financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock. Additionally, we expect to face increased regulation of our
industry, including as a result of the EESA. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities. We also may be required to pay significantly higher FDIC premiums because market developments
have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits.

Current levels of market volatility
are unprecedented and could adversely affect us.

The stock and credit markets have been experiencing volatility and disruption for more than twelve
months. In recent weeks, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers
underlying financial strength. If current levels of market disruption and volatility continue or worsen, we could experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and
results of operations.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial
services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different counterparties and we routinely execute transactions with counterparties in the financial services
industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the
financial services industry generally, have led to market wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or
client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the receivable due us. Any such losses could be material and could
materially and adversely affect our business, financial condition and results of operations.



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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 September 26, 2008 of our equity securities registered pursuant to Section 12 of the Exchange Act:

Issuer Purchases of Equity Securities



|                     |  |                                  |  |                           |  |                                                               |  |                                                                
|-------------------- |  | -------------------------------- |  | ------------------------- |  | ------------------------------------------------------------- |  | ---------------------------------------------------------------
|Period               |  | TotalNumber ofSharesPurchased(1) |  | AveragePricePaid perShare |  | Total Numberof SharesPurchased asPart ofPubliclyAnnouncedPlan |  | MaximumNumber ofShares thatMay Yet bePurchasedUnder thePlans(2)
|06/28/08 to 07/25/08 |  |                                 |  |                          |  |                                                              |  | 698,944                                                        
|07/26/08 to 08/29/08 |  | 16,789                           |  | 17.83                     |  |                                                              |  | 698,944                                                        
|08/30/08 to 09/26/08 |  |                                 |  |                          |  |                                                              |  | 698,944                                                        
|                     |  |                                  |  |                           |  |                                                               |  |                                                                
|                     |  | 16,789                           |  | 17.83                     |  |                                                              |  |                                                                
|                     |  |                                  |  |                           |  |                                                               |  |                                                                



|(1) | All the shares purchased during the three-month period ended
September 26, 2008 were acquired from grantees in connection with the settlement of income tax and related benefit withholding obligations arising from vesting of restricted stock grants. These shares were not part of our publicly announced
program to repurchase shares of common stock.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | On January 15, 2008, the board of directors of SWS Group approved a plan authorizing the Company to repurchase 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 June 30, 2009.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

None.



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

None



|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)                                                     
|                 |  | 
|November 4, 2008 |  |  |  | /S/ Donald W. Hultgren                                           
|Date             |  |  |  | (Signature)                                                      
|                 |  |  |  | Donald W. Hultgren                                               
|                 |  |  |  | President and Chief Executive Officer and Duly Authorized Officer
|                 |  |  |  | (Principal Executive Officer)                                    
|                 |  | 
|November 4, 2008 |  |  |  | /S/ Kenneth R. Hanks                                             
|Date             |  |  |  | (Signature)                                                      
|                 |  |  |  | Kenneth R. Hanks                                                 
|                 |  |  |  | Treasurer and Chief Financial Officer                            
|                 |  |  |  | (Principal Financial Officer)                                    
|                 |  | 
|November 4, 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 Annual Report on 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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